-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KQALSU/c9pze4+45Sf1YeuVEAVf9HnyBrrBmpaY+4PtP+dhVNuHla9/MQV+eLata xVSBA4i9auZVF3ah8l5cNA== 0000006292-07-000014.txt : 20070315 0000006292-07-000014.hdr.sgml : 20070315 20070315161505 ACCESSION NUMBER: 0000006292-07-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20061230 FILED AS OF DATE: 20070315 DATE AS OF CHANGE: 20070315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANALYSTS INTERNATIONAL CORP CENTRAL INDEX KEY: 0000006292 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 410905408 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-04090 FILM NUMBER: 07696657 BUSINESS ADDRESS: STREET 1: 3601 WEST 76TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55435 BUSINESS PHONE: 952-835-5900 MAIL ADDRESS: STREET 1: 3601 WEST 76TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55435 10-K 1 form10-k.htm ANALYSTS INTERNATIONAL FORM 10-K 12/30/2006 Analysts International Form 10-K 12/30/2006
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2006

Commission File number 0-4090

ANALYSTS INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Minnesota
41-0905408
(State of Incorporation)
(I.R.S. Employer Identification No.)
   
3601 West 76th Street, Minneapolis, Minnesota
55435
(Address of Principal Executive Offices)
(Zip Code)

Registrant’s telephone number, including area code: (952) 835-5900
Securities registered pursuant to Section 12 (b) of the Act:

Common Stock, par value $.10 per share
(Title of class)
Common Share Purchase Rights
(Title of class)
Securities registered pursuant to Section 12 (g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasonal issuer, as defined in Rule 405 of the Securities Act.
Yes ࿶ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ࿶ No þ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ࿶

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ࿶ Accelerated Filer þ Non-Accelerated Filer ࿶

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ࿶ No þ

The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (July 1, 2006) was $50,157,460 based upon the closing price as reported by Nasdaq.

As of March 12, 2007 there were 25,135,730 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Incorporated by reference herein are portions of (i) the Analysts International annual report to shareholders for the year ended December 30, 2006 (Parts I, II and IV) and (ii) the proxy statement for our 2007Annual Meeting of Shareholders to be held on May 24, 2007 (Part III).
 


PART I


Item 1.
Business.

Introduction

Established in 1966, Analysts International Corporation (“Analysts International,” “Analysts,” the “Company” or “we”), a Minnesota corporation, is a diversified IT services company that specializes in delivering and integrating technology for businesses. Analysts International partners with industry leaders to deliver the hardware, applications and expertise to help advance businesses through the intelligent application of technology. In the United States, Analysts International serves client companies through a network of offices. Analysts International also has a minor presence in Canada and in the United Kingdom where we have a wholly-owned subsidiary, AiC Analysts Ltd.

Development of Business; Service Offerings

We offer our clients a full range of information technology consulting, software development and other services. Our service offerings include Full Service Staffing, which provides high demand resources for supporting a client’s IT staffing needs and Solutions Services, which provides IP Communications, network infrastructure, application integration, customization and administration and IT Outsourcing services, Managed IT Services and Government Solutions. The Company partners with best-in-class IT organizations, allowing access to a wide range of expertise, resources and expansive geographical reach.

Approximately 90 percent of Analysts International’s revenue is from services provided to its existing customer base, which consists primarily of Fortune 500® companies. This high percentage of repeat business demonstrates our emphasis on customer satisfaction and development of long-term relationships with customers who have an ongoing need for the services we provide.

During 2002, we established a wholly-owned subsidiary, Medical Concepts Staffing, Inc., through which we have begun to offer staffing services to the medical industry.

As part of our effort to grow the services offered by our solutions practices, in January 2005, the Company acquired the assets of WireSpeed Networks, LLC (“WireSpeed”). WireSpeed was a Cincinnati-based company specializing in IP telephony and wireless networking. WireSpeed's assets, employees and service offerings have been integrated into Analysts International's Technology Integration Services group, extending and enhancing the Company's offerings in this rapidly growing area.

In April 2005, the Company also acquired the assets of Redwood Solutions Corporation (“Redwood”). Redwood was an information technology services company based in Livonia, Michigan, specializing in integrating hardware and software solutions for data storage and retrieval systems. Redwood's assets, employees and service offerings became part of Analysts International's Storage Solutions Group.

2

Major clients

International Business Machines Corporation

We provide services through many of our area offices to various divisions of International Business Machines Corporation (“IBM”), a major client of the Company. The services we provide to IBM are predominantly in the area of IT staffing. Analysts International’s contract with IBM was renewed as a National Technical Services (“NTS”) Core Supplier for a three-year period on July 8, 2005 and extended for one additional year on December 30, 2006. The expiration of this contract is October 31, 2009.

IBM requires Analysts International and other participating vendors to use a predetermined rate matrix for their hourly rates in return for the opportunity to do a greater volume of business with IBM. Generally, the rates we can charge for services provided are lower than the rates we would normally charge for the same services. IBM business accounted for approximately 19% and 13% of our total revenue for fiscal years 2006 and 2005, respectively.

Lexmark International, Inc.

For over twelve years, Analysts International has provided IT staffing services for Lexmark International, Inc., a Lexington, Kentucky-based company that is a leading developer, manufacturer and supplier of laser and inkjet printers, multifunction products, associated supplies and services. In fiscal 2003, Lexmark chose Analysts International as one of three prime vendors to continue to provide IT staffing services. Analysts International’s professional services agreement for staffing was renewed on August 5, 2005 and expires on August 4, 2007.

Also in 2003, Lexmark engaged Analysts International’s Managed Services Group to implement a Vendor Management System (“VMS”), a web-based application for managing temporary labor resources. Under this agreement, Analysts International provides consolidated billing for all of Lexmark’s IT contract suppliers and training and process management for the VMS tool and system.  Analysts International’s professional services agreement with Lexmark for the services of the Managed Services Group was renewed on July 25, 2005 and expires on July 24, 2007. Lexmark has the right to extend this agreement for up to two (2) consecutive periods of one (1) year each.

Revenue from services provided to Lexmark was approximately 6% of our total revenue during fiscal year 2006 and 2005.

Revenue by Industry

Analysts International provides its services to a wide range of industries. Its revenue for fiscal 2006 was derived from services rendered to customers in the following industry groups:

   
Approximate Percent of
FY 2006 Revenue
  
       
Services
    
36.5
%
Electronics/Manufacturing
    
25.1
%
Transportation
    
7.7
%
Oil and Chemical
    
7.0
%
Financial
    
6.7
%
Health Care
    
5.2
%
Government
    
4.5
%
Merchandising
    
3.6
%
Telecommunications
    
2.7
%
Other
    
1.0
%

Analysts International provided services to more than 1,000 clients during 2006. Consistent with its practices in prior years, the Company rendered these services predominantly on a time and materials hourly rate basis under which invoices for services rendered were submitted no less frequently than monthly with payment generally due in 30 to 60 days.

3

Organization and Marketing

Analysts International provides its services through area sales and customer service offices, and for larger accounts, through national account teams. Each area sales office and national account team is staffed with sales, recruiting and technical personnel and is managed by a regional manager, who has primary responsibility for the profitability of the area. The regional manager has broad authority to conduct the operation of the office, subject to adherence to corporate policies.

During the year ended December 30, 2006, the Company maintained a business presence in the following locations: Austin, TX; Boca Raton, FL; Charlotte, NC; Chicago, IL; Cincinnati, OH; Columbia, SC; Dallas, TX; Denver, CO; Detroit, MI; Houston, TX; Indianapolis, IN; Kansas City, MO; Lansing, MI; Las Vegas, NV; Lexington, KY; Livonia, MI; Minneapolis, MN; New York, NY; Norcross, GA; Omaha, NE; Phoenix, AZ; Raleigh/Durham, NC; Richmond, VA; Rochester, MN; Rochester, NY; St. Louis, MO; San Francisco, CA; Seattle, WA; Silicon Valley, CA; Tampa, FL; Toledo, OH; and Toronto, Canada.

Analysts International utilizes its own direct sales force to sell its services. At December 30, 2006, the Company employed approximately 60 sales representatives. The ability to recruit and hire experienced technical personnel with backgrounds and experience suitable for customer requirements is an important factor in the Company’s business. At December 30, 2006, the Company employed approximately 60 recruiters.

Competition

Analysts International competes with the computer consulting and/or IT staffing divisions of several large companies (including Adecco, Kelly Services, MPS Group (Modis), TEKsystems and Spherion) on a national basis. These organizations and their applicable divisions are substantially larger than the Company in terms of sales volume and personnel and have substantially greater financial resources.

Analysts International also competes with other national IT services companies such as Computer Task Group, Comforce, Ciber, Inc., Keane, Inc., Comsys IT Partners, Tech Team Global and RCM Technologies, Inc.

Analysts International’s area and customer service offices compete in local markets with numerous regional and local software services firms. Most of these competitors are approximately the same size as or smaller than the Company’s local office, although in certain market areas they are larger than the Company’s local office.

Principal competitive factors in the IT services business include technical expertise, responsiveness to customers' staffing needs, reputation and credibility, service delivery models and tools and hourly rates. Analysts International believes it is competitive in these respects.

Personnel

As of December 30, 2006, Analysts International had approximately 2,277 systems analysts, computer programmers and other business/technology personnel all of whose services are billable to clients. Several years of relevant experience is generally a prerequisite to employment with the Company.

Available Information

We maintain our company website at www.analysts.com and make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports, in the Investor Relations section of the website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.

Other Matters

The Company’s principal office is identified in Item 2 below. Raw materials, seasonality, compliance with environmental protection laws, and patents, trademarks, licenses, franchises or other concessions are not material to an understanding of the Company’s business. No portion of the Company’s business is subject to re-negotiation of profits at the election of the government. Backlog is not material because nearly all of the Company’s contracts for services, including contracts with the government (which are not material), are terminable by either the customer or the Company on notice of 30 days or less.

4

On February 14, 2007, Jeffrey P. Baker, our former President and Chief Executive Officer, tendered his resignation to our Board of Directors.  His employement will terminate on May 14, 2007.  On February 15, 2007, the Board of Directors accepted Mr. Baker’s resignation and appointed Michael J. LaVelle, 67, to serve as our Interim President and Chief Executive Officer. Mr. LaVelle has held a variety of positions with the Company since 1989, most recently as Chairman and CEO in 2004-2005. He has been a Director of the Company since 2000 and is currently the Chairman of the Board.

As a result of our financial performance in 2005 and 2006, our Board of Directors hired a business consultant to advise the Company on a strategy for improving our performance. This process is currently under way. The goal of this process is to be able to develop and implement a strategy which will allow us to improve all areas of our financial performance and attain profitability. There is no assurance that we will be able to improve our financial performance under any business plan developed and implemented. Our ability to increase revenues and improve earnings is subject to certain risk factors set forth in Item 1A. Risk Factors.

Item 1A.
Risk Factors

Market conditions and intense competition within the IT staffing industry may result in a loss of market share, lower revenues and margins, and could adversely affect our business.

The market for our services is extremely competitive. Intense price competition in the area of IT staffing, continued pressure on billing rates, and customers' continued requests for lower cost models for IT staffing services will continue to pressure and, in some cases, adversely impact our operating results. Management expects that clients will continue, for the foreseeable future, to request lower cost offerings for IT staffing services through e-procurement systems, extremely competitive bidding processes, the granting of various types of discounts and the use of offshore resources. Our ability to respond to customer requests for lower pricing or to provide other low-cost solutions in this area of our business while maintaining acceptable gross margins will have a direct effect on our results of operations. Furthermore, we are experiencing pressure from some clients who desire to utilize companies with larger market capitalization than ours for their IT staffing needs, requiring us to look for internal and external revenue growth opportunities. We expect competitive conditions in the area of IT staffing services to continue for the foreseeable future.

Additionally, many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do, and, as a result, they may be able to adjust to changing market conditions and respond to customer demands more effectively than us. They may also have greater resources to devote to the development of new technologies, products and services. It is possible that new competitors, alliances among competitors or alliances between competitors and third parties may emerge and acquire significant market share. If this were to occur, it could have an adverse effect on our business, results of operations and financial condition.

We derive a majority of our revenue from our IT staffing services and any material decrease in demand for these services would adversely affect our revenues and operating performance.

IT staffing continues to represent a majority of our total revenue and direct revenue. Many companies have transitioned their IT services to low-cost, offshore outsourcing centers, particularly in India, that perform the companies' technology-related work and projects. This trend has contributed to the decline in domestic IT staffing services revenue as well as some on-site solutions-oriented projects. While we saw an increase in demand for our services in 2006, and an increase in our average bill rate, we experienced intense competition on average bill rates and pay rates throughout the year. There can be no assurance as to when, or if, we will experience revenue growth. Our ability to respond to competitive conditions and trends will have a direct impact on our ability to achieve and sustain meaningful revenue growth and profitability.

Our success is directly dependent on our ability to hire and retain qualified technical personnel.

Our ability to quickly identify, hire and retain qualified technical personnel will affect our results of operations and our ability to grow in the future. If we are unable to hire the talent required by our clients in a timely, cost-effective manner and with mutually beneficial pay rates and benefit packages, it will affect our ability to grow the business.

5

Our ability to control costs while still being able to adequately respond to client needs is critical to our continued success.

Controlling our operating costs while not impeding our ability to respond to the needs of our clients is a key factor to our success. We have continued to streamline operations by consolidating offices, reducing administrative and management personnel and continuing to review the company structure for more efficient methods of operating our business and delivering our services. We may not be able to continue to reduce costs without affecting our ability to timely deliver service to our clients and therefore may choose to forego particular cost reductions if we believe it would be prudent to do so.

Our success is dependent on our ability to market our products and services to our existing client base, to attract and retain new customers, to capitalize on new client relationships and to successfully implement our customer service objectives.

We continue to concentrate on IT staffing services in Fortune 500 and small and medium-sized businesses, business solutions for small and medium-sized businesses, and business opportunities with technology and product partners. To serve this client base, we are focusing on the following objectives: (i) implementing a consultant centric/talent community model, which will transform us into a workforce deployment and human capital management organization; (ii) continuing to implement a number of improvements around key business processes that we believe will better align our business with the market's needs and allow us to more effectively drive growth; and (iii) building a focused set of services and solutions around high-demand, emerging technologies. We believe these objectives present opportunities to grow our business and provide the scale we believe necessary to be successful in the staffing business in the long term. We believe the economies of scale that would accompany this growth are important because more clients require vendors to be of a certain size, and because size provides the operating leverage necessary to create competitive margins. Success in meeting the objectives outlined above will depend on, among other things, our ability to compete with other vendors, our ability to obtain qualified technical personnel, our success in obtaining new clients and our ability to implement those objectives.

The terms of our standard agreements with our customers allow the customers to terminate or reduce the amount of our services they purchase from us on short notice, and a limited number of customers comprise a significant portion of our revenues. The loss of one or more significant customers could negatively affect our business.

Terms and conditions standard to computer consulting services contracts also present a risk to our business. In general, our customers can cancel or reduce their contracts on short notice. A large portion of our revenue has and will likely continue to depend on sales to a limited number of customers. During fiscal 2006, sales to IBM 19% and Lexmark 6% accounted for approximately twenty-five percent (25%) of our revenues. Loss of either of these significant customer relationships or a significant portion thereof, a significant number of other relationships or a major contract could have a material adverse effect on our business.

Our ability to manage our working capital is critical to our continued growth and success.

We believe our working capital will be sufficient for the foreseeable needs of our business. Significant rapid growth in our business, a major acquisition or a significant lengthening of payment terms with major clients could create a need for additional working capital. An inability to obtain additional working capital on terms reasonably acceptable to us, should it be required, could have an adverse material effect on our business. Failure to comply with the requirements of our credit agreement could have a material adverse effect on our business.

Our financing agreement subjects the Company to certain market risks that could result in an increase in the Company's annual interest expense.

Our financing agreement with GE Capital Corporation carries a variable interest rate, which exposes us to certain market risks. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates.

Certain risks of our business are uninsured and a claim or claims could adversely affect our business.

We maintain standard insurance coverage such as general liability insurance, including coverage for errors and omissions, property insurance and auto insurance. We do not maintain coverage for employment practices liability or liability for infringement of the intellectual property of third parties.

6

We attempt to control the risk of not having infringement liability insurance by entering into service agreements with terms that either disclaim or limit our liability for such claims. We may not be able to do so in a definitive manner in all agreements. In addition, disclaimers or limitations of liability for infringement in our contracts may not be enforceable in all situations. We attempt to control the risk of liability for employment claims by implementing and following sound employment practices and policies and through employee training as we deem necessary. Even if the terms of our agreements are sufficient to protect us from liability for infringement, our employment practices are appropriate or we are otherwise successful in defending infringement or employment claims, costly and time-consuming litigation of any such claim could adversely impact our business. A large successful claim brought against us for infringement or employment practices could have an adverse effect on our business, operating results and financial condition.

Our quarterly operating results have varied, and are likely to continue to vary. This may result in volatility in the market price of our common stock.

Our quarterly revenues and operating results have varied in the past and are likely to vary from quarter to quarter. This may lead to volatility in our share price. Some other factors that may cause the market price of our common stock to fluctuate substantially include:

§  
the failure to be awarded a significant anticipated project;
§  
the termination by a client of a material contract or the timing of purchase order expiration on existing contracts;
§  
announcement of new services by us or our competitors;
§  
announcement of acquisitions or other significant transactions by us or our competitors
§  
changes in or failure to meet our earnings estimates or the estimates of securities analysts;
§  
sales of common stock by our existing shareholders or the perception that such sales may occur;
§  
sales of larger than normal volume in a short period of time;
§  
inclusion or exclusion of our stock in market indexes;
§  
adverse judgments or settlements obligating us to pay damage awards; and
§  
changes in management.

The introduction of competitive IT solutions embodying new technologies and the emergence of new industry standards may render our existing IT solutions or underlying technologies obsolete or unmarketable which could have an adverse effect on our business.

The IT solutions industry is characterized by rapid technological change, changing client requirements and new service and product introductions. The introduction of competitive IT solutions embodying new technologies and the emergence of new industry standards may render our existing IT solutions or underlying technologies obsolete or unmarketable. As a result, we are dependent in large part upon our ability to develop new IT solutions that address the increasingly sophisticated needs of our clients, keep pace with new competitive service, product offerings and emerging industry standards and achieve broad market acceptance. Our business will be adversely affected if we are not successful in developing and marketing new IT solutions that respond to technological change, changing client requirements or evolving industry standards.

Forward-Looking Statements

Statements contained herein, which are not strictly historical fact, are forward-looking statements.  Words such as “believes,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” and similar expressions are intended to identify forward-looking statements.   Any forward-looking statements made herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such statements are based on our current expectations for future demand for our products and services, and our beliefs with respect to the competition we face within our industry, as well as our revenues, earnings, results of operations and sales and such statements relate to, among other things, our growth strategies, cost-control methods, our working capital and cash requirements, our ability to meet the requirements of our credit agreement, and the realization of our deferred tax assets.  The Company’s actual results may vary materially from those projected due to certain risks and uncertainties such as the general state of the economy, volume of business activity, continued need for our services by current and prospective clients, client cancellations or re-bidding of work, the Company’s ability to control and improve profit margins, including our ability to control operating and labor costs and hourly rates for our services, the availability and utilization of qualified technical personnel and other similar factors.  For more information concerning risks and uncertainties related to the Company’s business, refer to the Company’s prior Annual Reports, 10-Ks, 10-Qs, other Securities and Exchange Commission filings and investor relations materials.  You should not place undue reliance on these forward-looking statements, which speak only as of the date they were made.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

7

Item 1B.
Unresolved Staff Comments.

None.

Item 2.
Properties.

Analysts International’s principal executive offices and the Minneapolis area office are located at 3601 West 76th Street, Minneapolis, Minnesota 55435, in a 134,000 square foot office building in which it occupies approximately 50,000 square feet. All other locations are held under leases with varying expiration dates ranging from 30 days to 6 years. See Note H of Notes to Consolidated Financial Statements in the annual report incorporated by reference in this Form 10-K as Exhibit 13.

Item 3.
Legal Proceedings.

There are no pending legal proceedings to which the Company is a party or to which any of its property is subject, other than routine litigation incidental to the business.

Item 4.
Submission of Matters to a Vote of Security Holders.
 
No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of fiscal 2006.


8

PART II


The following portions of the Company’s annual report to shareholders for the fiscal year ended December 30, 2006 are incorporated by reference in response to Items 5, 6, 7 and 8 as follows:

Items in Form 10-K
  
Caption/Section in Annual Report
  
Page
         
5
  
Market for Registrant’s Common Equity and Related Stockholder Matters
  
41
         
6
  
Selected Financial Data
  
42
         
7
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
9-21
         
8
  
Financial Statements, and Supplementary Data
  
22-37, 43

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.

Our financing agreement with GE Capital Corporation carries a variable interest rate, which exposes us to certain market risks. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. Market risk is estimated as the potential increase in fair value resulting from a hypothetical one percent increase in interest rates. For example, our outstanding balance on our line of credit averaged $9.4 million during 2006. A one percent increase in interest rates would result in an annual interest expense increase of approximately $94,000.

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

There have been no disagreements with or changes in the Company’s independent auditors within the past two fiscal years.

Item 9A.
Controls and Procedures.

(a)
Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s interim President and Chief Executive Officer, Michael J. LaVelle, and Chief Financial Officer, David J. Steichen, regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its reports filed under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules of the Securities Exchange Commission.

(b)
Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 30, 2006. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 30, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included in our Annual Report to Shareholders incorporated herein as Exhibit 13.

9


(c)
Changes in Internal Controls.

There were no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.
Other Information.

None.

10

PART III

The information regarding executive officers required by Item 10 is set forth under the caption “Executive Officers” on the inside back cover page of the Company’s annual report to shareholders. Other information called for in Part III, including information regarding directors and corporate governance of the registrant and corporate governance (Item 10), executive compensation (Item 11), security ownership of certain beneficial owners and management and related stockholder matters (Item 12), director independence (Item 13) and principal accounting fees and services (Item 14), is set forth in the Company’s definitive proxy statement for the annual meeting of shareholders to be held May 24, 2007, filed pursuant to Regulation 14A, as follows:

Items in Form 10-K
  
Caption in Definitive Proxy Statement
     
10
  
Election of Directors
     
10
  
Corporate Governance
     
11
  
Executive Compensation
     
12
  
Security Ownership of Certain Beneficial Owners and Management
     
13
  
Certain Relationships and Related Transactions, and Director Independence
     
14
  
Independent Audit Fees


11

PART IV


Item 15.
Exhibits and Financial Statement Schedules.

(a).(1)
Consolidated Financial Statements

The consolidated financial statements of Analysts International Corporation and its subsidiaries and the related independent registered public accounting firm’s reports are included in the following pages of its annual report to shareholders for the fiscal year ended December 30, 2006.

Description
  
Page in Annual Report
     
Consolidated balance sheets at December 30, 2006 and December 31, 2005.
 
22
     
Consolidated statements of operations for the years ended December 30, 2006, December 31, 2005, and January 1, 2005.
  
23
     
Consolidated statements of cash flows for the years ended December 30, 2006, December 31, 2005, and January 1, 2005.
  
24
     
Consolidated statements of shareholders’ equity for the years ended December 30, 2006, December 31, 2005, and January 1, 2005
  
25
     
Notes to Consolidated Financial Statements
  
26-37
     
Reports of Independent Registered Public Accounting Firm
  
38-39
     
Report of Management
  
40
     
Management’s Report on Internal Control Over Financial Reporting
  
40


(a).(2)
Consolidated Financial Statement Schedules

Description
  
Page Herein
     
Report of Independent Registered Public Accounting Firm
  
17
     
Schedule II. Valuation and Qualifying Accounts
  
18

Other consolidated financial statement schedules are omitted because they are not required or the information is presented in the consolidated financial statements or notes thereto.
 
12
(b)          Exhibits
 
 
Exhibit No.
 
 
Description
 
 
 
^  3-a
 
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-b
 
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-c
 
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-d
 
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-e
 
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-a
 
Specimen Common Stock Certificate (Exhibit 4(a) to Annual Report on Form 10-K for fiscal year 1989, Commission File No. 0-4090, incorporated by reference).
 
 
 
^  4-b
 
Rights Agreement dated as of June 16, 1989 between Analysts International Corporation and Norwest Bank Minnesota, N.A., as Rights Agent which includes the form of Rights Certificate and Summary of Rights (Exhibit A to the Registrant's Form 8-A dated June 16, 1989, Commission File No. 0-4090, incorporated by reference).
 
 
 
^  4-c
 
First Amendment to Rights Agreement dated as of May 8, 1990 between Analysts International Corporation and Norwest Bank Minnesota, N.A. as Rights Agent (Exhibit 4(c) to Annual Report on Form 10-K for fiscal year 1991, Commission File No. 0-4090, incorporated by reference).
 
 
 
^  4-d
 
Second Amendment to Rights Agreement dated as of April 30, 1996 between Analysts International Corporation and Norwest Bank Minnesota, N.A. as Rights Agent (Exhibit 4(d) to Annual Report on Form 10-K for fiscal year 1996, Commission File No. 0-4090, incorporated by reference).
 
 
 
^  4-e
 
Restated Rights Agreement dated as of June 16, 1989 and restated as of April 16, 1998 between Analysts International Corporation and Norwest Bank Minnesota, N.A. as Rights Agent (Exhibit 4-e to Annual Report on Form 10-K for fiscal year 1998, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-a
 
Deferred Compensation Plan (Exhibit 10-g to Annual Report on Form 10-K for fiscal year 1984, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-b
 
1994 Stock Option Plan (Exhibit A to Definitive Proxy Statement dated September 6, 1994 for registrant's 1994 Annual Meeting of Shareholders, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-c
 
1996 Stock Option Plan for Non-employee Directors (Exhibit B to Definitive Proxy Statement dated September 5, 1996, Commission File No. 0-4090, incorporated by reference).

 
13
 
 
 
*^  10-d
 
1999 Stock Option Plan (Exhibit A to Definitive Proxy Statement dated September 13, 1999, Commission File No. 0-4090, incorporated by reference).
 
 
 
^  10-e
 
Credit Agreement dated April 11, 2002 between Analysts International Corporation and General Electric Capital Corporation. (Exhibit 2.1 to Current Report on Form 8-K dated April 26, 2002, Commission File No. 0-4090, incorporated by reference).
 
 
 
^   10-f
 
First Amendment to Credit Agreement dated as of July 24, 2002. (Exhibit 10-l to Annual Report on Form 10-K for fiscal year 2002, Commission File No. 0-4090, incorporated by reference).
 
 
 
^  10-g
 
Waiver and Second Amendment to Credit Agreement dated as of April 7, 2003.  (Exhibit 10-m to Annual Report on Form 10-K for fiscal year 2003, Commission File No. 0-4090, incorporated by reference).
 
 
 
^  10-h
 
Third Amendment to Credit Agreement dated as of April 28, 2003.  (Exhibit 10-n to Annual Report on Form 10-K for fiscal year 2003, Commission File No. 0-4090, incorporated by reference).
 
 
 
 ^  10-i
 
Consent and Fourth Amendment to Credit Agreement dated as of December 31, 2003.  (Exhibit 10-o to Annual Report on Form 10-K for fiscal year 2003, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-j
 
2004 Equity Incentive Plan.  (Exhibit 10-p to Quarterly Report on Form 10-Q for period ended July 3, 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-k
 
Employment contract with Jeffrey P. Baker (Exhibit 10-q to Quarterly Report on Form 10-Q for period ended July 3, 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*  10-l
 
Fifth Amendment to Credit Agreement dated as of August 5, 2004.  (Exhibit 10-r to Quarterly Report on Form 10-Q for period ended October 2, 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
^  10-m
 
Consent and Sixth Amendment to Credit Agreement dated as of January 6, 2005 (Exhibit
10-t to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-n
 
Standard Nonqualified Stock Option Agreement for Board Members under 2004 Equity Incentive Plan (Exhibit 10-u to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-o
 
Standard Restricted Stock Agreement for Board Members under 2004 Equity Incentive Plan (Exhibit 10-v to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-p
 
Standard Nonqualified Stock Option Agreement for Certain Employees under 2004 Equity Incentive Plan (Exhibit 10-w to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-q
 
Standard Restricted Stock Agreement for Certain Employees under 2004 Equity Incentive Plan (Exhibit 10-x to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).

 
14
 
 
 
*^  10-r
 
Standard Incentive Stock Option Agreement for Certain Employees under 2004 Equity Incentive Plan (Exhibit 10-y to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-s
 
Change in Control Agreement between Analysts International Corporation and Jeffrey P. Baker dated as of June 18, 2004, as amended March 15, 2005 (Exhibit 10-z to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-t
 
Change in Control Agreement between Analysts International Corporation and John D. Bamberger dated as of December 18, 2000, as amended March 15, 2005  (Exhibit 10-bb to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-u
 
Change in Control Agreement between Analysts International Corporation and David J. Steichen dated as of December 18, 2000, as amended March 15, 2005 (Exhibit 10-cc to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-v
 
Change in Control Agreement between Analysts International Corporation and Colleen M. Davenport dated as of December 18, 2000, as amended March 15, 2005 (Exhibit 10-dd to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-w
 
Change in Control Agreement between Analysts International Corporation and Paulette M. Quist dated as of December 18, 2000, as amended March 15, 2005 (Exhibit 10-ee to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-x
 
Change in Control Agreement between Analysts International Corporation and Walter P. Michels dated as of March 15, 2005 (Exhibit 10-ff to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference.
 
 
 
*^  10-y
 
Change in Control Agreement between Analysts International Corporation and David H. Jenkins dated as of March 15, 2005 (Exhibit 10-gg to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-z
 
Change in Control Agreement between Analysts International Corporation and Praba Manivasager dated as of March 15, 2005 (Exhibit 10-hh to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-aa
 
Summary of 2005 Management Incentive Compensation Plan (Exhibit 10-ii to Annual Report on Form 10-K for fiscal year 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-bb
 
Summary of Terms and Conditions of Michael J. LaVelle’s Retirement and Consulting Agreement (Exhibit 10.2 to Current Report on Form 8-K filed December 21, 2005, Commission File No. 0-4090, incorporated by reference).
 
 
 
*^  10-cc
 
Summary of Terms and Conditions of Accelerated Stock Options effective December 30, 2005 (contained in Form 8-K, filed January 5, 2006, Commission File No. 0-4090, incorporated by reference).
 
 
 
 

 
15
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*+  10-jj
 
Restated Executive Retirement Plan dated as of December 27, 2006.
 
 
 
*+  10-kk
 
Form of incentive stock option agreement for long-term incentive grants made for 2007.
 
 
 
*+ 10-ll
 
Form of restricted stock award agreement for long-term incentive awards made January for 2007.
 
 
 
+  13
 
2006 Annual Report to Shareholders.
 
 
 
^  18
 
Letter of Preferability from Deloitte & Touche LLP regarding change in date for annual goodwill assessment (Exhibit 18 on Form 10-Q for period ended October 2, 2004, Commission File No. 0-4090, incorporated by reference).
 
 
 
+  21
 
Subsidiaries of Registrant.
 
 
 
+  23
 
Consent of Independent Registered Public Accounting Firm.
 
 
 
+  24
 
Powers of Attorney.
 
 
 
+  31.1
 
Certification of CEO under section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
+  31.2
 
Certification of CFO under section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
++  32
 
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
______________________________________________________________________________________
 
*
 
Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report pursuant to Item 15(b) of Form 10-K.
 
 
 
^
 
Denotes an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference.
 
 
 
+
 
Filed herewith.
 
 
 
++
 
Furnished herewith.
 
16

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Shareholders and Board of Directors
Analysts International Corporation
Minneapolis, Minnesota


We have audited the consolidated financial statements of Analysts International Corporation and subsidiaries (the “Company”) as of December 30, 2006, and December 31, 2005, and for each of the years ended December 30, 2006, December 31, 2005, and January 1, 2005, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 30, 2006, and the effectiveness of the Company’s internal control over financial reporting as of December 30, 2006, and have issued our reports thereon dated March 15, 2007; such consolidated financial statements and reports are included in your 2006 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15a.2. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.


/s/ Deloitte & Touche LLP
  
Minneapolis, Minnesota
  
March 15, 2007
  

17

Schedule II


Analysts International Corporation
Valuation and Qualifying Accounts


   
Additions
  
 
 
Description
  
Balance at
beginning of
period
  
Charged to
costs and
expenses
  
Write-offs,
net of
recoveries
  
Balance at
end of
period
  
                   
Allowance for doubtful accounts:
                      
                       
Twelve months ended December 30, 2006
  
$
2,106,000
  
$
750,000
  
$
1,433,000
  
$
1,423,000
  
                           
Twelve months ended December 31, 2005
  
$
1,809,000
  
$
1,615,000
  
$
1,318,000
  
$
2,106,000
  
                           
Twelve months ended January 1, 2005
  
$
1,508,000
  
$
630,000
  
$
329,000
  
$
1,809,000
  

18

SIGNATURES


Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
ANALYSTS INTERNATIONAL CORPORATION
     
Date: March 15, 2007
By:
/s/ Michael J. LaVelle
   
Michael J. LaVelle, Interim President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
  
Title
  
Date
         
/s/ Michael J. LaVelle
  
Interim President and Chief Executive Officer/Chairman of the Board
  
March 15, 2007
Michael J. LaVelle
  
(Principal Executive Officer)
    
         
/s/ David J. Steichen
  
Chief Financial Officer and Treasurer
  
March 15, 2007
David J. Steichen
  
(Principal Finance and Accounting Officer)
    
         
   
Director
    
Brigid A. Bonner*
        
         
   
Director
    
Krzysztof K. Burhardt*
        
         
   
Director
    
Willard W. Brittain*
        
         
   
Director
    
Michael B. Esstman*
        
         
   
Director
    
Margaret A. Loftus*
        
         
   
Director
    
Robb L. Prince
        


*Michael J. LaVelle, by signing his name hereto, hereby signs this Form 10-K on behalf of the persons indicated pursuant to powers of attorney filed herewith.

 
/s/ Michael J. LaVelle
 
Michael J. LaVelle, Interim President and Chief Executive Officer


19


 EX-10.JJ 2 exhibit10-jj.htm RESTATED SPECIAL EXECUTIVE RETIREMENT PLAN Restated Special Executive Retirement Plan
Exhibit 10-jj
 
RESTATED SPECIAL EXECUTIVE RETIREMENT PLAN
 
Analysts International Corporation (the “Company”) established the Special Executive Retirement Plan (the “Plan”) effective as of June 21, 1984, which has been amended from time to time.  The Company further desires to amend and restate the Plan, generally effective January 1, 2005, to comply with Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations, notices and other guidance of general applicability issued thereunder (hereinafter referred to as “Code Section 409A”).
                1.             Purpose.  The purpose of the Plan is to assist the Company’s key senior executives with retirement and to encourage them to remain in the Company’s employ.  The Plan is an arrangement maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees and is intended to be an unfunded arrangement for tax purposes and purposes of Title I of the Employee Retirement Income Security Act of 1974.
                2.             Participants.  The Board of Directors of the Company shall, from time to time, select those key senior executives who shall participate in the Plan (hereinafter referred to as a “Participant”).  Exhibit A reflects those key senior executives who have been selected to participate in the Plan as of December 30, 2005.
                3.             Amount of Benefit; Bookkeeping Accounts
                                a.             Initial Account Balance.  For each Participant, the Company shall calculate the present value of all benefits accrued by such Participant under the Plan as it read prior to this restatement as of December 30, 2005, using a discount rate of 6%.  Such amount shall be credited to a bookkeeping account (the “Deferred Compensation Account”) in the name of the Participant.
                                b.             Basic Employer Contributions.  Effective for Plan Years beginning on and after January 1, 2006, the Company shall make a basic employer contribution to the Participant’s Company Contribution Account, which is a subaccount of the Participant’s Deferred Compensation Account.  Such basic employer contribution shall be determined according to the following schedule:
                                                Chief Executive Officer                        20% of Base Salary
                                                All Other Executive Officers               15% of Base Salary
 
                                c.             Supplemental Employer Contributions.  Effective for Plan Years beginning on and after January 1, 2006, the Company may, in its discretion, credit additional amounts to the Participant’s Company Contribution Account.  The amount of such additional contribution, if any, shall be determined by the Company’s Board of Directors, and may be determined based on the Participant’s or the Company’s performance.
                d.             Participant Deferrals.  A Participant may file, on a form prescribed by the Company, prior to the later of (i) the first day of the Plan Year, and (ii) the 31st day after the key senior executive employee first becomes a Participant, an irrevocable election to defer the receipt of up to 50% of the base salary and up to 100% of the bonus compensation payable to the Participant during such Plan Year.  Such election shall apply only to compensation or fees earned for services performed after the election is filed.  Amounts so deferred shall be credited to the Participant’s Salary Deferral Account, which is a subaccount of the Participant’s Deferred Compensation Account.  Notwithstanding the foregoing, a Participant’s election shall be immediately revoked if the Participant receives a hardship distribution from the Company’s 401(k) Plan.
                                e.             Value of Deferred Compensation Account.  The value of a Participant’s Deferred Compensation Account at any time shall be the sum of the Salary Deferral Account and Company Contribution Account, adjusted as follows:
                                                i.              Company Contribution Account.  The Participant’s Company Contribution Account shall be adjusted for interest, compounded annually, at a rate equal to the 10-year Treasury bill rate in effect as of the January 1st of each year plus 1%, 2% or 3%, as determined by the Board of Directors and communicated to Participants from time to time.  Such interest adjustments shall continue until all amounts credited to such Account have been distributed as provided in Section 5 below.
                                                ii.            Salary Deferral Account. 
                                                               a.             The Participant’s Salary Deferral Account shall be adjusted for interest, compounded annually, at a rate equal to the 10-year Treasury bill rate in effect as of the January 1st of each year plus 1%, 2% or 3%, as determined by the Company’s Board of Directors and communicated to Participants from time to time.  Such interest adjustments shall continue until all amounts credited to such Account have been distributed as provided in Section 5 below. 
                                                               b.             Notwithstanding the foregoing, the Company may, in its sole discretion, provide for the adjustment of the Participant’s Salary Deferral Account for investment earnings and losses calculated by assuming that the Participant has invested his or her Salary Deferral Account in one or more investment funds selected by the Participant from a list of investment funds made available by the Company.  The Company may, at any time and in its sole discretion, change the investment funds that it makes available, but only with respect to future periods.  The Participant may change his or her selection of investment funds from among those available at any time.  Neither the Company, its Board of Directors, nor any member of the Board of Directors, nor any agent, employee or advisor of the Company shall be liable for any decrease in the Participant’s Salary Deferral Account as a result of the performance or lack thereof of any investment fund selected by the Participant.

 
                4.             Vesting.  A Participant’s Deferred Compensation Account shall be fully vested at all times.
                5.             Distributions.
                                a.             Time of Distribution; Specified Date, Separation from Service or Death.  Except as otherwise provided in this Section 5, payment of the Participant’s Deferred Compensation Account shall be made or commence to the Participant (or, in the event of the Participant’s death to the Participant’s Beneficiary) on the latest of (i) the date specified by the Participant in his or her deferral election, (ii) within thirty (30) days following the date of the Participant’s Separation from Service, and (iii) within thirty (30) days following the date of the Participant’s death.  The Participant may elect a new distribution date for his or her Deferred Compensation Account; provided, however, that such election must be made at least twelve (12) months prior to the original distribution date and must postpone payment for at least five (5) years after such original distribution date.
                                b.             Time of Distribution; Disability.  Except as otherwise provided in this Section 5, in the event of the Participant’s Disability, payment of the Participant’s Deferred Compensation Account shall be made or commence to the Participant three (3) months following the commencement of the Participant’s benefits under the Company’s group long-term disability plan. 
                                c.             Special Rule for Key Employees.  Notwithstanding anything in this Section 5 to the contrary, if the Company determines that the Participant is a “specified employee” as defined in Code Section 409A as of the date of the Participant’s Separation from Service, payment of the Participant’s Deferred Compensation Account shall not be made or commence earlier than the date that is six months after the date of the Participant’s Separation from Service, but shall be made or commence during the calendar year following the year in which the Separation from Service occurs and within 30 days of the earliest possible date permitted under Code Section 409A.
                                d.             Form of Distribution. Distribution of the Participant’s Deferred Compensation Account shall be made in cash, in a single lump-sum payment or in 120 monthly installments, as elected by the Participant; provided however, that the Participant’s election to receive his or her Deferred Compensation Account in the form of monthly installments shall not be effective unless the value of the Participant’s Deferred Compensation Account equals or exceeds $120,000 as of the date of his or her election, in which case the Participant shall receive the entire value of his or her Deferred Compensation Account in the form of a single lump-sum payment; and provided, further, that if the Participant has not elected a form of distribution, the Participant’s Deferred Compensation Account shall be distributed in the form of a single-lump sum payment.
                                e.             Special Elections.
                                                (i)            Prior to December 31, 2005, a Participant may elect to terminate his or her participation in the Plan and receive the entire balance of his or her Deferred Compensation Account in cash, in a single lump-sum payment. 
                                                (ii)           Notwithstanding anything in the Plan to the contrary, prior to December 31, 2007, a Participant may file a one-time election (the “Special Election”) to select a distribution date and form of distribution; provided, however, that, with respect to a Special Election made on or after January 1, 2006, and on or before December 31, 2006, such Special Election shall not postpone the payment of any retirement benefit that was otherwise scheduled to be made during calendar year 2006 nor accelerate payment of the Participant’s retirement benefit to a date within calendar year 2006; and provided, further, that, with respect to a Special Election made on or after January 1, 2007, and on or before December 31, 2007, such Special Election shall not postpone the payment of any retirement benefit that was otherwise scheduled to be made during calendar year 2007 nor accelerate payment of the Participant’s retirement benefit to a date within calendar year 2007.  Under any such Special Election, the Participant shall not be required to postpone payment for at least five (5) years after the distribution event.  Such election shall be subject to such administrative rules as the Employer may deem necessary or desirable for compliance with Code Section 409A and the notices, regulations and other guidance of general applicability issued thereunder.
                6.             Change of Control.  In the event of a Change of Control, the Company shall, immediately prior to the effective date of the Change of Control, contribute sufficient funds to a Trust to provide for payment of all benefits due to Participants under the terms of the Plan.  Further, the Company (or the surviving entity, as the case may be) may, in its discretion, terminate the Plan within twelve (12) months immediately following the Change of Control.  In the event the Plan is terminated pursuant to this Section 6, all benefits due to Participants under the terms of the Plan shall be paid in a single lump-sum payment within twelve (12) months of the date of termination.
 
 

                7.             Definitions.
                                a.             Affiliate.  “Affiliate” means any entity under common control with the Company pursuant to Sections 414(b), (c) and (m) of the Internal Revenue Code of 1986, as amended, and the regulations issued thereunder.
                                b.             Beneficiary.  “Beneficiary” means the person or persons, natural or otherwise, designated by a Participant to receive benefits in the event of the Participant’s death.  A Participant may revoke or change his or her beneficiary designation at any time without the consent of the Beneficiary.  To be effective, such designation, revocation or alteration shall be in writing, in a form approved by the Company, and shall be filed with and accepted by the Company.  The most recently dated beneficiary designation form which is validly filed with the Company by a Participant shall revoke all previously dated beneficiary designation forms filed by such Participant.  If a Participant fails to designate a Beneficiary or if no Beneficiary designated by the Participant survives the Participant, any remaining payments shall be paid to the Participant’s estate.  If a Beneficiary dies before receiving all of the payments to which such Beneficiary is entitled, any remaining payments shall be paid to such Beneficiary’s estate.
                                c.             Change of Control.              For purposes of this Plan, “Change of Control” means:
                                                i.              The purchase or other acquisition by any one person, or more than one person acting as a group, of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total combined value or total combined voting power of all classes of stock issued by the Company; provided, however, that if any one person or more than one person acting as a group is considered to own more than 50% of the total combined value or total combined voting power of such stock, the acquisition of additional stock by the same person or persons shall not be considered a change of control;
                                                ii.             A merger or consolidation to which the Company is a party if the individuals and entities who were shareholders of the Company immediately prior to the effective date of such merger or consolidation have, immediately following the effective date of such merger or consolidation, beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power of all classes of securities issued by the surviving entity for the election of directors of the surviving entity;
                                                iii.            Any one person, or more than one person acting as a group, acquires or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons, direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of stock of the Company constituting more thirty-five percent (35%) or more of the total combined voting power of all classes of stock issued by the Company;
                                                iv.            The purchase or other acquisition by any one person, or more than one person acting as a group, of substantially all of the total gross value of the assets of the Company during the twelve (12) month period ending on the date of the most recent purchase or other acquisition by such person or persons.  For purposes of this Section 7(b)(iv), “gross value” means the value of the assets of the Company or the value of the assets being disposed of, as the case may be, determined without regard to any liabilities associated with such assets; or
                                                v.             A change in the composition of the Board of the Company at any time during any consecutive twelve-month (12) month period such that the “Continuity Directors” no longer constitute at least a fifty percent (50%) majority of the Board.  For purposes of this event, “Continuity Directors” means those members of the Board who were directors at the beginning of such consecutive twelve (12) month period or were elected by, or on the nomination or recommendation of, at least a two thirds (2/3) majority of the then-existing Board of Directors.
In all cases, the determination of whether a Change of Control has occurred shall be made in accordance with Code Section 409A and the regulations, notices and other guidance of general applicability issued thereunder.
                                d.             Disability.  “Disability” means a medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of at least twelve (12) months and which renders the Participant unable to engage in any substantial gainful activity.  Such Disability shall be established by the certificate of a medical doctor chosen by or satisfactory to the Company.
                                e.             401(k) Plan.  “401(k) Plan” means the Analysts International Corporation Savings and Investment Plan.
                                f.              Separation From Service.  “Separation from Service” means termination of employment with the Company and all Affiliates for any reason, including but not limited to voluntary resignation, termination by the Company (either with or without cause) or death.  A Participant shall not be deemed to have a Separation from Service while the Participant is on military leave, sick leave or other bona fide leave of absence if the period of the leave does not exceed six (6) months or, if longer, the Participant’s right to reemployment with the Company is provided either by statute or contract.  If the period of leave exceeds six (6) months and the Participant’s right to reemployment is not provided either by statute or contract, the Participant shall be deemed to have a Separation from Service on the first day immediately following such six (6) month period.
                                g.             Plan Year.  “Plan year” means the twelve-month period beginning January 1st and ending December 31st.
                                h.             Trust.  “Trust” means a grantor trust, if any, established in connection with the Plan, which conforms to the terms of the model trust agreement set forth in Revenue Procedure 92-64, I.R.B. 1992-33.
 

 
                8.             Nature of Company’s Obligations.  The Plan constitutes a mere promise by the Company to make benefit payments in the future.  The amounts credited to bookkeeping accounts and amounts payable hereunder shall at all times be and remain a general unsecured obligation of the Company, and the right of the Participant to such benefits shall be the rights of a general unsecured creditor.  Notwithstanding the foregoing, the Company, at its sole option, may provide for such payments in any manner which it deems prudent, including but not limited to the acquisition of one or more policies of insurance or other investments or set-asides, such policies, set-asides or investments at all times to remain free and clear of any interest therein by any Participant.
                9.             Relationship of the Plan to Present Company Benefits.  This Plan is intended to supplement Social Security, and benefits shall not be reduced by virtue of any Social Security payments.  This Plan replaces and supersedes the rights of the Participants under the existing Deferred Compensation Plan.
                10.           General
                                a.             Nontransferability.  No Participant or the estate or heirs at law of any Participant shall have any right to assign, encumber or otherwise anticipate the right to receive payment hereunder, and the value of the Participant’s Deferred Compensation Account under the Plan shall not be subject to garnishment, attachment or any other legal process by the creditors of any Participant or the estate or heirs at law of any Participant hereunder.
                                d.             Payment in Case of Incompetency.  If, in the judgment of the Company based upon facts and information readily available to it, any person entitled to receive a payment hereunder is incapable for any reason of personally receiving and giving a valid receipt for the payment of a benefit, the Company may cause such payment or any part thereof to be made to the duly appointed guardian or legal representative of such person, or to any person or institution contributing to or providing for the care and maintenance of such person, provided that no prior claim for said payment has been made by a duly appointed guardian or legal representative of such person.  The Company shall not be required to see to the proper application of any such payment made in accordance with the provisions hereof, and any such payment shall constitute payment for the account of such person and a full discharge of any liability or obligation of the Company.
                                                In the event the Board of Directors terminates the Plan, distribution of all Participants’ deferred compensation benefits shall be made within the time prescribed by and in accordance with Code Section 409A.  Further, the Company shall terminate all deferred compensation arrangements required to be aggregated with this Plan under Code Section 409A, and shall not establish a new deferred compensation arrangement at any time within five (5) years following the date of the termination of this Plan if such new arrangement would be aggregated with this Plan under Code Section 409A
                                l.              Governing Law.  The provisions of the Plan shall be construed and enforced according to the laws of the State of Minnesota to the extent that such laws are not preempted by any applicable federal law.
                m.            Administration.  The Compensation Committee of the Board of Directors shall have the responsibility of providing the responsible officers and other employees of the Company with the necessary information to properly maintain any bookkeeping accounts established pursuant to this Plan and shall take the necessary steps to assure that proper credits or other adjustments are made to such bookkeeping accounts.  In all other respects, the Plan shall be administered by the Board of Directors; provided, however, that, except for the power to amend and terminate the Plan, the Board of Directors may delegate such powers and duties to the Compensation Committee.
 
Analysts International Corporation has caused this Plan, as amended and restated, to be executed by its duly authorized officer as of this _____ day of ___________, 2006.
 

 
ANALYSTS INTERNATIONAL CORPORATION
   
   
By
  __________________________________
Its
  __________________________________
   
   
 
 


 

 
 
EXHIBIT A
TO
Analysts International Corporation
RESTATED SPECIAL EXECUTIVE RETIREMENT PLAN
 
 
 
 
Participants of December 30, 2005:
 
 
Jeffrey P. Baker
John D. Bamberger
Colleen M. Davenport
Michael J. LaVelle (Terminated participation effective 12/31/05)
David J. Steichen
Paulette M. Quist 
EX-10.KK 3 exhibit10-kk.htm INCENTIVE STOCK OPTION AGREEMENT Incentive Stock Option Agreement
Exhibit 10-kk

INCENTIVE STOCK OPTION AGREEMENT

ANALYSTS INTERNATIONAL CORP.
2004 EQUITY INCENTIVE PLAN


THIS AGREEMENT, made effective as of this ____ day of January 3, 2007, by and between Analysts International Corp., a Minnesota corporation (the “Company”), and _______________________________ (“Participant”).

W I T N E S S E T H:

WHEREAS, Participant on the date hereof is a key employee or officer of the Company or one of its Subsidiaries; and

WHEREAS, the Company wishes to grant an incentive stock option to Participant to purchase shares of the Company’s Common Stock pursuant to the Company’s 2004 Equity Incentive Plan (the “Plan”);

WHEREAS, certain of the terms of this Stock Option Agreement (the “Agreement”) are included herein pursuant to the Company’s 2007 Long-Term Incentive Plan; and

WHEREAS, the Board of Directors has authorized the grant of an incentive stock option to Participant and has determined that, as of the effective date of this Agreement, the fair market value of the Company’s Common Stock is $1.91 per share;

NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto agree as follows:

1. Grant of Option. The Company hereby grants to Participant on the date set forth above (the “Date of Grant”), the right and option (the “Option”) to purchase all or portions of an aggregate of   ( ) shares of Common Stock (the “Shares”) at a per share price of $1.91 on the terms and conditions set forth herein, and subject to adjustment pursuant to Section 12 of the Plan. This Option is intended to be an incentive stock option within the meaning of Section 422, or any successor provision, of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations thereunder, to the extent permitted under Code Section 422(d).

2. Duration and Exercisability.

a. General. The term during which this Option may be exercised shall terminate on the close of business on January 2, 2017, except as otherwise provided in Paragraphs 2(b) through 2(d) below. This Option shall become exercisable according to the following terms:


 
(i)  If the Company’s audited annual period financial statements for its 2007 fiscal year demonstrate that the Company generated positive net income during its 2007 fiscal year (“2007 Net Income”), the Option granted hereunder shall become exercisable with respect to 331/3% of the Shares;

(ii)  If the Company’s audited annual period financial statements for its 2008 fiscal year demonstrate that the Company’s 2008 net income was at least five percent (5%) greater than the 2007 Net Income, the Option granted hereunder shall become exercisable with respect to 331/3% of the Shares;

(iii) If the Company’s audited annual period financial statements for its 2009 fiscal year demonstrate that the Company’s 2009 net income was at least ten percent (10%) greater than the 2007 Net Income, the Option granted hereunder shall become exercisable with respect to 331/3% of the Shares;

If the vesting provisions of any of the Sections 2(a)(i)-2(a)(iii) are not satisfied for any vesting period, the Option that would have become exercisable with respect to such Shares shall be forfeited only with respect to such period in which the vesting provisions were not satisfied. Once the Option becomes exercisable with respect to any portion of the Shares, Participant may continue to exercise this Option with respect to such Shares under the terms and conditions of this Agreement until the termination of the Option as provided herein. If Participant does not purchase upon an exercise of this Option the full number of Shares which Participant is then entitled to purchase, Participant may purchase upon any subsequent exercise prior to this Option’s termination such previously unpurchased Shares in addition to those Participant is otherwise entitled to purchase.

b. Termination of Employment (other than Disability or Death). If Participant’s employment with the Company or any Subsidiary is terminated for any reason other than disability or death, this Option shall completely terminate on the earlier of (i) the close of business on the three-month anniversary date of such termination of employment, and (ii) the expiration date of this Option stated in Paragraph 2(a) above. In such period following the termination of Participant’s employment, this Option shall be exercisable only to the extent the Option was exercisable on the vesting date immediately preceding such termination of employment, but had not previously been exercised. To the extent this Option was not exercisable upon such termination of employment, or if Participant does not exercise the Option within the time specified in this Paragraph 2(b), all rights of Participant under this Option shall be forfeited.

c. Disability. If Participant’s employment terminates because of disability (as defined in Code Section 22(e), or any successor provision), this Option shall terminate on the earlier of (i) the close of business on the twelve-month anniversary date of the such termination of employment, and (ii) the expiration date of this Option stated in Paragraph 2(a) above. In such period following the termination of Participant’s employment, this Option shall be exercisable only to the extent the Option was exercisable on the vesting date immediately preceding such termination of employment, but had not previously been exercised. To the extent this Option was not exercisable upon such termination of employment, or if Participant does not exercise the Option within the time specified in this Paragraph 2(c), all rights of Participant under this Option shall be forfeited.

d. Death. In the event of Participant’s death, this Option shall terminate on the earlier of (i) the close of business on the twelve-month anniversary date of the date of Participant’s death, and (ii) the expiration date of this Option stated in Paragraph 2(a) above. In such period following Participant’s death, this Option shall be exercisable by the person or persons to whom Participant’s rights under this Option shall have passed by Participant’s will or by the laws of descent and distribution only to the extent the Option was exercisable on the vesting date immediately preceding the date of Participant’s death. To the extent this Option was not exercisable upon the date of Participant’s death, or if such person or persons do not exercise this Option within the time specified in this Paragraph 2(d), all rights under this Option shall be forfeited.

3.  Manner of Exercise.

a. General. The Option may be exercised only by Participant (or other proper party in the event of death or incapacity), subject to the conditions of the Plan and subject to such other administrative rules as the Board may deem advisable, by delivering within the Option Period written notice of exercise to the Company at its principal office. The notice shall state the number of Shares as to which the Option is being exercised and shall be accompanied by payment in full of the Option price for all shares designated in the notice. The exercise of the Option shall be deemed effective upon receipt of such notice by the Company and upon payment that complies with the terms of the Plan and this Agreement. The Option may be exercised with respect to any number or all of the Shares as to which it can then be exercised and, if partially exercised, may be so exercised as to the unexercised shares any number of times during the Option period as provided herein.


b. Form of Payment. Subject to approval by the Administrator, payment of the option price by Participant shall be in the form of cash, personal check, certified check or previously acquired shares of Common Stock of the Company, or any combination thereof. Any stock so tendered as part of such payment shall be valued at its Fair Market Value as provided in the Plan. For purposes of this Agreement, “previously acquired shares of Common Stock” shall include shares of Common Stock that are already owned by Participant at the time of exercise.

c. Stock Transfer Records. As soon as practicable after the effective exercise of all or any part of the Option, Participant shall be recorded on the stock transfer books of the Company as the owner of the Shares purchased, and the Company shall deliver to Participant one or more duly issued stock certificates evidencing such ownership. All requisite original issue or transfer documentary stamp taxes shall be paid by the Company.

4. Miscellaneous.

a. Employment; Rights as Shareholder. This Agreement shall not confer on Participant any right with respect to continuance of employment by the Company or any of its Subsidiaries, nor will it interfere in any way with the right of the Company to terminate such employment. Participant shall have no rights as a shareholder with respect to shares subject to this Option until such Shares have been issued to Participant upon exercise of this Option. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such Shares are issued, except as provided in Section 12 of the Plan.

b. Securities Law Compliance. The exercise of all or any parts of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. Participant may be required by the Company, as a condition of the effectiveness of any exercise of this Option, to agree in writing that all Common Stock to be acquired pursuant to such exercise shall be held, until such time that such Common Stock is registered and freely tradable under applicable state and federal securities laws, for Participant’s own account without a view to any further distribution thereof, that the certificates for such Shares shall bear an appropriate legend to that effect and that such Shares will be not transferred or disposed of except in compliance with applicable state and federal securities laws.

c. Mergers, Recapitalizations, Stock Splits, Etc. Pursuant and subject to Section 12 of the Plan, certain changes in the number or character of the Common Stock of the Company (through sale, merger, consolidation, exchange, reorganization, divestiture (including a spin-off), liquidation, recapitalization, stock split, stock dividend or otherwise) shall result in an adjustment, reduction or enlargement, as appropriate, in Participant’s rights with respect to any unexercised portion of the Option (i.e., Participant shall have such “anti-dilution” rights under the Option with respect to such events, but shall not have “preemptive” rights).

d. Shares Reserved. The Company shall at all times during the option period reserve and keep available such number of shares as will be sufficient to satisfy the requirements of this Agreement.

e. Withholding Taxes on Disqualifying Disposition. In the event of a disqualifying disposition of the shares acquired through the exercise of this Option, Participant hereby agrees to inform the Company of such disposition. Upon notice of a disqualifying disposition, the Company may take such action as it deems appropriate to insure that, if necessary to comply with all applicable federal or state income tax laws or regulations, all applicable federal and state payroll, income or other taxes are withheld from any amounts payable by the Company to Participant. If the Company is unable to withhold such federal and state taxes, for whatever reason, Participant hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal or state law. Participant may, subject to the approval and discretion of the Board or such administrative rules it may deem advisable, elect to have all or a portion of such tax withholding obligations satisfied by delivering shares of the Company’s Common Stock or by electing to have the Company withhold shares of Common Stock otherwise issuable to Participant. Such shares shall have a Fair Market Value equal to the minimum required tax withholding, based on the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, which are applicable to the supplemental income resulting from the disqualifying disposition of the shares acquired through the exercise of this Option. In no event may the Company withhold shares having a Fair Market Value in excess of such statutory minimum required tax withholding.

f. Nontransferability. During the lifetime of Participant, the accrued Option shall be exercisable only by Participant or by the Participant’s guardian or other legal representative, and shall not be assignable or transferable by Participant, in whole or in part, other than by will or by the laws of descent and distribution.


g. 2004 Equity Incentive Plan. The Option evidenced by this Agreement is granted pursuant to the Plan, a copy of which Plan has been made available to Participant and is hereby incorporated into this Agreement. This Agreement is subject to and in all respects limited and conditioned as provided in the Plan. The Plan governs this Option and, in the event of any questions as to the construction of this Agreement or in the event of a conflict between the Plan and this Agreement, the Plan shall govern, except as the Plan otherwise provides.

h. Lockup Period Limitation. Participant agrees that in the event the Company advises Participant that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and that the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Participant hereby agrees that for a period not to exceed 180 days from the prospectus, Participant will not sell or contract to sell or grant an option to buy or otherwise dispose of this option or any of the underlying shares of Common Stock without the prior written consent of the underwriter(s) or its representative(s).

i. Blue Sky Limitation. Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any state securities or Blue Sky law limitations with respect thereto, the Board of Directors of the Company shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives Participant 15 days’ prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Participant pursuant to the Plan which is not exercised prior to or contemporaneously with such public offering. Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to Participant at the address of Participant on file with the Company.

j. Accounting Compliance. Participant agrees that, if a merger, reorganization, liquidation or other “transaction” as defined in Section 12 of the Plan occurs and Participant is an “affiliate” of the Company or any Subsidiary (as defined in applicable legal and accounting principles) at the time of such transaction, Participant will comply with all requirements of Rule 145 of the Securities Act of 1933, as amended, and the requirements of such other legal or accounting principles, and will execute any documents necessary to ensure such compliance.

k. Stock Legend. The Board may require that the certificates for any shares of Common Stock purchased by Participant (or, in the case of death, Participant’s successors) shall bear an appropriate legend to reflect the restrictions of Paragraph 4(b) and Paragraphs 4(h) through 4(j) of this Agreement.
 
          l. Scope of Agreement. This Agreement shall bind and inure to the benefit of the Company and its successors and assigns and Participant and any successor or successors of Participant permitted by Paragraph 2 or Paragraph 4(f) above.
 
m. Arbitration. Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy. If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be a retired state or federal judge or an attorney who has practiced securities or business litigation for at least 10 years. If the parties cannot agree on an arbitrator within 20 days, any party may request that the chief judge of the District Court for Hennepin County, Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement. Limited civil discovery shall be permitted for the production of documents and taking of depositions. Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute. The arbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant; provided, however, that punitive or exemplary damages shall not be awarded. The arbitrator may award to the prevailing party, if any, as determined by the arbitrator, all of its costs and fees, including the arbitrator’s fees, administrative fees, travel expenses, out-of-pocket expenses and reasonable attorneys’ fees. Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Hennepin County, Minnesota.



IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.

 
ANALYSTS INTERNATIONAL CORPORATION
   
   
By
  __________________________________
Its
  __________________________________
   
   __________________________________
 
 Participant


EX-10.LL 4 exhibit10-ll.htm RESTRICTED STOCK AGREEMENT Restricted Stock Agreement

Exhibit 10-ll


RESTRICTED STOCK AGREEMENT

ANALYSTS INTERNATIONAL CORP.
2004 EQUITY INCENTIVE PLAN


THIS AGREEMENT, made effective as of this 3 day of January, 2007, by and between Analysts International Corp., a Minnesota corporation (the “Company”), and ___________________ (“Participant”).

W I T N E S S E T H:

WHEREAS, the Participant on the date hereof is a key employee or officer of the Company; and

WHEREAS, the Company wishes to grant a restricted stock award to Participant for shares of the Company’s Common Stock pursuant to the Company’s 2004 Equity Incentive Plan (the “Plan”);

WHERAS, certain of the terms of this Restricted Stock Agreement (the “Agreement”) are included herein pursuant to the Company’s 2007 Long-Term Incentive Plan; and 

WHEREAS, the Administrator of the Plan has authorized the grant of a restricted stock award to the Participant;

NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto agree as follows:

1. Grant of Restricted Stock Award. The Company hereby grants to Participant on the date set forth above a restricted stock award (the “Award”) for _____________________ ( ) shares of Common Stock (the “Shares”) on the terms and conditions set forth herein, and subject to adjustment pursuant to Section 12 of the Plan. The Company shall cause to be issued a stock certificate representing such shares of Common Stock in the Participant’s name, and shall deliver such certificate to the Participant; provided, however, that the Company shall place a legend on such certificate describing the risks of forfeiture and other transfer restrictions set forth in this Agreement and providing for the cancellation and return of such certificate if such shares of Common Stock are forfeited as provided in Section 2 below. Until such risks of forfeiture have lapsed or the shares subject to this Award have been forfeited pursuant to Section 2 below, the Participant shall be entitled to vote the shares represented by such stock certificates and shall receive all dividends attributable to such shares, but the Participant shall not have any other rights as a shareholder with respect to such shares.

2. Vesting of Restricted Stock.

a.  The shares of Stock subject to this Award shall remain forfeitable until the risks of forfeiture lapse according to the following vesting provisions:
 
(i) If the Company’s audited annual period financial statements for its 2007 fiscal year demonstrate that the Company generated positive net income during its 2007 fiscal year (“2007 Net Income”), the risk of forfeiture shall lapse with respect to 331/3% of the Shares and such Shares shall be considered vested;

(ii) If the Company’s audited annual period financial statements for its 2008 fiscal year demonstrate that the Company’s 2008 net income was at least five percent (5%) greater than the 2007 Net Income, the risk of forfeiture shall lapse with respect to 331/3% of the Shares and such Shares shall be considered vested;

(iii) If the Company’s audited annual period financial statements for its 2009 fiscal year demonstrate that the Company’s 2009 net income was at least ten percent (10%) greater than the 2007 Net Income, the risk of forfeiture shall lapse with respect to 331/3% of the Shares and such Shares shall be considered vested;
 
Shares that do not vest in any vesting period shall be forfeited. If the Participant’s employment with the Company (or a subsidiary of the Company) ceases at any time prior to the vesting of all of the Shares hereunder for any reason, including the Participant’s voluntary resignation or retirement but excluding termination by the Company without “cause,” the Participant shall immediately forfeit all Shares subject to this Award which have not yet vested and for which the risks of forfeiture have not lapsed. If the Participant’s employment or other relationship is terminated by the Company without “cause” prior to the vesting date for this Award, all risks of forfeiture on the Shares subject to this Award shall immediately lapse.

b. Solely for purposes of this Paragraph 2(b), “cause” shall mean (i) Participant charged with a felony or convicted of any criminal misdemeanor or more serious act; (ii) any intentional and/or willful act of fraud or dishonesty by Participant related to or connected with Participant’s employment by the Company or any of its Affiliates; (iii) the willful and/or continued failure, neglect or refusal by Participant to perform his or her employment duties with the Company or any of its Affiliates, (iv) a material violation of the Participant’s or an Affiliate’s policies or codes of conduct; or (v) the willful and/or material breach by Participant of any agreement between Participant and the Company or any of its Affiliates, including but not limited to an employment agreement or a noncompetition agreement.

3. Miscellaneous.

a. Employment-at-Will. This Agreement shall not confer on Participant any right with respect to continuance of employment by the Company or any of its Affiliates, nor will it interfere in any way with the right of the Company to terminate such employment. Participant’s employment relationship with the Company and its Affiliates shall be employment-at-will, and nothing in this Agreement shall be construed as creating an employment contract for any specified term between Participant and the Company or any Affiliate.

b. Securities Law Compliance. Participant shall not transfer or otherwise dispose of the Shares received pursuant to this Agreement until such time as counsel to the Company shall have determined that such transfer or other disposition will not violate any state or federal securities laws. The Participant may be required by the Company, as a condition of the effectiveness of this restricted stock award, to agree in writing that all Shares subject to this Agreement shall be held, until such time that such Shares are registered and freely tradable under applicable state and federal securities laws, for Participant’s own account without a view to any further distribution thereof, that the certificates for such shares shall bear an appropriate legend to that effect and that such Shares will be not transferred or disposed of except in compliance with applicable state and federal securities laws.

c. Mergers, Recapitalizations, Stock Splits, Etc. Pursuant and subject to Section 12 of the Plan, certain changes in the number or character of the Common Stock of the Company (through merger, consolidation, exchange, reorganization, divestiture (including a spin-off), liquidation, recapitalization, stock split, stock dividend or otherwise) shall result in an adjustment, reduction or enlargement, as appropriate, in Participant’s rights with respect to any unexercised portion of this Award (i.e., Participant shall have such “anti-dilution” rights under the Award with respect to such events, but shall not have “preemptive” rights).

d. Shares Reserved. The Company shall at all times during the term of this Agreement reserve and keep available such number of shares as will be sufficient to satisfy the requirements of this Agreement.

e. Withholding Taxes. In order to permit the Company to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, income or other taxes are withheld from any amounts payable by the Company to the Participant. If the Company is unable to withhold such federal and state taxes, for whatever reason, the Participant hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal or state law.

f. 2004 Equity Incentive Plan. The Award evidenced by this Agreement is granted pursuant to the Plan, a copy of which Plan has been made available to Participant and is hereby incorporated into this Agreement. This Agreement is subject to and in all respects limited and conditioned as provided in the Plan. The Plan governs this Agreement and, in the event of any questions as to the construction of this Agreement or in the event of a conflict between the Plan and this Agreement, the Plan shall govern, except as the Plan otherwise provides.

g. Lockup Period Limitation. Participant agrees that in the event the Company advises Participant that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and that the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Participant hereby agrees that for a period not to exceed 180 days from the prospectus, Participant will not sell or contract to sell or grant an option to buy or otherwise dispose of this Agreement or any of the underlying shares of Common Stock without the prior written consent of the underwriter(s) or its representative(s).

h. Blue Sky Limitation. Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines, in its sole discretion, that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any state securities or Blue Sky law limitations with respect thereto, the Board of Directors of the Company shall accelerate the vesting of this restricted stock award, provided that the Company gives Participant 15 days’ prior written notice of such acceleration. Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to Participant at the address of Participant on file with the Company.

i. Accounting Compliance. Participant agrees that, if a merger, reorganization, liquidation or other “transaction” as defined in Section 12 of the Plan occurs, and Participant is an “affiliate” of the Company or any Affiliate (as defined in applicable legal and accounting principles) at the time of such transaction, Participant will comply with all requirements of Rule 145 of the Securities Act of 1933, as amended, and the requirements of such other legal or accounting principles, and will execute any documents necessary to ensure such compliance.

j. Stock Legend. The Administrator may require that the certificates for any shares of Common Stock purchased by Participant (or, in the case of death, Participant’s successors) shall bear an appropriate legend to reflect the restrictions of Paragraph 4(b) and Paragraphs 4(g) through 4(j) of this Agreement; provided, however, that failure to so endorse any of such certificates shall not render invalid or inapplicable Paragraph 4(j).

k. Scope of Agreement. This Agreement shall bind and inure to the benefit of the Company, its Affiliates and its successors and assigns and Participant and any successor or successors of Participant permitted by this Agreement.

l.  Arbitration. Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy. If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be a retired state or federal judge or an attorney who has practiced securities or business litigation for at least 10 years. If the parties cannot agree on an arbitrator within 20 days, any party may request that the chief judge of the District Court of Hennepin County, Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement. Limited civil discovery shall be permitted for the production of documents and taking of depositions. Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute. The arbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant; provided, however, that punitive or exemplary damages shall not be awarded. The arbitrator may award to the prevailing party, if any, as determined by the arbitrator, all of its costs and fees, including the arbitrator’s fees, administrative fees, travel expenses, out-of-pocket expenses and reasonable attorneys’ fees. Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Hennepin County, Minnesota.
 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.

 

 
ANALYSTS INTERNATIONAL CORPORATION
   
   
By
  __________________________________
Its
  __________________________________
   
   __________________________________
 
 Participant

 




 EX-13 5 exhibit13.htm ANNUAL REPORT Annual Report
 

 
EXHIBIT 13

[COVER]

Analysts International


Annual Report

2006


Inside Front Cover


Forward-Looking Statements

Statements contained herein, which are not strictly historical fact, are forward-looking statements.  Words such as “believes,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” and similar expressions are intended to identify forward-looking statements.   Any forward-looking statements made herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such statements are based on the our current expectations for future demand for our products and services, and our beliefs with respect to the competition we face within our industry, as well as our revenues, earnings, results of operations and sales and such statements relate to, among other things, our growth strategies, cost-control methods, our working capital and cash requirements, our ability to meet the requirements of our credit agreement, and the realization of our deferred tax assets.  The Company’s actual results may vary materially from those projected due to certain risks and uncertainties such as the general state of the economy, volume of business activity, continued need for our services by current and prospective clients, client cancellations or re-bidding of work, the Company’s ability to control and improve profit margins, including our ability to control operating and labor costs and hourly rates for our services, the availability and utilization of qualified technical personnel and other similar factors.  For more information concerning risks and uncertainties related to the Company’s business, refer to the Company’s prior Annual Reports, 10-Ks, 10-Qs, other Securities and Exchange Commission filings and investor relations materials.  You should not place undue reliance on these forward-looking statements, which speak only as of the date they were made.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.



Financial Highlights


 
(Dollars in thousands except per share amounts)
  
Year Ended
December 30, 2006
  
Year Ended
December 31, 2005
  
           
Revenue:
              
Professional services provided directly
  
$
261,489
  
$
263,121
  
Professional services provided through subsuppliers
    
54,902
    
34,431
  
Product sales
    
30,596
    
24,746
  
Total revenue
    
346,987
    
322,298
  
               
Loss before income taxes
    
(1,019
)
  
(17,649
)
Net loss
    
(1,060
)
  
(17,699
)
               
Per share of common stock:
              
Net loss (basic and diluted)
    
(.04
)
  
(.72
)
Shareholders’ equity
    
2.26
    
2.29
  
Dividends declared
    
.00
    
.00
  
               
Average common and common equivalent shares outstanding (in thousands)
    
24,645
    
24,495
  
               
Number of technical consultants
    
2,277
    
2,449
  
               
Working capital
  
$
28,841
  
$
26,182
  
Current ratio
    
1.76
    
1.61
  

1

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Overview of 2006 Events

Headquartered in Minneapolis, Minnesota, Analysts International is a diversified IT services company. In business since 1966, we have sales and customer support offices in the United States and Canada.

We offer our clients a full range of information technology consulting, software development and other services, including offerings sometimes referred to in the industry as “solutions” or “projects”. Service offerings are divided into four categories: Staffing Services, providing IT supplemental staffing and managed team services; Technology Integration, specializing in the delivery, integration and implementation of applications and hardware; Outsourcing, delivering local, national and global capabilities for organizational streamlining and cost reduction; and Advisory Services, providing methodologies and processes for implementing technology and managing human capital.
 
Early in 2006, we experienced a significant decline in the number of billable technical staff. A decline in headcount during the early part of the fiscal year is typical in our business as a high number of purchase orders expire during this time. Although we made some progress during 2006 in regaining a portion of this lost headcount, by the end of the year we had not returned to beginning of year levels. Also in early 2006, we completed our transition of a large group of subsuppliers to bill through us to IBM. This transition had begun in late 2005. As a result of transitioning this large group of subsuppliers, our subsupplier revenue grew 59% from 2005 to 2006. Finally, during 2006, we continued to experience significant growth in our partnership with Cisco. This partnership is centered around Cisco IP Communications products, and was the primary reason our product sales grew by 24% from 2005 to 2006.

By the end of 2006, we had experienced a decline in billable headcount from 2005 and were operating at slightly below breakeven as a company.  We believe that by continuing to focus on our performance improvement initiatives we can return to profitability.

Market Conditions and Economics of Our Business

Market conditions in the IT services industry continue to present challenges for us. We were successful in growing our business during 2006 by expanding our relationship as a reseller of IT products, and expanding our use of subsupplier firms to help serve our clients. We continue to experience intense competition in hiring billable technical personnel and intense pricing pressures from our largest clients. During 2006, as a result of these pressures, our direct services revenue declined slightly from 2005 levels. Average bill rates, however, increased slightly, and our average hourly margins on direct billing also increased. The impact of intense market pressures on our 2006 results was more pronounced due to an increase in the percentage of our services provided to IBM and other large national clients where rate pressures are typically more noticeable. The larger volume associated with these contracts may not offset the lower rates we charge in order to win additional business. We expect that many larger companies will continue, for the foreseeable future, to request low cost offerings for IT Staffing Services through a variety of means including e-procurement systems, competitive bidding processes, the granting of various types of discounts, use of offshore resources and other lower cost offerings. Overall, we expect these market conditions in the area of IT Staffing Services to continue for the foreseeable future, although we expect that demand for these services will increase modestly.

Along with our ability to respond to customer requests for lower pricing, our ability to quickly identify, attract and retain qualified technical personnel at competitive pay rates will affect our results of operations and our ability to grow in the future. Competition for the technical personnel needed to deliver the services has intensified during 2006. If we are unable to hire the talent required by our clients in a timely, cost-effective manner, it will affect our ability to grow our business.

Employee benefit and other employee-related costs is an additional factor bearing on our ability to hire qualified personnel and control overall labor costs. In an effort to manage our benefits costs, we have regularly implemented changes to our benefits plans. While we believe the changes we implemented will be effective in reducing the costs of those plans, the effectiveness of these changes may vary due to factors such as rising medical costs, the amount of medical services used by our employees and similar factors. Also, as we make changes to benefit plans to control costs, the risk that it will be more difficult to retain current consultants or to attract and retain new resources increases.

Our ability to continue to respond to our client needs in a cost-controlled environment is a key factor to our future success. We have continued to streamline our operations by consolidating offices, reducing administrative and management personnel and continuing to review our company structure for more efficient methods of operating our business and delivering our services. We may not be able to continue to reduce costs without affecting our ability to deliver timely services to our clients and therefore may choose to forego particular cost reductions if we believe it would be prudent to do so for our future success.

Our ability to respond to the conditions outlined above will bear directly on our performance because IT Staffing Services continues to represent the majority of our total revenue. Although we believe we can continue to grow this business, there can be no assurance as to when, or if, we will experience sustained revenue growth.

9

Strategy

We continue to pursue IT Staffing Services in Fortune 500 and small and medium-sized businesses. However, because of the market conditions in IT Staffing Services we continue to focus on the following key objectives: i) implementing a consultant centric/talent community model, which will transform us into a workforce deployment and human capital management organization; ii) continuously improve key business processes to better align our business with the market needs and allow us to more efficiently drive growth; and iii) building a focused set of services and solutions around high-demand, emerging technologies. We believe these objectives present opportunities to grow our business and to provide the scale we believe necessary for success in the staffing business in the long term.

In our Technology Integration and Outsourcing Services groups we continue to pursue clients of all sizes, but primarily focus on small and medium-sized businesses. We also continue to pursue business opportunities with technology and product partners such as Cisco, Microsoft and EMC. Partnering with vendors like these is an important factor in achieving growth in revenue and profit. In the third quarter of 2005, we introduced a more focused approach for pursuing Technology Integration and Outsourcing services offerings. We identified four major practice areas which are aligned with leading edge technologies:

 
-
IP Communications which includes Wireless, IP Telecommunictions, Call Center and Security Services
 
-
Storage Solutions which includes storage product support and VMware services
 
-
Lawson Services which includes integration, customization, and administration of Lawson Software applications
 
-
IT Outsourcing which includes Application Outsourcing, Help Desk, Hosting, and Field Engineering services

In addition, state and local government is a key vertical market for the Company. In this vertical market, we are providing a broad array of services including criminal justice information systems and mobile and wireless solutions.

Other Factors

Terms and conditions standard to computer consulting services contracts also present a risk to our business. In general, our clients can cancel or reduce their contracts on short notice. Loss of a significant client relationship or a significant portion thereof or a significant number of smaller contracts could have a material adverse effect on our business.

Compliance with the Sarbanes-Oxley Act under Section 404 of the Act has created substantial cost to us and strained our internal resources. We incurred significant costs throughout 2006, and we expect to continue to incur such costs in future years for maintaining compliance. An inability to control these costs, a failure to comply with the Sarbanes-Oxley Act, or a failure to adequately remediate control deficiencies as they are identified could have a material adverse effect on our business.

We believe our working capital will be sufficient for the foreseeable needs of our business. Significant rapid growth in our business, a major acquisition or a significant lengthening of payment terms with major clients, could create a need for additional working capital. An inability to obtain additional working capital, should it be required, could have a material adverse effect on our business. We expect to be able to comply with the requirements of our credit agreement; however, failure to do so could affect our ability to obtain necessary working capital and have a material adverse effect on our business.

Overview of Results of 2006 Operations

Total revenue for the year ended December 30, 2006 (fiscal year 2006) was $347.0 million, up from $322.3 million in the year ended December 31, 2005 (fiscal year 2005). The increase in revenue included a (.6%) decline in revenue from services we supply directly to customers and a 59.5% increase in revenue from services we provide to our clients through subsuppliers. We also saw a 23.6% increase in product sales. The increase in product sales is attributable primarily to the growth in our IP Communications (Voice over Internet Protocol or “IP Telephony”) business where we are a reseller of Cisco and other products. In 2006, direct services represented 75.4% of our revenues, compared to 81.6% in 2005. Our overall gross margin on total revenue declined from 18.5% in 2005 to 17.1% in 2006, and our gross margin on direct services revenue decreased from 21.2% in 2005 to 20.6% in 2006.

Net loss for fiscal 2006 was $(1.1) million compared with last year’s net loss of $(17.7) million. The loss in fiscal 2005 included special charges for restructuring costs of $3.9 million, unsuccessful merger costs of $2.1 million, goodwill impairment of $7.1 million, and an asset write-off of $1.8 million all totaling $14.9 million.

10

On a diluted per share basis, net loss for the year ended December 30, 2006 was ($.04) per share, compared with a net loss of $(.72) per share last year.

At year end, our balance sheet reflected $28.8 million of working capital and a balance of $2.7 million on our working capital line of credit. This compares to working capital of $26.2 million and a balance of $5.0 million on our working capital line of credit at the beginning of the year.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. We believe the estimates described below are the most sensitive estimates made by management in the preparation of the financial statements.

Estimates of Future Operating Results

The realization of certain assets recorded in our balance sheet is dependent upon our ability to achieve and maintain profitability. In evaluating the recorded value of our intangible assets, goodwill, and deferred tax assets for indication of impairment, we are required to make critical accounting estimates regarding the future operating results of the Company. These estimates are based on management’s current expectations but involve risks, uncertainties and other factors that could cause actual results to differ materially from these estimates.

To evaluate our indefinite-lived intangible assets and goodwill for impairment, we rely heavily on the discounted cash flow method to assess the value of the associated reporting units. The discounted cash flow valuation technique requires us to project operating results and the related cash flows over a ten-year period. These projections involve risks, uncertainties and other factors and are by their nature subjective. If actual results were substantially below projected results, an impairment of the recorded value of our goodwill and indefinite-lived intangible assets could result. Please refer to Note J to the consolidated financial statements for a discussion of the 2005 write off of the goodwill associated with our non-infrastructure solutions business.

To assess the recorded value of our deferred tax assets for possible impairment, we must predict the likelihood of future taxable income generation. Realization of the net deferred tax assets of $2.6 million (deferred tax asset of $15.4 million net of a valuation allowance of $12.8 million) requires the generation of at least $6.8 million of future taxable income prior to the expiration of the federal net operating loss carry forward benefits. The federal net operating loss (NOL) carry forward benefits of $857,000, $62,000, $3,554,000 and $1,239,000 expire in 2023, 2024, 2025, and 2026, respectively. If the Company does not generate sufficient future taxable income, an impairment of the recorded assets could result.

Allowance for Doubtful Accounts

In each accounting period we determine an amount to set aside to cover potentially uncollectible accounts. We base our determination on an evaluation of accounts receivable for risk associated with a client’s ability to make contractually required payments. These determinations require considerable judgment in assessing the ultimate potential for collection of these receivables and include reviewing the financial stability of the client, the clients’ willingness to pay and current market conditions. If our evaluation of a client’s ability to pay is incorrect, we may incur future charges.

Accrual of Unreported Medical Claims

In each accounting period we estimate 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 evaluation of past rates of claim payouts and trends in the amount of payouts. This determination requires significant judgment and assumes past patterns are representative of future payment patterns and that we have identified any trends in our claim experience. A significant shift in usage and payment patterns within our medical plans could necessitate significant adjustments to these accruals in future accounting periods.

11

Critical Accounting Policies

Critical accounting policies are defined as those that involve significant judgments and uncertainties or affect significant line items within our financial statements and potentially result in materially different outcomes under different assumptions and conditions. Application of these policies is particularly important to the portrayal of our financial condition and results of operations. We believe the accounting policies described below meet these characteristics.

Revenue Recognition

We recognize revenue for our staffing business and the majority of our solutions business as services are performed or products are delivered. Certain of our outsourcing and help desk engagements provide for a specific level of service each month for which we bill a standard monthly fee. Revenue for these engagements is recognized in monthly installments over the period of the contract. In some such contracts, we invoice in advance for two or more months of service. When we do this, the revenue is deferred and recognized over the term of the contractual agreement.

We occasionally enter into fixed price engagements. When we enter into such engagements, revenue is recognized over the life of the contract based on time and materials input to date and estimated time and materials to complete the project. This method of revenue recognition relies on accurate estimates of the cost, scope and duration of the engagement. If the Company does not accurately estimate the resources required or the scope of the work to be performed, future revenues may be negatively affected or losses on contracts may need to be recognized. All future anticipated losses are recognized in the period they are identified.

Subsupplier Revenue

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

Goodwill and Other Intangible Impairment

In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” the Company is required to evaluate its goodwill and indefinite-lived intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the assets might be impaired. The Company currently performs the annual test as of the last day of its monthly accounting period for August. This evaluation relies on assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or related assumptions change, we may be required to recognize impairment charges.

Effective January 1, 2002 we ceased amortization of indefinite-lived intangible assets including goodwill. Intangible assets with definite useful lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

We performed our annual impairment evaluation at September 2, 2006 and found no indication of impairment of the goodwill.

In 2005, we found indications of impairment resulting in an impairment charge of $7.1 million. This impairment of value is the result of gradual erosion in the operating results of this operating unit. The primary service provided within this operating unit is application development services, including the web development services acquired as part of the SequoiaNET.com, Inc. acquisition in 2000. In recent years, the demand for these services in the marketplace has declined steadily, and our results in this area have declined along with the market generally. Please see Note J to the consolidated financial statements for further discussion.

12

Deferred Taxes

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between reported income and income considered taxable by the taxing authorities. SFAS No. 109 also requires the resulting deferred tax assets to be reduced by a valuation allowance if some portion or all of the deferred tax assets are not expected to be realized. Based upon prior taxable income and estimates of future taxable income, we expect our deferred tax assets, net of the established valuation allowance, will be fully realized in the future.

During 2006 we recorded only $41,000 of income tax expense related to subsidiaries where profitability was achieved and state taxes were paid. We recorded no income tax benefit associated with our net loss because the benefit created by our operating loss has been negated by the establishment of additional reserves against our deferred assets. If actual future taxable income is less than we anticipate from our estimates, we may be required to record an additional valuation allowance against our deferred tax assets resulting in additional income tax expense, which will be recorded in our consolidated statement of operations. If, however, we successfully return to profitability to a point where future realization of deferred tax assets which are currently reserved becomes “more likely than not,” we may be required to reverse the existing valuation allowances resulting in an income tax benefit.

Restructuring and other severance related costs

During 2005, we recorded restructuring and other severance charges of $3.9 million. Of these charges, $1.6 million related to workforce reductions and $2.3 million related to lease obligations and abandonment costs (net of sub-lease income) in locations where we have chosen to downsize or exit completely.

Factors such as our ability to enter into subleases, the creditworthiness of sub lessees, and the ability to negotiate early termination agreements with lessors could materially affect the real estate reserve for each restructure. While we believe our current estimates regarding lease obligations are adequate, our inability to sublet the remaining space, negotiate early termination agreements or obtain payments from sub lessees could necessitate significant adjustments to these estimates in the future.

Sales Taxes

We account for our sales tax and any other taxes that are collected from our customers and remitted to governmental authorities on a net basis. The assessment, collection and payment of these taxes are not reflected on our income statement.

Income Taxes

We and our subsidiaries file a consolidated income tax return in the US federal jurisdiction. We also file consolidated or separate company income tax returns in most states, Canada federal, Ontario province, and, the United Kingdom. As of December 30, 2006, there are no Federal, state, or foreign income tax audits in progress. We are no longer subject to US federal audits for years before 2003, and with a few exceptions, the same applies to our status relative to state and local audits.

We will adopt the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on December 31, 2006. Our initial study for the future implementation of Interpretation No. 48 concludes that all of our positions will more likely than not be sustained if challenged, therefore, it is not necessary for us to recognize any changes to future tax benefits or liabilities. We are continuing to evaluate the effect that the adoption of FIN 48 will have on our consolidated results of operations and financial condition.

13


RESULTS OF OPERATIONS, YEAR ENDED DECEMBER 30, 2006 VS. YEAR ENDED DECEMBER 31, 2005

The following table illustrates the relationship between revenue and expense categories and provides a count of employees and technical consultants for fiscal year 2006 versus fiscal year 2005. The tables provide guidance in our explanation of our operations and results.

   
Year Ended
December 30, 2006
  
Year Ended
December 31, 2005
  
Increase (Decrease)
  
(Dollars in thousands)
  
Amount
  
% of
Revenue
  
Amount
  
% of
Revenue
  
Amount
  
%
Inc (Dec)
  
As %
of Revenue
  
Revenue:
                                            
Professional services provided directly
  
$
261,489
    
75.4
%
$
263,121
    
81.6
%
$
(1,632
)
  
(0.6
%)
  
(6.2
%)
Professional services provided through subsuppliers
    
54,902
    
15.8
    
34,431
    
10.7
    
20,471
    
59.5
    
5.1
  
Product sales
    
30,596
    
8.8
    
24,746
    
7.7
    
5,850
    
23.6
    
1.1
  
Total revenue
    
346,987
    
100.0
    
322,298
    
100.0
    
24,689
    
7.7
    
0.0
  
                                             
Salaries, contracted services and direct charges
    
260,619
    
75.1
    
240,100
    
74.5
    
20,519
    
8.5
    
0.6
  
Cost of product sales
    
27,149
    
7.8
    
22,550
    
7.0
    
4,599
    
20.4
    
0.8
  
Selling, administrative and other operating costs
    
58,847
    
17.0
    
61,053
    
18.9
    
(2,206
)
  
(3.6
)
  
(1.9
)
Amortization of intangible assets
    
1,053
    
0.3
    
982
    
0.3
    
71
    
7.2
    
0.0
  
Restructuring costs and other severance related costs
    
(51
)
  
0.0
    
3,914
    
1.2
    
(3,965
)
  
(101.3
)
  
(1.2
)
Loss on asset disposal
     --     
0.0
    
1,825
    
0.6
    
(1,825
)
  
(100.0
)
  
(0.6
)
Goodwill Impairment
     --     
0.0
    
7,050
    
2.2
    
(7,050
)
  
(100.0
)
  
(2.2
)
Expenses related to attempted merger
    
(327
)
  
(0.1
)
  
2,129
    
0.7
    
(2,456
)
  
(115.4
)
  
(0.8
)
Non-operating income
    
(20
)
  
0.0
    
(50
)
  
0.0
    
(30
)
  
(60.0
)
  
0.0
  
Interest expense
    
736
    
0.2
    
394
    
0.1
    
342
    
86.8
    
0.1
  
Loss before taxes
    
(1,019
)
  
(0.3
)
  
(17,649
)
  
(5.5
)
  
16,630
    
(94.2
)
  
5.2
  
                                             
Income taxes
    
41
    
0.0
    
50
    
--
    
(9
)
  
(18.0
)
  
0.0
  
Net loss
  
$
(1,060
)
  
(0.3
%)
$
(17,699
)
  
(5.5
%)
$
16,639
    
(94.0
%)
  
5.2
%
                                             
Personnel:
                                            
Management and Administrative
    
403
          
400
          
3
    
.8
%
      
Technical Consultants
   
2,277
          
2,449
          
(172
)
  
(7.0
%)
      

14

Revenue

Services revenue provided directly by Analysts’ employees during the year ended December 30, 2006 decreased (.6%) from the comparable period a year ago while revenue from subsuppliers and product sales increased 59.5% and 23.6%, respectively during the same period. Early in 2006, we experienced a significant decline in the number of billable technical staff due to a high number of purchase order expirations. This is typical for our business. Although we made some progress during 2006 on improving average bill rates and regaining some of the headcount we lost early in the year, by the end of 2006 we had not returned to our beginning headcount numbers, and we had not managed to return our direct services revenue to 2005 levels. While demand for our services remains constant, competition is intense. There can be no assurance direct service revenue will grow in 2007.

A higher percentage of our total revenue came from subsuppliers during fiscal year 2006 as compared to fiscal year 2005. Our subsupplier revenue is mainly pass-through revenue with associated fees for management and administration providing minimal profit. While demand for IT services increased slightly during 2006, we experienced a change in the mix of our business with a greater percentage of our revenue coming from national accounts where we rely more heavily on our subsuppliers to deliver services. In October 2006, we began providing managed services to a significant new client. As a result of this new relationship, we expect subsupplier revenue to grow in 2007.

Product sales increased over fiscal year 2005. The increase in product sales was due largely to our IP Communications services where we resell a significant amount of Cisco IP telephony products. We expect product revenue to continue to increase in 2007, both in terms of total dollars and as a percentage of revenue.

Salaries, Contracted Services and Direct Charges 

Salaries, contracted services and direct charges primarily represent our payroll and benefit costs associated with billable consultants. These expenses increased slightly as a percentage of total revenue in 2006; as a percent of service revenue these costs increased from 80.7% in fiscal year 2005 to 82.4% in fiscal year 2006. The increase in these costs associated with direct revenue increased from 78.8% in fiscal year 2005 to 79.4% in fiscal year 2006. This decrease in 2006 direct service margins was driven by our mix of business which includes a higher concentration of national account and subsupplier business where margins are lower than our other direct business. We continuously attempt to control the factors which affect this category of expense; however, there can be no assurance we will be able to maintain or improve this level.

Cost of Product Sales

Cost of product sales represents our cost where we act as a reseller of hardware and software products. These costs, as a percentage of product sales, decreased from 91.1% in 2005 to 88.7% in 2006. This decrease is due mainly to increased product sales in emerging technologies such as our IP Communications product and services offering where our margins are higher and we enjoy greater discounts from vendors with higher sales volume and promotional programs. While we were able to achieve improved margins for this business in 2006, vendor pricing and promotional programs change regularly, and there can be no assurance this level of margins can be maintained on our product revenue.

Selling, Administrative and Other Operating Costs 

Selling, administrative and other operating (SG&A) costs include management and administrative salaries, commissions paid to sales representatives and recruiters, location costs, and other administrative costs. This category of costs represented 17.0% of total revenue for 2006, down from 18.9% in 2005. The decline in these costs is reflective of the cost reduction measures implemented in October 2005 as part of our restructuring efforts. We are committed to continuing to manage this category of expense to the right level for the Company; however, there can be no assurance this category of cost will not increase as a percentage of revenue.

Amortization of Intangible Assets

Amortization of intangible assets increased during 2006 as a result of recognizing a full year of amortization related to our acquisitions of WireSpeed in January 2005 and Redwood in April 2005.


15

Restructuring Costs and Other Severance Related Costs

We recorded restructuring and severance related costs of $3.9 million during 2005. Of this amount, $1.6 million related to workforce reductions and severance. The remaining $2.3 million related to lease obligations and abandonment costs (net of sub-lease income) for locations where we have chosen to downsize or exit completely. During the year ended December 30, 2006 we recorded a credit of $51,000 as a change in estimate.

Loss on Asset Disposal

During the third quarter of 2005, we recorded a loss on asset disposal of $1.8 million with respect to software development costs. Since 2002 we had been investing in the customization of this software, but the software had become increasingly difficult to customize, leading to our decision to terminate our development contract with the owner of the software and write off our investment in the software.

Goodwill Impairment

In accordance with the provisions of SFAS No. 142, we performed our annual test of goodwill during the third quarter of 2006 and found no indications of impairment. Our testing in 2005 found an indication of impairment with our non-infrastructure solutions reporting unit. Accordingly, we completed the impairment testing during the third quarter of 2005 and recognized an impairment charge of $7.1 million.

Expenses Related to Attempted Merger

During 2005, we accrued $2.1 million of costs relating to the attempted merger with Computer Horizons Corp. These costs consisted primarily of amounts paid or accrued for legal, accounting, investment banking, proxy solicitation, consulting, travel and other costs. Included in this accrual was $327,000 for a contingency reserve related to various matters surrounding the merger. During 2006, we determined this contingency reserve was no longer required and the accrual was reversed.

Non-Operating Income

Non-operating income, consisting primarily of interest income, decreased during fiscal year 2006 compared to fiscal year 2005.

Interest Expense

Interest expense during fiscal year 2006 increased compared to fiscal year 2005 due to an increase in average borrowings under the line of credit and an increase in interest rates.

Income Taxes

During 2006 we recorded $41,000 of income tax expense related to subsidiaries where profitability was achieved and state taxes were due. We recorded no income tax benefit associated with our net loss because the benefit created by our operating loss has been negated by the establishment of additional reserves against our deferred assets. If actual future taxable income is less than we anticipate, we may be required to record an additional valuation allowance against our deferred tax assets resulting in additional income tax expense, which will be recorded in our consolidated statement of operations. If, however, we successfully return to profitability to a point where future realization of deferred tax assets which are currently reserved, becomes “more likely than not,” we may be required to reverse the existing valuation allowances resulting in an income tax benefit.

Personnel

Our technical consulting staff levels finished the year down by approximately 172 consultants from where we started the year. This number excludes headcount of our subsuppliers and headcount from Medical Concepts Staffing, our medical staffing business, which accounts for an immaterial amount of our revenue.

16

RESULTS OF OPERATIONS, YEAR ENDED DECEMBER 31, 2005 VS. YEAR ENDED JANUARY 1, 2005

The following table illustrates the relationship between revenue and expense categories and provides a count of employees and technical consultants for fiscal year 2005 versus fiscal year 2004. The tables provide guidance in our explanation of our operations and results.

   
Year Ended
December 31, 2005
  
Year Ended
January 1, 2005
  
 
Increase (Decrease)
  
(Dollars in thousands)
  
Amount
  
% of
Revenue
  
Amount
  
% of
Revenue
  
Amount
  
%
Inc (Dec)
  
As % of
Revenue
  
Revenue:
                                            
Professional services provided directly
  
$
263,121
    
81.6
%
$
269,610
    
78.9
%
$
(6,489
)
  
(2.4
%)
  
2.7
%
Professional services provided through subsuppliers
    
34,431
    
10.7
    
55,806
    
16.3
    
(21,375
)
  
(38.3
)
  
(5.6
)
Product sales
    
24,746
    
7.7
    
16,196
    
4.8
    
8,550
    
52.8
    
2.9
  
Total revenue
    
322,298
    
100.0
    
341,612
    
100.0
    
(19,314
)
  
(5.7
)
  
0.0
  
                                             
Salaries, contracted services and direct charges
    
240,100
    
74.5
    
261,005
    
76.4
    
(20,905
)
  
(8.0
)
  
(1.9
)
Cost of product sales
    
22,550
    
7.0
    
14,964
    
4.4
    
7,586
    
50.7
    
2.6
  
Selling, administrative and other operating costs
    
61,053
    
18.9
    
61,015
    
17.9
    
38
    
0.1
    
1.0
  
Amortization of intangible assets
    
982
    
0.3
    
774
    
0.2
    
208
    
26.9
    
0.1
  
Restructuring costs and other severance related costs
    
3,914
    
1.2
    
--
    
--
    
3,914
    
100.0
    
1.1
  
Loss on asset disposal
    
1,825
    
0.6
    
--
    
--
    
1,825
    
100.0
    
0.6
  
Goodwill Impairment
    
7,050
    
2.2
    
--
    
--
    
7,050
    
100.0
    
2.2
  
Expenses related to attempted merger
    
2,129
    
0.7
    
--
    
--
    
2,129
    
100.0
    
0.6
  
Non-operating income
    
(50
)
  
0.0
    
(39
)
  
(0.0
)
  
11
    
28.2
    
0.0
  
Interest expense
    
394
    
0.1
    
41
    
0.0
    
353
    
861.0
    
0.1
  
Net (loss) income before taxes
    
(17,649
)
  
(5.5
)
  
3,852
    
1.1
    
(21,501
)
  
(558.2
)
  
(6.6
)
                                             
Income taxes
    
50
    
--
    
--
    
--
    
50
    
100.0
    
0.0
  
Net (loss) income
  
$
(17,699
)
  
(5.5
%)
$
3,852
    
1.1
%
$
(21,551
)
  
(559.5
%)
  
(6.6
%)
                                             
Personnel:
                                            
Management and Administrative
    
400
          
430
          
(30
)
  
(7.0
%)
      
Technical Consultants
   
2,449
          
2,448
          
1
    
0.0
%
      

17

Revenue

Services revenue provided directly by Analysts’ employees during the year ended December 31, 2005 decreased 2.4% from the comparable period a year ago while revenue from product sales increased 52.8% during the same period primarily as a result of our partnership with Cisco and our growing IP Communications practice. A decrease in the number of billable technical staff occurred early in 2005 due to a predominant supplier initiative at IBM and a high number of purchase order expirations during December of 2004 and January of 2005, which is typical for our business. In July, we were awarded a core supplier contract with IBM, and made significant progress toward replacing our earlier losses. By the end of the year, although direct revenue was off for the year, we had replaced all of the billable staff we had lost earlier in the year.

A higher percentage of our total revenue came from direct billings during fiscal year 2005 as compared to fiscal year 2004. The increase in direct revenue as a percentage of total revenue was due to the decrease in subsupplier revenue from Bank of America. Late in 2005, we began to deliver an increased amount of revenue to IBM using subsuppliers, and opportunities for our managed services group were expanding.

Our number of technical consultants remained relatively constant from January 1, 2005 to year end. Hourly rates, however, decreased slightly during 2005 as compared to 2004. This decline in hourly rates and lower utilization rates in our solutions businesses caused our direct revenue to decline. While demand for IT services remained relatively constant during 2005, we experienced a shift in the mix of our business with a greater percentage of our revenue coming from large national accounts where bill rates are generally lower. Product sales increased from fiscal year 2004. The increase in product sales was due largely to our IP Communications services where we resell a significant amount of Cisco IP telephony products. This increase was the result of our acquisition of WireSpeed in January 2005 and continued growth in this particular market.

Salaries, Contracted Services and Direct Charges 

Salaries, contracted services and direct charges primarily represent our payroll and benefit costs associated with billable consultants. These expenses decreased slightly as a percentage of total revenue in 2005; however, as a percent of service revenue these costs increased from 80.2% in fiscal year 2004 to 80.7% in fiscal year 2005 despite the shift away from subsupplier revenue. The increase in these costs associated with direct revenue increased from 77.0% in fiscal year 2004 to 78.8% in fiscal year 2005. This decrease in margins was driven primarily by higher concentrations in larger national accounts where margin pressures are greater, and lower utilization rates in our solutions groups as we prepared for the growth we expected and were starting to experience in our IP Communications and Applications services groups at the end of 2005.

Cost of Product Sales

Cost of product sales represents our cost where we act as a reseller of hardware and software products. These costs, as a percentage of product sales, decreased from 92.4% in 2004 to 91.1% in 2005. This decrease is due mainly to increased product sales in emerging technologies such as our IP Communications product and services offering where our margins are higher and where we obtain greater discounts from vendors because of higher sales volume and vendor promotional programs.

Selling, Administrative and Other Operating Costs 

Selling, administrative and other operating costs include management and administrative salaries, commissions paid to sales representatives and recruiters, location costs, and other administrative costs. This category of costs represented 18.9% of total revenue for 2005, up from 17.9% in 2004. This increase is primarily attributable to additional sales and recruiting resources throughout the first three quarters of 2005. We are committed to continuing to manage this category of expense to the right level for the Company.

18

Amortization of Intangible Assets

Amortization of intangible assets increased during 2005 as a result of our acquisitions of WireSpeed in January 2005 and Redwood in April 2005.

Non-Operating Income

Non-operating income, consisting primarily of interest income, increased slightly during fiscal year 2005 compared to fiscal year 2004.

Interest Expense

Interest expense during fiscal year 2005 increased compared to fiscal year 2004 due to an increase in average borrowings under the line of credit and an increase in interest rates.

Expenses Related to Attempted Merger

During 2005, we incurred $2.1 million of costs relating to the attempted merger with Computer Horizons Corp. These costs consisted primarily of amounts paid or accrued for legal, accounting, investment banking, proxy solicitation, consulting, travel and other costs and had a significant impact on our operating results.

Restructuring Costs and Other Severance Related Costs

We recorded restructuring and severance related costs of $3.9 million during 2005. Of this amount, $1.6 million related to workforce reductions and severance. The remaining $2.3 million related to lease obligations and abandonment costs (net of sub-lease income) for locations where we had chosen to downsize or exit completely.

Loss on Asset Disposal

During the third quarter of 2005, we recorded a loss on asset disposal of $1.8 million with respect to software development costs. Since 2002 we had been investing in the customization of this software, but the software had become increasingly difficult to customize, leading to our decision to terminate our development contract with the owner of the software and write off our investment in the software.

Goodwill Impairment

In accordance with the provisions of SFAS No. 142, we performed our annual test of goodwill during the third quarter and found an indication of impairment with our non-infrastructure solutions reporting unit. Accordingly, we completed the impairment testing during the third quarter of 2005 and recognized an impairment charge of $7.1 million.

Income Taxes

During 2005 we recorded $50,000 of income tax expense related to subsidiaries where profitability was achieved and state taxes were due. We recorded no income tax benefit associated with our net loss because the benefit created by our operating loss has been negated by the establishment of additional reserves against our deferred assets.

Personnel

Our technical consulting staff levels finished the year at about the same level as where we started. This number excludes headcount of our subsuppliers and headcount from Medical Concepts Staffing, our medical staffing business, which accounts for an immaterial amount of our revenue.

19

Liquidity and Capital Resources

The following table provides information relative to the liquidity of our business.

(Dollars in thousands)
  
December 30,
2006
  
December 31,
2005
  
Increase
(Decrease)
  
Percentage
Increase
(Decrease)
  
                   
Cash and cash equivalents
  
$
179
  
$
64
  
$
115
    
179.7
%
Accounts receivable
    
64,196
    
66,968
    
(2,772
)
  
(4.1
)
Other current assets
    
2,484
    
2,383
    
101
    
4.2
  
Total current assets
    
66,859
    
69,415
    
(2,556
)
  
(3.7
)
                           
Accounts payable
    
24,411
    
24,581
    
(170
)
  
(0.7
)
Salaries and vacations
    
7,416
    
8,260
    
(844
)
  
(10.2
)
Line of credit
    
2,661
    
5,000
    
(2,339
)
  
(46.8
)
Restructuring accruals - current
    
385
    
971
    
(586
)
  
(60.4
)
Other current liabilities
    
3,145
    
4,421
    
(1,276
)
  
(28.9
)
                           
Total current liabilities
    
38,018
    
43,233
    
(5,215
)
  
(12.1
)
                           
Working capital
  
$
28,841
  
$
26,182
  
$
2,659
    
10.2
%
Current ratio
    
1.76
    
1.61
    
.15
    
9.3
  
                           
Total shareholders’ equity
  
$
55,734
  
$
56,312
  
$
(578
)
  
(1.0
%)

Cash Requirements

The day-to-day operation of our business requires a significant amount of cash flow. During fiscal year 2006, we made total payments of approximately $194.2 million to pay our employees wages, benefits, and associated taxes. We also made payments of approximately $98.1 million to pay vendors who provided billable technical resources to our clients through us. Finally, we made payments of approximately $57.4 million to fund general operating expenses such as employee expense reimbursement, office space rental and utilities.

The cash to fund these significant payments comes almost exclusively from our collection of amounts due for services rendered to our clients (approximately $349.8 million in fiscal year 2006). Generally, payments made to fund the day-to-day operation of our business are due and payable regardless of the rate of cash collections from our clients. While we do not anticipate such an occurrence, a significant decline in the rate of collections from our clients, or an inability of the Company to timely invoice and therefore collect from our clients, could rapidly increase our need to borrow to fund the operations of our business.

Sources and Uses of Cash/Credit Facility

Cash and cash equivalents increased by $115,000 from December 31, 2005 to December 30, 2006 while the outstanding debt on our line of credit decreased from to $5.0 million at December 31, 2005 to $2.7 million at December 30, 2006. Generally, our primary need for working capital is to support accounts receivable resulting from our business and to fund the time lag between payroll disbursement, a bi-weekly occurrence, and receipt of fees billed to clients. Historically, we have been able to support internal growth in our business with internally generated funds. If we are unable to return to profitability, or if we choose to utilize cash for other purposes, we would expect our need to borrow to increase.

Working capital at December 30, 2006 increased from December 31, 2005 as a result of the conversion of certain long-term investment assets to cash, and very tight control over capital expenditures.

20

At December 30, 2006 we had borrowings of $2.7 million under the asset-based revolving credit agreement described below. At December 30, 2006, the total available under this credit facility, which fluctuates based on our level of eligible accounts receivable, was $37.3 million. Borrowings under the credit agreement are secured by all of the Company’s assets.
 
We believe funds generated from our business and credit available under our credit facility will be adequate to meet demands placed upon our resources by our operations and capital investments.

Effective April 11, 2002, we entered into an asset-based revolving credit agreement with GE Capital. Total availability under this credit agreement is $45.0 million. We must take advances or pay down the outstanding balance daily. We can, however, choose to request fixed-term advances of one, two, or three months for a portion of the outstanding balance on the line of credit. The agreement restricts, among other things, the payment of dividends and capital expenditures. The credit agreement, as amended, expires in January 2010, requires a commitment fee of .25% of the unused portion of the line, and an annual administration fee of $25,000. The credit agreement carries an interest rate on daily advances equal to the Wall Street Journal’s “Prime Rate” (8.25% on December 30, 2006) and on fixed-term advances equal to the LIBOR rate plus 2.0%.

Contractual Obligations

The Company leases office facilities under non-cancelable operating leases. Deferred compensation is payable to participants in accordance with the terms of individual contracts. The Company’s line of credit, with an outstanding balance of $2.7 million at December 30, 2006, expires on January 20, 2010. The Company will incur interest expense on all amounts outstanding on this line of credit at a variable interest rate. Minimum future obligations on operating leases and deferred compensation agreements at December 30, 2006, are as follows:

(In thousands)
  
1 Year
  
2-3 Years
  
4-5 Years
  
Over 5 Years
  
Total
  
                       
Line of Credit:
    
    -- 
     --   
$
2,661
     --   
$
2,661
  
                                 
Operating Leases
  
$
4,188
  
$
5,476
    
3,982
  
$
795
    
14,441
  
                                 
Deferred Compensation
    
208
    
1,174
    
280
    
865
    
2,527
  
                                 
Total
  
$
4,396
  
$
6,650
  
$
6,923
  
$
1,660
  
$
19,629
  

New Accounting Pronouncements and Interpretations

In December 2004, the Financial Accounting Standards Board issued a revision to SFAS 123, “Share-Based Payment.” The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The statement eliminates the alternative method of accounting for employee share-based payments previously available under APB Opinion No. 25. The Statement was effective for the Company beginning in the first quarter of fiscal 2006. See Note A to the consolidated financial statements for the Company’s disclosure.

On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006.  Our initial study of the future implementation of FIN 48 concludes that all of our positions will more likely than not be sustained if challenged.  Therefore, it is not necessary for us to recognize any changes to future tax benefits or liabilities. The Company is continuing to evaluate the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), Fair Value Measurements. This statement establishes a consistent framework for measuring fair value and expands disclosures on fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its consolidated results of operations and financial condition.

In February 2007, the FASB issued Statement of Financial Standards No. 159 (“SFAS No. 159”), the Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS No. 159 will have on its consolidated results of operations and financial condition.

21

Consolidated Balance Sheets


(Dollars in thousands except per share amounts)
  
December 30,
2006
  
December 31,
2005
  
           
ASSETS
              
               
Current assets:
              
Cash and cash equivalents
 
$
179
  
$
64
  
Accounts receivable, less allowance for doubtful accounts of $1,423 and $2,106, respectively
    
64,196
    
66,968
  
Prepaid expenses and other current assets
   
2,484
    
2,383
  
Total current assets
    
66,859
    
69,415
  
               
Property and equipment, net
    
2,925
    
4,056
  
Intangible assets other than goodwill, net of accumulated amortization of $5,550 and $4,497, respectively
    
11,245
    
12,298
  
Goodwill
    
11,799
    
11,799
  
Other assets
    
3,403
    
4,436
  
   
$
96,231
  
$
102,004
  
               
               
LIABILITIES AND SHAREHOLDERS' EQUITY
              
               
Current liabilities:
              
Accounts payable
  
$
24,411
  
$
24,581
  
Salaries and vacations
   
7,416
    
8,260
  
Line of credit
    
2,661
    
5,000
  
Deferred revenue
    
1,267
    
1,645
  
Restructuring accrual
    
385
    
971
  
Health care reserves and other
    
1,670
    
2,242
  
Deferred compensation
    
208
    
534
  
Total current liabilities
   
38,018
    
43,233
  
               
Non-current liabilities
              
Deferred compensation
    
2,319
    
1,878
  
Restructuring accrual
    
160
    
581
  
Total non-current liabilities
    
2,479
    
2,459
  
Commitments (Note H)
              
Shareholders' equity:
              
Common stock, par value $.10 a share; authorized 120,000,000 shares; issued and outstanding 24,695,396 and 24,604,063 shares, respectively
    
2,469
    
2,460
  
Additional capital
    
22,079
    
21,606
  
Retained earnings
    
31,186
    
32,246
  
Total shareholders' equity
   
55,734
    
56,312
  
   
$
96,231
  
$
102,004
  

See notes to consolidated financial statements.

22

Consolidated Statements of Operations


   
Fiscal Year
  
(In thousands except per share amounts)
  
2006
  
2005
  
2004
  
               
Revenue:
                    
Professional services provided directly
  
$
261,489
  
$
263,121
  
$
269,610
  
Professional services provided through subsuppliers
    
54,902
    
34,431
    
55,806
  
Product sales
    
30,596
    
24,746
    
16,196
  
Total revenue
    
346,987
    
322,298
    
341,612
  
                     
Operating expenses:
                    
Salaries, contracted services and direct charges
    
260,619
    
240,100
    
261,005
  
Cost of product sales
    
27,149
    
22,550
    
14,964
  
Selling, administrative and other operating costs
    
58,847
    
61,053
    
61,015
  
Amortization of intangible assets
    
1,053
    
982
    
774
  
Restructuring and other severance related costs
    
(51
)
  
3,914
    
--
  
Loss on asset disposal
    
--
    
1,825
    
--
  
Goodwill impairment
    
--
    
7,050
    
--
  
Expenses related to attempted merger
    
(327
)
  
2,129
    
--
  
                     
Operating (loss) income
   
(303
)
  
(17,305
)
  
3,854
  
                     
Non-operating income
    
20
    
50
    
39
  
Interest expense
    
736
    
394
    
41
  
                     
(Loss) income before income taxes
    
(1,019
)
  
(17,649
)
  
3,852
  
                     
Income taxes
   
41
    
50
    
--
  
                     
Net (loss) income
 
$
(1,060
)
$
(17,699
)
$
3,852
  
                     
Per common share (basic):
                    
Net (loss) income:
  
$
(.04
)
$
(.72
)
$
.16
  
                     
Per common share (diluted):
                    
Net (loss) income:
  
$
(.04
)
$
(.72
)
$
.16
  
                     
Average common shares outstanding
    
24,645
    
24,495
    
24,212
  
Average common and common equivalent shares outstanding
    
24,645
    
24,495
    
24,398
  

See notes to consolidated financial statements.

23

Consolidated Statements of Cash Flows

   
Fiscal Year
  
(In thousands)
  
2006
  
2005
  
2004
  
               
Cash flows from operating activities:
                    
Net (loss) income
  
$
(1,060
)
$
(17,699
)
$
3,852
  
                     
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
                    
Depreciation
    
2,411
    
2,763
    
2,918
  
Amortization of intangible assets
    
1,053
    
982
    
774
  
Goodwill impairment
    
--
    
7,050
    
--
  
Loss on asset disposal
   
42
    
1,867
    
211
  
        Stock based compensation
    
482
    
267
    
101
  
                     
Change in:
                    
Accounts receivable
    
2,772
    
(8,012
)
  
(2,141
)
Prepaid expenses
    
265
    
604
    
451
  
Other assets
    
667
    
290
    
(115
)
Accounts payable
    
(174
)
  
7,424
    
541
  
Salaries and vacations
    
(844
)
  
(580
)
  
1,054
  
Other accrued expenses
    
(572
)
  
483
    
(781
)
Deferred revenue
    
(378
)
  
(13
)
  
(1,108
)
Restructuring accrual
    
(1,007
)
  
1,234
    
(293
)
Deferred compensation
    
115
    
(1,718
)
  
414
  
Net cash provided by (used in) operating activities
    
3,772
    
(5,058
)
  
5,878
  
                     
Cash flows from investing activities:
                    
Property and equipment additions
    
(1,335
)
  
(2,873
)
  
(2,508
)
Payments for acquisitions, net of cash acquired
    
--
    
(5,010
)
  
--
  
Proceeds from property and equipment sales
    
17
    
18
    
18
  
Net cash used in investing activities
    
(1,318
)
  
(7,865
)
  
(2,490
)
                     
Cash flows from financing activities:
                    
Net change in line of credit
    
(2,339
)
  
5,000
    
--
  
Proceeds from exercise of stock options
    
--
    
98
    
2
  
Net cash (used in) provided by financing activities
    
(2,339
)
  
5,098
    
2
  
                     
Net increase (decrease) in cash and equivalents
    
115
    
(7,825
)
  
3,390
  
                     
Cash and equivalents at beginning of year
    
64
    
7,889
    
4,499
  
                     
Cash and equivalents at end of year
  
$
179
  
$
64
  
$
7,889
  
                     
Supplemental cash flow information:
                    
Cash paid during the year for:
                    
Income taxes
  
$
22
  
$
181
  
$
35
  
Interest
  
$
795
  
$
528
  
$
41
  
                     
Non-cash Activities:
                    
Value of common stock issued for acquisitions
  
$
--
  
$
1,000
    $
--
  
Value of common stock issued for stock awards
  
$
20
  
$
28
    $
--
  
 
See notes to consolidated financial statements.
 
 
24

Consolidated Statements of Shareholders' Equity


(Dollars in thousands)
  
Common
Stock
  
Additional
Capital
  
Deferred
Compensation
  
Retained
Earnings
  
Total
Shareholders’
Equity
  
                       
Balances at January 3, 2004
  
$
2,421
  
$
20,149
     --   
$
46,093
  
$
68,663
  
                                 
Common stock issued - 650 shares upon exercise of stock options
     --     
2
     --      --     
2
  
Issuance of restricted stock - 300,000 shares
     --     
944
  
$
(944
)
   --     
--
  
Amortization of deferred compensation
     --      --     
101
     --     
101
  
Net income
                                
(Comprehensive income)
     --      --      --     
3,852
    
3,852
  
Balances at January 1, 2005
    
2,421
    
21,095
    
(843
)
  
49,945
    
72,618
  
                                 
Common stock issued - 31,975 shares upon exercise of stock options
    
3
    
95
     --      --     
98
  
Common stock issued - 269,298 shares for acquisitions
    
27
    
973
     --      --     
1,000
  
Common stock issued - 7,000 shares as stock grants
    
1
    
27
     --      --     
28
  
Amortization of deferred compensation
    
8
    
(8
)
  
267
          
267
  
Net loss (Comprehensive loss)
                      
(17,699
)
  
(17,699
)
Balance at December 31, 2005
    
2,460
    
22,182
    
(576
)
  
32,246
    
56,312
  
                                 
Effect of accounting change (SFAS 123R)
     --     
(576
)
  
576
     --      --   
Common stock issued - 8,000 shares as stock grants
    
1
    
19
    
--
    
--
    
20
  
Stock compensation expense
    
--
    
134
    
--
    
--
    
134
  
Restricted shares amortization
    
8
    
320
     --     
--
    
328
  
Net loss (Comprehensive loss)
    
--
    
--
    
--
    
(1,060
)
  
(1,060
)
Balance at December 30, 2006
  
$
2,469
  
$
22,079
  
$
0
  
$
31,186
  
$
55,734
  

See notes to consolidated financial statements.

25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.
Summary of Significant Accounting Policies

Description of business - Analysts International Corporation (the Company) is a diversified IT services company, offering clients a full range of information technology consulting, software development and other services, including offerings, sometimes referred to in the industry as “solutions” or “projects”. Service offerings are divided into four categories: Staffing Services, providing IT supplemental staffing and managed team services; Technology Integration services, specializing in the delivery, integration and implementation of applications and hardware; Outsourcing Services, delivering local, national and global capabilities for organizational streamlining and cost reduction; and Advisory Services, providing methodologies and processes for implementing technology and managing human capital.

Basis of presentation - The consolidated financial statements include the accounts of Analysts International and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.

Fiscal year - The Company’s fiscal year ends on the Saturday closest to December 31. References to fiscal years 2006, 2005 and 2004 refer to the fiscal years ended December 30, 2006, December 31, 2005, and January 1, 2005, respectively.

Depreciation - Property and equipment is being depreciated using the straight-line method over the estimated useful lives (1 to 10 years for leasehold improvements and 2 to 10 years for office furniture and equipment) of the assets for financial statement purposes and accelerated methods for income tax purposes.

Financial instruments - In accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 107, “Disclosures about Fair Value of Financial Instruments,” management estimates the carrying value of all financial instruments approximate fair value because of the short-term nature of these instruments.

Revenue recognition - The Company recognizes revenue for the staffing business and the majority of our solutions business as services are performed or products are shipped or delivered. Certain of our outsourcing and help desk engagements provide for a specific level of service each month for which we bill a standard monthly fee. Revenue for these engagements is recognized in monthly installments over the period of the contract. In some such contracts we invoice in advance for two or more months of service. When we do this, the revenue is deferred and recognized over the term of the invoicing agreement.

In certain client situations, where the nature of the engagement requires it, we utilize the services of other companies in our industry. If these services are provided under an arrangement whereby we agree to retain only a fixed portion of the amount billed to the client to cover our management and administrative costs, we classify the amount billed to the client as subsupplier revenue. These revenues, however, are recorded on a gross versus net basis because we retain credit risk and are the primary obligor to our client. All revenue derived from services provided by our employees or other independent contractors working directly for us are recorded as direct revenue.

Within the Solutions business, the Company periodically enters into fixed price engagements. When the Company enters into such an engagement, revenue is recognized over the life of the contract based on time and materials input to date and estimated time and materials to complete the project. This method of revenue recognition relies on accurate estimates of the cost, scope, and duration of the engagement. If the Company does not accurately estimate the resources required or the scope of the work to be performed, then future revenues may be negatively affected or losses on contracts may need to be recognized. All future anticipated losses are recognized in the period they are identified.

Net (loss) income per share - Basic and diluted earnings per share (EPS) are presented in accordance with SFAS No. 128, "Earnings per Share.” Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. The difference between weighted-average common shares and average common and common equivalent shares used in computing diluted EPS is the result of outstanding stock options and restricted stock awards. Options to purchase 2,115,000, 2,349,000 and 2,391,000 shares of common stock were outstanding at the end of fiscal periods 2006, 2005 and 2004, respectively. All such options were excluded from the computation of common stock equivalents in 2006 and 2005 whereas 1,359,000 of such options were excluded in 2004 because they were anti-dilutive.

Cash equivalents - Short-term cash investments in money market accounts are considered to be cash equivalents.

26

Notes to Consolidated Financial Statements (continued)

Allowance for doubtful accounts - In each accounting period we determine an amount to set aside to cover potentially uncollectible accounts based on our evaluation of accounts receivable for risk associated with a client’s ability to make contractually required payments. Our revenue and accounts receivable are concentrated with large, established companies. IBM and Lexmark represented 19% and 6% of our total revenue for 2006, respectively. IBM and Lexmark represented approximately 24% and 8% of our total accounts receivable balance at December 30, 2006.

Shares reserve - At December 30, 2006, there were approximately 31,777,000 shares reserved for issuance under the stock option plans and the shareholders' rights plan.

Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Other intangible assets - Other intangible assets consist of trade names and customer lists. The customer lists are amortized on a straight-line basis over a period ranging from 4 to 20 years and are scheduled to be fully amortized in 2024. At December 30, 2006, management assessed whether indications of impairment in the value of intangible assets were present. The factors considered by management in performing this assessment included current operating results, trends and prospects, as well as the anticipated effects of demand, competition and other economic factors. No indicators of impairment of our customer list or tradenames were identified at December 30, 2006.

Goodwill assets - SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No, 142) prohibits companies from amortizing purchased goodwill. Instead, we examine our goodwill at least annually to determine if impairment has occurred. Effective September 4, 2004, the Company changed the date at which it performs the annual examination for impairment from the first day of the fiscal year to the last day of our monthly accounting period for August. The change was made in response to significant constraints on our accounting resources during our first fiscal quarter. The Company performed its annual impairment evaluation at September 2, 2006 and found no indication of impairment of the goodwill. During the third quarter 2005 testing the Company determined the goodwill associated with its non-infrastructure solutions reporting unit was impaired. See Note J for a discussion of the impairment charge recorded during the third quarter of 2005.

Derivatives - The Company’s policy is not to use freestanding derivatives and not to enter into contracts with terms that cannot be designated as normal purchases or sales.

Taxes - We account for our sales tax and any other taxes that are collected from our customers and remitted to governmental authorities on a net basis. The assessment collection and payment of these taxes are not reflected on our income statement.

Accounting Pronouncements

On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006.  Our initial study of the future implementation of FIN 48 concludes that all of our positions will more likely than not be sustained if challenged.  Therefore, it is not necessary for us to recognize any changes to future tax benefits or liabilities. The Company is continuing to evaluate the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), Fair Value Measurements. This statement establishes a consistent framework for measuring fair value and expands disclosures on fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its consolidated results of operations and financial condition.

27

Notes to Consolidated Financial Statements (continued)

In February 2007, the FASB issued Statement of Financial Standards No. 159 (“SFAS No. 159”), the Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS No. 159 will have on its consolidated results of operations.

Equity Compensation Plans

Analysts International has options outstanding under five equity-based plans. New options may be granted under three of these plans. Under the 1999 Stock Option Plan, the Company may grant options to its employees for up to 1,000,000 shares of common stock. Under the 2000 Stock Option Plan, the Company may grant non-qualified options to its employees for up to 225,000 shares of common stock. Under the 2004 Equity Incentive Plan, the Company may grant incentive options, non-qualified options or restricted stock awards to its employees and non-qualified options or restricted stock awards to its directors for up to 2,000,000 shares of common stock. The Company also has outstanding options under the 1994 Incentive Stock Option Plan and the 1996 Stock Option Plan for Non-Employee Directors. Generally, an option's maximum term is 10 years; the exercise price of each option is equal to the closing market price of the Company's stock on the date of grant; and the options and awards become exercisable or vest in annual increments of 25% beginning one year after the date of grant. Exceptions to this general rule are: i) 300,000 options granted in 2004 and 100,000 options granted in each of 2005 and 2006 to Jeffrey P. Baker, the Company’s former President and CEO, with seven-year cliff vesting and subject to certain previously disclosed accelerators, ii) 100,000 restricted shares granted in October, 2004 to Michael J. LaVelle, the Company’s then-CEO and current Chairman and interim CEO, which vest in annual increments of 33% over three years and iii) 250,000 restricted shares granted to Mr. Baker in January 2006 and vesting over five years in the following manner; 25,000 shares in each of the first two years; 50,000 shares in the third year; and 75,000 shares in each of years four and five. As part of Mr. Baker’s resignation (see Footnote L for further discussion of Mr. Baker’s resignation), unvested restricted shares granted to him in January 2006, along with 100,000 unvested shares granted to him at other times, will become fully vested 90 days from the effective date of his resignation (May 14, 2007). Also, at that time, all outstanding options held by Mr. Baker are expected to be forfeited without vesting according to their terms.

Effective December 30, 2005, the Compensation Committee of the Board of Directors of the Company authorized the vesting of all of the Company's then outstanding, unvested stock options granted to directors, officers and employees of the Company, except for the unvested options held by Mr. Baker.

Prior to January 1, 2006, Analysts International applied Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for options. Accordingly, prior to January 1, 2006, no stock-based compensation expense relating to stock options was recognized in the consolidated statements of income, as the exercise price of all option grants was equal to or greater than the market price on the date of grant.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (123R), requiring the Company to recognize expense related to the fair value of its stock-based compensation awards. The Company elected the modified prospective transition method as permitted by SFAS No. 123R. Accordingly, results from prior periods have not been restated. Under this transition method, stock-based compensation expense for the year ended December 30, 2006 includes:

 
a)
Compensation expense for all stock-based compensation awards granted prior to December 31, 2005, which were not fully vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation; and

 
b)
Compensation expense for all stock-based compensation awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.

Historically for SFAS No. 123 pro forma disclosure on stock-based compensation, the Company reported compensation expense for stock option awards issued to employees over the requisite service period of the award. This policy differs from the policy to be applied to awards granted after the adoption of SFAS No. 123R, which requires that compensation expense be recognized in the Company’s statement of operations. For all awards granted after December 31, 2005, and any unvested awards as of December 31, 2005, compensation expense will be recognized in the Company’s statement of operations over the requisite service period of the award. Total stock option expense included in the Company’s condensed consolidated statements of operations for the fiscal years 2006 and 2005 was $134,510 and $0, respectively. The tax benefit recorded for these same periods was $48,436 and $0, respectively. This tax benefit is offset against our valuation allowance for our deferred tax asset.


28

Notes to Consolidated Financial Statements (continued)

 
Prior to the adoption of SFAS No. 123R, the Company reported all tax benefits resulting from the exercise of stock options as operating cash flows in its condensed consolidated statements of cash flows. In accordance with SFAS No. 123R, fiscal year 2006, the presentation of the Company’s condensed consolidated statement of cash flows changed to report the excess tax benefits from the exercise of stock options as financing cash flows. There were no excess tax benefits recognized for the twelve months ended December 30, 2006.

The table below illustrates the effect on net earnings and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation during fiscal years 2005 and 2004 (in thousands):

   
Year Ended
December 31, 2005
  
Year Ended
January 1, 2005
  
           
Net (loss) gain, as reported
 
$
(17,699
)
$
3,852
  
Deduct: Stock-based compensation expense determined under fair value method for all awards(1)
    
(1,055
)
  
(567
)
               
Net (loss) gain, pro forma
  
$
(18,754
)
$
3,285
  
               
Earnings per share:
              
Basic - as reported
  
$
(.72
)
$
.16
  
Basic - pro forma
    
(.77
)
  
.14
  
               
Diluted - as reported
  
$
(.72
)
$
.16
  
Diluted - pro forma
    
(.77
)
  
.13
  

(1) For purposes of this pro forma disclosure, the value of the stock-based compensation is amortized to expense on a straight-line basis over the period it is vested.

The following table summarizes the stock option activity for the year ended December 30, 2006:

   
Options
  
Weighted
Average
Exercise
Price
Per Share
  
Weighted
Average
Remaining
Contractual
Term
(in years)
  
Aggregate
Intrinsic
Value
  
                   
Outstanding on December 31, 2005
    
2,348,781
  
$
6.36
    
6.38
  
$
18,550
  
Granted
    
164,000
    
2.44
              
Exercised
    
0
    
0
              
Forfeited/Canceled
    
397,892
    
7.01
              
                           
Outstanding on December 30, 2006
    
2,114,889
    
5.94
    
5.75
    
0
  
Vested or expected to vest at December 30, 2006
    
1,614,889
    
6.84
    
5.06
    
0
  
Exercisable on December 30, 2006
    
1,566,889
  
$
6.97
    
4.94
  
$
0
  

The aggregate intrinsic value of options (the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant) exercised during the years ended December 30, 2006 and December 31, 2005 was $0 and $14,831, respectively.

29

Notes to Consolidated Financial Statements (continued)

As of December 30, 2006, there was $430,138 of unrecognized compensation expense related to unvested option awards that were expected to vest over a weighted average period of 4.68 years. Approximately $403,000 of this amount related to options held by Mr. Baker which, following his resignation, are no longer expected to vest.

The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model. The weighted-average grant date fair value of stock options granted during fiscal year 2006 was $1.62, and during the fiscal year 2005 was $2.49.

   
The Twelve-Month Period Ended
  
Black-Scholes Option Valuation Assumptions(1)
  
December 30,
2006
  
December 31,
2005
  
           
Risk-free interest rate(2)
    
4.7 - 5.0
%
  
3.9 - 4.5
%
Expected dividend yield
    
0
    
0
  
Expected stock price volatility(3)
    
43.0 - 74.3
    
45.1 - 76.0
  
Expected life of stock options (in years)(4)
    
5.8
    
6.4
  

 
(1)
Forfeitures are estimated and based on historical experience.
 
(2)
Based on the U.S. Treasury zero-coupon bond with a term consistent with the expected life of the options.
 
(3)
Expected stock price volatility is based on historical experience.
 
(4)
Expected life of stock options is based upon historical experience.

No options were exercised during fiscal year 2006. Net cash proceeds from the exercise of stock options were $96,938 in fiscal year 2005. The actual income tax benefit realized from stock option exercises totaled $480 in fiscal year 2005. This tax benefit is offset against our valuation allowance for our deferred tax asset.

Stock Awards

On June 18, 2004, Jeffrey P. Baker, the Company’s then President was awarded 200,000 shares of restricted stock vesting in annual increments of 25% over four years. On January 3, 2006, Mr. Baker the Company’s then President and CEO was awarded 250,000 restricted shares vesting over five years in the following manner: 25,000 shares vest in each of the first two years, 50,000 shares in the third year and 75,000 shares in each of years four and five. As part of Mr. Baker’s resignation, all remaining unvested restricted shares will become fully vested 90 days from the effective date of his resignation (May 14, 2007).

On October 21, 2004, Michael J. LaVelle, the Company’s then Chairman and CEO and current Chairman and interim CEO was awarded 100,000 shares of restricted stock vesting in annual increments of 33% over three years. Mr. LaVelle remained employed as a consultant to the Company after his retirement as CEO in December 2005 until June 30, 2006. On June 30, 2006, the Compensation Committee of the board of directors of Analysts International Corporation amended the October 21, 2004 restricted stock agreement (the “Agreement”) to provide for the shares to continue to vest as set forth in the Agreement after termination of Mr. LaVelle’s employment. Continued vesting is contingent upon continued service on the Company’s board of directors. This was treated as a modification under FAS 123R.

On January 3, 2006, each of the outside members of the Board of Directors was awarded 1,000 shares of fully vested common stock.

30

Notes to Consolidated Financial Statements (continued)

The following table summarizes the restricted stock activity for fiscal year 2006:

   
Shares
  
Weighted
Average
Grant Date
Fair Value
  
Non-vested December 31, 2005
    
216,667
  
$
3.12
  
Granted
    
258,000
    
2.43
  
Vested
    
91,333
    
2.47
  
Forfeited
    
0
        
Non-vested at December 30, 2006
    
383,334
    
2.49
  

As of December 30, 2006, there was $730,801 of total unrecognized compensation cost related to non-vested restricted stock granted under the 2004 plan. Following the resignation of the Company’s CEO effective February 14, 2007, all of these restricted shares are expected to become fully vested during 2007. The total fair value of shares vested during fiscal years 2006 and 2005 was approximately $225,816 and $234,446, respectively.

B.
Property and Equipment

(In thousands)
  
December 30,
2006
  
December 31,
2005
  
           
Leasehold improvements
  
$
2,293
  
$
2,846
  
Office furniture & equipment
    
15,571
    
27,789
  
     
17,864
    
30,635
  
Accumulated depreciation
    
(14,939
)
  
(26,579
)
   
$
2,925
  
$
4,056
  

During the third quarter of 2005 the Company recorded a loss on asset disposal of $1.8 million with respect to software development costs.

C.
Other Intangible Assets

No intangibles were acquired, impaired or disposed of during the year ended December 30, 2006. Other intangibles consisted of the following:

   
December 30, 2006
  
December 31, 2005
  
(In thousands)
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Other
Intangibles,
Net
  
Gross Carrying
Amount
  
Accumulated
Amortization
  
Other
Intangibles,
Net
  
                           
Customer list
  
$
15,075
  
$
(5,417
)
$
9,658
  
$
15,075
  
$
(4,364
)
$
10,711
  
Trade name
    
1,720
    
(133
)
  
1,587
    
1,720
    
(133
)
  
1,587
  
                                       
   
$
16,795
  
$
(5,550
)
$
11,245
  
$
16,795
  
$
(4,497
)
$
12,298
  


During the year ended December 31, 2005 as further discussed in Note K, the Company acquired the assets of WireSpeed Networks, LLC ("WireSpeed”) and Redwood Solutions Corporation (“Redwood”). Part of the assets acquired for each entity included a customer list. The customer lists were valued at $1.1 million and $1.7 million for WireSpeed and Redwood, respectively, and are included in the above numbers.

31

Notes to Consolidated Financial Statements (continued)

The customer lists are amortized on a straight-line basis over 4 to 20 years and are scheduled to be fully amortized in 2024. Amortization is estimated to be approximately $1.0 million per year through 2008, $900,000 from 2009 to 2015, and under $150,000 from 2016 to 2024. The trade name is considered to have an indefinite life and therefore does not result in any amortization.

D.
Deferred Compensation

Effective December 30, 2005, in response to changes required by the American Jobs Creation Act of 2004, the Company's Board of Directors restated the Company's unfunded deferred compensation plan for executives, referred to by the Company as the Restated Special Executive Retirement Plan (hereinafter the “Plan”). The material terms of the amendment call for the Company to credit the employees’ account balance at a rate of fifteen percent of base pay for all participants, except for the Company's CEO, who will receive employer contributions of twenty percent of base pay. Employee account balances will be subject to a crediting rate equivalent to the 10-year treasury rate plus one to three percent as determined each year by the Board of Directors.

Included in liabilities at December 30, 2006 and December 31, 2005 was $2,527,000 and $2,412,000, respectively, representing the Company's liability under the Plan. This liability is partially funded by life insurance and annuity contracts. Included in other assets at December 30, 2006 and December 31, 2005 were $353,000, and $1,020,000, respectively, representing the carrying value, which approximates market value, of the annuities and insurance cash value. Deferred compensation expense for fiscal years 2006, 2005 and 2004 was approximately $651,000, $593,000, and $920,000, respectively.

The Plan allows participant contributions of up to fifty percent of annual base pay and one hundred percent of incentive bonus, if any. Employer and employee contributions are one hundred percent vested. Additionally, the amended plan allows for discretionary employer contributions with separate vesting schedules if approved by the Compensation Committee. Participants are allowed to choose between lump sum distribution or one hundred twenty months of payments and a date of distribution for employee and employer contributions, subject to the “one-year, five-year” rule and other deferred compensation rules issued by the Internal Revenue Service. Key employees are not allowed to take distribution for six months after separation from service. Hardship distributions from the Plan are not allowed, and deferral elections will be canceled following any participant's hardship distribution from his or her 401(k) account. The Plan provides that upon a change in control, a rabbi trust will be funded, and payments will be made if the Plan is subsequently terminated within twelve months of a change in control or due to a participant's right to take distribution upon a separation from service.

E.
Line of Credit

Effective April 11, 2002, the Company consummated an asset-based revolving credit facility with GE Capital Corporation which provides us with up to $45.0 million of availability. At December 30, 2006, total availability under this credit facility, which fluctuates based on our level of eligible accounts receivable, was $37.3 million. At December 30, 2006, we had borrowings of $2.7 million. Borrowings under this credit agreement are secured by all of the Company’s assets. The Company must take advances or pay down the outstanding balance daily. The Company can, however, choose to request fixed-term advances of one, two, or three months for a portion of the outstanding balance on the line of credit. The credit facility, as amended, requires a commitment fee of .25% of the unused portion of the facility, and an annual administration fee of $25,000. The facility carries an interest rate on daily advances equal to the Wall Street Journal’s “Prime Rate” (8.25% on December 30, 2006) and on fixed-term advances equal to the LIBOR rate plus 2.0%. The agreement restricts, among other things, the payment of dividends and capital expenditures.

Effective January 20, 2006, the Company amended the revolving credit agreement extending the expiration date from October 31, 2006 to January 20, 2010. The modifications included the elimination of certain reserves in calculating the amount the Company can borrow under the facility and changes to the definition of eligible receivables.

32

Notes to Consolidated Financial Statements (continued)

F.
Shareholders' Rights Plan

On June 15, 1989, the Board of Directors adopted a common stock shareholders' rights plan. Under this plan, the Board of Directors declared a dividend of one common share purchase right for each outstanding share of common stock and stock options granted and available for grant. The Board of Directors amended the plan on April 29, 1996 and April 16, 1998. The rights, which expire on April 16, 2008, are exercisable only under certain conditions, and when exercisable the holder will be entitled to purchase from the Company one share of common stock at a price of $160.00, subject to certain adjustments. The rights will become exercisable after a person or group acquires beneficial ownership of 15% or more (or as low as 10% as the Board of Directors may determine) of the Company's common stock or after a person or group announces an offer, the consummation of which would result in such person or group owning 15% or more of the common stock.

If the Company is acquired at any time after the rights become exercisable, the rights will be adjusted so as to entitle a holder to purchase a number of shares of common stock of the acquiring company at one-half of their market value. If any person or group acquires beneficial ownership of 15% or more of the Company's shares, the rights will be adjusted so as to entitle a holder (other than such person or group whose rights become void) to purchase a number of shares of common stock of Analysts International Corporation at one-half of their market value or the Board of Directors may exchange the rights, in whole or in part, at an exchange ratio of one common share per right (subject to adjustment).

At any time prior to an acquisition by a person or group of beneficial ownership of 15% or more of the Company's shares, the Board of Directors may redeem the rights at $.01 per right.

G.
Income Taxes

The provision for income tax expense (benefit) was as follows:

   
Fiscal Year
  
(In thousands)
  
2006
  
2005
  
2004
  
               
Currently payable:
                    
Federal
  
$
--
  
$
--
  
$
--
  
State
    
41
    
50
    
--
  
     
41
    
50
    
0
  
                     
Deferred:
                    
Federal
    
(169
)
  
(5,360
)
  
1,581
  
State
    
(25
)
  
(788
)
  
233
  
     
(194
)
  
(6,148
)
  
1,814
  
Valuation allowance for deferred tax asset
    
194
    
6,148
    
(1,814
)
     
0
    
0
    
0
  
                     
Total:
  
$
41
  
$
50
  
$
0
  


33

Notes to Consolidated Financial Statements (continued)

Net deferred tax assets (liabilities) are comprised of the following:

(In thousands)
  
December 30,
2006
  
December 31,
2005
  
           
Deferred compensation
  
$
986
  
$
941
  
Accrued vacation and compensatory time
    
388
    
465
  
Accrued reorganization costs
    
212
    
605
  
Self insured healthcare reserves
    
101
    
(89
)
Allowance for doubtful accounts
    
622
    
889
  
Depreciation
    
1,105
    
625
  
Capital loss carry-forward
    
1,148
    
1,148
  
Goodwill and other intangibles
    
3,822
    
4,904
  
State net operating loss carry forwards
    
767
    
767
  
Federal net operating loss carry forward
    
5,712
    
4,614
  
Non-income tax accrual
    
248
    
0
  
A/P accruals
    
224
    
0
  
Prepaid insurance
    
(103
)
  
(98
)
Charitable contributions
    
540
    
531
  
Gain/loss on disposal
    
(420
)
  
63
  
Other
    
64
    
(143
)
Valuation allowance
    
(12,820
)
  
(12,626
)
               
Net deferred tax assets
  
$
2,596
  
$
2,596
  
               
Whereof:
              
Current
    
347
  
$
261
  
Non-current
    
2,249
    
2,335
  
   
$
2,596
  
$
2,596
  

The federal net operating loss (NOL) carry forward benefits of approximately $857,000, $62,000, $3,554,000 and $1,239,000 expire in 2023, 2024, 2025, and 2026, respectively. The approximate state NOL carry forward benefits expire as follows: $141,000 in 2007, $144,000 in 2008 through 2010, $426,000 in 2011 through 2020 and $387,000 in 2021 and beyond.

The provision for income taxes differs from the amount of income tax determined by applying the federal statutory income tax rates to pretax (loss) income as a result of the following differences:

   
Fiscal Year
  
(In thousands)
  
2006
  
2005
  
2004
  
               
Income (benefit) tax at statutory federal rate
  
$
(346
)
$
(6,177
)
$
1,349
  
State and local taxes, net of federal benefit
    
(34
)
  
(459
)
  
100
  
Valuation allowance for deferred tax asset
    
194
    
6,148
    
(1,814
)
Meals and Entertainment
    
176
    
192
    
215
  
Goodwill
    
(22
)
  
(23
)
  
(23
)
Cash surrender value of life insurance
    
(19
)
  
26
    
(15
)
Other
  
 
92
    
343
    
188
  
                     
Total tax provision
  
$
41
  
$
50
  
$
0
  


34

Notes to Consolidated Financial Statements (continued)

H.
Commitments

At December 30, 2006 aggregate net minimum rental commitments under non-cancelable operating leases having an initial or remaining term of more than one year are payable as follows:

(In thousands)
          
           
Year ending December
    
2007
  
$
4,679
  
     
2008
    
3,390
  
     
2009
    
2,140
  
     
2010
    
2,074
  
 
     Later     
2,702
  
           
14,985
  
               
Less: sublease contracts
          
544
  
               
Total minimum obligation
        
$
14,441
  

Rent expense, primarily for office facilities, for the fiscal years ended December 30, 2006, December 31, 2005 and January 1, 2005 were $3,982,000, $5,127,000, and $5,250,000, respectively.

Analysts International has compensation arrangements with its corporate officers and certain other employees which provide for certain payments in the event of a change of control of the Company.

The Company also sponsors a 401(k) plan. Substantially all employees are eligible to participate and may contribute up to 50% of their pre-tax earnings, subject to IRS maximum contribution amounts. After one year of employment, we make matching contributions for non-highly compensated participants in the form of Company stock of 18% of a participant’s first 15% of pre-tax contributions. Matching contributions vest at the rate of 20% per year and are fully vested after five years of service. We made matching contributions for fiscal years 2006, 2005, and 2004 in the amount of approximately $515,000, $513,000, and $580,000, respectively.

I.
Restructuring and Other Severance Related Costs

A summary of the restructuring charge and subsequent activity in the restructuring accrual account, which is included in other current and other non-current liabilities, is as follows:

(In thousands)
  
Workforce
Reduction
  
Office Closure/
Consolidation
  
Total
  
               
Balance at January 3, 2004
  
$
--
  
$
611
  
$
611
  
Cash expenditures
    
--
    
(293
)
  
(293
)
Non-cash charges
    
--
    
--
    
--
  
                     
Balance at January 1, 2005
  
$
--
  
$
318
  
$
318
  
Additional restructuring charge
    
1,656
    
2,258
    
3,914
  
Cash expenditures
    
(1,612
)
  
(429
)
  
(2,041
)
Write-off of deferred leasehold costs
     --     
(578
)
  
(578
)
Non-cash charges
     --     
(61
)
  
(61
)
                     
Balance at December 31, 2005
  
$
44
  
$
1,508
  
$
1,552
  
Cash expenditures
    
(44
)
  
(896
)
  
(940
)
Non-cash charges
     --     
(67
)
  
(67
)
Balance at December 30, 2006
  
$
0
  
$
545
  
$
545
  

35

Notes to Consolidated Financial Statements (continued)

During 2005, the Company recorded restructuring and severance related charges of $3.9 million. Of these charges, $1.6 million related to workforce reductions and $2.3 million related to lease obligations and abandonment costs (net of sub-lease income) in locations where the Company has chosen to downsize or exit completely.

The Company believes the reserve is currently adequate. Negative sublease activity in the future, including any defaults of existing subleases or an inability to negotiate favorable early termination agreements could create the need for future adjustments to this reserve.

J. Goodwill

SFAS No. 142 prohibits companies from amortizing purchased goodwill and certain indefinite-lived intangible assets. Instead companies must test such assets for impairment at least annually.

At September 3, 2005, the Company evaluated goodwill pursuant to SFAS No. 142 and found indication of impairment of the goodwill related to the non-infrastructure solutions reporting unit. Accordingly, the Company completed the impairment testing during the third quarter and recognized an impairment charge of $7.1 million. During 2006, the Company again evaluated goodwill for indications of impairment and determined no indications of impairment existed.

K.
Business Acquisitions

WireSpeed Networks, LLC - On January 6, 2005, the Company acquired the assets of WireSpeed Networks, LLC for $2.0 million in cash and 103,093 shares of common stock valued at $400,000. The common stock and $250,000 in cash were placed in escrow to be paid to the principals of WireSpeed over the next three years. In addition, the purchase agreement contains a maximum payout of an additional $2.8 million in earn-out consideration over four years, contingent upon the achievement of aggressive financial targets. No amounts were earned under the earn-out consideration in 2005 or 2006.

This transaction was accounted for using the purchase method in accordance with SFAS No. 141. Accordingly, the results of WireSpeed Networks LLC are included in the consolidated financial statements from the acquisition date. The Company has allocated approximately $200,000 of the purchase price to the tangible net assets of WireSpeed, $1.1 million to other intangible assets consisting entirely of customer relationships and $1.1 million to goodwill.

WireSpeed Networks LLC was a Cincinnati-based company specializing in IP telephony and wireless networking. WireSpeed's assets, employees and service offerings have been integrated into Analysts International's IP Telephony Infrastructure Solutions Group, extending and enhancing the Company's offerings in this rapidly growing area.

Redwood Solutions Corporation - On April 4, 2005, the Company acquired the assets of Redwood for $3.4 million in cash and 166,205 shares of common stock valued at $600,000. The common stock and $900,000 in cash were placed in escrow to be paid to the principals of Redwood over the next four years. In addition, the purchase agreement contains an earn-out clause over four years, contingent upon the achievement of aggressive financial targets. No amounts were earned under the earn-out consideration in 2005 or 2006.

This transaction was accounted for using the purchase method in accordance with SFAS No. 141. Accordingly, the results of Redwood Solutions are included in the consolidated financial statements from the acquisition date. The Company has allocated approximately $1.0 million of the purchase price to the tangible net assets of Redwood, $1.7 million to other intangible assets consisting entirely of customer relationships and $1.3 million to goodwill.

Redwood Solutions was an information technology services company based in Livonia, Michigan, specializing in integrating hardware and software solutions for data storage and retrieval systems. Redwood's assets, employees and service offerings have become part of Analysts International's Storage Infrastructure Solutions Group.

36

Notes to Consolidated Financial Statements (continued)

L.  
Subsequent Events

On February 14, 2007, Analysts International Corporation (the “Company”) announced that Jeffrey P. Baker, its President and Chief Executive Officer, had tendered his resignation to the company’s Board of Directors, effective immediately. On February 15, 2007, the Company’s Board of Directors accepted Mr. Baker’s resignation and appointed Michael J. LaVelle, to serve as the Company’s Interim President and Chief Executive Officer. Following termination of his employment on May 14, 2007, 325,000 shares of unvested, restricted stock will become fully vested, and 500,000 shares of unvested stock options will be forfeited according to their original terms. These events are expected to result in the recording of equity-based compensation amounts of approximately $610,000 during the first quarter of 2007. In addition, six months following his termination of employment, deferred compensation amounts totaling $132,183 at December 30, 2006 and classified as non-current, will become due and payable to him.


37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Shareholders and Board of Directors
Analysts International Corporation
Minneapolis, Minnesota


We have audited the accompanying consolidated balance sheets of Analysts International Corporation and subsidiaries (the “Company”) as of December 30, 2006 and December 31, 2005, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended December 30, 2006, December 31, 2005 and January 1, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Analysts International Corporation and subsidiaries as of December 30, 2006 and December 31, 2005, and the results of their operations and their cash flows for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note A to the consolidated financial statements, in 2006 the Company changed its method of accounting for stock-based compensation.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 30, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2007, expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.




/s/ Deloitte & Touche LLP
  
Minneapolis, Minnesota
  
March 15, 2007
  

38

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Shareholders and Board of Directors
Analysts International Corporation
Minneapolis, Minnesota

We have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Analysts International Corporation and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 30, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and consolidated financial statement schedule as of and for the year ended December 30, 2006 of the Company and our reports dated March 15, 2007 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule and included an explanatory paragraph relating to the change in accounting for stock-based compensation in 2006 described in Note A.

/s/ Deloitte & Touche LLP
  
Minneapolis, Minnesota
  
March 15, 2007
  

39

Report of Management


The consolidated financial statements of Analysts International Corporation published in this report were prepared by company management, which is responsible for their integrity and objectivity. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America applying certain estimates and judgments as required. The financial information elsewhere in this report is consistent with the statements.

Analysts International maintains internal controls adequate to provide reasonable assurance its transactions are appropriately recorded and reported, its assets are protected and its established policies are followed. The control structure is enforced by written policies and procedures, internal audit activities and a qualified financial staff.

Our independent auditors, Deloitte & Touche LLP, provide an objective independent review by audit of Analysts International’s consolidated financial statements and issuance of a report thereon.

The Audit Committee of the Board of Directors, comprised solely of outside directors, meets with the independent auditors and representatives from management to appraise the adequacy and effectiveness of the audit functions, internal controls and quality of our financial accounting and reporting.


Dated: March 15, 2007
By:
/s/ Michael J. LaVelle
  
   
Michael J. LaVelle
  
   
Interim President and Chief Executive Officer
  
       
Dated: March 15, 2007
By:
/s/ David J. Steichen
  
   
David J. Steichen
  
   
Chief Financial Officer
  


Management’s Report on Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 30, 2006. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 30, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Dated: March 15, 2007
By:
/s/ Michael J.LaVelle
  
   
Michael J. LaVelle
  
   
Interim President and Chief Executive Officer
  
       
Dated: March 15, 2007
By:
/s/ David J. Steichen
  
   
David J. Steichen
  
   
Chief Financial Officer
  

40

Stock Data


   
Market Range
  
Fiscal Year Ended December 30, 2006
  
High
  
Low
  
Close
  
               
Fourth Quarter
  
$
2.26
  
$
1.69
  
$
1.87
  
Third Quarter
    
2.47
    
1.79
    
2.11
  
Second Quarter
    
2.87
    
1.99
    
2.00
  
First Quarter
    
3.00
    
2.37
    
2.79
  
                     
Fiscal Year Ended December 31, 2005
                    
                     
Fourth Quarter
  
$
2.74
  
$
2.24
  
$
2.40
  
Third Quarter
    
4.00
    
2.56
    
2.65
  
Second Quarter
    
3.91
    
2.75
    
3.41
  
First Quarter
    
4.10
    
3.33
    
3.75
  


The Company’s common shares are traded on The NASDAQ Stock Market® under the symbol ANLY. As of March 12, 2007, there were approximately 1,050 shareholders of record. The above table sets forth for the periods indicated the market prices for the Company's Common Stock as reported by NASDAQ.

The Company’s current debt arrangement prohibits the payment of dividends. The Company currently has no intention of reinstating a dividend paying policy.

Sales of Unregistered Securities

On January 6, 2005, the Company acquired the assets of WireSpeed Networks, LLC. The Company issued 103,093 of its common stock, having an aggregate value of $400,000, to an escrow account. The shares will be distributed on a pro rata basis from the escrow account to the Principals of WireSpeed Networks, LLC over a three-year period. These shares were not registered under the Securities Act of 1933. The unregistered shares were issued in reliance upon Section 4(2) of the Securities Act of 1933, as amended, as a sale by the Company not involving a public offering. No underwriters were involved with such issuance of common stock.

On April 4, 2005, the Company acquired the assets of Redwood Solutions Corporation. The Company issued 166,205 of its common stock, having an aggregate value of $600,000, to an escrow account. The shares will be distributed on a pro rata basis from the escrow account to the Principals of Redwood Solutions Corporation over a four-year period. These shares were not registered under the Securities Act of 1933. The unregistered shares were issued in reliance upon Section 4(2) of the Securities Act of 1933, as amended, as a sale by the Company not involving a public offering. No underwriters were involved with such issuance of common stock.

41
Five Year Financial Summary

(In thousands except per share amounts
  
Fiscal Year
  
and number of personnel)
  
2006
  
2005
  
2004
  
2003
  
2002
  
                       
Revenue:
                                
Professional services provided directly
  
$
261,489
  
$
263,121
  
$
269,610
  
$
266,175
  
$
312,085
  
Professional services provided through subsuppliers
    
54,902
    
34,431
    
55,806
    
50,543
    
98,578
  
Product sales
    
30,596
    
24,746
    
16,196
    
15,181
    
15,497
  
Total revenue
    
346,987
    
322,298
    
341,612
    
331,899
    
426,160
  
                                 
Salaries, contracted services and direct charges
    
260,619
    
240,100
    
261,005
    
256,643
    
339,016
  
Cost of product sales
    
27,149
    
22,550
    
14,964
    
14,562
    
14,699
  
Selling, administrative and other operating costs
    
58,847
    
61,053
    
61,015
    
61,511
    
73,694
  
Amortization of goodwill and other intangible assets
    
1,053
    
982
    
774
    
773
    
785
  
Loss on sale of corporate headquarters(1)
    
--
    
--
    
--
    
--
    
1,860
  
Restructuring and other severance related costs(4)
    
(51
)
  
3,914
    
--
    
--
    
--
  
Loss on Disposal(5)
    
--
    
1,825
    
--
    
--
    
--
  
Goodwill Impairment(6)
    
--
    
7,050
    
--
    
--
    
--
  
Merger Related Expenses
   
(327
)
  
2,129
    
--
    
--
    
--
  
Non-operating income
    
20
    
50
    
39
    
79
    
122
  
Loss on investment
    
--
    
--
    
--
    
--
    
190
  
Interest expense
    
736
    
394
    
41
    
13
    
1,042
  
Loss on debt extinguishment(2) 
    
--
    
--
    
--
    
--
    
744
  
Income taxes (benefit) and minority interest
    
41
    
50
    
--
    
--
    
(1,106
)
Net (loss) income before cumulative effect of change in accounting for goodwill
  
$
(1,060
)
$
(17,699
)
$
3,852
  
$
(1,524
)
$
(4,642
)
                                 
Cumulative effect of change in accounting for goodwill(3)
    
--
    
--
    
--
    
--
    
16,389
  
                                 
Total assets
  
$
96,231
  
$
102,004
  
$
105,677
  
$
101,895
  
$
106,744
  
Long-term liabilities
    
2,479
    
2,459
    
3,637
    
4,038
    
3,605
  
Shareholders’ equity
  
$
55,734
  
$
56,312
  
$
72,618
  
$
68,663
  
$
70,166
  
                                 
Per share data:
                                
Net (loss) income before cumulative effect of change in accounting for goodwill (basic)
    
(.04
)
  
(.72
)
  
.16
    
(.06
)
  
(.19
)
Net (loss) income before cumulative effect of change in accounting for goodwill (diluted)
    
(.04
)
  
(.72
)
  
.16
    
(.06
)
  
(.19
)
Cash dividends
    
.00
    
.00
    
.00
    
.00
    
.00
  
Shareholders’ equity
    
2.26
    
2.29
    
3.00
    
2.84
    
2.90
  
                                 
Average common shares outstanding
    
24,645
    
24,495
    
24,212
    
24,201
    
24,198
  
Average common and common equivalent shares outstanding
    
24,645
    
24,495
    
24,398
    
24,201
    
24,198
  
                                 
Number of Personnel
    
2,984
    
3,095
    
3,015
    
3,000
    
3,075
  
                                 

(1)On May 15, 2002, we completed the sale of our Corporate headquarters building. The net proceeds of the sale were $16,380,000. The Company recorded a $1,860,000 loss on the sale. The Company remains a major tenant in the building.
(2)During 2002, we used an advance under our line of credit to pay the outstanding balance of senior notes ($19,100,000 including make-whole obligations). Repayment of the senior notes resulted in a loss on the early extinguishment of debt of $744,000 in 2002.
(3)In preparation for the adoption of FAS No. 141 and FAS No. 142, we evaluated our goodwill and intangible assets acquired prior to June 30, 2001, the effective date of FAS No. 141, using the criteria of FAS No. 141. This evaluation resulted in $1,080,000 of other intangibles (comprised entirely of assembled workforce intangibles) being subsumed into goodwill at January 1, 2002, and, based on impairment tests, we recognized a transitional impairment loss of $16,389,000 in the first quarter of 2002 to reduce the carrying value of goodwill.
(4)During 2005, the Company recorded restructuring and severance related charges of $3.9 million. Of these charges, $1.6 million related to workforce reductions and $2.3 million related to lease obligations and abandonment costs (net of sub-lease income) in locations where the Company has chosen to downsize or exit completely.
(5)During the third quarter of 2005, the Company recorded a loss on asset disposal of $1.8 million with respect to software development costs.
(6)At September 3, 2005, the Company evaluated goodwill pursuant to SFAS No. 142 and found indication of impairment of the goodwill related to the non-infrastructure solutions reporting unit. Accordingly, the Company completed the impairment testing during the third quarter and recognized an impairment charge of $7.1 million.

42

Quarterly Revenues and Income

The following table sets forth certain statements of operations data for each of the quarters indicated below, and in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation thereof.

   
Quarter Ended
(unaudited)
      
(In thousands except per share amounts)
  
April 1
  
July 1
  
September 30
  
December 30
  
Total
  
                       
Fiscal 2006
                      
                       
Total revenue
  
$
86,841
  
$
87,906
  
$
85,480
  
$
86,760
  
$
346,987
  
Gross margin
    
15,201
    
14,683
    
14,697
    
14,637
    
59,218
  
(Loss) Income before income taxes
    
267
    
(250
)
  
(512
)
  
(524
)
  
(1,019
)
Income taxes (benefit)
    
13
    
8
    
10
    
10
    
41
  
Net (loss) income
   
254
    
(258
)
  
(522
)
  
(534
)
  
(1,060
)
Net (loss) income per share (basic and diluted)
    
.01
    
(.01
)
  
(.02
)
  
(.02
)
  
(.04
)

   
Quarter Ended
(unaudited)
      
(In thousands except per share amounts)
  
April 2
  
July 2
  
October 1
  
December 31
  
Total
  
                       
Fiscal 2005
                      
                       
Total revenue
  
$
79,099
  
$
79,104
  
$
78,244
  
$
85,851
  
$
322,298
  
Gross margin
    
14,925
    
15,408
    
14,163
    
15,152
    
59,648
  
(Loss) income before income taxes
    
(706
)
  
(2,375
)
  
(15,584
)
  
1,016
    
(17,649
)
Income taxes (benefit)
    
--
    
--
    
--
    
50
    
50
  
Net (loss) income
    
(706
)
  
(2,375
)
  
(15,584
)
  
966
    
(17,699
)
Net (loss) income per share (basic and diluted)
    
(.03
)
  
(.10
)
  
(.63
)
  
.04
    
(.72
)

43

[INSIDE BACK COVER]
 
Corporate Information

Board of Directors
  
Officers
  
10-K and Other Reports Available
         
Inside Directors
 
Michael J. LaVelle
Chairman of the Board
  
Michael J. LaVelle
Interim President and Chief Executive Officer
 
David J. Steichen
Chief Financial Officer and Treasurer
  
A copy of the Company's 2006 Annual Report on Form 10-K and other reports, filed with the Securities and Exchange Commission, is available to security holders without charge upon request to the Treasurer at:
Outside Directors
        
 
Brigid A. Bonner
Senior Vice President
United Health Group
  
Colleen M. Davenport
Secretary and General Counsel
 
John D. Bamberger
Senior Vice President, Solutions
  
Analysts International Corporation
3601 West 76th Street
Minneapolis, Minnesota 55435-3000
or the Investor Relations page of the Company’s website
         
Willard A. Brittain
Chairman and Chief Executive Officer,
Professional Resources on Demand
 
Krzysztof K. Burhardt
Partner, Clotho & Associates
  
Paulette M. Quist
Senior Vice President,
Business Development and Strategy
 
Angelia Smith-Brekke
Senior Vice President, Staffing
  
Stock Transfer Agent
 
Computershare Trust Company, N. A.
P.O. Box 43078
Providence, Rhode Island 02940-3023
         
Michael B. Esstman
General Partner,
Esstman Investments, Ltd. and
Retired Senior Vice President,
GTE Corporation
  
David H. Jenkins
Chief Information Officer
 
Michael Souders
Senior Vice President, Solutions
  
Shareholder Inquiries:
800-254-5196
http://www.Computershare.com
 
        Independent Auditors
Margaret A. Loftus
Principal, Loftus Brown-Wescott, Inc.
 
Robb L Prince
Retired Vice President and Treasurer,
Jostens, Inc.
  
 
  
 
Deloitte & Touche LLP
Minneapolis, Minnesota
 
 
 
        World Wide Web Address
     
       
http://www.analysts.com
Founder
Frederick W. Lang
Founder of Analysts International
      
 
 


[BACK COVER]
 

 

 



Analysts International Corporation

3601 West 76th Street

Minneapolis, Minnesota 55435-3000

Phone: 952-835-5900
www.analysts.com
 EX-21 6 exhibit21.htm SUBSIDIARIES Subsidiaries
EXHIBIT 21


Subsidiaries of Registrant
Year Ended December 30, 2006


Subsidiaries
  
State or Jurisdiction
of Incorporation
  
Percentage of Voting
Securities Owned
         
AiC Analysts Limited
  
United Kingdom
  
100.0%
         
Medical Concepts Staffing, Inc.
  
Minnesota
  
100.0%
         
Analysts International Strategic Sourcing Services, LLC
  
Minnesota
  
100.0%
         
Analysts International Business Resources Services, LLC
  
Minnesota
  
100.0%
         
Analysts International Business Solutions Services, LLC
  
Minnesota
  
100.0%
         
Analysts International Management Services, LLC
  
Minnesota
  
100.0%

 
 EX-23 7 exhibit23.htm CONSENT Consent
EXHIBIT 23


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


 
We consent to the incorporation by reference in Registration Statement Nos. 333-137446, 333-36188, and 333-118663 on Form S-8 of our reports dated March 15, 2007, relating to the consolidated financial statements and consolidated financial statement schedule of Analysts International Corporation and subsidiaries (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the change in accounting for stock-based compensation in 2006 described in Note A), and management's report on the effectiveness of internal control over financial reporting appearing in and incorporated by reference in the Annual Report on Form 10-K of Analysts International Corporation and subsidiaries for the year ended December 30, 2006.
 


/s/ Deloitte & Touche LLP
  
Minneapolis, Minnesota
  
March 15, 2007
  
EX-24 8 exhibit24.htm POWERS OF ATTORNEY Powers of Attorney
EXHIBIT 24
ANALYSTS INTERNATIONAL CORPORATION

POWER OF ATTORNEY
TO SIGN
ANNUAL REPORT ON FORM 10-K



KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby appoints Michael J. LaVelle or Colleen M. Davenport, or either of them, my true and lawful attorneys in fact, for me and in my name, place and stead, to sign and affix my name as a Director of Analysts International Corporation to the Annual Report on Form 10-K for the year ended December 30, 2006 and all amendments thereto to be filed by said Company with the Securities and Exchange Commission, Washington, D.C. as required by Section 13 of the Securities Exchange Act of 1934, as amended granting and giving unto said attorneys in fact, or any one of them, full authority and power to do and perform any and all acts necessary or incidental to the performance and execution of powers herein expressly granted, with full power to do and perform all acts authorized hereby as fully to all intents and purposes as I might or could do if personally present, with full power of substitution.

IN TESTIMONY WHEREOF, I have hereunto set my hand this 9th day of March, 2007.


 
/s/ Willard W. Brittain
  
 
Willard W. Brittain
  



STATE OF MINNESOTA )
 
)
ss
COUNTY OF HENNEPIN )


On the 9th day of March, 2007, before me, personally came Willard W. Brittain to me known to be the person described in and who executed the foregoing instrument and acknowledged that he executed the same as his free act and deed.


 
/s/ Cindy A. Streich
  
 
Notary Public
  


ANALYSTS INTERNATIONAL CORPORATION

POWER OF ATTORNEY
TO SIGN
ANNUAL REPORT ON FORM 10-K



KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby appoints Michael J. LaVelle or Colleen M. Davenport, or either of them, my true and lawful attorneys in fact, for me and in my name, place and stead, to sign and affix my name as a Director of Analysts International Corporation to the Annual Report on Form 10-K for the year ended December 30, 2006 and all amendments thereto o be filed by said Company with the Securities and Exchange Commission, Washington, D.C. as required by Section 13 of the Securities Exchange Act of 1934, as amended granting and giving unto said attorneys in fact, or any one of them, full authority and power to do and perform any and all acts necessary or incidental to the performance and execution of powers herein expressly granted, with full power to do and perform all acts authorized hereby as fully to all intents and purposes as I might or could do if personally present, with full power of substitution.

IN TESTIMONY WHEREOF, I have hereunto set my hand this 9th day of March, 2007.


 
/s/ Brigid A. Bonner
  
 
Brigid A. Bonner
  



STATE OF MINNESOTA )
 
)
ss
COUNTY OF HENNEPIN )


On the 9th day of March, 2007, before me, personally came Brigid A. Bonner to me known to be the person described in and who executed the foregoing instrument and acknowledged that he executed the same as his free act and deed.


 
/s/ Lee Ann Prevost
  
 
Notary Public
  


ANALYSTS INTERNATIONAL CORPORATION

POWER OF ATTORNEY
TO SIGN
ANNUAL REPORT ON FORM 10-K



KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby appoints Michael J. LaVelle or Colleen M. Davenport, or either of them, my true and lawful attorneys in fact, for me and in my name, place and stead, to sign and affix my name as a Director of Analysts International Corporation to the Annual Report on Form 10-K for the year ended December 30, 2006 and all amendments thereto to be filed by said Company with the Securities and Exchange Commission, Washington, D.C. as required by Section 13 of the Securities Exchange Act of 1934, as amended granting and giving unto said attorneys in fact, or any one of them, full authority and power to do and perform any and all acts necessary or incidental to the performance and execution of powers herein expressly granted, with full power to do and perform all acts authorized hereby as fully to all intents and purposes as I might or could do if personally present, with full power of substitution.

IN TESTIMONY WHEREOF, I have hereunto set my hand this 12th day of March, 2007.


 
/s/ Margaret A. Loftus
  
 
Margaret A. Loftus
  


STATE OF MINNESOTA )
 
)
ss
COUNTY OF HENNEPIN )


On the 12th day of March, 2007, before me, personally came Margaret A. Loftus to me known to be the person described in and who executed the foregoing instrument and acknowledged that he executed the same as his free act and deed.


 
/s/ Cindy A. Streich
  
 
Notary Public
  


ANALYSTS INTERNATIONAL CORPORATION

POWER OF ATTORNEY
TO SIGN
ANNUAL REPORT ON FORM 10-K



KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby appoints Michael J. LaVelle or Colleen M. Davenport, or either of them, my true and lawful attorneys in fact, for me and in my name, place and stead, to sign and affix my name as a Director of Analysts International Corporation to the Annual Report on Form 10-K for the year ended December 30, 2006 and all amendments thereto to be filed by said Company with the Securities and Exchange Commission, Washington, D.C. as required by Section 13 of the Securities Exchange Act of 1934, as amended granting and giving unto said attorneys in fact, or any one of them, full authority and power to do and perform any and all acts necessary or incidental to the performance and execution of powers herein expressly granted, with full power to do and perform all acts authorized hereby as fully to all intents and purposes as I might or could do if personally present, with full power of substitution.

IN TESTIMONY WHEREOF, I have hereunto set my hand this 9th day of March, 2007.


 
/s/ Krzysztof K. Burhardt
  
 
Krzysztof K. Burhardt
  


STATE OF MINNESOTA )
 
)
ss
COUNTY OF HENNEPIN )


On the 9th day of March, 2007, before me, personally came Krzysztof K. Burhardt to me known to be the person described in and who executed the foregoing instrument and acknowledged that he executed the same as his free act and deed.


 
/s/ Cindy A. Streich
  
 
Notary Public
  


ANALYSTS INTERNATIONAL CORPORATION

POWER OF ATTORNEY
TO SIGN
ANNUAL REPORT ON FORM 10-K

KNOW ALL PEOPLE BY THESE PRESENTS, that the undersigned hereby appoints Michael J. LaVelle or Colleen M. Davenport, or either of them, my true and lawful attorneys in fact, for me and in my name, place and stead, to sign and affix my name as a Director of Analysts International Corporation to the Annual Report on Form 10-K for the year ended December 30, 2006 and all amendments thereto to be filed by said Company with the Securities and Exchange Commission, Washington, D.C. as required by Section 13 of the Securities Exchange Act of 1934, as amended granting and giving unto said attorneys in fact, or any one of them, full authority and power to do and perform any and all acts necessary or incidental to the performance and execution of powers herein expressly granted, with full power to do and perform all acts authorized hereby as fully to all intents and purposes as I might or could do if personally present, with full power of substitution.
 
IN TESTIMONY WHEREOF, I have hereunto set my hand this 13th day of March, 2007.


 
/s/ Michael B. Esstman
  
 
Michael B. Esstman
  


STATE OF MINNESOTA )
 
)
ss
COUNTY OF HENNEPIN )


On the 13th day of March, 2007, before me, personally came Michael B. Esstman to me known to be the person described in and who executed the foregoing instrument and acknowledged that he executed the same as his free act and deed.


 
/s/ Cindy A. Streich
  
 
Notary Public
  


EX-31.1 9 exhibit31-1.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification
EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. LaVelle, Chief Executive Officer, certify that:

1.
I have reviewed this annual report on Form 10-K of Analysts International Corporation (the Registrant);

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

 
d)
disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent function):

 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Dated: March 15, 2007
By:
/s/ Michael J. LaVelle
   
Michael J. LaVelle
   
Interim President and Chief Executive Officer
EX-31.2 10 exhibit31-2.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, David J. Steichen, Chief Financial Officer, certify that:

1.
I have reviewed this annual report on Form 10-K of Analysts International Corporation (the Registrant);

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f)) for the registrant and we have:

 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

 
d)
disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent function):

 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: March 15, 2007
By:
/s/ David J. Steichen
   
David J. Steichen
   
Chief Financial Officer



EX-32 11 exhibit32.htm SECTION 906 CEO/CFO CERTIFICATION Section 906 CEO/CFO Certification
EXHIBIT 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of Analysts International Corporation (the “Company”) on Form 10-K for the year ended December 30, 2006 as filed with the Securities and Exchange Commission (the “Report”), the undersigned, Michael J. LaVelle, Interim Chief Executive Officer of the Company, and David J. Steichen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Dated: March 15, 2007
By:
/s/ Michael J. LaVelle
   
Michael J. LaVelle
   
Interim President and Chief Executive Officer
     
Dated: March 15, 2007
By:
/s/ David J. Steichen
   
David J. Steichen
   
Chief Financial Officer


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