<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________,TO________
Commission File Number 1-12793
STARTEK, INC.
- ------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1370538
- ------------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
111 Havana Street
Denver, Colorado 80010
- ------------------------------------- ------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 361-6000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Not Applicable
- ------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGE SINCE LAST
REPORT)
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes_____ No__X__
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock August 12, 1997
Common Stock, par value $.01 per share 13,828,571
<PAGE>
STARTEK, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet--June 30, 1997 3
and December 31, 1996
Condensed Consolidated Statements of Operations--Three 4
months ended June 30, 1997 and 1996; Six months ended
June 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows--Six 5
months ended June 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
PART II. OTHER INFORMATION
- ----------------------------
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
- ----------
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
-------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 2,742 $ 8,423
Short term investments available for sale........................ - 25,125
Trade accounts receivable, less
allowance for doubtful accounts of
$311 and $361, respectively..................................... 11,031 7,406
Inventories..................................................... 2,535 1,645
Deferred tax asset.............................................. - 552
Prepaid expenses and other...................................... 140 243
-------------- ------------
Total current assets................................................. 16,448 43,394
Property, plant and equipment, net................................... 6,528 6,300
Other assets......................................................... 3 3
-------------- ------------
Total assets......................................................... $ 22,979 $ 49,697
-------------- ------------
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................................................. $ 3,500 -
Accounts payable................................................ 6,962 $ 4,479
Accrued liabilities............................................. 1,584 1,412
Accrued income tax.............................................. - 192
Current portion of capital lease obligations.................... 917 139
Current portion of long-term debt............................... 6 -
Other........................................................... 584 524
-------------- ------------
Total current liabilities............................................ 13,553 6,746
Capital lease obligations, less current portion...................... 1,504 151
Long-term debt, less current portion................................. 548 200
Deferred income taxes................................................ - 253
Other................................................................ 271 145
Stockholders' equity:
Common stock.................................................... 1 138
Additional paid-in capital...................................... 6,148 41,661
Cumulative translation adjustment............................... 129 80
Retained earnings............................................... 1,038 323
Note receivable-stockholder for the
exercise of stock options....................................... (213) -
-------------- ------------
Total stockholders' equity........................................... 7,103 42,202
-------------- ------------
Total liabilities and stockholders' equity........................... $ 22,979 $ 49,697
-------------- ------------
-------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
Pro Forma Pro Forma
1996 1997 1997 1996 1997 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................$ 14,108 $ 16,067 $ 16,067 $ 29,327 $ 32,733 $ 32,733
Cost of services................................ 11,121 12,541 12,541 23,776 25,273 25,273
----------------------------- -----------------------------
Gross profit.................................... 2,987 3,526 3,526 5,551 7,460 7,460
Selling, general and administrative expenses.... 1,857 1,952 1,952 3,563 4,115 4,115
Management fee expense.......................... 700 2,333 - 899 3,126 -
----------------------------- -----------------------------
Operating profit (loss)......................... 430 (759) 1,574 1,089 219 3,345
Net interest expense and other.................. 108 98 98 233 183 183
----------------------------- -----------------------------
Income (loss) before income taxes............... 322 (857) 1,476 856 36 3,162
Income tax expense (credit)..................... - (216) 551 - (216) 1,179
----------------------------- -----------------------------
Net income (loss)............................... $ 322 $ (641) $ 925 $ 856 $ 252 $ 1,983
----------------------------- -----------------------------
----------------------------- -----------------------------
Pro forma net income per share.................. $ 0.08 $ 0.17
Weighted average shares outstanding............. 11,551,647 11,457,300
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1997
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................................... $ 856 $ 252
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization.............................. 489 907
Changes in operating assets and liabilities:
Accounts receivable..................................... 5,387 3,625
Inventories............................................. (333) 889
Deferred tax asset...................................... - (552)
Prepaid expenses and other assets....................... 54 (103)
Accounts payable........................................ (3,003) (2,482)
Accrued and other liabilities........................... 383 (358)
Accrued and deferred income taxes....................... - 445
---------- -----------
Net cash provided by operating activities....................... 3,833 2,623
CASH FLOWS FROM INVESTING ACTIVITIES
Short-term investments.......................................... - (25,125)
Purchases of property, plant and equipment, net................. (277) (693)
Collections on notes receivable-
stockholders.................................................... 28 213
---------- -----------
Net cash used in investing activities........................... (249) (25,605)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line of credit borrowings....................... (2,703) (3,500)
Principal advances (payments) on borrowings..................... 66 (354)
Proceeds from borrowings and capital lease obligations.......... 201 -
Principal payments on capital lease obligations................. (187) (2,130)
Dividend to S corporation principal stockholders................ - (8,000)
Principal payments on notes payable-stockholders................ (16) -
Principal payments on note payable-affiliate.................... (1,111) -
Net proceeds of initial public offering of common stock......... - 41,042
Contributed capital............................................. - 1,641
---------- -----------
Net cash provided by (used in) financing activities............. (3,750) 28,699
Effect of exchange rate changes on cash......................... (6) (36)
---------- -----------
Net increase in cash and cash equivalents....................... (172) 5,681
Cash and cash equivalents at beginning of year.................. 451 2,742
---------- -----------
Cash and cash equivalents at end of period...................... $ 279 $ 8,423
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Equipment acquired or refinanced under capital leases........... $ 733 -
Common stock split effected by stock dividend................... - $ 107
</TABLE>
SEE ACCOMPANYING NOTES.
5
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STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(unaudited)
NOTE (1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. The condensed consolidated financial
statements reflect all adjustments (consisting of only normal recurring
accruals) which, in the opinion of management, are necessary to present
fairly the financial position, results of operations and cash flows of
StarTek, Inc., and subsidiaries as of June 30, 1997 and 1996 and for the
periods then ended. Operating results for the three and six months periods
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997.
The unaudited condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's prospectus dated June 18, 1997 for the
Company's initial public offering.
NOTE (2) INITIAL PUBLIC OFFERING OF COMMON STOCK
On June 24, 1997 the Company completed an initial public offering of its
common stock. The Company sold 3,000,000 shares of common stock at an
offering price of $15.00 per share. Total proceeds after deducting $3,958 in
estimated costs associated with the offering were $41,042. Immediately prior
to the closing of the offering the Company completed a 320.1064-for-1 common
stock split effected by a stock dividend. All common stock amounts,
equivalent share amounts and per share amounts included in the accompanying
financial statements and related notes have been adjusted to give effect to
the stock dividend.
NOTE (3) DIVIDEND TO S CORPORATION PRINCIPAL STOCKHOLDERS
Effective immediately prior to the June 24, 1997 closing of the initial
public offering, the Company declared an $8,000 dividend in an amount
approximately equal to the estimated additional paid-in capital and retained
earnings of the Company as of the closing date of the initial public
offering, pursuant to certain promissory notes. Such notes were paid June
30, 1997 from the net proceeds of the initial public offering.
NOTE (4) MANAGEMENT FEE EXPENSE
Historically, certain S corporation stockholders and an affiliate have
been paid certain management fees, bonuses and other fees in connection with
services rendered to the Company which have not been included in selling,
general and administrative expenses, in addition to general compensation for
services rendered. Such management fees are reflected as management fee
expense as set forth below. Effective with the closing of the Company's
initial public offering in June 1997, these management fees, bonuses and
other fees were discontinued.
6
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except share data)
(unaudited)
After the closing of the initial public offering, all compensation
payable to persons who are now stockholders of the Company (or an affiliate
of such stockholder) will be in the form of advisory fees, salaries and
bonuses (which at current rates will aggregate approximately $516 annually)
and will be included in selling, general and administrative expenses. Such
advisory fees and salaries, together with payments under an operating lease
terminated effective December 31, 1996, are reflected as selling, general and
administrative expense as set forth below.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ---------------
1996 1997 1996 1997
---- ---- ---- ----
Selling, general and administrative
expense......................... $ 135 $ 129 $ 270 $ 258
Management fee expense............ $ 700 $ 2,333 $ 899 $ 3,126
NOTE (5) PRO FORMA INFORMATION
The pro forma condensed consolidated statement of operations present the
effect on the historical consolidated financial statements of the elimination
of management fee expense paid to stockholders and their affiliates, as these
fees were discontinued upon the completion of the Company's initial public
offering, and the provision for related income taxes at an effective rate of
37.3% as if the Company were taxed as a C corporation.
NOTE (6) WEIGHTED AVERAGE SHARES OUTSTANDING
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
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 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 533,333 492,307 533,333 512,707
3,000,000 shares issued in connection with
initial public offering completed June 24, 1997,
for days outstanding in the respective periods - 230,769 - 116,022
----------------------- ----------------------
Weighted average shares outstanding 11,361,904 11,551,647 11,361,904 11,457,300
----------------------- ----------------------
----------------------- ----------------------
</TABLE>
7
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except share data)
(unaudited)
NOTE (7) INCOME TAX CREDIT
The $216 income tax credit for the three and six month periods ended
June 30, 1997 is composed of a one-time credit to record a net deferred tax
asset of $299 upon termination of S corporation status, less income tax
expense on earnings during the June 1997 period when the Company was taxed as
a C corporation as adjusted for a foreign tax benefit item.
NOTE (8) INVENTORIES
Total inventories consisted of the following:
December 31, 1996 June 30, 1997
----------------- --------------
Raw materials .......................... $ 2,327 $ 1,308
Finished goods.......................... 208 337
---------------- --------------
$ 2,535 $ 1,645
---------------- --------------
---------------- --------------
NOTE (9) STOCK OPTIONS GRANTED
A summary of the Company's stock option activity follows:
Six Months
Ended
June 30,
1997
-------------
Outstanding at beginning of period......................... -
Granted.................................................... 614,500
-------------
Outstanding at end of period............................... 614,500
-------------
-------------
Exercisable at end of period............................... 20,000
-------------
-------------
The exercise price for options outstanding as of June 30, 1997 was $15.00 per
share.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
unaudited condensed consolidated statement of operations data expressed as a
percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
PRO FORMA PRO FORMA
1996 1997 1997 1996 1997 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of service.................................... 78.8 78.1 78.1 81.1 77.2 77.2
--------------------------- --------------------------
Gross profit....................................... 21.2 21.9 21.9 18.9 22.8 22.8
SG&A expenses...................................... 13.2 12.1 12.1 12.1 12.6 12.6
Management fee expense............................. 5.0 14.5 - 3.1 9.5 -
--------------------------- --------------------------
Operating profit (loss)............................ 3.0 (4.7) 9.8 3.7 0.7 10.2
Net interest expense and other..................... 0.7 0.6 0.6 0.8 0.6 0.6
--------------------------- --------------------------
Income (loss) before income
taxes.............................................. 2.3 (5.3) 9.2 2.9 0.1 9.6
Income tax expense (credit)........................ - (1.3) 3.4 - (0.7) 3.6
--------------------------- --------------------------
Net income (loss).................................. 2.3 (4.0) 5.8 2.9 0.8 6.0
--------------------------- --------------------------
--------------------------- --------------------------
</TABLE>
The following table sets forth certain unaudited pro forma condensed
consolidated statement of operations data expressed in dollars and as a
percentage of revenues for the three and six month periods ended June 30,
1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
------------------------------------ -------------------------------------
(DOLLARS IN THOUSANDS, (DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA) EXCEPT SHARE DATA)
---------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues................................ $ 14,108 100.0% $ 29,327 100.0%
Cost of services........................ 11,121 78.8 23,776 81.1
--------- ------ --------- -------
Gross profit............................ 2,987 21.2 5,551 18.9
SG&A expenses........................... 1,857 13.2 3,563 12.1
Management fee expense.................. - - - -
--------- ------ --------- -------
Operating profit........................ 1,130 8.0 1,988 6.8
Net interest expense and other.......... 108 0.7 233 0.8
--------- ------ --------- -------
Income before income taxes.............. 1,022 7.3 1,755 6.0
Income tax expense...................... 381 2.8 655 2.2
--------- ------ --------- -------
Net income.............................. $ 641 4.5 $ 1,100 3.8
--------- ------ --------- -------
--------- ------ --------- -------
Pro forma net income per share $ 0.06 $ 0.10
Weighted average shares
outstanding 11,361,904 11,361,904
</TABLE>
Pro forma adjustments are described in Note 5 to Condensed Consolidated
Financial Statements.
9
<PAGE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS
ENDED JUNE 30, 1996
REVENUES. Revenues increased $2.0 million, or 13.9%, to $16.1 million
for the three months ended June 30, 1997 from $14.1 million for the three
months ended June 30, 1996. Revenues of $0.7 million for the three months
ended June 30, 1997 were attributable to new clients while existing clients
accounted for the remaining $1.3 million of this increase.
COST OF SERVICES. Costs of services increased $1.4 million, or 12.8%,
to $12.5 million for the three months ended June 30, 1997 from $11.1 million
for the three months ended June 30, 1996. As a percentage of revenues, cost
of services decreased to 78.1% for the three months ended June 30, 1997 from
78.8% for the three months ended June 30, 1996, primarily due to the absence
of product recall and rework costs incurred on a certain product distributed
from the United Kingdom facility which were incurred in the three months
ended June 30, 1996.
GROSS PROFIT. As a result of the foregoing factors, gross profit
increased $0.5 million, or 18.0%, to $3.5 million for the three months ended
June 30, 1997 from $3.0 million for the three months ended June 30, 1996. As
a percentage of revenues, gross profit increased to 21.9% for the three
months ended June 30, 1997 from 21.2% for the three months ended June 30,
1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
$0.1 million, or 5.1%, to $2.0 million for the three months ended June 30,
1997 from $1.9 million for the three months ended June 30, 1996, primarily as
a result of increased personnel costs incurred to service increasing
business. As a percentage of revenues, SG&A expenses decreased to 12.1% for
the three months ended June 30, 1997 from 13.2% for the three months ended
June 30, 1996, reflecting a lesser relative increase in SG&A expense as
compared to the increase in revenues.
MANAGEMENT FEE EXPENSE. Management fee expense increased $1.6 million,
or 233.3%, to $2.3 million for the three months ended June 30, 1997 from $0.7
million for the three months ended June 30, 1996. As a percentage of
revenues, management fee expense increased to 14.5% for the three months
ended June 30, 1997 from 5.0% for the three months ended June 30, 1996. For
the three months ended June 30, 1996, management fee expense was accrued
based on estimated tax requirements of the recipients. The Company incurred
management fee and bonus expense of $2.3 million in the three months ended
June 30, 1997, after giving consideration to operating profits and the
effects of certain expense timing differences for book and tax purposes.
Effective with the closing of the Company's initial public offering in June
1997, these management fee and bonus arrangements were discontinued.
OPERATING PROFIT (LOSS). As a result of the foregoing factors,
operating profit decreased $1.2 million, or 276.5%, to a $(0.8) million
operating loss for the three months ended June 30, 1997 from $0.4 million
operating profit for the three months ended June 30, 1996. As a percentage
of revenues, operating profit decreased to a (4.7)% operating loss for the
three months ended June 30, 1997 from 3.0% operating profit for the three
months ended June 30, 1996.
NET INTEREST EXPENSE AND OTHER. Net interest expense and other was
relatively unchanged at $0.1 million for each of the three months ended June
30, 1996 and 1997. As a percentage of revenues, net interest expense and
other decreased to 0.6% for the three months ended June 30, 1997 from 0.7%
for the three months ended June 30, 1996, reflecting increased
10
<PAGE>
interest earnings relative to the revenues of the Company together with
interest earnings for the last seven days of June 1997 from the net proceeds
of the Company's initial public offering, partially offset by prepayment
premiums in connection with the repayment of capital lease obligations.
INCOME (LOSS) BEFORE INCOME TAXES. As a result of the foregoing
factors, income before income taxes decreased $1.2 million, or 366.1%, to a
$(0.9) million loss before income taxes for the three months ended June 30,
1997 from $0.3 million income before income taxes for the three months ended
June 30, 1996. As a percentage of revenues, income before income taxes
decreased to a (5.3)% loss before income taxes for the three months ended
June 30, 1997 from 2.3% income before income taxes for the three months ended
June 30, 1996.
INCOME TAX EXPENSE (CREDIT). The Company operated as an S corporation
for federal and state income tax purposes until termination of S corporation
status on June 18, 1997 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. The $0.2 million income tax credit for the
three months ended June 30, 1997 is composed of a one-time credit to record a
net deferred tax asset of $0.3 million upon termination of S corporation
status, less income tax expense on earnings during the June 1997 period when
the Company was taxed as a C corporation as adjusted for a foreign tax
benefit item.
NET INCOME (LOSS). Based on the factors discussed above, net income
decreased a $0.9 million, or 299.1%, to $(0.6) million net loss for the
three months ended June 30, 1997 from $0.3 million net income for the three
months ended June 30, 1996. As a percentage of revenues, net income
decreased to a (4.0)% net loss for the three months ended June 30, 1997 from
2.3% net income for the three months ended June 30, 1996.
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 to
stockholders and their affiliates as these fees and bonuses were discontinued
upon the 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 (i) pro forma
management fee expense is zero for the three months ended June 30, 1996 and
1997; (ii) pro forma operating profit increased $0.5 million, or 39.3%, to
$1.6 million for the three months ended June 30, 1997 from $1.1 million for
the three months ended June 30, 1996; (iii) pro forma income before income
taxes increased $0.5 million, of 44.4%, to $1.5 million for the three months
ended June 30, 1997 from $1.0 million for the three months ended June 30,
1996; (iv) pro forma income taxes increased $0.2 million, or 44.6%, to $0.6
million for the three months ended June 30, 1997 from $0.4 million for the
three months ended June 30, 1996; and (v) pro forma net income increased $0.3
million, or 44.3%, to $0.9 million for the three months ended June 30, 1997
from $0.6 million for the three months ended June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues increased $3.4 million, or 11.6%, to $32.7 million
for the six months ended June 30, 1997 from $29.3 million for the six months
ended June 30, 1996. Revenues of $1.2 million for the six months ended June
30, 1997 were attributable to new clients while existing clients accounted
for the remaining $2.2 million of this increase. Revenues from
11
<PAGE>
new clients were partially offset by the effects of completion of projects
for existing clients and fluctuating requirements with respect to ongoing
projects. A portion of the revenues for the six months ended June 30, 1996
were attributable to two large projects, which generated unusually high
revenues.
COST OF SERVICES. Cost of services increased $1.5 million, or 6.3%, to
$25.3 million for the six months ended June 30, 1997 from $23.8 million for
the six months ended June 30, 1996. As a percentage of revenues, cost of
services decreased to 77.2% for the six months ended June 30, 1997 from 81.1%
for the six months ended June 30, 1996. This change was primarily due to
improved labor utilization. Additionally, the six months ended June 30, 1997
were affected positively by the absence of start-up costs for the Denver
facility and product recall and rework costs incurred on a certain product
distributed from the United Kingdom facility, as well as the discontinuation
of certain lower margin projects.
GROSS PROFIT. As a result of the foregoing factors, gross profit
increased $1.9 million, or 34.4%, to $7.5 million for the six months ended
June 30, 1997 from $5.6 million for the six months ended June 30, 1996. As a
percentage of revenues, gross profit increased to 22.8% for the six months
ended June 30, 1997 from 18.9% for the six months ended June 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
$0.5 million, or 15.5%, to $4.1 million for the six months ended June 30,
1997 from $3.6 million for the six months ended June 30, 1996, primarily as a
result of increased personnel costs incurred to service increasing business.
As a percentage of revenues, SG&A expenses increased to $12.6% for the six
months ended June 30, 1997 from 12.1% for the six months ended June 30, 1996,
reflecting a greater relative increase in SG&A expense as compared to the
increase in revenues.
MANAGEMENT FEE EXPENSE. Management fee expense increased $2.2 million,
or 247.7%, to $3.1 million for the six months ended June 30, 1997 from $0.9
million for the six months ended June 30, 1996. As a percentage of revenues,
management fee expense increased to 9.5% for the six months ended June 30,
1997 from 3.1% for the six months ended June 30, 1996. For the six months
ended June 30, 1996, management fee expense was accrued based on estimated
tax requirements of the recipients. The Company paid management fees and
bonuses of $3.1 million in the six months ended June 30, 1997, after giving
consideration to operating profits and the effects of certain expense timing
differences for book and tax purposes. Effective with the closing of the
Company's initial public offering in June 1997, these management fees and
bonus arrangements were discontinued.
OPERATING PROFIT (LOSS). As a result of the foregoing factors,
operating profit decreased $0.9 million, or 79.9%, to $0.2 million for the
six months ended June 30, 1997 from $1.1 million for the six months ended
June 30, 1996. As a percentage of revenues, operating profit decreased to
0.7% for the six months ended June 30, 1997 from 3.7% for the six months
ended June 30, 1996.
NET INTEREST EXPENSE AND OTHER. Net interest expense and other was
relatively unchanged at $0.2 million for each of the six months ended June
30, 1996 and 1997. As a percentage of revenues, net interest expense and
other decreased to 0.6% for the six months ended June 30, 1997 from 0.8% for
the six months ended June 30, 1996, reflecting lower outstanding average
borrowing relative to the revenues of the Company, increased interest
earnings, and interest earnings for the last seven days of June 1997 from the
net proceeds of the
12
<PAGE>
Company's initial public offering, all partially offset by prepayment
premiums in connection with the repayment of capital lease obligations.
INCOME (LOSS) BEFORE INCOME TAXES. As a result of the foregoing
factors, income before income taxes decreased $0.9 million, or 95.8%, to
approximately zero for the six months ended June 30, 1997 from $0.9 million
income before income taxes for the six months ended June 30, 1996. As a
percentage of revenues, income before income taxes decreased to 0.1% for the
six months ended June 30, 1997 from 2.9% for the six months ended June 30,
1996.
INCOME TAX EXPENSE (CREDIT). The Company operated as an S corporation
for federal and state income tax purposes until termination of S corporation
status on June 18, 1997 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. The $0.2 million income tax credit for the six
months ended June 30, 1997 is composed of a one-time credit to record a net
deferred tax asset of $0.3 million upon termination of S corporation status,
less income tax expense on earnings during the June 1997 period when the
Company was taxed as a C corporation as adjusted for a foreign tax benefit
item.
NET INCOME (LOSS). Based on the factors discussed above, net income
decreased $0.6 million, or 70.6%, to $0.3 million for the six months ended
June 30, 1997 from $0.9 million net income for the six months ended June 30,
1996. As a percentage of revenues, net income decreased to 0.8% for the six
months ended June 30, 1997 from 2.9% for the six months ended June 30, 1996.
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 to
stockholders and their affiliates as these fees and bonuses were discontinued
upon the 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 (i) pro forma
management fee expense is zero for the six months ended June 30, 1996 and
1997; (ii) pro forma operating profit increased $1.3 million, or 68.3%, to
$3.3 million for the six months ended June 30, 1997 from $2.0 million for the
six months ended June 30, 1996; (iii) pro forma income before income taxes
increased $1.4 million, or 80.2%, to $3.2 million for the six months ended
June 30, 1997 from $1.8 million for the six months ended June 30, 1996; (iv)
pro forma income taxes increased $0.5 million, or 80.0%, to $1.2 million for
the six months ended June 30, 1997 from $0.7 million for the six months ended
June 30, 1996; and (v) pro forma net income increased $0.9 million, or 80.3%,
to $2.0 million for the six months ended June 30, 1997 from $1.1 for the six
months ended June 30, 1996.
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. The
Company has a $3.5 million revolving line of credit with Norwest Business
Credit, Inc. (the "Bank"), which matures on June 30, 1999. Borrowings under
the line of credit bear interest at the Bank's base rate, plus 1%.
13
<PAGE>
The Company completed 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 it outstanding
indebtedness, which included approximately $5.0 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 approximately equal to the additional paid-in capital
and retained earnings of the Company as of the closing date. The balance of
the net proceeds (approximately $26.2 million) will be used for working
capital and other general corporate purposes, including approximately $8.0
million for capital expenditures to expand and build-out its existing
facilities and systems and to potentially make strategic acquisitions of
complementary businesses.
The Company had cash, cash equivalents and short-term investments
available for sale of $33.5 million at June 30, 1997. The Company's working
capital was $36.6 million.
The Company agreed to finance telecommunications computer hardware and
software through a 36 month operating lease which became effective in April
1997. Monthly payments approximate $27,000.
Net cash provided by operating activities decreased to $2.6 million for
the six months ended June 30, 1997 from $3.8 million for the same period in
the prior year. The principal causes of this decrease were (i) a lesser
reduction in accounts receivable in the period and (ii) a decrease in net
income, partially offset by a decrease in inventories.
Net cash used in investing activities increased to $25.6 million for the
six months ended June 30, 1997 from $0.2 million for the same period in the
prior year. The principal cause for this increase was short-term investment
of the net proceeds of the Company's initial public offering.
Net cash provided from financing activities increased to $28.7 million
in the six months ended June 30, 1997 from $(3.8) million used in financing
activities for the same period in the prior year. The principal causes of
this increase were the net proceeds from the Company's initial public
offering, contributed capital from principal stockholders and reduction in
principal payments on an affiliate note, partially offset by a dividend to the
principal stockholders and the repayment of substantially all of the
Company's indebtedness.
The Company believes that cash flow from operations and net proceeds to
the Company from its initial public offering, together with available funds
under the line of credit, will be sufficient to support its operations and
capital expenditure and liquidity requirements for the next 12 months and
anticipated operations and cash expenditures for the foreseeable future.
However, long-term capital requirements depend on many factors including, but
not limited to, the rate at which the Company expands its business, whether
internally or through acquisitions and strategic alliances. To the extent
that 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 the 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 acceptable to the Company.
14
<PAGE>
VARIABILITY OF QUARTERLY OPERATING RESULTS
Historically, the Company's revenues have been significantly lower in
the first and second quarters of each year due to the timing of its clients'
marketing programs and the introduction of new products, which are typically
geared toward the Christmas holiday seasons. Additionally, the Company has
experienced, and expects to experience in the future, 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 new projects;
(ii) the expiration or termination of existing projects; (iii) the timing of
increased expenses incurred to obtain and support new business; (iv) the
seasonal pattern of certain of the businesses served by the Company; and (v)
the cyclical nature of certain client's businesses.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of
inflation on its operations, the Company does not believe that inflation has
had, or is likely in the foreseeable future to have, a material effect on its
results of operations or financial condition.
FORWARD-LOOKING STATEMENTS
All statements contained in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" or elsewhere in this
quarterly report, that are not statements of historical facts are
forward-looking statements that involve substantial risks and uncertainties.
Forward-looking statements include (i) the anticipated level of capital
expenditures, (ii) the Company's belief that existing cash, short-term
investments and available borrowing will be sufficient to finance the
Company's operations; and (iii) statements relating to the Company or its
operations that are preceded by terms such as "anticipates", "expects",
"believes", and similar expressions.
In accordance with the Private Securities Litigation Reform Act of 1995,
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 one or more of its
significant clients, and the loss or delay in implementation of a large
project which could cause quarterly variations in the Company's revenues and
earnings. Readers are encouraged to review the Risk Factors section of the
Company's prospectus dated June 18, 1997 for its initial public offering.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Sales of Unregistered Securities
The Company did not issue or sell any unregistered securities
during the quarter ended June 30, 1997, except as follows:
(i) The Company granted options to purchase a total of
594,500 shares of common stock to 65 employees
pursuant to the Company's Stock Option Plan at an
exercise price of $15.00 per share, the initial public
offering price of the Company's common stock. These
options have a term of ten years and vest at the rate
of 20% per year.
(ii) Pursuant to the Company's Director Option Plan, two
non-employee directors were automatically granted
options to purchase a total of 20,000 shares of common
stock at an exercise price of $15.00 per share. These
options have a term of ten years and were fully vested
upon grant.
The foregoing options were granted by the Company in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following document is filed as an exhibit to this report:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three months ended June 30, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARTEK, INC.
--------------------------------------
(Registrant)
Date: August 14, 1997 /s/ MICHAEL W. MORGAN
---------------------- --------------------------------------
Michael W. Morgan
President and Chief Executive Officer
Date: August 14, 1997 /s/ DENNIS M. SWENSON
---------------------- --------------------------------------
Dennis M. Swenson
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8423
<SECURITIES> 25125
<RECEIVABLES> 7767
<ALLOWANCES> 361
<INVENTORY> 1645
<CURRENT-ASSETS> 43394
<PP&E> 10869
<DEPRECIATION> 4569
<TOTAL-ASSETS> 49697
<CURRENT-LIABILITIES> 6746
<BONDS> 351
0
0
<COMMON> 138
<OTHER-SE> 42064
<TOTAL-LIABILITY-AND-EQUITY> 49697
<SALES> 0
<TOTAL-REVENUES> 32733
<CGS> 0
<TOTAL-COSTS> 25273
<OTHER-EXPENSES> 6988
<LOSS-PROVISION> 97
<INTEREST-EXPENSE> 339
<INCOME-PRETAX> 36
<INCOME-TAX> (216)
<INCOME-CONTINUING> 252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Proforma net income per share - primary $0.17
<F2>Proforma net income per share - fully diluted $0.17
</FN>
</TABLE>
