Analysts International 10-K 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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)
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).
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of fiscal 2006.
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:
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.
There have been no disagreements with or changes in the Company’s independent auditors within the past two fiscal years.
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.
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.
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.
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:
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.
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Analysts International Corporation
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.
Analysts International Corporation
Valuation and Qualifying Accounts
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.
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.
*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.