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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______.
Commission File Number 1-12793
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STARTEK, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-1370538
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
111 HAVANA STREET
DENVER, COLORADO 80010
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(Address of principal executive offices) (Zip code)
(303) 361-6000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by checkmark 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 [ x ] No [ ]
Indicate by checkmark 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 the 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. [ ]
As of March 24, 1999, 13,828,571 shares of common stock were outstanding and
held by approximately 1,394 holders. The aggregate market value of common stock
held by non-affiliates of the registrant on such date was approximately $21.7
million, based upon the closing price of the Company's common stock as quoted on
the New York Stock Exchange composite tape on such date. Shares of common stock
held by each executive officer and director and by each person who owned 5% or
more of the outstanding common stock as of such date have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant's
Proxy Statement to be delivered in connection with its 1999 Annual Meeting of
Stockholders. With the exception of certain portions of the Proxy Statement
specifically incorporated herein by reference, the Proxy Statement is not deemed
to be filed as part of this Form 10-K.
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FORWARD-LOOKING STATEMENTS
All statements contained in this Form 10-K that are not statements of
historical facts are forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995) that involve substantial risks and
uncertainties. Forward-looking statements are preceded by terms such as "may",
"will", "should", "anticipates", "expects", "believes", "plans", "future",
"estimate" "continue", and similar expressions. The following are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements; these include, but are
not limited to, general economic conditions in the Company's markets, the loss
of the Company's principal client(s), the loss or delayed implementation of a
large project which could cause quarterly variation in the Company's revenues
and earnings, difficulties of managing rapid growth, dependence on key
personnel, dependence on key industries and the trend toward outsourcing, risks
associated with the Company's contracts, risks associated with rapidly changing
technology, risks of business interruption, risks associated with international
operations and expansion, dependence on labor force, the year 2000 issue, and
highly competitive markets. These factors include risks and uncertainties beyond
the Company's ability to control; and, in many cases, the Company and its
management cannot predict the risks and uncertainties that could cause actual
results to differ materially from those indicated by use of forward-looking
statements. All forward-looking statements herein are qualified in their
entirety by the information set forth in "Management's Discussion and Analysis
of Financial Condition and Results of Operations"--"Factors That May Affect
Future Results" appearing elsewhere in this Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
StarTek, Inc. (the "Company" or "StarTek") is a leading international
provider of integrated, value-added, outsourced process management services
primarily for Fortune 500 companies. The Company's process management services
encompass a wide spectrum of service platforms, including logistics management
(selection and management of suppliers), management of product assembly and
packaging, E-commerce order processing and fulfillment, Internet support,
product distribution, direct store distribution, warehouse services and
inventory management, inbound technical support and customer care teleservices,
telecommunications process management, and product order processing. By focusing
on these services as its core business, StarTek allows its clients to focus on
their primary business, reduce overhead, replace fixed costs with variable costs
and reduce working capital needs. The Company has continuously expanded its
business and facilities to offer additional services on an outsourced basis in
response to the growing needs of its clients and to capitalize on market
opportunities, both domestically and internationally.
StarTek's goal is to continue to grow profitably by focusing on
providing high-quality, integrated, value-added, outsourced process management
services. StarTek has a strategic partnership philosophy, through which it
assesses each of its client's needs and, together with its clients, develops and
implements customized outsourcing solutions. Management believes that its
entrepreneurial culture, long-term relationships with clients and suppliers,
efficient operations, dedication to quality, and use of advanced technology and
management techniques provide StarTek a competitive advantage in attracting
clients that outsource non-core operations. StarTek's largest two clients, based
on 1998 revenues, have utilized StarTek's outsourced services since 1996 and
1987.
StarTek's existing clients are primarily in the computer software,
Internet, E-commerce, computer hardware, technology, and telecommunications
industries which are characterized by rapid growth, complex and evolving product
offerings, and large customer bases, which require frequent, often
sophisticated, customer interaction. Currently, the Company is also targeting
financial services, transportation, consumer products, and health care
companies. Management believes there are substantial opportunities to cross-sell
StarTek's wide spectrum of outsourced process management services to its
existing and future client base. The Company intends to capitalize on the
increasing trend toward outsourcing by focusing on potential clients in
additional industries which could benefit from the Company's expertise in
developing and delivering integrated, cost-effective outsourced services.
StarTek currently has five facilities in Colorado, four of which are
operational and one of which is currently anticipated to be operational during
the second quarter of 1999. StarTek also has one facility each in Wyoming and
Tennessee. The Company's Europe operations are performed from its facility in
Hartlepool, England. The Company also operates through a subcontract
relationship in Singapore. The Company has announced plans to search for an
additional facility, which is currently expected to be operational during the
second half of 1999.
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The Company's business was founded in 1987 and through its wholly-owned
subsidiaries, has been providing outsourced process management services since
inception. On December 30, 1996, StarTek, Inc. was incorporated in Delaware and
in June 1997, StarTek completed an initial public offering of its common stock.
Prior to December 30, 1996, StarTek USA, Inc. and StarTek Europe, Ltd.
(previously named StarPak, Inc. and StarPak International, Ltd., respectively,
both of which became wholly-owned subsidiaries of the Company in January 1997
and are Colorado corporations) conducted business as affiliates under common
control. In 1998, the Company formed StarTek Pacific, Ltd., a Colorado
corporation and Domain.com, Inc., a Delaware corporation, both of which are also
wholly-owned subsidiaries of the Company. StarTek, Inc. is a holding company for
the businesses conducted by its four wholly-owned subsidiaries. StarTek's
principal executive offices are located at 111 Havana Street, Denver, Colorado
80010 and its telephone number is (303) 361-6000. StarTek's home page on the
Internet can be located at www.startek.com.
STARTEK'S INTEGRATED SERVICE PLATFORMS
The Company's interaction with a client's customers may begin with an
inbound call or message via the Internet requesting information or placing an
order for the client's product. A StarTek service representative takes the
order, and if the Company manages the client's inventory, the Company packs and
ships the order. If the Company does not manage the client's inventory, the
Company transmits the customer's request directly to the client. In the event
the Company manages the client's inventory, the Company may receive finished
goods directly from the client or the Company may manage the production process
on an outsourced basis, following product specifications provided by the client.
In the latter case, the Company selects and contracts with the necessary
suppliers and performs all tasks necessary to assemble and package the finished
product, which may be held by the Company pending receipt of customer orders or
shipped in bulk to distributors or retail outlets.
The Company's clients typically provide their customers with telephone
numbers for a variety of product, technical support, and service questions.
Calls are routed to StarTek technical support or customer care service
representatives who have been trained to support specific products and services.
A call may also lead to an order for another product or service offered by the
client, in which case the Company takes the order and the cycle begins again.
StarTek's clients may utilize one or more of the Company's service platforms.
BUSINESS STRATEGY
StarTek's strategic objective is to increase revenues and earnings by
maintaining and enhancing its position as a leading international provider of
integrated, value-added, outsourced process management services.
To reach this objective, the Company intends to:
Provide Integrated, Outsourced Process Management Services. StarTek
seeks to provide integrated, outsourced process management services which enable
its clients to provide their customers with high-quality services at lower cost
than through a client's own in-house operations. The Company believes that its
ability to tailor operations, materials, and employee resources objectively and
to provide process management services on a cost-effective basis will allow the
Company to become an integral part of its clients' businesses.
Develop Strategic Partnerships and Long-Term Relationships. StarTek
seeks to develop long-term client relationships, primarily with Fortune 500
companies. The Company invests significant resources to establish strategic
partnership relationships and to understand each client's processes, culture,
decision, parameters and goals, so as to develop and implement customized
solutions. The Company believes this solution-oriented, value-added integrated
approach to addressing its clients' needs distinguishes StarTek from its
competitors and plays a key role in the Company's ability to attract and retain
clients on a long-term basis.
Maintain Low-Cost Position through the StarTek Process Management
System. StarTek strives to establish a competitive advantage by frequently
redefining its operational process to reduce cost and improve quality. The
Company believes its continuous improvement philosophy and modern process
management techniques enable the Company to reduce waste and increase efficiency
in the following areas: (i) controlling overproduction; (ii) minimizing waiting
time due to inefficient work sequences; (iii) reducing inessential handling of
materials; (iv) eliminating nonessential movement and processing; (v)
implementing fail-safe processes; (vi) improving inventory management; and (vii)
preventing defects.
Emphasize Quality. StarTek strives to achieve the highest quality
standards in the industry. To this end, the Company, through certain of its
wholly-owned subsidiaries, has received ISO 9002 certifications, an
international standard for quality assurance and consistency in operating
procedures, for substantially all of its facilities and services. Certain of the
Company's existing clients require evidence of ISO 9002 certification prior to
selecting an outsourcing provider.
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Capitalize on Sophisticated Technology. The Company believes it has
established a competitive advantage by capitalizing on sophisticated technology
and proprietary software, including automatic call distributors, inventory
management software, transportation management software, call tracking systems,
and telephone-computer integration software. The Company further believes these
capabilities enable StarTek to improve efficiency, serve as a transparent
extension of its clients, receive telephone calls and data directly from its
clients' systems, and report detailed information concerning the status and
results of the Company's services and interaction with clients on a daily basis.
SERVICE PLATFORMS
The Company offers a wide spectrum of service platforms, which are
designed to provide cost-effective and efficient management of portions of its
clients' operations. The Company works closely with its clients to develop,
refine, and implement efficient and productive integrated outsourced solutions
that link StarTek with its clients and their customers. The processes that
create such solutions generally include the development of product manufacturing
specifications, packaging, and distribution requirements, as well as
product-related software programs for telephone, facsimile, E-mail, and Internet
interactions involving product order processing and fulfillment, and technical
support and customer care. Substantially all of the Company's process-related
teleservices activities are inbound telephone calls, rather than outbound calls.
Specific services StarTek provides to its clients include, but are not
necessarily limited to:
Product Order Processing. Product order processing is generally the
process by which a call or an Internet message from a client's customer is
received, identified and routed to a StarTek service representative. Typically,
a customer calls or E-mails to request product service information, to place an
order for an advertised product, or to obtain assistance regarding a previous
order or purchase. The information and results of the message are then
communicated either to StarTek's employees for order processing and fulfillment
or, if StarTek does not manage the client's inventory, the Company transmits the
customer's request directly to the client. For telephone calls, StarTek utilizes
automated call distributors to identify each inbound call by the number dialed
by the customer and immediately route the call to a StarTek service
representative trained for that product. Product orders also occur as a result
of a customer visiting the web site of a client and placing orders which are
received by StarTek or a StarTek service representative offering products in
connection with a technical support or customer care call. To facilitate product
orders, the Company can process credit card charges and other payment methods in
connection with its product order processing.
Supplier Management. Company personnel are responsible for maintaining
and managing multiple supplier relationships. When the Company is selected by a
client to provide product assembly and packaging services, the Company
qualifies, selects, certifies, and manages the sourcing and manufacturing of the
various products and related components including, among other things, the
printing of boxes, labels, manuals and other printed materials to be included
with the client's product, and the mass duplication of software onto various
media. Such products and related components are then assembled and packaged at
certain of the Company's facilities. The Company monitors the quality of its
suppliers through visits to manufacturing facilities and utilizes just-in-time
production to minimize inventory in the Company's warehouses. Management
believes that the Company's strong, long-term relationships with multiple
suppliers allows the Company to be flexible and responsive to its clients, while
minimizing costs and the Company's dependency on any single supplier.
Product Assembly and Packaging. The Company assembles and packages
products in various containers, including folding cartons, set-up boxes, compact
disc jewel cases, digi-packs, binders, and slip cases. The Company assembles and
packages products in the United States, the United Kingdom, and Singapore. The
Company's assembly lines have been designed with significant flexibility,
enabling the Company to assemble and package various types of products and
rapidly change the type of product produced. During peak periods of operations,
the Company's capacity is dependent upon (i) the complexity of the product to be
assembled; (ii) the availability of materials from suppliers; (iii) the
availability of temporary personnel to increase capacity; (iv) the number of
shifts operated by the Company; and (v) the ability to activate additional
production lines.
Product Distribution. The Company's inventory management systems enable
the Company to ship and track products to distribution centers, individual
stores, and its clients' customers directly. Product orders are received by the
Company via file transfer protocol (FTP), the Internet, electronic data
interchange (EDI), and facsimile, as well as through the Company's product order
teleservices and E-commerce support services described elsewhere.
E-commerce and Product Order Fulfillment. StarTek personnel process,
pack, and ship product orders and requests for promotional and educational
literature, and direct customers of the Company's clients to product or service
sources ("fulfillment") by telephone, E-mail, facsimile, and the Internet, 24
hours per day, seven days per week. The Company provides same-day shipping of
customer orders if the product is available.
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Technical Support Teleservices. StarTek service representatives provide
technical support services by telephone, E-mail, facsimile, and the Internet, 24
hours per day, seven days per week. Technical support inquiries are generally
driven by a customer's purchase of a product or by a customer's need for ongoing
technical assistance. Customers of StarTek's clients dial a technical support
number listed in their product manuals and, based on touch-tone responses, are
automatically connected to an appropriate StarTek service representative who is
specially trained in use of computerized knowledge databases for the applicable
product. Each StarTek service representative acts as a transparent extension of
the client when resolving complaints, diagnosing and resolving product or
service problems, or answering technical questions.
Customer Care Teleservices. Customer care programs are customized by
the Company to meet its clients' needs. The Company customizes responses to
various customer product inquiries by designing special greetings, marketing
messages, and specific queue-time controls. A StarTek service representative
receiving a call or an E-mail message can enter customer information into the
Company's call-tracking system, answer questions, and quickly access a
proprietary networked knowledge database via personal computer to locate an
answer to a customer's question. A senior quality control team member is
available to provide additional assistance for complex or unique customer
questions. As additional product information becomes available, the Company
promptly integrates such information into its knowledge database, thereby
ensuring that answers are based upon the latest product information.
Each customer interaction presents the Company and its clients with an
opportunity to gather valuable customer information, including the customer's
demographic profile and preferences. This information can prompt the StarTek
service representative to make logical, progressive inquiries about the
customer's interest in additional products and services, identify additional
revenue generating and cross-selling opportunities, or resolve other issues
relating to a client's products or services.
Telecommunication Process Management. StarTek personnel are responsible
for managing installation and providing on-going support services for large
scale telecommunications networks for its client's customers, most of whom are
Fortune 1000 companies. Service representatives manage the relationships between
StarTek's client and its customers on a transparent basis. StarTek's
installation management and on-going network support services, on an outsourced
basis, enable its client to provide telecommunications services to customers
more efficiently and cost effectively.
INTERNATIONAL OPERATIONS
StarTek provides process management services on an international basis
from the United Kingdom and Singapore. The Company's facility in the United
Kingdom provides most of the Company's outsourced service platforms for clients
throughout Europe, including supplier management, product assembly and
packaging, product distribution, product order fulfillment, product order
processing, inbound technical support and customer care services in several
languages. The Company currently provides supplier management, product assembly,
and packaging and product distribution for one of its principal clients through
a subcontract relationship with a company in Singapore. The subcontract
relationship generally operates on a purchase order basis. International
operations generated approximately 13.9% of the Company's total revenues during
1998, which, in large part, was a result of the revenues derived from the
Company's relationship with one of its principal clients in Singapore. See Note
14 to the consolidated financial statements set forth herein for a further
description of revenues, operating profit and identifiable assets classified by
the major geographic areas in which the Company operates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"--
"Factors That May Affect Future Results" set forth herein for a discussion of
"Risks Associated with International Operations and Expansion".
CLIENTS
StarTek provided services to approximately 75 clients during 1998.
StarTek's current client base consists of companies engaged primarily in the
computer software, Internet, E-commerce, computer hardware, technology, and
telecommunications industries. However, the Company is currently also targeting
companies in the financial services, transportation, consumer products, and
health care industries. Microsoft Corporation ("Microsoft") accounted for
approximately 56.3% and 72.5% of the Company's revenues during the years ended
December 31, 1997 and 1998, respectively. Hewlett-Packard Company
("Hewlett-Packard") accounted for approximately 25.4% of the Company's revenues
during the year ended December 31, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"-- "Factors That May
Affect Future Results" set forth herein for a further discussion of the
Company's "Reliance on Principal Client Relationships" and "Risks Associated
with the Company's Contracts".
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SALES AND MARKETING
The Company's marketing objective is to develop long-term relationships
with existing and potential clients to become the preferred worldwide provider
of outsourced services. StarTek invests significant resources to create a
strategic partnership with its clients to understand their existing operations,
customer service processes, culture, decision parameters, and goals. A StarTek
team assesses the client's outsourcing service needs, and, together with the
client, develops and implements customized solutions. Management believes that,
as a result of StarTek's strategic relationship with its clients and
comprehensive understanding of their businesses, the Company can identify new
revenue generating opportunities, customer interaction possibilities, and
product service improvements not adequately addressed by the client. The
Company's sales strategy emphasizes multiple contacts with a client to
strengthen its relationship and facilitate the cross-selling of services.
StarTek markets its outsourced services through a variety of methods,
including personal sales calls, client referrals, attendance at trade shows,
advertisements in industry publications, and cross-selling of services to
existing clients. As part of its marketing efforts, the Company encourages
visits to its facilities, where the Company demonstrates its services, quality
procedures, and ability to accommodate additional business.
Management believes a key element to sales growth is the ability to
flexibly, effectively, and efficiently expand service capacity to meet client
needs as its clients grow or outsource more of their non-core operations to the
Company. In addition, to attract new clients to StarTek's services, the Company
must have the resources to develop a strategy to meet new clients' outsourcing
goals promptly, as well as the ability to implement operations for such clients
quickly and accurately.
TECHNOLOGY
The Company employs technology and proprietary software that
incorporates digital switching, relational knowledge database management
systems, call tracking systems, workforce management systems, object-oriented
software modules, and computer telephony integration. The Company's digital
switching technology is designed to enable calls to be routed to the next
available teleservice representative with the appropriate product knowledge,
skill, and language abilities. Call tracking and workforce management systems
generate and track historical call volumes by client, enabling the Company to
schedule personnel efficiently, anticipate fluctuations in call volume and
provide clients with detailed information concerning the status and results of
the Company's services on a daily basis. Management believes that the Company's
proprietary technology platform provides the Company with a competitive
advantage in maintaining existing clients and attracting new clients. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"-- "Factors That May Affect Future Results" set forth herein for a
discussion of "Risks Associated with Rapidly Changing Technology".
EMPLOYEES AND TRAINING
StarTek's success in recruiting, hiring, and training large numbers of
full-time skilled employees and obtaining large numbers of hourly and temporary
employees during peak periods is critical to the Company's ability to provide
high quality outsourced services. To maintain good employee relations and to
minimize turnover, the Company offers competitive pay, hires employees who are
eligible to receive the full range of employee benefits, and provides employees
with clear, visible career paths. To meet its service objectives, the Company
also utilizes temporary services. As of December 31, 1998, the Company had
approximately 2,155 full-time equivalent employees. The number of temporary
employees varies substantially due to the seasonal variations of the Company's
business. Management believes that the demographics surrounding its facilities,
its reputation, stability, and compensation plans should allow the Company to
continue to attract and retain qualified employees. However, the Company
operates in some locations where unemployment levels are currently at low levels
compared to historic norms. If low unemployment levels continue to persist in
these areas, the Company's ability to attract qualified employees could be
adversely affected. The Company believes its current operations in six separate
locations, with a seventh location being added in Grand Junction, Colorado,
should reduce this exposure. The Company considers its employee relations to be
good. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations"-- "Factors That May Affect Future Results" set forth
herein for a discussion of factors relating to the Company's "Dependence on
Labor Force" and "Dependence on Key Personnel".
In keeping with StarTek's continuous improvement philosophy, the
Company is committed to training all of its employees. StarTek provides formal
training for senior management, supervisors, process managers, quality
coordinators, and service representatives. StarTek also maintains an employee
quality program to backup every employee, including specialized quality
coordinators who teach problem solving, assist with service calls, and offer
immediate performance feedback. On a more informal basis, the Company provides
on-the-job process training and tutoring for all product assembly and packaging
personnel. Employee teams gather daily to receive information about products to
be produced and techniques to be utilized, and have an opportunity to ask
questions and receive one-on-one training, as necessary.
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The Company's in-house training programs for technical support,
customer care, and telecommunications process management employees involve an
in-depth, structured learning environment that builds technical competence and
teaches critical software skills necessary to provide effective services to its
clients. Each service representative is specially designated and trained to
support a particular product or group of products for a particular client. These
client service representatives receive training in product knowledge, call
listening, and computer skills prior to answering any customer calls
independently. This training time depends on the complexity of the product for
which such representative will provide services. Further, the Company uses live
and taped call reviews and customer feedback surveys to continue to monitor and
enhance its level of customer support services.
INDUSTRY AND COMPETITION
StarTek continues to believe that businesses throughout the world are
increasingly focusing on their core businesses and are increasingly engaging
outsourcing service companies to perform specialized, non-core functions and
services. Outsourcing of non-core activities offers a strategic advantage to
companies in a wide range of industries by offering them an opportunity to
reduce operating costs and working capital needs, improve their reaction to
business cycles, manage capacity and improve customer and technical information
gathering and utilization. To realize these advantages, companies are
outsourcing the process of planning, implementing, and controlling the efficient
flow of goods, services, teleservices and related information from the point of
origin to the point of consumption. Additionally, rapid technological changes
and rising customer expectations for high-quality goods and services make it
increasingly difficult and expensive for companies to maintain the necessary
personnel and product capabilities in-house to support a product's life-cycle on
a cost-effective basis. Companies which focus on providing these services as
their core business, including StarTek, are expected to continue to benefit from
these outsourcing trends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations"-- "Factors That May Affect Future Results"
set forth herein for a discussion of the Company's "Highly Competitive Market".
StarTek competes on the basis of quality, reliability of service,
price, efficiency, speed and flexibility in tailoring services to client needs.
Management believes its comprehensive and integrated services differentiate it
from its non-client competitors who may only be able to provide one or a few of
the outsourced services that StarTek provides. The Company continuously explores
new outsourcing service opportunities, typically in circumstances where clients
are experiencing inefficiencies in non-core areas of their businesses and
management believes it can develop a superior outsourced solution to such
inefficiency on a cost-effective basis. Management believes that it competes
primarily with the in-house process management operations of its current and
potential clients. Such in-house operations include Internet operations,
teleservices, customer support services, logistics management, packaging and
assembling, distribution, and warehousing. StarTek also competes with certain
companies that provide similar services on an outsourced basis. There are
numerous competitors of all sizes that provide product order teleservices and
product fulfillment distribution services.
ITEM 2. PROPERTIES
FACILITIES
StarTek's principal executive offices are located in Denver, Colorado.
Currently, StarTek owns and operates (unless otherwise noted) the following
facilities, containing an aggregate of approximately 735,000 square feet:
YEAR
OPENED OR SQUARE LEASED, COMPANY OWNED, OR
PROPERTIES ACQUIRED FEET OTHERWISE
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U.S. Facilities
Greeley, Colorado 1987 100,000 Company Owned
Greeley, Colorado 1993 10,500 Company Owned
Denver, Colorado 1995 138,000 Company Owned
Greeley, Colorado 1998 35,000 Company Owned
Laramie, Wyoming 1998 22,000 Company Owned
Clarksville, Tennessee 1998 305,000 Company Owned(a)
Grand Junction, Colorado 1999 46,350 Leased
International Facilities
Hartlepool, England 1993 53,000 Leased
Singapore 1995 25,000 Subcontractor Relationship
------------------------------
(a) See Note 8 to the consolidated financial statements set forth herein for a
description of the Tennessee financing arrangement.
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Substantially all of the Company's facility space can be used to support a
number of the Company's process management service platforms. The Company has
announced plans to search for an additional facility, which is currently
expected to be operational during the second half of 1999. Management believes
StarTek's existing facilities are adequate for the Company's current operations,
but continued capacity expansion will be required to support continued growth.
Management intends to maintain a certain amount of excess capacity to enable it
to readily provide for the needs of new clients and the increased needs of
existing clients. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations"-- "Factors That May Affect Future Results"
set forth herein for a discussion of "Risks of Business Interruptions".
ITEM 3. LEGAL PROCEEDINGS
The Company has been involved from time to time in litigation arising in
the normal course of business, none of which is currently expected by management
to have a material adverse effect on the Company's business, financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE OF COMMON STOCK
StarTek's common stock has been traded under the symbol "SRT" on the
New York Stock Exchange since June 19, 1997, the effective date of the Company's
initial public offering. The high and low closing sale prices of the Company's
common stock for 1997 and 1998 were:
1997 HIGH LOW
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Second Quarter (beginning June 19, 1997) 16 3/8 14
Third Quarter 16 1/8 11 1/4
Fourth Quarter 14 3/8 10 5/8
1998 High Low
---- ---- ---
First Quarter 12 1/8 9 1/8
Second Quarter 13 11 9/16
Third Quarter 12 11/16 8 5/8
Fourth Quarter 12 3/8 8 1/16
The closing sale price for StarTek's common stock on March 24, 1999 was
$10.50. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations"-- "Factors That May Affect Future Results" set forth
herein for a discussion of "Volatility of Stock Price".
HOLDERS OF COMMON STOCK
As of March 24, 1999, there were approximately 1,394 stockholders of
record of the Company's common stock and 13,828,571 shares of common stock
outstanding. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations"-- "Factors That May Affect Future Results" set forth
herein for a discussion of "Control by Principal Stockholders".
DIVIDEND POLICY
The Company currently intends to retain all future earnings in order to
finance continued growth and development of its business and does not expect to
pay any cash dividends with respect to its common stock in the foreseeable
future. The payment of any dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, the availability of
funds, future earnings, capital requirements, contractual restrictions, the
general financial condition of the Company and general business conditions.
Under its $5 million line of credit, the Company may not pay dividends in an
amount, which would cause a failure to meet its financial covenants. See Note 6
to the consolidated financial statements set forth herein and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations"--"Liquidity and Capital Resources" set forth herein for a
description of these financial covenants.
7
9
SALES OF UNREGISTERED SECURITIES
The Company did not issue or sell any unregistered securities during
the quarter ended December 31, 1998, except for the following:
In November 1998, the Company granted options to purchase 12,200 shares of
common stock, in the aggregate, to three employees pursuant to the
Company's 1997 Stock Option Plan. These options vest at a rate of 20% per
year beginning November 1999, expire in November 2008 and are exercisable
at $10.375 per share, which was the market value of the Company's common
stock on the date the options were granted. These stock option grants were
made in reliance upon the exemptions from registration provided by Sections
4(2) and 3(b) of the Securities Act of 1933, as amended, and the
regulations promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K. Additionally, the following selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31 (A)
---------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------
STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 26,341 $ 41,509 $ 71,584 $ 89,150 $ 140,984
Cost of services 21,355 33,230 57,238 71,986 115,079
-------- -------- -------- -------- ---------
Gross profit 4,986 8,279 14,346 17,164 25,905
Selling, general and administrative
expenses 4,489 5,341 7,764 8,703 14,714
Management fee expense 612 2,600 6,172 3,126 --
-------- -------- -------- -------- ---------
Operating profit (loss) (115) 338 410 5,335 11,191
Net interest income (expense) and
other (216) (396) (372) 933 2,254
-------- -------- -------- -------- ---------
Income (loss) before income taxes (331) (58) 38 6,268 13,445
Income tax expense -- -- 112 2,110 4,901
-------- -------- -------- -------- ---------
Net income (loss) $ (331) $ (58) $ (74) $ 4,158 $ 8,544
======== ======== ======== ======== =========
Basic and diluted net income per
share $ 0.62
Weighted average shares outstanding 13,828,571
Selected Operating Data:
Capital expenditures, net of proceeds $ 670 $ 2,104 $ 1,333 $ 3,191 13,927
Depreciation and amortization 588 873 1,438 1,829 2,852
Balance Sheet Data (December 31):
Working capital $ 434 $ 798 $ 2,895 $ 38,704 $ 38,336
Total assets 12,352 21,580 22,979 58,172 80,201
Total debt 3,288 7,294 6,475 664 4,225
Total stockholders' equity 3,006 3,798 7,103 46,006 54,133
(A) SELECTED UNAUDITED PRO FORMA
OPERATING DATA: YEAR ENDED DECEMBER 31
-----------------------------------------------
1994 1995 1996 1997
------ ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical net income (loss) $ (331) $ (58) $ (74) $ 4,158
Add back management fee expense 612 2,600 6,172 3,126
Less applicable income tax expense (105) (948) (2,204) (1,394)
------ ------- ------- -------
Net income $ 176 $ 1,594 $ 3,894 $ 5,890
====== ======= ======= =======
Basic and diluted net income per share $ 0.47
Weighted average shares outstanding 12,652,680
See Note 2 to the consolidated financial statements set forth herein for a
further description of pro forma adjustments. Pro forma presentation was not
applicable for the year ended December 31, 1998.
8
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this Form 10-K
that are not statements of historical facts are forward-looking statements (as
defined in the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties. Forward-looking statements are preceded by
terms such as "may", "will", "should", "anticipates", "expects", "believes",
"plans", "future", "estimate", "continue", and similar expressions. The
following are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements;
these include, but are not limited to, general economic conditions in the
Company's markets, the loss of the Company's principal client(s), the loss or
delayed implementation of a large project which could cause quarterly variation
in the Company's revenues and earnings, difficulties of managing rapid growth,
dependence on key personnel, dependence on key industries and the trend toward
outsourcing, risks associated with the Company's contracts, risks associated
with rapidly changing technology, risks of business interruption, risks
associated with international operations and expansion, dependence on labor
force, the year 2000 issue, and highly competitive markets. These factors
include risks and uncertainties beyond the Company's ability to control; and, in
many cases, the Company and its management cannot predict the risks and
uncertainties that could cause actual results to differ materially from those
indicated by use of forward-looking statements. All forward-looking statements
herein are qualified in their entirety by the information set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"--"Factors That May Affect Future Results" appearing elsewhere in
this Form 10-K.
OVERVIEW
StarTek generates its revenues by providing process management services,
which encompass a wide spectrum of service platforms, including logistics
management (selection and management of suppliers), management of product
assembly and packaging, E-commerce order processing and fulfillment, Internet
support, product distribution, direct store distribution, warehouse services and
inventory management, inbound technical support and customer care teleservices,
telecommunications process management, and product order processing. The Company
recognizes revenues as process management services are completed. Substantially
all of the Company's significant arrangements with its clients for its services
generate revenues based, in large part, on the number and duration of customer
inquiries, and the volume, complexity and type of components involved in the
handling of clients' products. Changes in the complexity or type of components
in the product units assembled by the Company may have an effect on the
Company's revenues, independent of the number of product units assembled.
A key element of the Company's ability to grow is the availability of
capacity to readily provide for the needs of new clients and the increased needs
of existing clients. StarTek's capacity substantially expanded during 1998
through the opening of a 305,000 square-foot building in Clarksville, Tennessee,
a 35,000 square-foot building in Greeley, Colorado and a 22,000 square-foot
building in Laramie, Wyoming. These three facilities, all of which became
operational during 1998, together with the Company's previously existing
capacity, provided adequate capacity to accommodate the revenue and earnings
growth experienced by the Company during 1998. StarTek leases 46,350 square-feet
of building space in Grand Junction, Colorado, which is currently expected to
become operational during the second quarter of 1999. The Company also operates
from facilities in the United Kingdom and Singapore. Additionally, the Company
has announced plans to search for an additional facility, which is currently
expected to be operational during the second half of 1999. Management believes
StarTek's existing facilities are adequate for the Company's current operations,
but continued capacity expansion will be required to support continued growth.
Management intends to maintain a certain amount of excess capacity to enable it
to readily provide for the needs of new clients and the increased needs of
existing clients.
The Company's cost of services primarily includes labor,
telecommunications, materials, and freight charges that are variable in nature
and certain facility expenses. All other operating expenses, including expenses
attributed to technology support, sales and marketing, human resource management
and other administrative functions that are not allocable to specific client
services, are included in selling, general and administrative expenses, which
generally tend to be either semi-variable or fixed in nature.
From July 1992, through June 17, 1997, the Company operated as an S
corporation and, accordingly, was not subject to federal or state income taxes.
As an S corporation, in addition to general compensation for services rendered,
the Company historically paid certain management fees, bonuses and other fees to
the principal stockholders and/or their affiliates in amounts on an annual basis
which were approximately equal to the annual earnings of the Company, and all
such amounts were reflected as management fee expense in the consolidated
statement of operations. Upon receipt of such management fees and bonuses, the
principal stockholders historically contributed approximately 53% of such
amounts to the Company to provide the Company with necessary working capital,
with substantially all of the balance used to pay applicable federal and state
income taxes. The amounts so contributed are reflected in additional
paid-in-capital on the Company's consolidated balance sheets. Effective with the
closing of the Company's initial public offering, these management fees and
bonus arrangements were discontinued. See Note 1 to the consolidated financial
statements set forth herein.
9
11
Compensation has continued to be payable to certain principal
stockholders as general compensation for services rendered in the form of
salaries, bonuses, or advisory fees and all such payments are included in
selling, general and administrative expenses in the consolidated statement of
operations. At current rates, such payments aggregate approximately $516,000
annually. See Note 1 to the consolidated financial statements set forth herein.
The Company frequently purchases components of its clients' products as
an integral part of its supplier management services and in advance of providing
its product assembly and packaging services. These components are packaged,
assembled and held by StarTek pending shipment. The Company generally has the
right to be reimbursed from clients for unused inventories. Client-owned
inventories are not reflected in the Company's consolidated balance sheets. See
Note 1 and Note 4 to the consolidated financial statements set forth herein for
a further description of the Company's inventories.
RESULTS OF OPERATIONS
The following tables should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-K.
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data expressed as a percentage of revenues:
YEAR ENDED DECEMBER 31
----------------------------------------------
1996 1997 1998
--------------- ----------- ------------
Revenues 100.0% 100.0% 100.0%
Cost of services 80.0 80.7 81.6
--------------- ----------- ------------
Gross profit 20.0 19.3 18.4
Selling, general and administrative
expenses 10.8 9.8 10.4
Management fee expense 8.6 3.5 --
--------------- ----------- ------------
Operating profit 0.6 6.0 8.0
Net interest income ( expense) and other (0.5) 1.0 1.6
--------------- ----------- ------------
Income before income taxes 0.1 7.0 9.6
Income tax expense 0.2 2.3 3.5
--------------- ----------- ------------
Net income (loss) (0.1)% 4.7% 6.1%
=============== =========== ============
The following table sets forth certain unaudited pro forma consolidated
statement of operations data expressed in dollars and as a percentage of
revenues (dollars in thousands, except per share data) (b):
YEAR ENDED DECEMBER 31
---------------------------------------------------
1996 1997
------------------------ -------------------------
Revenues $ 71,584 100.0% $ 89,150 100.0%
Cost of services 57,238 80.0 71,986 80.7
-------------- ----------------
Gross profit 14,346 20.0 17,164 19.3
Selling, general and administrative expenses 7,764 10.8 8,703 9.8
-------------- ----------------
Operating profit 6,582 9.2 8,461 9.5
Net interest income ( expense) and other (372) (0.5) 933 1.0
-------------- ----------------
Income before income taxes 6,210 8.7 9,394 10.5
Income tax expense 2,316 3.3 3,504 3.9
-------------- ----------------
Net income $3,894 5.4% $5,890 6.6%
============== ================
Basic and diluted net income per share $ 0.34 $ 0.47
Weighted average shares outstanding 11,361,904 12,652,680
- -------------------------------
(b) See Note 2 to the consolidated financial statements set forth herein for a
further description of pro forma adjustments. Pro forma presentation was
not applicable for the year ended December 31, 1998.
10
12
1998 Compared to 1997
Revenues. Revenues increased $51.8 million, or 58.1%, from $89.2 million
for 1997 to $141.0 million for 1998. This increase was primarily due to an
increase in the volume of services provided to one of the Company's principal
clients, together with certain existing and new clients, partially offset by
decreases in the volume of services provided to other existing clients.
Cost of Services. Cost of services increased $43.2 million, or 59.9%, from
$71.9 million for 1997 to $115.1 million for 1998. As a percentage of revenues,
costs of services increased from 80.7% for 1997 to 81.6% for 1998. This
percentage increase was primarily due to higher overall costs of certain
business for a principal client at lower relative margins, mix of services
performed and training and start-up expenses related to the new Greeley,
Colorado, Laramie, Wyoming and Clarksville, Tennessee facilities, all of which
became operational during 1998.
Gross Profit. Due to the foregoing factors, gross profit increased $8.7
million, or 50.9%, from $17.2 million for 1997 to $25.9 million for 1998. As a
percentage of revenues, gross profit decreased from 19.3% for 1997 to 18.4% for
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.0 million, or 69.1%, from $8.7 million for
1997 to $14.7 million for 1998, primarily as a result of increased personnel
costs incurred to service increasing business and costs associated with capacity
expansion. As a percentage of revenues, selling, general and administrative
expenses increased from 9.8% for 1997 to 10.4% for 1998.
Management Fee Expense. Management fee expense was $3.1 million for 1997
and zero for 1998. Effective with the closing of the Company's initial public
offering in June 1997, management fees were discontinued.
Operating Profit. As a result of the foregoing factors, operating profit
increased from $5.3 million for 1997 to $11.2 million for 1998. As a percentage
of revenues, operating profit increased from 6.0% for 1997 to 8.0% for 1998.
Net Interest Income and Other. Net interest income and other was $0.9
million for 1997 and $2.3 million for 1998. This increase was primarily a result
of an increase in interest income derived from cash equivalents and investments
available for sale balances during 1998, whereas there were line of credit and
substantially more capital lease borrowings outstanding during the first half of
1997, substantially all of which were repaid from the net proceeds received by
the Company from its June 1997 initial public offering.
Income Before Income Taxes. As a result of the foregoing factors, income
before income taxes increased $7.1 million, or 114.5%, from $6.3 million for
1997 to $13.4 million for 1998. As a percentage of revenues, income before
income taxes increased from 7.0% for 1997 to 9.6% for 1998.
Income Tax Expense. The Company was taxed as an S corporation for federal
and state income tax purposes from July 1, 1992 through June 17, 1997, when S
corporation status was terminated in contemplation of the Company's initial
public offering. Accordingly, the Company was not subject to federal or state
income taxes prior to June 17, 1997. During 1997, a provision for income taxes
as a C corporation was made for the period June 18, 1997 through December 31,
1997 as adjusted for a foreign tax benefit item, less a one-time credit to
record a net deferred tax asset of $0.3 million upon termination of S
corporation status. Income tax expense for 1998 reflects a provision for
federal, state and foreign income taxes at an effective rate of 36.5%.
Net Income. Based on the factors discussed above, net income increased $4.3
million, or 105.5%, from $4.2 million for 1997 to $8.5 million for 1998. As a
percentage of revenues, net income increased from 4.7% for 1997 to 6.1% for
1998.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Tax Expense and Pro Forma Net
Income for 1997 compared to actual results for 1998. Pro forma amounts for 1997
reflect the elimination of management fees and bonuses to stockholders and their
affiliates as these fees and bonuses were discontinued upon the closing of the
Company's June 1997 initial public offering, and provide for related income
taxes at 37.3% of pre-tax income as if the Company were taxed as a C corporation
for the entire year of 1997. Pro forma presentation was not applicable to 1998.
As a result of the foregoing factors: (i) pro forma management fee expense is
zero for 1997 and actual management fee expense is zero for 1998; (ii) pro forma
operating profit was $8.5 million for 1997 compared to actual operating profit
of $11.2 million for 1998, while such operating profit represented 9.5% and 8.0%
of revenues, respectively; (iii) income before income taxes increased $4.0
million, or 43.1%, from a pro forma amount of $9.4 million for 1997 to an actual
amount of $13.4 million for 1998; (iv) income tax expense increased $1.4
million, or 39.9%, from a pro forma amount of $3.5 million for 1997 to an actual
amount of $4.9 million for 1998; and (v) net income increased $2.6 million, or
45.1%, from a pro forma amount of $5.9 million for 1997 to an actual amount of
$8.5 million for 1998.
11
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1997 Compared to 1996
Revenues. Revenues increased $17.6 million, or 24.5%, from $71.6
million for 1996 to $89.2 million for 1997. This increase was primarily from
existing clients. A portion of the revenues for 1996 were attributable to two
large projects, which generated unusually high revenues.
Cost of Services. Cost of services increased $14.7 million, or 25.8%,
from $57.2 million for 1996 to $71.9 million for 1997. As a percent of revenues,
cost of services increased 0.7%. Factors pertaining to this increase were
decreased labor utilization, primarily from Greeley capacity restraints in
latter 1997, increased training costs and a greater penetration of business with
a large client at lower relative margins. These increased cost factors were
partially offset by the absence of start-up costs in Denver and product rework
cost as compared to 1996.
Gross Profit. As a result of the foregoing factors, gross profit
increased $2.8 million, or 19.6%, from $14.3 million for 1996 to $17.2 million
for 1997. As a percentage of revenues, gross profit decreased from 20.0% for
1996 to 19.3% for 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.9 million, or 12.0%, from $7.8 million for
1996 to $8.7 million for 1997, primarily as a result of increased personnel
costs incurred to service increasing business. As a percentage of revenues,
selling, general and administrative expenses decreased from 10.8% for 1996 to
9.8% for 1997, reflecting the spreading of fixed and semi-variable costs over a
larger revenue base.
Management Fee Expense. Management fee expense decreased $3.1 million,
or 49.3%, from $6.2 million for 1996 to $3.1 million for 1997. As a percentage
of revenues, management fee expense decreased from 8.6% for 1996 to 3.5% for
1997. Management fee expense was determined by the Board of Directors and
related primarily to changes in operating profit of the Company for 1996. The
Company paid management fees and bonuses of $3.1 million in the period from
January 1, 1997 through the closing of the Company's initial public offering in
June 1997, at which time these management fees and bonus arrangements were
discontinued. These management fee and bonus payments gave consideration to
operating profits and the effects of certain expense timing differences for book
and tax purposes.
Operating Profit. As a result of the foregoing factors, operating
profit increased $4.9 million, or 1200%, from $0.4 million for 1996 to $5.3
million for 1997. As a percentage of revenues, operating profit increased from
0.6% for 1996 to 6.0% for 1997.
Net Interest Income (Expense) and Other. Net interest income (expense)
and other was $0.4 million expense in 1996, while it was $0.9 million income for
1997. This increase in net interest earnings was primarily due to interest
earnings from the net proceeds of the Company's initial public offering in June
1997 and the substantial absence of line-of-credit borrowing during the third
and fourth quarters of 1997.
Income Before Income Taxes. As a result of the foregoing factors,
income before income taxes increased $6.3 million from zero for 1996 to $6.3
million for 1997. As a percentage of revenues, income before income taxes
increased from 0.1% for 1996 to 7.0% for 1997.
Income Tax Expense. The Company operated as an S corporation for
federal and state income tax purposes until termination of S corporation status
in connection with the Company's initial public offering. Accordingly, the
Company was not subject to federal or state income taxes through June 17, 1997.
A provision for foreign income taxes of $0.1 million was made in 1996. During
1997, a provision for income taxes as a C corporation was made for the period
June 18, 1997 through December 31, 1997, as adjusted for a foreign tax benefit
item, less a one-time credit to record a net deferred tax asset of $0.3 million
upon termination of S corporation status.
Net Income (Loss). Based on the factors discussed above, net income
increased $4.3 million, from $(0.1) million for 1996 to $4.2 million for 1997.
As a percentage of revenues, net income increased from (0.1)% for 1996 to 4.7%
for the year ended December 31, 1997.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Taxes and Pro Forma Net Income. Pro
forma amounts reflect the elimination of management fees and bonuses paid to
stockholders and their affiliates as these fees and bonuses were discontinued
upon closing of the Company's initial public offering, and provide for related
income taxes at 37.3% of pre-tax income as if the Company were taxed as a C
corporation. As a result of the foregoing factors: (1) pro forma management fee
expense is zero for 1996 and 1997; (2) pro forma operating profit increased $1.9
million, or 28.5% from $6.6 million for 1996 to $8.5 million for 1997; (3) pro
forma income before income taxes increased $3.2 million, or 51.3%, from $6.2
million in 1996 to $9.4 million for 1997; (4) pro forma income taxes increased
$1.2 million, or 51.4%, from $2.3 million 1996 to $3.5 million for 1997; and (5)
pro forma net income increased $2.0 million, or 51.3% from $3.9 million for 1996
to $5.9 million for 1997.
12
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LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in June 1997, the Company funded its
operations and capital expenditures primarily through cash flow from operations,
borrowings under various lines of credit, capital lease arrangements, short-term
borrowings from its stockholders and their affiliates and additional capital
contributions by its stockholders. In November 1997, the Company replaced its
previous $3.5 million line of credit with Norwest Business Credit, Inc. with a
$5.0 million revolving line of credit with Norwest Bank Colorado, N.A. (the
"Bank"), which matures on April 30, 1999. Borrowings under the line of credit
bear interest at the Bank's prime rate (7.75% as of December 31, 1998). Under
this line of credit, the Company is required to maintain working capital of
$17.5 million and tangible net worth of $25.0 million. The Company may not pay
dividends in an amount which would cause a failure to meet these financial
covenants. As of December 31, 1998, and the date of this Form 10-K, the Company
was in compliance with these financial covenants. Collateral for the line of
credit is the accounts receivable of certain of the Company's wholly-owned
subsidiaries. As of December 31, 1998, no amount was outstanding under the $5.0
million line of credit. The Company is currently expects to renew this line of
credit with the Bank under the same general terms and conditions provided for in
the arrangement described above.
The Company closed an initial public offering of common stock on June 24,
1997. The net proceeds, after deducting underwriting discounts and commissions
and offering expenses, were approximately $41.0 million. From the net proceeds,
the Company repaid substantially all of its outstanding indebtedness, which
included approximately $4.9 million of bank and mortgage indebtedness, $1.8
million of capital lease obligations and $8.0 million of notes payable to
principal stockholders arising from an S corporation dividend in an amount
approximating the additional paid-in capital and retained earnings of the
Company as of the closing date. The balance of the net proceeds (approximately
$26.3 million) was primarily used for working capital and other general
corporate purposes, including approximately $8.0 million for capital
expenditures to expand into new facilities and build-out of the Company's
existing facilities.
During the first half of 1998, the Company completed construction of and
began operating from a new 35,000 square-foot call center facility in Greeley,
Colorado (the "Greeley Facility"). The Company purchased the Greeley Facility in
order to expand its call center capacity. The total construction cost of the
Greeley Facility and related equipment was approximately $3.5 million (excluding
the cost of the land). The Company financed the land for the Greeley Facility
through a $0.3 million non-interest bearing ten year promissory note. The
principal balance of the ten year promissory note declines on an equal basis,
without payment, over ten years so long as the Company does not sell or transfer
the land or fail to continuously operate a customer service center thereon.
During 1998, the Company purchased a total of approximately $1.8 million in
equipment, leasehold improvements and other fixed assets in order to operate a
22,000 square-foot call center facility in Laramie, Wyoming in a leased
building. The Laramie call center became operational during the three months
ended June 30, 1998. An option to purchase the Laramie land and building for
$365,000 was exercised on October 30, 1998.
On July 8, 1998, the Company entered into certain financing agreements with
the Industrial Development Board of the County of Montgomery, Tennessee, (the
"Board") in connection with the Board's issuance to StarTek USA, Inc. of an
Industrial Development Revenue Note, Series A not to exceed $4.5 million (the
"Facility Note") and an Industrial Development Revenue Note, Series B not to
exceed $3.5 million (the "Equipment Loan"). The Facility Note bears interest at
9% per annum commencing on October 1, 1998, payable quarterly, and maturing on
July 8, 2008. Concurrently, the Company advanced $3.6 million in exchange for
the Facility Note and entered into a lease agreement, maturing July 8, 2008,
with the Board for the use and acquisition of a 305,000 square-foot process
management and distribution facility in Clarksville, Tennessee (the "Facility
Lease"). The Facility Lease provides for the Company to pay to the Board lease
payments sufficient to pay, when and as due, the principal of and interest on
the Facility Note due to the Company from the Board. Pursuant to the provisions
of the Facility Lease and upon the Company's payment of the Facility Lease in
full, the Company shall have the option to purchase the 305,000 square-foot,
Clarksville, Tennessee facility for a lump sum payment of one hundred dollars.
The Equipment Loan generally contains the same provisions as the Facility Note
and provides for an equipment lease, except the Equipment Loan and equipment
lease mature on January 1, 2004. As of December 31, 1998, the Company had used
approximately $3.9 million and $1.2 million of the Facility Note and Equipment
Loan, respectively, and correspondingly entered into further lease arrangements
with the Board.
All transactions related to the purchase of the notes by the Company from
the Board and the lease arrangements from the Board to the Company have been
offset against each other in the consolidated financial statements set forth
herein, and accordingly have no impact on the consolidated balance sheets. The
assets acquired are included in property, plant and equipment. Similarly, the
interest income and interest expense related to the notes and lease
arrangements, respectively, have also been offset. The lease payments are equal
to the amount of principal and interest payments on the notes, and accordingly
have no impact on the consolidated statements of operations.
13
15
On October 26, 1998, the Company entered into an equipment loan
agreement with a finance company, which matures on November 2, 2002. In
connection with the equipment loan, the Company received cash of $3.6 million in
exchange for providing, among other things, certain collateral which generally
consisted of equipment, furniture and fixtures used in the Company's business.
The equipment loan provides for interest at a fixed annual interest rate of 7.0%
and for the Company to pay forty-eight equal monthly installments, which in
aggregate total approximately $4.2 million. In addition to the collateral
described above, the Company granted to the finance company a secondary security
interest in certain of its wholly-owned subsidiaries' accounts receivable.
On February 16, 1999, the Company entered into an operating lease agreement
whereby the Company acquired use of 46,350 square-feet of building space in
Grand Junction, Colorado to be used by the Company for call center, general
office use and other services as appropriate for the general purposes of the
Company (the "Grand Junction Facility"). The term of the lease agreement
commences on April 1, 1999 and unless earlier terminated or extended, continues
until March 31, 2009. Pursuant to the terms of the lease agreement, the Company
was granted, among other things, (i) a right of first refusal to purchase the
property, of which the leased space is a part, during the lease term and (ii) a
right to terminate the lease agreement anytime after the end of the fifth year
by giving the landlord 180 day prior written notice to terminate. Assuming the
operating lease agreement is not terminated, future minimum rental commitments
in aggregate, excluding certain taxes and utilities as defined, total
approximately $1.1 million and are payable on a monthly basis from April 1999
through March 2009.
On February 18, 1999 and in connection with the Grand Junction Facility,
the Company ordered certain call center computer hardware and software with an
aggregate purchase price of approximately $0.8 million. Completion of
installation of this call center equipment is currently scheduled to occur
during the second quarter of 1999, when, it is currently expected, the Grand
Junction Facility will also become operational.
As of December 31, 1998, the Company had cash, cash equivalents, and
investments available for sale of $36.4 million, working capital of $38.3
million and net worth of $54.1 million. The Company's investments available for
sale generally consisted of corporate bonds, foreign government bonds
denominated in U.S. dollars, bond related mutual funds, other debt securities,
and various real estate investment trusts and equity related mutual funds. Such
investments held by the Company could be materially and adversely affected by
(i) various domestic and foreign economic conditions, such as recessions,
increasing interest rates, adverse foreign currency exchange fluctuations,
foreign and domestic inflation, and other factors and (ii) the inability of
certain corporations to repay their debts, including interest amounts, to the
Company. See "Quantitative and Qualitative Disclosures About Market Risk", and
Note 1 and Note 3 to the consolidated financial statements set forth herein for
further discussions regarding the Company's cash and cash equivalents, and
investments available for sale.
Net cash provided by operating activities increased from $6.1 million
for 1997 to $13.1 million for 1998. This increase was primarily a result of
increases in net income, depreciation and amortization expense, various tax
related items, accounts payable, and accrued and other liabilities, partially
offset by increases in accounts receivable, inventories, and gain on sale of
assets.
Net cash used in investing activities was $10.5 million for 1997 and
$24.2 million for 1998. This increase was primarily due to increased purchases
of (i) property, plant and equipment, and (ii) investments available for sale,
partially offset by proceeds received from dispositions of certain fixed assets
and investments.
Net cash provided by financing activities during 1997 of approximately
$28.6 million was primarily the result of $41.0 million of net proceeds received
from the June 1997 initial public offering, $1.6 million in contributed capital
from certain S corporation stockholders prior to the June 1997 initial public
offering, and $1.5 million proceeds received from borrowings and capital lease
arrangements, partially offset by approximately $7.5 million of net repayments
of various debt obligations, and $8.0 million of cash dividends paid to certain
S corporation principal stockholders. Net cash provided by financing activities
during 1998 of $3.6 million primarily consisted of $3.7 million of net proceeds
received from an October 1998 equipment loan and other borrowings, partially
offset by approximately $0.1 million of principal payments for the October 1998
equipment loan and various capital lease obligations.
The effect of currency exchange rate changes on the translation of the
Company's United Kingdom operations was not substantial during 1997 and 1998.
The terms of the Company's agreements with its clients and its foreign
subcontracts are typically in U.S. dollars except for certain of its agreements
related to its United Kingdom operations. In the past, the Company's exposure to
foreign currency exchange risks has been minimal in connection with its day to
day operations in the United Kingdom. However, as the international portion of
the Company's business grows, more revenues and expenses may be denominated in
foreign currency, and this will increase the Company's exposure to fluctuations
in currency exchange rates. See "Quantitative and Qualitative Disclosures About
Market Risk" set forth herein for a further discussion of the Company's exposure
to foreign currency exchange risks in connection with certain of its investments
available for sale.
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The Company believes its current cash, cash equivalents and investments
available for sale balances, anticipated cash flows from future operations and
the $5.0 million of currently available financing under its $5.0 million line of
credit, will be sufficient to support its operations, capital expenditures and
various repayment obligations under its debt and lease agreements for the
foreseeable future. However, liquidity and capital requirements depend on many
factors including, but not limited to, the Company's ability to retain or
successfully and timely replace its principal clients and the rate at which the
Company expands its business, whether internally or through acquisitions and
strategic alliances. To the extent the funds generated from the sources
described above are insufficient to fund the Company's activities in the short
or long-term, the Company will be required to raise additional funds through
public or private financing. No assurance can be given that additional financing
will be available or that, if available, it will be available on terms favorable
to the Company.
QUARTERLY RESULTS
Note 16 to the consolidated financial statements set forth herein
reflects certain unaudited statement of operations data for the quarters in 1997
and 1998 on a historical and pro forma basis. The unaudited historical quarterly
information has been prepared on the same basis as the annual information and,
in management's opinion, includes all adjustments necessary to present fairly
the information for the quarters presented. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"-- "Factors That May
Affect Future Results"--"Variability of Quarterly Operating Results" set forth
herein for a further discussion of the Company's quarterly results.
For the quarterly periods in 1997 and 1998, revenues, cost of services
and gross profits fluctuated principally due to the seasonal pattern of certain
of the businesses served by the Company and an increase in the volume of
services provided to one of the Company's principal clients, together with
certain existing and new clients, partially offset by decreases in the volume of
services provided to other existing clients. Revenues, cost of services and
gross profit from the fourth quarter of 1997 to the first quarter of 1998
declined principally due to the seasonal pattern of certain businesses served by
the Company.
The following table sets forth certain unaudited historical and pro
forma statement of operations data, expressed as a percentage of revenues:
1997 QUARTERS ENDED 1998 QUARTERS ENDED
----------------------------------------- --------------------------------------------
MAR 31 JUN 30 SEPT 30 DEC 31 MAR 31 JUN 30 SEPT 30 DEC 31
----------------------------------------- --------------------------------------------
Historical:
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit 23.6 21.9 19.4 16.0 18.8 19.0 18.4 18.0
Selling, general and
administrative expenses 13.0 12.1 10.6 6.8 11.2 13.3 11.0 8.6
Management fee expense 4.7 14.5 -- -- -- -- -- --
Operating profit (loss) 5.9 (4.7) 8.8 9.2 7.6 5.7 7.4 9.4
Net income (loss) 5.4 (4.0) 7.2 6.8 6.2 5.4 5.7 6.5
Pro forma:
Revenues 100.0% 100.0% -- -- -- -- -- --
Gross profit 23.6 21.9 -- -- -- -- -- --
Selling, general and
administrative expenses 13.0 12.1 -- -- -- -- -- --
Management fee expense -- -- -- -- -- -- -- --
Operating profit (loss) 10.6 9.8 -- -- -- -- -- --
Net income (loss) 6.3 5.8 -- -- -- -- -- --
Gross profit, as a percentage of revenues, increased 2.8% from the fourth
quarter of 1997 to the first quarter of 1998 as a result of the mix of services
performed and the absence of lower labor utilization and capacity constraints
related to the 100,000 square-foot Greeley facility, partially offset by
training and start-up expenses related to the 35,000 square-foot Greeley
facility.
Gross profit, as a percentage of revenues, decreased 4.8% from the first
quarter of 1997 to the first quarter of 1998 primarily as a result of higher
overall cost of services from greater penetration of business with certain
principal clients at lower relative margins, training and start-up expenses
related to the 35,000 square-foot Greeley facility and the mix of services
performed.
Gross profit, as a percentage of revenues, decreased 2.9% from the second
quarter of 1997 to the second quarter of 1998 primarily as a result of higher
overall cost of services of certain business at lower relative margins, mix of
services performed, and training and start-up expenses related to the 35,000
square-foot Greeley facility and the 22,000 square-foot Laramie facility, both
of which became operational in the second quarter of 1998.
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Gross profit, as a percentage of revenues, decreased 1.0% from the third
quarter of 1997 to the third quarter of 1998 primarily as a result of higher
overall costs of certain business at lower relative margins, mix of services
performed and training and start-up expenses related to the 305,000 square-foot
Clarksville, Tennessee facility, which became operational during the third
quarter of 1998.
Gross profit, as a percentage of revenues, increased 2.0% from the fourth
quarter of 1997 to the fourth quarter of 1998 primarily as a result of the
absence of lower labor utilization and capacity constraints related to the
100,000 square-foot Greeley facility. Operating from the 305,000 square-foot
facility in Clarksville, Tennessee substantially contributed to the relief of
the capacity constraints experienced by the Company during the fourth quarter of
1997. Gross profit, as a percentage of revenues, remained relatively consistent
for the quarterly periods in 1998.
For the quarterly periods in 1997, selling, general and administrative
expenses as a percentage of revenues, fluctuated principally due to the
spreading of fixed and semi-variable costs over a revenue base that fluctuates
from quarter to quarter. For the quarterly periods in 1998, selling, general and
administrative expenses as a percentage of revenues, fluctuated principally due
to increased personnel costs incurred to service increasing business and costs
associated with capacity expansion.
The Company paid management fees and bonuses of $3.1 million in the
period January 1, 1997 through the closing of the Company's initial public
offering in June 1997, at which time these management fees and bonus
arrangements were discontinued. These 1997 management fees and bonus
arrangements gave consideration to operating profits and the effects of certain
expense timing differences for book and tax purposes.
Operating profit fluctuated within the quarterly periods of 1997 and
1998 based primarily on the factors noted above. Net income fluctuated within
the quarterly periods of 1997 (pro forma quarterly results for the first two
quarters of 1997 and actual quarterly results for the last two quarters of 1997)
and 1998 (actual quarterly results for all quarters in 1998) based primarily on
the factors noted above, and based on an increase in interest earnings in 1998
derived from the Company's cash equivalents and investments available for sale,
partially offset by a provision for income tax expense in 1998 of 36.5%.
The unaudited pro forma quarterly information for the first two
quarters of 1997 presents the effects on operating profit of the elimination of
management fee expense paid to stockholders and their affiliates as these fees
were discontinued effective with closing of the Company's initial public
offering. See Note 2 to the consolidated financial statements set forth herein
for a further description of the 1997 pro forma information and related pro
forma adjustments. Pro forma presentation was not applicable for the quarterly
periods beginning after June 30, 1997.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Some of the
Company's older computer programs and technologies fall into this category. As a
result, those programs have time-sensitive applications that recognize a date
using "00" as the year 1900 rather than the year 2000. This could cause system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in other normal business activities.
The Company formally created a year 2000 project team (the "Y2K Team")
during the first quarter of 1998. The Y2K Team reports directly to the Company's
executive committee and periodically provides the executive committee status
updates of its year 2000 compliance efforts. To date, the Y2K Team has, among
other things, completed its initial assessment of the Company's year 2000
compliance issues, identified non year 2000 compliant computer equipment and
software, communicated with applicable third party vendors of the Company in
order to gather information on year 2000 matters beyond the Company's internal
information technologies, scheduled and partially completed year 2000 testing of
the Company's applicable information systems, and planned to develop and test a
year 2000 contingency plan. The total cost of the Company's year 2000 compliance
efforts is currently estimated to be approximately $100,000.
The Company currently anticipates that the Y2K Team will complete its
year 2000 compliance efforts during the third quarter of 1999, which is prior to
any currently anticipated material adverse effect the year 2000 issue may have
on the Company's business, financial condition and results of operations.
Additionally, StarTek uses certain of its clients' software applications in
performing its outsourced services. Such client-owned software used by StarTek,
if not year 2000 compliant, could cause significant interruptions and delays in
the Company's services, revenues and cash receipts. Currently, management is
unaware of any specific year 2000 issues related to client-owned software used
in StarTek's day to day operations. The Company currently believes, based on its
current year 2000 compliance planning, the year 2000 issue will not pose
material adverse problems to its business. However, if the Company's, its third
party vendors', subcontractors' and clients' year 2000 compliance efforts are
not successful, or not completed in a timely manner, the year 2000 issue could
have a material adverse effect on the operations of the Company.
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The anticipated cost and timing to complete the year 2000 compliance
efforts mentioned above are based on estimates which have been derived using
numerous assumptions of future events, including the continued availability of
certain resources and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to completely identify and correct all relevant
information systems, the ability to coordinate successfully with its third party
vendors, subcontractors and clients in order to attempt to insure year 2000
issues beyond the Company's internal information systems are also successfully
and timely addressed, and other uncertainties. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"-- "Factors That May
Affect Future Results" set forth herein for a further discussion of factors
relating to the Company's "Year 2000 Compliance".
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of domestic
and foreign inflation on its operations, the Company does not believe that
inflation has had, or is likely in the foreseeable future to have, a material
adverse effect on its results of operations or financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Reliance on Principal Client Relationships
A substantial portion of the Company's revenue is generated from its
principal client(s) and the loss of its principal client(s) could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company's two largest clients during the twelve and
three months ended December 31, 1997 were Microsoft Corporation ("Microsoft")
and Hewlett-Packard Company ("Hewlett-Packard"). Microsoft, which began its
outsourcing relationship with StarTek in April 1996, accounted for approximately
56.3% of the Company's revenues during the year ended December 31, 1997. The
Company provides various outsourced services to various divisions of
Hewlett-Packard, each of which the Company considers separate clients since each
division acts through a relatively autonomous decision maker. Hewlett-Packard's
various divisions accounted for approximately 25.4% of the Company's revenues
during the year ended December 31, 1997. The Company began its outsourcing
relationship with Hewlett-Packard in 1987. The Company's largest client during
the year ended December 31, 1998 was Microsoft. Microsoft accounted for
approximately 72.5% of the Company's revenues during the year ended December 31,
1998. There can be no assurance the Company will be able to retain its principal
client(s) or, if it were to lose its principal client(s), it would be able to
timely replace its principal client(s) with clients which generate a comparable
amount of revenues.
Variability of Quarterly Operating Results
The Company's business is highly seasonal and is, at times, conducted in
support of product launches for new and existing clients. Historically, the
Company's revenues have been substantially lower in the first and second
quarters due to the timing of its clients' marketing programs and product
launches, which are typically geared toward the holiday buying season.
Additionally, the Company has experienced, and expects to continue to
experience, quarterly variations in operating results as a result of a variety
of factors, many of which are outside the Company's control, including: (i) the
timing of existing and future client product launches; (ii) the expiration or
termination of existing client projects; (iii) the timing and amount of costs
incurred to expand capacity in order to provide for further revenue growth from
current and future clients; (iv) the seasonal nature of certain clients'
businesses; (v) the cyclical nature of certain high technology clients'
businesses; and (vi) changes in the Company's principal client base.
Year 2000 Compliance
As the year 2000 approaches, an issue impacting all companies,
including StarTek, has emerged regarding how existing application software
programs, computer operating systems and other operating equipment which use
embedded computer chips can accommodate this date value. Software programs,
computer operating systems and other operating equipment that have
date-sensitive programming or embedded chips may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of StarTek's operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. Similarly, disruptions in the
operations of StarTek's clients, third party vendors and/or subcontractors due
to the year 2000 issue could materially and adversely affect StarTek's
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations"--"Year 2000 Compliance" set forth herein for a further
discussion of the Company's year 2000 compliance efforts.
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Difficulties in Managing Business Undergoing Rapid Growth
StarTek has experienced rapid growth over the past several years and
anticipates continued future growth. Continued growth depends on a number of
factors, including the Company's ability to (i) initiate, develop and maintain
new and existing client relationships, particularly relationships with its
principal client(s); (ii) expand its sales and marketing organization; (iii)
recruit, motivate and retain qualified management, customer support and other
personnel; (iv) rapidly expand the capacity of its existing facilities or
identify, acquire or lease suitable additional facilities on acceptable terms
and complete build-outs of such facilities in a timely and economic fashion; (v)
provide high quality services to its clients; and (vi) maintain relationships
with high-quality and reliable suppliers. Continued rapid growth can be expected
to place significant strain upon the Company's management, employees,
operations, operating and financial systems, and other resources. To accommodate
such growth and to compete effectively, the Company must continue to implement
and improve its information systems, procedures, and controls and expand, train,
motivate, and manage its workforce. There can be no assurance that the Company's
personnel, systems, procedures, and controls will be adequate to support the
Company's future operations. Further, there can be no assurance the Company will
be able to maintain or accelerate its current growth, effectively manage its
expanding operations or achieve planned growth on a timely and profitable basis.
If the Company is unable to manage growth effectively or if growth does not
occur, its business, results of operations and financial condition could be
materially and adversely affected.
Risks Associated with Rapidly Changing Technology
Continued and substantial world-wide use and development of the
Internet as a delivery system for computer software, hardware, computer games,
other computer related products, and products in general could significantly and
adversely affect demand for the Company's services. Additionally, the Company's
success is significantly dependent on its computer equipment, telecommunications
equipment, software systems, operating systems, and financial systems. There can
be no assurance that the Company will be able to timely and successfully develop
and market any new services, that such services will be commercially successful
or that clients' and competitors' technologies or services will not render the
Company's services obsolete. Furthermore, the Company's failure to successfully
and timely implement sophisticated technology or to respond effectively to
technological changes in general, could have a material adverse effect on the
Company's success, growth prospects, results of operations and financial
condition.
Dependence on Labor Force
StarTek's success is largely dependent on its ability to recruit, hire,
train, and retain qualified employees. The Company's business is labor intensive
and continues to experience relatively high personnel turnover. The Company's
operations, especially its technical support teleservices, generally require
specially trained employees. Increases in the Company's employee turnover rate
could increase the Company's recruiting and training costs and decrease its
operating efficiency and productivity. Also, the addition of new clients or the
implementation of new projects for existing clients may require the Company to
recruit, hire, and train personnel at accelerated rates. There can be no
assurance that the Company will be able to successfully recruit, hire, train,
and retain sufficient qualified personnel to adequately staff for existing
business or future growth. In addition, because a substantial portion of the
Company's operating expenses consist of labor related costs, continued labor
shortages together with increases in wages (including minimum wages as mandated
by the U.S. federal government, employee benefit costs, employment tax rates,
and other labor related expenses) could have a material adverse effect on
StarTek's business, operating profit and financial condition. Furthermore,
certain of StarTek's facilities are located in areas with relatively low
unemployment rates and/or relatively high labor costs, thus potentially making
it more difficult and costly to hire qualified personnel.
Risks Associated with International Operations and Expansion
StarTek currently conducts business in Europe and Asia, in addition to
its North American operations. Such international operations accounted for
approximately 13.9% of the Company's total revenues for the year ended December
31, 1998. A component of the Company's growth strategy continues to be expansion
of its international operations. There can be no assurance that the Company will
be able to continue or expand its capacity to market, sell, and deliver its
services in international markets or that it will be able to develop
relationships with other businesses to expand its international operations.
Additionally, there are certain risks inherent in conducting international
business, including: (i) exposure to foreign currency fluctuations against the
U.S. dollar; (ii) potentially longer working capital cycles; (iii) greater
difficulties in collecting accounts receivable; (iv) difficulties in complying
with a variety of foreign laws and foreign tax regulations; (v) unexpected
changes in foreign government programs, policies, regulatory requirements and
labor laws; (vi) difficulties in staffing and effectively managing foreign
operations; and (vii) political instability and adverse tax consequences. There
can be no assurance that one or more of such factors will not have a material
adverse effect on the Company's international operations and, consequently, on
the Company's business, results of operations, growth prospects and financial
condition.
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Control by Principal Stockholders
As of March 24, 1999, A. Emmet Stephenson, Jr., Chairman of the Board
and co-founder of the Company, and his family, beneficially own approximately
66.2% of the Company's outstanding common stock. As a result, Mr. Stephenson and
his family will be able to elect the entire Board of Directors of the Company
and to control substantially all other matters requiring action by the Company's
stockholders. Additionally, substantially all of the Company's revenues,
operating expenses and operating results in general are derived from the
Company's wholly-owned subsidiaries. Mr. Stephenson is also the sole Director
for each of the Company's wholly-owned subsidiaries. Such voting concentration
may discourage, delay or prevent a change in control of the Company and its
wholly-owned subsidiaries.
Dependence on Key Personnel
The Company's success to date has depended in large part on the skills
and efforts of Mr. Stephenson and of Michael W. Morgan, President, Chief
Executive Officer, Director and co-founder of the Company. As of March 24, 1999,
Mr. Stephenson and his family and Mr. Morgan beneficially own approximately
66.2% and 7.0% of the Company's outstanding common stock, respectively. Mr.
Stephenson and Mr. Morgan have not entered into employment agreements with the
Company and there can be no assurance that the Company can retain the services
of these individuals. The loss of either Mr. Stephenson or Mr. Morgan, or the
Company's inability to hire or retain other qualified officers, directors and
key employees, could have a material adverse effect on the Company's success,
growth prospects, results of operations and financial condition.
Dependence on Key Industries and Trends Toward Outsourcing
StarTek's current client base primarily consists of companies engaged
primarily in the computer software, computer hardware, Internet, E-commerce,
technology and telecommunications industries. The Company's business and growth
is largely dependent on the continued demand for its services from clients in
these industries and industries targeted by the Company, and current trends in
such industries to outsource various non-core functions which are offered on an
outsourced basis by the Company. A general economic downturn in the computer
industry or in other industries targeted by the Company or a slowdown or
reversal of the trend in these industries to outsource services provided by the
Company could materially and adversely affect the Company's business, results of
operations, growth prospects and financial condition.
Risks Associated with the Company's Contracts
The Company typically enters into written agreements with each client for
outsourced services or performs services on a purchase order basis. Under
substantially all of the Company's significant arrangements with its clients,
including its principal clients, the Company typically generates revenues based
in large part, on the number and duration of customer inquiries, and the volume,
complexity, and type of components involved in its clients' products.
Consequently, the amount of StarTek's revenues generated from any particular
client is generally dependent upon customers' purchase and use of its clients'
products. There can be no assurance as to the number of customers who will be
attracted to the products of the Company's clients or that the Company's clients
will continue to develop new products that will require the Company's services.
Although the Company currently seeks to sign multi-year contracts with its
clients, the Company's contracts generally (i) permit termination upon
relatively short notice by its clients, (ii) do not designate the Company as its
clients' exclusive outsourcing service provider, (iii) do not penalize its
clients for early termination, and (iv) generally hold the Company responsible
for work performed which does not meet certain pre-defined specifications. To
the extent the Company works on a purchase order basis, agreements with its
clients frequently do not provide for minimum purchase requirements, except in
connection with certain of its technical support and customer care services.
Several of the Company's contracts require the Company, through its wholly-owned
subsidiaries and for certain of its facilities and services, to maintain ISO
9002 certification.
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Highly Competitive Market
The markets in which the Company operates are highly competitive. The
Company expects competition to persist and intensify in the future. The
Company's competitors include small firms offering specific applications,
divisions of large companies, large independent firms and, most significantly,
the in-house operations of the Company's existing and potential clients. A
number of competitors have or may develop financial and other resources greater
than those of the Company. Similarly, there can be no assurance that additional
competitors with greater name recognition and resources than the Company will
not enter the markets in which the Company operates. Because the in-house
operations of the Company's existing and potential clients are significant
competitors of the Company, the Company's performance and growth could be
materially and adversely affected if its clients decide to provide in-house
services that currently are outsourced or if potential clients retain or
increase their in-house capabilities. Further, a decision by its principal
client(s) to consolidate its outsourced services with a company other than
StarTek could materially and adversely affect the Company's business,
particularly due to the fact that the Company is not the largest supplier of any
of the services it currently provides to its principal client(s). Additionally,
competitive pressures from current or future competitors could result in
substantial price erosion, which could materially and adversely affect the
Company's business, results of operations and financial condition.
Risks of Business Interruptions
StarTek's operations are dependent upon its ability to protect its
facilities, clients' products, confidential client information, computer
equipment, telecommunications equipment, and software systems against damage
from Internet interruption, fire, power loss, telecommunications interruption,
E-commerce interruption, natural disaster, theft, unauthorized intrusion,
computer viruses, and other emergencies and the ability of its suppliers, to
deliver component parts on an expedited basis. While the Company maintains
certain procedures and contingency plans to minimize the detrimental impact of
such events, there can be no assurance that such procedures and plans will be
successful. In the event the Company experiences temporary or permanent
interruptions or other emergencies at one or more of its facilities, the
Company's business could be materially and adversely affected and the Company
may be required to pay contractual damages to its clients or allow its clients
to terminate or renegotiate their arrangements with the Company. While the
Company maintains property and business interruption insurance, such insurance
may not adequately and/or timely compensate the Company for all losses that it
may incur. Further, some of the Company's operations, including
telecommunication systems and telecommunication networks, and the Company's
ability to timely and consistently access and use 24 hours per day, seven days
per week, telephone, Internet, E-commerce, E-mail, facsimile connections, and
other forms of communication, are substantially dependent upon telephone
companies, Internet service providers, T1 lines, etc. If such communications are
interrupted on a short or long-term basis, the Company's services would be
similarly interrupted and delayed.
Volatility of Stock Price
The market price of StarTek's common stock may be highly volatile and
could be subject to wide fluctuations in response to quarterly variations in
operating results, the success of the Company in implementing its business and
growth strategies, announcements of new contracts or contract cancellations,
announcements of technological innovations or new products and services by the
Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors. Additionally, the stock market has
experienced substantial price and volume fluctuations that have particularly
affected the market prices of equity securities of many companies, and that have
often been unrelated to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of StarTek's common
stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. Any such litigation initiated against the
Company could result in substantial costs and diversion of management's
attention and resources, which could materially and adversely affect the
Company's business, results of operations and financial condition.
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ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses the Company's exposure to market risk related
to changes in interest rates and other general market risks, equity market
prices, and foreign currency exchange rates. Primarily all of the Company's
investment decisions are directed by its Chairman of the Board. This discussion
contains forward-looking statements that are subject to risks and uncertainties.
Actual results could vary materially as a result of a number of factors,
including but not limited to, changes in interest rates and other general market
risks, equity market prices, foreign currency exchange rates, and those set
forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations"--"Factors That May Affect Future Results". See also Note
1 and Note 3 to the consolidated financial statements set forth herein for a
further discussion of the Company's cash and cash equivalents and investments
available for sale.
Interest Rate Sensitivity and Other General Market Risks
Cash and cash equivalents. As of December 31, 1998, the Company had cash
and cash equivalents of approximately $19.6 million, which consisted of (i)
approximately $1.4 million invested in various money market funds and overnight
investments at a weighted average interest rate of approximately 5.5%, (ii)
approximately $17.9 million invested in various commercial paper securities at a
weighted average interest rate of approximately 6.1%, and (iii) approximately
$0.3 million in various non-interest bearing operating accounts. StarTek
considers cash equivalents to be short-term, highly liquid investments that are
readily convertible to known amounts of cash and so near their maturity that
they present insignificant risk of changes in value because of changes in
interest rates. The Company does not expect any material loss with respect to
its cash and cash equivalents as a result of interest rate changes, and the
estimated fair value of its cash and cash equivalents approximates original
cost.
Investments Available for Sale. As of December 31, 1998, the Company had
investments available for sale of $16.8 million. These investments available for
sale generally consisted of corporate bonds, foreign government bonds
denominated in U.S. dollars, bond related mutual funds, other debt securities,
and various equity related mutual funds. Corporate bonds , foreign government
bonds denominated in U.S. dollars, bond related mutual funds, and other debt
securities held in the Company's investment portfolio are subject to interest
rate risk and will fall in value if market interest rates increase.
The fair market value of, and the estimated cash flows from, the Company's
investments in corporate bonds are substantially dependent upon the
creditworthiness of certain corporations that are expected to repay their debts,
including interest, as they become due, to the Company. If such corporations'
financial condition and liquidity adversely changes, the Company's investments
in their debts can be expected to be materially and adversely affected.
The Company's investments in foreign government bonds denominated in U.S.
dollars entail special risks of global investing; these include, but are not
limited to, (i) currency exchange fluctuations which could adversely affect the
ability of foreign governments to repay their debts in U.S. dollars, (ii)
foreign government regulations, and (iii) the potential for political and
economic instability. The fair market value of such investments in foreign
government bonds (denominated in U.S. dollars) can be expected to be more
volatile than that of U.S. government bonds. These risks are intensified for the
Company's investments in debt of foreign governments located in countries
generally considered to be emerging markets.
The table below provides information about maturity dates and corresponding
weighted average interest rates with regard to certain of StarTek's investments
available for sale as of December 31, 1998.
EXPECTED MATURITY DATE
WEIGHTED AVERAGE --COST--
INTEREST RATES (DOLLARS IN THOUSANDS)
------------------------------------------------------------------------------ -------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
Corporate bonds 8.3% $ 1,063 -- -- -- -- -- $ 1,063 $ 1,079
Corporate bonds 7.4% -- $ 3,590 -- -- -- -- $ 3,590 $ 3,602
Corporate bonds 7.3% -- -- $ 1,888 -- -- -- $ 1,888 $ 1,791
Corporate bonds 6.3% -- -- -- -- -- $ 2,445 $ 2,445 $ 2,354
Foreign government bonds
and other 8.9% -- -- -- -- -- $ 3,202 $ 3,202 $ 2,907
============================================================= =============
Total 7.6% $ 1,063 $ 3,590 $ 1,888 -- -- $ 5,647 $ 12,188 $ 11,733
============================================================= =============
Management believes the Company currently has the ability to hold these
investments until maturity, and therefore, if held to maturity, the Company
would not expect the future proceeds from these investments to be affected, to
any significant degree, by the effect of a sudden change in market interest
rates. Declines in interest rates over time will, however, reduce the Company's
interest income derived from future investments.
21
23
As of December 31, 1998 and as part of its investments available for sale
portfolio, the Company also was invested in (i) various bond related mutual
funds which, in the aggregate, had an original cost and fair market value of
approximately $4.0 million and $3.9 million, respectively and (ii) various real
estate investment trusts and equity related mutual funds which, in the
aggregate, had an original cost and fair market value of approximately $1.6
million and $1.2 million, respectively.
Such bond related mutual funds, as of December 31, 1998 (i) had a weighted
average interest rate of approximately 6.0%, and a weighted average maturity of
approximately three years; (ii) are primarily invested in investment grade bonds
of U.S. and foreign issuers denominated in U.S. and foreign currencies, and
interests in floating or variable rate senior collateralized loans to
corporations, partnerships, and other entities in a variety of industries and
geographic regions; (iii) include certain foreign currency risk hedging
instruments which are intended to reduce fair market value fluctuations; (iv)
are subject to interest rate risk and will fall in value if market interest
rates increase; and (v) are subject to the quality of the underlying securities
within the mutual funds. The Company's investments in such bond related mutual
funds entail special risks of global investing, including, but not limited to,
(i) currency exchange fluctuations, (ii) government regulations, and (iii) the
potential for political and economic instability. The fair market value of the
Company's investments in such bond related mutual funds can be expected to be
more volatile than that of a U.S.-only fund. These risks are intensified for
certain investments in debt of foreign governments (included in bond related
mutual funds) which are located in countries generally considered to be emerging
markets. Additionally, certain of the bond related mutual fund investments are
also subject to the effect of leverage, which in a declining market, can be
expected to result in a greater decrease in fair market value than if such
investments were not leveraged.
Outstanding Debt of the Company. As of December 31, 1998, the Company
had outstanding debt of approximately $4.2 million, approximately $3.6 million
of which bears interest at an annual fixed rate of 7.0%. Since substantially all
of the interest on the Company's debt is fixed, a hypothetical 10.0% decrease in
interest rates would not have a material impact on the Company. Increases in
interest rates could, however, increase interest expense associated with future
borrowings by the Company, if any. For example, the Company may from time to
time effect borrowings under its $5.0 million line of credit for general
corporate purposes, including working capital requirements, capital expenditures
and other purposes related to expansion of the Company's capacity. Borrowings
under the $5.0 million line of credit bear interest at the lender's prime rate,
which was 7.75% as of December 31, 1998. As of December 31, 1998, the Company
had no outstanding line of credit obligations.
The Company has not hedged against interest rate changes.
Equity Price Risk
As of December 31, 1998, the Company held in its investments available
for sale portfolio, certain equity securities with original costs and fair
market values, in aggregate, of $1.6 million and $1.2 million, respectively. The
Company's investments in equity securities generally consist of various real
investment trusts and equity related mutual funds. A substantial decline in the
values of real estate investment trusts and equity related mutual funds, and
equity prices in general could have a material adverse effect on the Company's
equity investments.
The Company has not hedged against equity price changes.
Foreign Currency Exchange Risk
Approximately 5.9% of the Company's total revenues for 1998 were derived
from arrangements whereby the Company received payments from its clients in
currencies other than U.S. dollars. The terms of the Company's agreements with
its clients and its foreign subcontracts are typically in U.S. dollars except
for certain of its agreements related to its United Kingdom operations. If an
arrangement provides for the Company to receive payments in a foreign currency,
the ultimate revenues realized from such an arrangement may be less if the value
of such foreign currency declines. Similarly, if an arrangement provides for the
Company to make payments in a foreign currency, the ultimate cost of services
and operating expenses for such an arrangement may be more if the value of such
foreign currency increases. For example, a 10% change in the relative value of
such foreign currency could cause a related 10% change in the Company's
previously expected revenues, cost of services and operating expenses. In the
past, the Company's exposure to currency exchange risks has been minimal in
connection with its day to day operations in the United Kingdom. However, as the
international portion of the Company's business grows, more revenues and
expenses may be denominated in foreign currency, and this will increase the
Company's exposure to fluctuations in currency exchange rates.
The Company has not hedged against foreign currency exchange rate changes
related to its day to day operations in the United Kingdom. However, certain of
its investments classified as bond related mutual funds (discussed in further
detail above as part of "Interest Rate Sensitivity and Other General Market
Risks") include investments in various forms of currency risk hedging
instruments which are intended to reduce fair market value fluctuations of such
mutual funds.
22
24
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY FINANCIAL DATA
The consolidated financial statements and supplementary data of the
Company required by this Item are set forth herein at the pages indicated at
Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEMS 10 THROUGH 13
The information required under Item 10. (Directors and Executive
Officers of the Registrant), Item 11. (Executive Compensation), Item 12.
(Security Ownership of Certain Beneficial Owners and Management) and Item 13.
(Certain Relationships and Related Transactions) will be included in StarTek's
Proxy Statement to be delivered in connection with its 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Document List
1. Financial Statements
Response to this portion of Item 14. is submitted per the
Index to Financial Statements, Supplementary Data and
Financial Statement Schedules on page 24 of this Form 10-K.
2. Supplementary Data and Financial Statement Schedules
Response to this portion of Item 14. is submitted per the
Index to Financial Statements, Supplementary Data and
Financial Statement Schedules on page 24 of this Form 10-K.
3. An Index of Exhibits is on page 43 of this Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
three months ended December 31, 1998.
23
25
STARTEK, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND
FINANCIAL STATEMENT SCHEDULES
PAGE NUMBER IN
FORM 10-K
---------
FINANCIAL STATEMENTS:
Report of Independent Auditors 25
Consolidated Balance Sheets,
as of December 31, 1997 and 1998 26
Consolidated Statements of Operations,
years ended December 31, 1996, 1997 and 1998 27
Consolidated Statements of Cash Flows,
years ended December 31, 1996, 1997 and 1998 28
Consolidated Statements of Stockholders' Equity,
years ended December 31, 1996, 1997 and 1998 29
Notes to Consolidated Financial Statements 30
SUPPLEMENTARY DATA:
Selected Financial Data 8
FINANCIAL STATEMENT SCHEDULES
None. All schedules have been included in the Consolidated Financial
Statements or notes thereto.
24
26
REPORT OF INDEPENDENT AUDITORS
Board of Directors
StarTek, Inc.
We have audited the accompanying consolidated balance sheets of
StarTek, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1998. 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 generally accepted auditing
standards. 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 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
StarTek, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
February 20, 1999
25
27
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31
1997 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 26,960 $ 19,593
Investments available for sale 7,356 16,829
Trade accounts receivable, less
allowance for doubtful accounts of $383 and $441
as of December 31, 1997 and 1998, respectively 12,518 20,476
Inventories 2,539 2,772
Deferred tax assets 440 1,135
Prepaid expenses and other 205 165
-------- --------
Total current assets 50,018 60,970
Property, plant and equipment, net 8,151 19,171
Other assets 3 60
-------- --------
Total assets $ 58,172 $ 80,201
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,387 $ 17,433
Accrued liabilities 1,292 2,092
Income taxes payable 106 1,944
Current portion of capital lease obligations 82 46
Current portion of long-term debt 26 906
Other 421 213
-------- --------
Total current liabilities 11,314 22,634
Capital lease obligations, less current portion 121 77
Long-term debt, less current portion 435 3,196
Deferred income taxes 231 144
Other 65 17
Commitments -- --
Stockholders' equity:
Common stock 138 138
Additional paid-in capital 41,661 41,661
Cumulative currency translation adjustment 70 167
Unrealized loss on investments available for sale (92) (606)
Retained earnings 4,229 12,773
-------- --------
Total stockholders' equity 46,006 54,133
-------- --------
Total liabilities and stockholders' equity $ 58,172 $ 80,201
======== ========
See notes to consolidated financial statements.
26
28
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31
1996 1997 1998
----------- ----------- -----------
Revenues $ 71,584 $ 89,150 $ 140,984
Cost of services 57,238 71,986 115,079
----------- ----------- -----------
Gross profit 14,346 17,164 25,905
Selling, general and administrative
expenses 7,764 8,703 14,714
Management fee expense 6,172 3,126 --
----------- ----------- -----------
Operating profit 410 5,335 11,191
Net interest income (expense) and
other (372) 933 2,254
----------- ----------- -----------
Income before income taxes 38 6,268 13,445
Income tax expense 112 2,110 4,901
----------- ----------- -----------
Net income (loss) $ (74) $ 4,158 $ 8,544
=========== =========== ===========
Basic and diluted net income per share $ 0.62
Weighted average shares outstanding 13,828,571
See notes to consolidated financial statements.
27
29
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
1996 1997 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (74) $ 4,158 $ 8,544
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,438 1,829 2,852
Deferred income taxes -- (153) (577)
Gain on sale of assets -- -- (106)
Changes in operating assets and liabilities :
Accounts receivable 2,231 (1,487) (7,958)
Inventories (1,177) (4) (233)
Prepaid expenses and other assets 87 (65) (17)
Accounts payable (2,744) 2,425 8,046
Income taxes payable -- 106 1,838
Accrued and other liabilities 1,657 (661) 679
-------- -------- --------
Net cash provided by operating activities 1,418 6,148 13,068
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,333) (3,191) (14,108)
Proceeds from disposition of property, plant and equipment -- -- 181
Purchases of investments available for sale -- (7,504) (18,684)
Proceeds from disposition of investments available for sale -- -- 8,397
Collections on notes receivable-stockholders 663 213 --
-------- -------- --------
Net cash used in investing activities (670) (10,482) (24,214)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (principal payments on) line of credit
borrowings 49 (3,500) --
Principal payments on borrowings (7) (1,854) (62)
Proceeds from borrowings and capital lease obligations 819 1,500 3,729
Principal payments on capital lease obligations (847) (2,218) (80)
Principal payments on notes payable-stockholders (738) -- --
Dividend to S corporation principal stockholders -- (8,000) --
Principal payments on note payable-affiliate (1,112) -- --
Net proceeds from initial public offering of common stock -- 41,042 --
Contributed capital 3,240 1,641 --
-------- -------- --------
Net cash provided by financing activities 1,404 28,611 3,587
Effect of exchange rate changes on cash 139 (59) 192
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,291 24,218 (7,367)
Cash and cash equivalents at beginning of year 451 2,742 26,960
-------- -------- --------
Cash and cash equivalents at end of year $ 2,742 $ 26,960 $ 19,593
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 535 $ 368 $ 58
Income taxes paid $ 112 $ 2,263 $ 3,640
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Equipment acquired or refinanced under capital leases $ 1,017 $ -- $ --
Property, plant and equipment acquired or refinanced under
long-term debt $ -- $ 261 $ 3,629
Net unrealized loss on investments available for sale $ -- $ 92 $ 514
See notes to consolidated financial statements.
28
30
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL NOTE OTHER TOTAL
------------------ PAID-IN RECEIVABLE RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDER EARNINGS INCOME EQUITY
--------------------------------------------------------------------------------------
Balance, December 31, 1995 43,200 $ 1 $ 2,908 $ (213) $ 1,112 $ (10) $ 3,798
Contributed capital -- -- 3,240 -- -- -- 3,240
Net loss -- -- -- -- (74) -- (74)
Currency translation
adjustment -- -- -- -- -- 139 139
---------------
Comprehensive income -- -- -- -- -- -- 65
---------------
--------------------------------------------------------------------------------------
Balance, December 31, 1996 43,200 1 6,148 (213) 1,038 129 7,103
Payment of note receivable-
stockholder -- -- -- 213 -- -- 213
Contribution of StarTek
Europe, Ltd. (9,582) -- -- -- -- -- --
Contributed capital -- -- 1,641 -- -- -- 1,641
322.1064-for-one common stock
split effected by stock
dividend, immediately
prior to closing
of initial public
offering 10,794,953 107 (107) -- -- -- --
Dividend to principal
stockholders -- -- (7,033) -- (967) -- (8,000)
Issuance of common stock
pursuant to initial public
offering, net of stock
issuance costs of $3,958 3,000,000 30 41,012 -- -- -- 41,042
Net income -- -- -- -- 4,158 -- 4,158
Currency translation
adjustment -- -- -- -- -- (59) (59)
Unrealized loss on investments
available for sale -- -- -- -- -- (92) (92)
---------------
Comprehensive income -- -- -- -- -- -- 4,007
---------------
--------------------------------------------------------------------------------------
Balance, December 31, 1997 13,828,571 138 41,661 -- 4,229 (22) 46,006
Net income -- -- -- -- 8,544 -- 8,544
Currency translation
adjustment -- -- -- -- -- 97 97
Unrealized loss on investments
available for sale -- -- -- -- -- (514) (514)
---------------
Comprehensive income -- -- -- -- -- -- 8,127
---------------
======================================================================================
Balance, December 31, 1998 13,828,571 $ 138 $ 41,661 $ -- $ 12,773 $ (439) $ 54,133
======================================================================================
See notes to consolidated financial statements.
29
31
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
StarTek, Inc. (the "Company" or "StarTek") was incorporated in Delaware on
December 30, 1996. Prior to the formation of the Company, StarTek USA, Inc. and
StarTek Europe, Ltd. (previously named StarPak, Inc. and StarPak International,
Ltd., respectively, and whose stockholder groups were substantially identical)
conducted business as affiliates under common control. Effective January 1,
1997, the stockholders of StarTek USA, Inc. exchanged all of the outstanding
shares of capital stock of StarTek USA, Inc. for shares of common stock of the
Company, and StarTek USA, Inc. became a wholly-owned subsidiary of the Company.
Effective January 24, 1997, the stockholders of StarTek Europe, Ltd. contributed
all of its outstanding shares of capital stock to the Company and StarTek
Europe, Ltd. became a wholly-owned subsidiary of the Company. Because the
shareholder groups of StarTek USA, Inc. and StarTek Europe Ltd. were
substantially identical and the relative holdings of the individual stockholders
in StarTek were not altered as a result of the contributions, the formation of
StarTek has been treated as a combination of entities under common control and
accounted for as if it were a pooling of interests. References to the Company
and StarTek include these combined entities. Financial statements for periods
prior to January 1, 1997 reflect the combined accounts of StarTek USA, Inc. and
StarTek Europe, Ltd. After January 1, 1997, the accompanying consolidated
financial statements include the accounts of StarTek Inc. and its wholly-owned
subsidiaries, StarTek USA, Inc., StarTek Europe, Ltd.. During 1998, the Company
formed two other wholly-owned subsidiaries, StarTek Pacific, Ltd. and
Domain.com, Inc. and the accompanying 1998 consolidated financial statements
also include the accounts of these two subsidiaries. All significant
intercompany transactions have been eliminated.
Business Operations
StarTek is a leading international provider of integrated, value-added,
outsourced process management services primarily for Fortune 500 companies. The
Company's process management services encompass a wide spectrum of service
platforms, including logistics management (selection and management of
suppliers), management of product assembly and packaging, E-commerce order
processing and fulfillment, Internet support, product distribution, direct store
distribution, warehouse services and inventory management, inbound technical
support and customer care teleservices, telecommunications process management,
and product order processing. The Company has operations in North America,
Europe and Asia.
Capital Stock
Immediately prior to the closing of the Company's initial public
offering in June 1997, the Company declared a 322.1064-for-one stock split of
the Company's common stock. All references in the notes to the consolidated
financial statements to shares, related prices in per share calculations, per
share amounts and stock option plan data have been restated to reflect the
split.
Foreign Currency Translation
The assets and liabilities of the Company's European operations are
translated into U.S dollars at current exchange rates and revenues and expenses
are translated at average monthly exchange rates. The resulting translation
adjustments, net of applicable deferred income taxes (1997 tax benefit of $42
and 1998 tax of $53), are recorded in a separate component of stockholders'
equity:
The Company's Singapore operations, and related assets and liabilities
are primarily denominated in U.S. dollars. Foreign currency transaction gains
and losses related are included in determining net income (loss).
Such gains and losses were not material for any period presented.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income, which was effective in 1998 for the
Company. The statement establishes new rules for the reporting and display of
comprehensive income. Comprehensive income is defined essentially as all changes
in stockholders' equity, exclusive of transactions with owners. Comprehensive
income was $65, $4,007 and $8,127 for the years ended December 31, 1996, 1997
and 1998, respectively.
Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, Disclosures About Segments of an Enterprise and Related Information,
which was effective for 1998 for the Company. The statement changes the way
companies report segment information in annual financial statements by requiring
the "management approach" for reporting financial and descriptive information
about operating segments. The adoption of Statement No. 131 did not change the
Company's segment information disclosure and, as such, no restatement of prior
years' segment information was necessary.
30
32
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Earnings Per Share
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128), which supersedes
Accounting Principles Board Opinion No. 15. Under FAS 128, basic earnings per
common share is computed by dividing net income by the weighted average number
of shares of common stock outstanding during the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock. For the periods presented, the
additional shares assuming dilution has no impact on earnings per share because
the average price per share of common stock during the period was less than the
exercise price of the options.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect amounts reported in the Company's
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Reclassifications
Certain reclassifications of the 1996 and 1997 consolidated financial
statements and related notes have been made to conform with the 1998
presentation.
Revenue Recognition
Revenues are recognized as services are completed.
Training
Training costs pertaining to start-up and ongoing projects are expensed
during the year incurred.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, investments
available for sale, accounts receivable and payable, notes receivable, debt and
capital lease obligations. The carrying values of cash and cash equivalents, and
accounts receivable and payable approximate fair value. Investments available
for sale are reported at fair value. Management believes the difference between
the fair values and carrying values of debt and capital lease obligations would
not be materially different because interest rates approximate market rates for
material items.
Cash and Cash Equivalents
The Company considers cash equivalents to be short-term, highly liquid
investments that are readily convertible to known amounts of cash and so near
their maturity that they present insignificant risk of changes in value because
of changes in interest rates.
Investments Available for Sale
Investments available for sale consist of debt and equity securities
which are reported at fair value, with the unrealized gains and losses, net of
tax (1997 tax benefit of $56 and 1998 tax benefit of $295) reported in a
separate component of stockholders' equity. There have been no unrealized gains
and losses or declines in value judged to be other than temporary on investments
available for sale. The original cost of investments available for sale which
are sold is based on the specific identification method. Interest on investments
available for sale is included in interest income.
31
33
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Inventories
Inventories are valued at average costs that approximate actual costs
computed on a first-in, first-out basis, not in excess of market value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions,
improvements and major renewals are capitalized. Maintenance, repairs and minor
renewals are expensed as incurred.
Depreciation and amortization of equipment is computed using the
straight-line method based on the following estimated useful lives:
Estimated Useful Lives
----------------------
Buildings and improvements 7 to 30.5 years
Equipment, and equipment acquired under capital leases 3 to 5 years
Furniture and fixtures 7 years
Income Taxes
Effective July 1, 1992, StarTek USA, Inc. elected Subchapter S status
for income tax purposes, and StarTek Europe, Ltd. elected Subchapter S status at
inception. On June 17, 1997, Subchapter S status was terminated and the Company
has thereafter been taxable as a C corporation. During the Subchapter S status
period, income and expenses of the Company were reportable on the tax returns of
the stockholders and no provision was made for federal and state income taxes.
Subsequent to the termination of the Company's Subchapter S status,
the Company began accounting for income taxes using the liability method of
accounting for income taxes as prescribed by FASB Statement No. 109,
"Accounting for Income Taxes". Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The Company is subject to foreign income taxes on certain of its operations.
Management Fee Expense
Prior to the Company's June 24, 1997 initial public offering and in
addition to general compensation for services rendered, certain S corporation
stockholders and an affiliate were paid certain management fees, bonuses and
other fees in connection with services rendered to the Company, which were not
included in selling, general and administrative expenses. Such management fees
have been reflected as management fee expense as set forth below. Effective with
the closing of the Company's June 24, 1997 initial public offering, these
management fees, bonuses and other fees were discontinued.
After the closing of the June 24, 1997 initial public offering, all
compensation payable to persons who are now stockholders of the Company (or an
affiliate of such stockholder) are in the form of advisory fees, salaries and
bonuses (which at current rates aggregate approximately $516 annually) and are
included in selling, general and administrative expenses. Prior to 1997, the
Company also had an operating lease for office space with a partnership in which
major stockholders of the Company were the general partner and limited partner.
Payments under the lease for the year ended December 31, 1996 were $70. Such
advisory fees and salaries and operating lease payments are also set forth
below:
YEAR ENDED DECEMBER 31
1996 1997 1998
------- ------- -----
Selling, general and administrative expenses $ 564 $ 512 $ 516
Management fee expense $ 6,172 $ 3,126 --
32
34
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Consolidated Statement of Operations
The following unaudited pro forma consolidated statement of operations
present the effect on the historical 1997 consolidated statement of operations
of the elimination of management fee expense paid to stockholders and their
affiliates as these fees were discontinued upon the completion of the initial
public offering in June 1997 and a provision for income taxes of 37.3% as if the
Company were taxed as a C corporation for the entire year of 1997. In connection
with the closing of the initial public offering in June 1997, the Company's S
corporation status terminated.
YEAR ENDED
DECEMBER 31,
1997
(UNAUDITED)
-----------
Revenues $ 89,150
Cost of services 71,986
--------
Gross profit
17,164
Selling, general and administrative expenses 8,703
--------
Operating profit 8,461
Net interest income ( expense) and other 933
--------
Income before income taxes 9,394
Income tax expense
3,504
--------
Net income $ 5,890
========
Basic and diluted net income per share $ 0.47
Weighted average shares outstanding 12,652,680
Pro Forma Basic and Diluted Net Income Per Common Share
Pro forma basic and diluted net income per share for the year ended
December 31, 1997 is based on the following number of shares of common stock:
Shares outstanding after giving effect to 322.1064-for-one stock split effected
by a stock dividend 10,828,571
Shares deemed outstanding prior to closing of initial public offering, representing
the number of shares (at an initial public offering price of $15.00 per share)
sufficient to fund payment of $8,000 note payable to principal stockholders 254,246
3,000,000 shares issued in connection with initial public offering completed
June 24, 1997, for days outstanding in 1997 1,569,863
-------------
Weighted average shares outstanding 12,652,680
=============
33
35
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. INVESTMENTS AVAILABLE FOR SALE
The following is a summary of investments available for sale as of
December 31, 1997:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------
Corporate bonds $ 2,205 $ 5 $ (45) $ 2,165
Bond mutual funds 5,196 -- (108) 5,088
Other debt securities 103 -- 103
--
-----------------------------------------------------------
Total $ 7,504 $ 5 $ (153) $ 7,356
===========================================================
The following is a summary of investments available for sale as of
December 31, 1998:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------
Corporate bonds $ 8,987 $ 80 $ (239) $ 8,828
Foreign government bonds 2,915 150 (308) 2,757
Bond mutual funds 4,005 1 (132) 3,874
Other debt securities 286 -- (138) 148
Equity securities 1,598 -- (376) 1,222
-----------------------------------------------------------
Total $ 17,791 $ 231 $ (1,193) $ 16,829
===========================================================
The amortized cost and estimated fair value of investments available
for sale as of December 31, 1998, by contractual maturity, are:
ESTIMATED
COST FAIR VALUE
---------------- ------------------
Corporate bonds, foreign government bonds
and certain other debt securities
maturing within:
One year $1,063 $ 1,079
Two to five years 5,478 5,393
Due after five years 5,647 5,261
---------------- ------------------
12,188 11,733
Bond mutual funds 4,005 3,874
Equity securities 1,598 1,222
---------------- ------------------
Total $ 17,791 $ 16,829
================ ==================
Bond mutual funds are primarily invested in investment grade bonds of
U.S. and foreign issuers denominated in U.S. and foreign currencies, and
interests in floating or variable rate senior collateralized loans to
corporations, partnerships, and other entities in a variety of industries
and geographic regions.
4. Inventories
The Company frequently purchases components of its clients'
products as an integral part of its supplier management services and in advance
of providing its product assembly and packaging services. At the close of an
accounting period, packaged and assembled products (together with other
associated costs) are reflected as finished goods inventories pending shipment.
The Company generally has the right to be reimbursed from its clients for unused
inventories. Client-owned inventories are not reflected in the Company's balance
sheet. Inventories consist of:
DECEMBER 31
----------------------
1997 1998
----------------------
Purchased components and
fabricated assemblies $ 2,171 $ 2,313
Finished goods 368 459
----------------------
$ 2,539 $ 2,772
======================
34
36
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31
------------------------------
1997 1998
------------------------------
Land $ 636 $ 1,129
Buildings and improvements 3,392 9,656
Equipment 8,641 14,785
Furniture and fixtures 978 1,445
------------------------------
13,647 27,015
Less accumulated depreciation and amortization (5,496) (7,844)
------------------------------
Property, plant and equipment, net $ 8,151 $ 19,171
==============================
On February 18, 1999, the Company ordered certain call center computer
hardware and software with an aggregate purchase price of approximately $800.
Completion of installation of this call center equipment is currently scheduled
to occur during the second quarter of 1999.
6. LINE OF CREDIT
As of December 31, 1997 and 1998, the Company had a revolving line of
credit agreement with a bank whereby the bank agreed to loan the Company up to
$5,000. No amount was outstanding under the line of credit as of December 31,
1997 and 1998. Interest is payable monthly and accrues at the bank's prime rate
(8.5% as of December 31, 1997 and 7.75% as of December 31, 1998). This revolving
line of credit matures on April 30, 1999.
The Company has pledged as security certain of its wholly-owned
subsidiaries' accounts receivable under the revolving line of credit agreement.
The Company must maintain working capital of $17,500 and tangible net worth of
$25,000 and maintain not less than $250 in non-interest bearing accounts with
the bank. The Company may not pay dividends in an amount which would cause a
failure to meet these financial covenants. As of and for the years ended
December 31, 1997 and 1998, the Company was in compliance with all of the
various financial and other covenants provided for under the line of credit.
7. LEASES
During 1997, the Company paid the majority of its capital lease obligations
from the proceeds of its initial public offering.
Amortization of equipment held under capital lease obligations is included
in depreciation and amortization expense. Included in property, plant and
equipment in the accompanying consolidated balance sheets is the following
equipment held under capital leases:
DECEMBER 31
--------------------------
1997 1998
--------------------------
Equipment $ 261 $ 261
Less accumulated amortization (165) (233)
--------------------------
$ 96 $ 28
==========================
The Company also leases equipment under various non-cancelable operating
leases. As of December 31, 1998, future minimum rental commitments for capital
and operating leases are:
CAPITAL OPERATING
LEASES LEASES
----------- -------------
1999 $ 57 $ 406
2000 44 171
2001 40 50
2002 -- 47
2003 -- 27
Thereafter -- --
-------------------------
Total minimum lease payments 141 $ 701
=============
Less amount representing interest (18)
-----------
Present value of minimum lease payments 123
Less current portion of obligations under capital
leases (46)
-----------
Obligations under capital leases, less current
portion $ 77
===========
Rent expense, including equipment rentals, for 1996, 1997 and 1998 was
$382, $271 and $410, respectively.
35
37
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. LEASES (CONTINUED)
On February 16, 1999, the Company entered into an operating lease agreement
whereby the Company acquired use of 46,350 square-feet of building space in
Grand Junction, Colorado to be used by the Company for call center, general
office use and other services as appropriate for the general purposes of the
Company. The term of the lease agreement commences on April 1, 1999 and unless
earlier terminated or extended, continues until March 31, 2009. Pursuant to the
terms of the lease agreement, the Company was granted, among other things, (i) a
right of first refusal to purchase the property, of which the leased space is a
part, during the lease term and (ii) a right to terminate the lease agreement
anytime after the end of the fifth year by giving the landlord 180 day prior
written notice to terminate. Assuming the operating lease agreement is not
terminated, future minimum rental commitments, excluding certain taxes and
utilities as defined, are:
1999 $ 73
2000 97
2001 97
2002 101
2003 105
Thereafter 607
------------
$ 1,080
============
8. TENNESSEE FINANCING AGREEMENT
On July 8, 1998, the Company entered into certain financing agreements with
the Industrial Development Board of the County of Montgomery, Tennessee, (the
"Board") in connection with the Board's issuance to StarTek USA, Inc. of an
Industrial Development Revenue Note, Series A not to exceed $4,500 (the
"Facility Note") and an Industrial Development Revenue Note, Series B not to
exceed $3,500 (the "Equipment Loan"). The Facility Note bears interest at 9% per
annum commencing on October 1, 1998, payable quarterly and maturing on July 8,
2008. Concurrently, the Company advanced $3,575 in exchange for the Facility
Note and entered into a lease agreement, maturing July 8, 2008, with the Board
for the use and acquisition of a 305,000 square-foot process management and
distribution facility in Clarksville, Tennessee (the "Facility Lease"). The
Facility Lease provides for the Company to pay to the Board lease payments
sufficient to pay, when and as due, the principal of and interest on the
Facility Note due to the Company from the Board. Pursuant to the provisions of
the Facility Lease and upon the Company's payment of the Facility Lease in full,
the Company shall have the option to purchase the 305,000 square-foot,
Clarksville, Tennessee facility for a lump sum payment of one hundred dollars.
The Equipment Loan generally contains the same provisions as the Facility Note
and provides for an equipment lease, except the Equipment Loan and equipment
lease mature on January 1, 2004. As of December 31, 1998, the Company had used
approximately $3,900 and $1,174 of the Facility Note and Equipment Loan,
respectively, and correspondingly entered into further lease arrangements with
the Board.
All transactions related to the purchase of the notes by the Company from
the Board and the lease arrangements from the Board to the Company have been
offset against each other, and accordingly have no impact on the consolidated
balance sheets. The assets acquired are included in property, plant and
equipment. Similarly, the interest income and interest expense related to the
notes and lease arrangements, respectively, have also been offset. The lease
payments are equal to the amount of principal and interest payments on the
notes, and accordingly have no impact on the consolidated statements of
operations.
36
38
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. LONG-TERM DEBT
DECEMBER 31
-------------------------------
1997 1998
------------- -----------------
Economic development loan $ 200 $ 200
Promissory note with waiver provisions 261 238
Unsecured loan -- 100
Equipment loan -- 3,564
------------- -----------------
461 4,102
Less current portion of long-term debt (26) (906)
------------- -----------------
Long-term debt, less current portion $ 435 $ 3,196
============= =================
In December 1996, the Company received a $200 economic development loan
which bears interest at 6% per annum and is collateralized by certain equipment.
Interest payments are due quarterly on the remaining unpaid principal balance
and, beginning January 1, 1999 continuing through January 1, 2001, principal
payments of $30 are due semi-annually. A final principal payment of $50 is due
on July 1, 2001.
In December 1997, the Company acquired land for $261 and financed the
purchase through a non-interest bearing ten-year promissory note. The principal
balance of the note declines on an equal basis, without payment, over ten years
so long as the Company does not sell or transfer the parcel or fail to
continuously operate a customer support service center thereon.
On August 15, 1998, the Company received a $100 unsecured loan maturing on
January 2, 2000, which provides for interest at a fixed annual rate of 6.5%. The
$100 loan balance, including all accrued interest, is due and payable on January
2, 2000.
On October 26, 1998, the Company entered into an equipment loan
agreement with a finance company, which matures on November 2, 2002. In
connection with the equipment loan, the Company received cash of $3,629 in
exchange for providing, among other things, certain collateral which generally
consisted of equipment, furniture and fixtures used in the Company's business.
The equipment loan provides for interest at a fixed annual interest rate of
7.00% and for the Company to pay forty-eight equal monthly installments of $87,
the first of which was due and paid in December 1998. In addition to the
collateral described above, the Company granted to the finance company a
secondary security interest in certain of its wholly-owned subsidiaries'
accounts receivable. During the year ended December 31, 1998, interest expense
incurred on the equipment loan was $21.
Future scheduled annual principal payments of long-term debt, including
amounts related to the $261 promissory note with waiver provisions, as of
December 31, 1998 are:
1999 $ 906
2000 1,068
2001 1,048
2002 950
2003 26
Thereafter 104
---------
$ 4,102
=========
37
39
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCOME TAXES
The Company was taxed as an S corporation for federal and state income tax
purposes from July 1, 1992 through June 17, 1997, when S corporation status
was terminated in contemplation of the Company's initial public offering.
Since June 18, 1997, the Company has been taxable as a C corporation and
income taxes have been accrued since that date. The Company is subject to
foreign income taxes on certain of its operations. Pretax income from the
taxable period June 18, 1997, through December 31, 1997 was $6,818, of
which $6,143 and $675 were attributable to domestic and foreign operations,
respectively.
The significant components of the provision for income taxes for the
period June 18, 1997 through December 31, 1997 and for the year ended December
31, 1998 are:
1997 1998
----------- -----------
Current:
Federal $ 2,211 $ 5,311
Foreign 9 123
State 99 249
----------- -----------
Total current 2,319 5,683
Deferred:
Federal (181) (678)
State (28) (104)
----------- -----------
Total deferred (209) (782)
----------- -----------
Total income tax
expense $ 2,110 $ 4,901
=========== ===========
The significant components of deferred tax assets, which required no
valuation allowance, and deferred tax liabilities included in the accompanying
balance sheets as of December 31 are:
1997 1998
---------- ---------
Deferred tax assets:
Bad debt allowance $ 143 $ 161
Vacation accrual 92 233
Accrued expenses 108 280
Other 97 461
---------- ---------
Total deferred tax assets
440 1,135
Long-term deferred tax liabilities:
Tax depreciation in excess of book (231) (49)
Other -- (95)
---------- ---------
Total long-term deferred tax liabilities (231) (144)
---------- ---------
Net deferred tax assets $ 209 $ 991
========== =========
The differences between the U.S. federal statutory income tax rate and
the Company's effective tax rate for the period June 18, 1997 through December
31, 1997 and for the year ended December 31, 1998 are:
1997 1998
------------- -----------
Tax at U.S. statutory rates 34.0% 35.0%
State income taxes, net of federal tax
benefit 3.3 3.2
One-time credit to record deferred
tax asset upon termination of
S corporation status (4.4) --
Other, net (2.0) (1.7)
------------- -----------
30.9% 36.5%
============= ===========
11. NET INTEREST INCOME (EXPENSE) AND OTHER
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1997 1998
-------------- ----------- ------------
Interest income $ 18 $ 1,229 $ 2,122
Interest expense $ (443) $ (373) $ (58)
Other income and expense 53 77 190
============== =========== ============
Net interest income (expense) and
other $ (372) $ 933 $ 2,254
============== =========== ============
38
40
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. STOCKHOLDERS' EQUITY
Immediately prior to the closing of the Company's initial public offering
in June 1997, the Company declared a 322.1064-for-one
stock split of the Company's common stock. All references in the notes to the
consolidated financial statements to shares and related prices in per share
calculations, per share amounts and stock option plan data have been restated to
reflect the split.
Immediately prior to closing the offering, the Company also declared an
$8,000 dividend approximating the additional paid-in capital and retained
earning of the Company as of the closing date, payable to the principal
stockholders (the "Principal Stockholders") pursuant to certain promissory
notes. The promissory notes payable to the Principal Stockholders were paid from
net proceeds of the Company's initial public offering.
The common stock and additional paid-in capital as of December 31, 1997
and 1998 are:
Preferred stock-undesignated; 15,000,000 shares, $.01 par
value, authorized; no shares outstanding $ --
Common stock; 95,000,000 shares, $.01 par value, authorized;
13,828,571 shares outstanding 138
Additional paid-in capital 41,661
----------------
$ 41,799
================
13. STOCK OPTIONS
1987 Stock Option Plan
Effective July 24, 1987, the stockholders of StarTek USA, Inc. approved
a Stock Option Plan ("Plan"), which provided for the grant of stock options,
stock appreciation rights ("SARs") and supplemental bonuses to key employees.
The stock options were intended to qualify as "incentive stock options" as
defined in Section 422A of the Internal Revenue Code unless specifically
designated as "nonstatutory stock options."
The options granted under the Plan could be exercised for a period of
not more than 10 years and one month from the date of grant, or any shorter
period as determined by StarTek USA, Inc.'s Board of Directors. The option price
of any incentive stock option would be equal to or exceed the fair market value
per share on the date of grant, or 110% of the fair market value per share in
case of a 10% or greater stockholder. Options generally vested ratably over a
five-year period from the date of grant. Unexercised vested options remained
exercisable for three calendar months from the date of termination of
employment.
During 1995, StarTek USA, Inc.'s Board of Directors accelerated the
vesting on all outstanding options under the Plan to allow the holders to
exercise any granted options. Subsequently, all outstanding options were
exercised. In aggregate, the option holders paid $18 in cash and delivered a
note of $213 bearing interest at 4.63% to StarTek USA, Inc. in exchange for
shares of common stock. This note was secured by 288,607 shares of StarTek USA,
Inc. common stock. On January 22, 1997, the note and all accrued interest
thereon was repaid in full. Options for 2,124,936 shares of common stock were
available for grant at the end of 1996.
The Plan was terminated effective January 24, 1997.
39
41
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. STOCK OPTIONS (CONTINUED)
1997 Stock Option Plan
On February 13, 1997, the Company's Board of Directors approved the
StarTek, Inc. Stock Option Plan (the "Option Plan") and, on January 27, 1997,
the Director Stock Option Plan (the "Director Option Plan").
The Option Plan was established to provide stock options, SARs and
incentive stock options (cumulatively referred to as the "Options") to key
employees, directors (other than non-employee directors), consultants, and other
independent contractors. The Option Plan provides for the Options to be granted
for a maximum of 985,000 shares of common stock, which are to be awarded by
determination of committee of non-employee directors. Unless otherwise
determined by the committee, all of the Options granted under the Option Plan
vest 20% annually beginning on the first anniversary of the Options' grant date
and expire at the earlier of (i) ten years (or five years for participants
owning greater than 10% of the voting stock) from the Options' grant date, (ii)
three months after the termination of employment of the participant as outlined
by the Option Plan, (iii) six months after the participant's death, or (iv)
immediately upon termination for "cause".
The Director Option Plan was established to provide stock options to
non-employee directors who are elected to serve on the Company's board of
directors and serve continuously from the commencement of their term (the
"Participants"). The Director Option Plan provides for stock options to be
granted for a maximum of 90,000 shares of common stock. Participants were
automatically granted options to acquire 10,000 shares of common stock upon the
closing of the Company's June 1997 initial public offering. Additionally, each
Participant will be automatically granted options to acquire 3,000 shares of
common stock on the date of each annual meeting of stockholders thereafter at
which such Participant is reelected to serve on the Company's board of
directors. All options granted under the Director Option Plan fully vest upon
grant and expire at the earlier of (i) the date of the Participant's membership
on the Company's board of directors is terminated for cause, (ii) ten years from
the option grant date, or (iii) one year after the Participant's death.
The following is a summary of stock option activity during 1997 and
1998:
1997 1998
Outstanding as of beginning of year -- 611,500
Granted 618,500 36,200
Exercised -- --
Canceled (7,000) (33,900)
--------- -----------
Outstanding as of end of year 611,500 613,800
========= ===========
Exercisable as of end of year 20,000 140,200
There was no stock option activity during 1996. As of December 31, 1997,
exercise prices for options issued and outstanding were $15.00, except for 8,000
options, which were priced at $13.06.
As of December 31, 1998, the exercise price for options outstanding, each
of which is exercisable on a basis of one option for one share of the Company's
common stock, was $15.00 for 583,000 options, $13.06 for 8,000 options, $12.69
for 6,000 options, $12.25 for 7,600 options and $10.38 for 9,200 options. As of
December 31, 1998, there were 132,600 fully vested options exercisable at $15.00
per share, 1,600 fully vested options exercisable at $13.06 per share and 6,000
fully vested options exercisable at $12.69 per share. Options for 397,200 and
64,000 shares of the Company's common stock were available for future grant as
of December 31, 1998 under the Option Plan and Director Option Plan,
respectively.
40
42
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. STOCK OPTIONS (CONTINUED)
The Company elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its stock options. Under APB 25, because the exercise price of
the Company's stock options equals the market price of the underlying stock on
the date of grant, no compensation expense has been recognized. Pro forma
information regarding net income and net income per share is required by
Statement 123, Accounting For Stock Based Compensation, and has been determined
as if the Company had accounted for its stock options under the fair value
method as provided for by Statement 123. The fair value for options granted
during 1997 was estimated as of the date of grant using a Black-Scholes option
pricing model assuming a 6% risk-free interest rate, a seven year life for the
options, a 30% expected volatility and no dividends. The fair value for options
granted during 1998 was also estimated as of the date of grant using a
Black-Scholes option pricing model assuming a 5.5% risk-free interest rate, a
seven year life for the options, a 55.1% expected volatility and no dividends.
The weighted average grant date fair market value of options granted during 1997
and 1998 was approximately $7 per share. Had this method been used in the
determination of pro forma net income for 1997, pro forma net income would have
decreased by $367 and pro forma basic and diluted net income per share would
have decreased by $0.03. Similarly, had this method been used in the
determination of net income for 1998, net income would have decreased by $559
and basic and diluted net income per share would have decreased by $0.04.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
14. GEOGRAPHIC AREA INFORMATION
The Company, operating in a single industry segment, provides a variety of
integrated outsourcing services to other businesses throughout the world. As of
and for the years ended December 31, 1996 and 1997, the Company's operations in
Asia, and the Company's long-lived assets located in Europe and Asia as of
December 31, 1996, 1997, and 1998, were not material and have been combined with
North America in the following table. The Company's North America operations are
located in the United States of America. The Company's Europe operations are
located in the United Kingdom. The Company's Asia operations are located in
Singapore. Revenues, operating profit and identifiable assets, classified by the
major geographic areas in which the Company operates, are:
NORTH
AMERICA EUROPE ASIA ELIMINATIONS TOTAL
---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Revenues $ 59,563 $ 12,021 $ -- $ -- $ 71,584
Operating profit 377 33 -- -- 410
Identifiable assets $ 21,236 $ 3,459 $ -- $ (1,716) $ 22,979
YEAR ENDED DECEMBER 31, 1997
Revenues $ 79,011 $ 10,139 $ -- $ -- $ 89,150
Operating profit 4,587 748 -- -- 5,335
Identifiable assets $ 55,072 $ 4,123 $ -- $ (1,023) $ 58,172
YEAR ENDED DECEMBER 31, 1998
Revenues $ 121,374 $ 8,317 $ 11,293 $ -- $ 140,984
Operating profit 10,279 330 582 -- 11,191
Identifiable assets $ 76,385 $ 2,861 $ 1,075 $ (120) $ 80,201
15. PRINCIPAL CLIENTS
Two clients accounted for 38.4% and 33.4% of revenues for the year ended
December 31, 1996. Two clients accounted for 56.3% and 25.4% of revenues for the
year ended December 31, 1997. One client accounted for 72.5% of revenues for the
year ended December 31, 1998.
The loss of its principal client(s) could have a material adverse effect on
the Company's business, operating results or financial condition. To limit the
Company's credit risk, management performs ongoing credit evaluations of its
clients and maintains allowances for potentially uncollectible accounts.
Although the Company is directly impacted by economic conditions in which its
clients operate, management does not believe substantial credit risk exists as
of December 31, 1998.
41
43
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
16. QUARTERLY DATA (UNAUDITED)
1997 QUARTERS ENDED
---------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------ --------------- --------------
Historical:
Revenues $ 16,667 $ 16,067 $ 20,226 $ 36,190
Gross profit 3,935 3,526 3,920 5,783
Selling, general and administrative
expenses 2,164 1,952 2,135 2,452
Management fee expense 793 2,333
Operating profit (loss) 978 (760) 1,785 3,332
Net income (loss) 894 (642) 1,454 2,452
Net income per share 0.11 0.18
Weighted average shares outstanding 13,828,571 13,828,571
Pro Forma (a):
Revenues $ 16,667 $ 16,067
Gross profit 3,935 3,526
Selling, general and administrative expenses 2,164 1,952
Management fee expense -- --
Operating profit 1,771 1,574
Net income 1,058 925
Basic and diluted net income per share 0.09 0.08
Weighted average shares outstanding 11,361,904 11,551,647
Weighted Average Shares Outstanding :
Shares outstanding after giving effect to
322.1064-for-one stock split effected by
a stock dividend 10,828,571 10,828,571 10,828,571 10,828,571
Shares deemed outstanding prior to closing of
initial public offering, representing the
number of shares (at an initial public
offering price of $15.00 per share)
sufficient to fund payment of $8,000 note
payable to principal stockholders 533,333 492,307 -- --
3,000,000 shares issued in connection with
initial public offering in June 1997, for
days outstanding in the respective
periods -- 230,769 3,000,000 3,000,000
------------- ------------ --------------- --------------
Weighted average shares outstanding 11,361,904 11,551,647 13,828,571 13,828,571
============= ============ =============== ==============
1998 QUARTERS ENDED
----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- ------------ ---------------- --------------
Revenues $ 24,321 $ 24,692 $ 31,617 $ 60,354
Gross profit 4,564 4,684 5,821 10,836
Selling, general and administrative expenses 2,732 3,285 3,483 5,214
Operating profit 1,832 1,399 2,338 5,622
Net income 1,512 1,338 1,787 3,907
Basic and diluted net income per share 0.11 0.10 0.13 0.28
Weighted average shares outstanding 13,828,571 13,828,571 13,828,571 13,828,571
- -----------------------------------
(a) From July 1, 1992 and until the June 1997 initial public offering, the
Company was an S corporation and, accordingly, was not subject to federal
or state income taxes. Subsequent to the initial public offering, the
Company has been subject to income taxation as a C corporation. Pro forma
net income for quarters through June 30, 1997 (i) reflects the elimination
of management fee expense and (ii) includes a provision for federal, state
and foreign income taxes at an effective rate of 37.3%. Management fee
expense was discontinued with the initial public offering in June 1997.
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44
STARTEK, INC.
INDEX OF EXHIBITS
Exhibits
- --------------
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference from Form S-1 Registration
Statement filed with the Securities and Exchange
Commission on January 29,
1997).
3.2 Restated Bylaws of the Company (incorporated by
reference from Form S-1 Registration Statement filed
with the Securities and Exchange Commission on
January 29, 1997).
4.1 Specimen Common Stock certificate (incorporated by
reference from Amendment No. 1 to Form S-1
Registration Statement filed with the Securities and
Exchange Commission on March 7, 1997).
10.1 StarTek, Inc. Stock Option Plan (incorporated by
reference from Amendment No. 1 to Form S-1
Registration Statement filed with the Securities and
Exchange Commission on March 7, 1997).
10.2 Form of Stock Option Agreement (incorporated by
reference from Amendment No. 1 to Form S-1
Registration Statement filed with the Securities and
Exchange Commission on March 7, 1997).
10.3 StarTek, Inc. Director Stock Option Plan
(incorporated by reference from Form S-1 Registration
Statement filed with the Securities and Exchange
Commission on January 29,
1997).
10.4 Lease by and between East Mercia Developments
Limited and StarTek Europe, Ltd. and StarTek USA
Inc. (formerly named StarPak International, Ltd. and
StarPak, Inc., respectively) (incorporated by
reference from Form S-1 Registration Statement filed
with the Securities and Exchange Commission on
January 29, 1997).
10.5 Promissory Note of StarTek USA, Inc. (formerly named
StarPak, Inc.) dated December 29, 1995 in the
principal amount of $1,111,844.17 payable to the
order of General Communications, Inc. (incorporated
by reference from Form S-1 Registration Statement
filed with the Securities and Exchange Commission on
January 29, 1997).
10.6 HP Purchase Agreement dated September 1, 1995 by and
between Hewlett-Packard Company, StarTek USA, Inc.
and StarTek Europe, Ltd. (formerly named StarPak,
Inc. and StarPak International, Ltd., respectively)
(incorporated by reference from Amendment No. 3 to
Form S-1 Registration Statement filed with the
Securities and Exchange Commission on March 26,
1997).
10.7 Microsoft Supply, Manufacturing and Services
Agreement dated March 28, 1996 by and between
Microsoft Corporation and StarTek USA, Inc.
(formerly named StarPak, Inc.). (incorporated by
reference from Amendment No. 3 to Form S-1
Registration Statement filed with the Securities and
Exchange Commission on March 26, 1997).
10.8 Equipment Lease (Schedule No. 01) between Varilease
Corporation, as Lessor, and StarTek USA, Inc.
(formerly StarPak, Inc.), as Lessee, dated March 7,
1997 (incorporated by reference from Amendment No. 4
to Form S-1 Registration Statement filed with the
Securities and Exchange Commission on May 23, 1997).
10.9 Equipment Lease (Schedule No. 2) between Varilease
Corporation, as Lessor, and StarTek USA, Inc.
(formerly StarPak, Inc.), as Lessee, dated April
15th, 1997 (incorporated by reference from Amendment
No. 4 to Form S-1 Registration Statement filed with
the Securities and Exchange Commission on May 23,
1997).
10.10 Loan Agreement, dated November 6, 1997, between
StarTek, Inc. (the "Borrower") and Norwest Bank
Colorado, National Association (the "Bank") and 360
Day Promissory Note dated November 6, 1997, payable
by the Borrower to the Bank (incorporated by
reference from Form 10-Q Quarterly Report filed with
the Securities and Exchange Commission on November
13, 1997).
10.11 Amendment dated September 30, 1997 to HP Purchase
Agreement dated September 1, 1995 by and between
Hewlett-Packard Company, StarTek USA, Inc. and
StarTek Europe, Ltd. (formerly named StarPak, Inc.
and StarPak International, Ltd., respectively)
(incorporated by reference from Form 10-Q Quarterly
Report filed with the Securities and Exchange
Commission on November 13, 1997).
10.12 Standard Form of Agreement Between Owner (StarTek
USA, Inc.) and Contractor (Landmark Builders
of Greeley, Inc.) dated December 1, 1997
(incorporated by reference from Form 10-K Annual
Report filed with the Securities and Exchange
Commission on March 31, 1998).
10.13 HP Master Agreement Technical Support Services dated
January 7, 1998 by and between Hewlett Packard
Company and StarTek USA, Inc. (incorporated by
reference from Form 10-K Annual Report filed with the
Securities and Exchange Commission on March 31,
1998).
10.14 Facility lease agreement dated as of July 8, 1998
between StarTek USA, Inc. (a wholly-owned subsidiary
of the Company) and the Industrial Development Board
of the County of Montgomery, Tennessee and Industrial
Development Revenue Note, Series A dated as of
July 8, 1998 and issued by the Industrial
Development Board of the County of Montgomery,
Tennessee (incorporated by reference from Form 10-Q
Quarterly Report filed with the Securities and
Exchange Commission on August 14, 1998).
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45
10.15 Microsoft Corporation Manufacturing Agreement
between StarTek, Inc. and Microsoft Corporation
dated as of January 1, 1998 (incorporated by
reference from Form 10-Q Quarterly Report filed with
the Securities and Exchange Commission on November
13, 1998).
*10.16 Equipment lease agreement dated as of July 8, 1998
between StarTek USA, Inc. (a wholly-owned subsidiary
of the Company) and the Industrial Development Board
of the County of Montgomery, Tennessee and
Industrial Development Revenue Note, Series B dated
as of July 8, 1998 and issued by the Industrial
Development Board of the County of Montgomery,
Tennessee.
*21.2 Subsidiaries of the Registrant.
*27.1 Financial Data Schedule.
- ------------------
* Filed with this Form 10-K.
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned thereunto duly authorized.
STARTEK, INC.
- --------------------------------------------
(Registrant)
By: /s/ Dennis M. Swenson
-----------------------------------------
Dennis M. Swenson
Executive Vice President, Chief
Financial Officer, Secretary and Treasurer
Date: 3-31-99
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Michael W. Morgan
- --------------------------------------------
Michael W. Morgan
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: 3-31-99
---------------------------------------
/s/ Dennis M. Swenson
- --------------------------------------------
Dennis M. Swenson
Executive Vice President and Chief
Financial Officer (Principal Financial and Accounting Officer)
Date: 3-31-99
---------------------------------------
/s/ E. Preston Sumner, Jr.
- --------------------------------------------
E. Preston Sumner, Jr.
Executive Vice President and Chief Operating Officer
Date: 3-31-99
---------------------------------------
/s/ A. Emmet Stephenson, Jr.
- --------------------------------------------
A. Emmet Stephenson, Jr.
Chairman of the Board
Date: 3-31-99
---------------------------------------
/s/ Thomas O. Ryder
- --------------------------------------------
Thomas O. Ryder
Director
Date: 3-31-99
---------------------------------------
/s/ Ed Zschau
- --------------------------------------------
Ed Zschau
Director
Date: 3-31-99
---------------------------------------
45