ITEM 1. BUSINESS
Analysts International Corporation ("Analysts International" or the "Company") provides a full range of computer software services to computer users, computer manufacturers and software developers throughout the United States and in Canada and the United Kingdom. Over 90% of the Company's revenues are from services provided to its existing customer base, which consists primarily of Fortune 500 companies. This high percentage of repeat business reflects the Company's emphasis on customer satisfaction and development of long-term relationships with customers who have an ongoing need for the services which the Company provides.
Analysts International offers its clients a full range of software service offerings, sometimes referred to by others in the industry as "solutions," including custom software development under Company project management, Year 2000 assessment and remediation services, supplemental IT and software engineering staffing, maintenance of legacy systems, help desk services and single source staffing of programmers and other software professionals through the Company's TechWest Division. The Company's projects involve nearly every type and manufacture of computers and all of the major operating systems. Examples of the types of projects in which the Company was involved in during the fiscal year are highlighted in detail in the Company's 1998 Annual Report.
Analysts International's largest customer is U S West Inc., which is headquartered in Denver and provides telecommunication services to over 25 million customers in 14 states as well as domestic and international cable and telephone, wireless communications, directory and information services. The Company is U S West's single source for supplemental staffing for
U S West's IT/software engineering needs. To meet these needs, and to facilitate its management of over 1,000 computer programmers and other technical personnel it has on assignment at U S West, the Company established its TechWest Division, which fills requirements, manages assigned personnel and provides time record keeping/billing services through proprietary software developed specifically for this engagement. The Company's three-year contract expired May 31, 1998, and the contract was extended through November 30, 1998. The Company believes the contract will be renewed for an additional two to three years. Revenues from services provided to U S West were about 22% of total revenues during the last two fiscal years and are expected to be about that same percentage for fiscal 1999. Loss of this business could have a material adverse effect on the Company, although the Company believes it could replace the business lost if the contract is not renewed and the replacement business would mitigate or offset the profit lost from the loss of the U S West business.
The Company has expanded the TechWest service offering to other clients, including Chevron Information Technology Company (Chevron Corporation's technology subsidiary) and Salt River Project (the nation's third largest public power utility). Motorola's Semi-Conductor Products Sector became a TechWest customer during fiscal 1998. These TechWest customers use the Company as their sole source for supplemental IT/software engineering staffing.
Analysts International provided services through 30 of its branch offices during the year to various divisions of International Business Machines Corporation (IBM), its second largest customer, as one of a limited number of national service providers under IBM's National Procurement initiative. The Company's contract with IBM expires December 31, 2000, subject to IBM's right to cancel for convenience on 30 days' written notice. IBM's National Procurement initiative requires the Company and the other participating vendors to
accept lower hourly rates in return for the opportunity to do a greater volume of business with IBM. There can be no assurance, however, that volume will offset lower rates. IBM business under the national contract accounted for about 16% to 21% of revenues in each of the last three fiscal years, and loss of this business could have a material adverse effect on the Company. The Company believes, however, that the prevailing high demand for the services it provides would permit it to replace the loss of the IBM business and at least mitigate, if not offset, the resulting loss of profits.
Analysts International provides its services to a wide range of industries. Its fiscal 1998 revenues were derived from services rendered to customers in the following industry groups:
Analysts International provided services to more than 900 clients during the fiscal year. Consistent with its practices in prior years, the Company rendered these services almost exclusively on a time and materials hourly rate basis under which invoices for services rendered were submitted no less frequently than monthly with payment due generally net 30 days.
ORGANIZATION AND MARKETING
Analysts International provides its software services through its branch and field offices, assigned on a geographical basis to one of five regions. Each branch office is staffed with technical personnel and is managed by a branch manager, who has primary responsibility for the administration, personnel and recruiting, customer relations and profitability of the branch. The branch manager has broad authority to conduct the operation of the branch, subject to adherence to corporate policies. In general, field offices are established to support specific projects for one or more specific customers at locations not served by a local branch office and are managed by a branch within the same geographical region. A field office may become a branch office when the volume of business and the prospects for additional business justify the additional location expenses associated with branch office status.
During the fiscal year, the Company maintained branch offices in the following cities: Atlanta, Austin, Boca Raton, Chicago, Cincinnati/Dayton, Cleveland, Columbus (Ohio), Dallas, Danbury, Denver, Des Moines, Detroit, Houston, Indianapolis, Kansas City, Iselin (New Jersey), Lexington (Kentucky), Los Angeles, Minneapolis, New York City, Omaha, Phoenix, Raleigh/Durham, Rochester (Minnesota), Rochester (New York), St. Louis, San Francisco, Seattle, Silicon Valley, Tampa, Toronto, Canada and Tulsa. On July 1, 1998, one additional branch office was established in Portland, Oregon.
Analysts International utilizes its own direct sales force to sell its services. At the end of the fiscal year, the Company's sales staff totaled 110 in number. 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, and each branch office employs at least one full time recruiter. At the end of the fiscal year, the Company's recruiting staff totaled 125 in number.
COMPETITION
Analysts International competes with software consulting divisions of several large companies (including DEC, Andersen Consulting and IBM) on a national basis. These organizations and their software consulting divisions are substantially larger than the Company in terms of sales volume and personnel and have substantially greater financial resources.
The Company also competes with other national software services companies such as Computer Task Group, CGA, Keane Inc., and Computer Horizons.
The Company's branches compete in their local market areas with numerous locally-based software services firms. Most of the locally-based competitors are approximately the same size as or smaller than the Company's local branch, although in certain market areas they are larger than the Company's local branch.
The Company believes its total staff and sales volume are larger than most of the national and local software services companies, but in some market areas certain of these competitors may be larger. Although there are no comprehensive industry statistics available, the Company believes it is among the ten largest national software services companies in the United States.
Principal competitive factors in the software services business include technical expertise, responsiveness to customers' needs, reputation and credibility, and hourly rates. Analysts International believes it is competitive in these respects.
PERSONNEL
Analysts International has approximately 5,300 personnel. Of these, approximately 4,500 are systems analysts, computer programmers and other technical personnel whose services are billable to clients. Several years of programming experience is generally a prerequisite to employment with the Company.
Maintaining the present volume of the Company's business and its continued growth depend to a significant extent on its ability to attract and retain qualified technical personnel. Such personnel are in great demand. Although the Company has been able to attract and retain qualified technical personnel and believes its personnel relations are satisfactory, there can be no assurance the Company will be able to continue to attract and retain such personnel. Its inability to do so would have a material adverse effect on the registrant's business.
OTHER MATTERS
Analysts International was incorporated under Minnesota law on March 29, 1966. Its principal office is identified in response to Item 2
ITEM 2. PROPERTIES
Analysts International's principal executive offices are located at 7615 Metro Boulevard, Minneapolis, Minnesota 55439, in a 20,000 square foot office building which it owns. All branch offices and field offices are held under leases with varying expiration dates ranging from
30 days to 9 years. See Note H of Notes to Consolidated Financial Statements at page 24 of the Company's 1998 Annual Report to Shareholders.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party to or which any of its property is subject, other than ordinary routine litigation incidental to the business.
ITEM 4.
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 it's 1998 fiscal year.
EXECUTIVE OFFICERS
Terms of office expire October 15, 1998.
PART II
The following portions of the Company's annual report to shareholders for the fiscal year ended June 30, 1998 are incorporated by reference in response to Items 5, 6, 7 and 8 as follows:
(See Index to Consolidated Financial Statements and Schedules set forth in Item 14 of this Form 10-K.)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with or changes in the Company's independent auditors within the past 24 months.
PART III
The information regarding executive officers required by Item 10
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1998:
a. No director, executive officer, nominee for election as a director, holder of more than five percent of the Company's common stock or members of the immediate family of any of the foregoing persons had any direct or indirect material interest in any transaction or series of transactions to which the Company was a party and in which the amount exceeded $60,000, nor is any such transaction proposed;
b. The Company was not a party with any entity in which any of the Company's directors or nominees for election as directors was an executive officer, held more than a 10% equity interest, was a member of or of counsel to (in the case of a law firm) or was a partner or executive officer (in the case of an investment banking firm), in any transaction involving payments of more than five percent of the gross revenues of either the Company or such entity, nor is any such transaction proposed; and
c. No director, executive officer or nominee for election as a director or (i) any member of the immediate family of any of the foregoing, (ii) any corporation or beneficial holder of ten percent or more of any class of equity securities, or (iii) any trust or other estate in which such person served as a trustee or in a similar capacity was indebted to the Company in excess of $60,000.
Subparagraph d. of this Item is not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a.1 CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Analysts International Corporation and its subsidiary and the related independent auditors' report are included on the following pages of its annual report to shareholders for the fiscal year ended June 30, 1998:
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.
a.3 EXHIBITS
b. Reports on Form 8-K
There were no reports on Form 8-K for the three months ended June 30, 1998.
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
Shareholders and Board of Directors Analysts International Corporation Minneapolis, Minnesota
We have audited the consolidated financial statements of Analysts International Corporation and its subsidiary as of June 30, 1998 and 1997, and for each of the three years in the period ended June 30, 1998, and have issued our report thereon dated August 17, 1998; such consolidated financial statements and report are included in your 1998 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Analysts International Corporation and subsidiary, listed in Item 14 a.2. This consolidated financial statement schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, this consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota August 17, 1998
ANALYSTS INTERNATIONAL CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
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
BY /s/ F.W. Lang ------------------------------- DATE September 28, 1998 F. W. Lang, Chairman ------------------
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.
*F.W. Lang, 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/ F. W. Lang ---------------------------------- F. W. Lang, Chairman
EXHIBIT INDEX
*Reference is to the page number in the sequential numbering system.
For a list of exhibits incorporated by reference and not filed with this Form 10-K, see Item 14 a.3 at pages 15-16 of this Form 10-K.