<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1997
REGISTRATION NO. 333-20633
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
STARTEK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7389 84-1370538
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification No.)
incorporation or Classification Code Number)
organization)
</TABLE>
111 HAVANA STREET, DENVER, COLORADO 80010
(303) 361-6000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
MICHAEL W. MORGAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
STARTEK, INC.
111 HAVANA STREET
DENVER, COLORADO 80010
(303) 361-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
BLAIR L. LOCKWOOD, ESQ. PETER P. WALLACE, ESQ.
KAREN L. BARSCH, ESQ. MORGAN, LEWIS & BOCKIUS LLP
OTTEN, JOHNSON, ROBINSON, NEFF & 801 South Grand Avenue
RAGONETTI, P.C. Suite 2200
950 17th Street, Suite 1600 Los Angeles, California 90017
Denver, Colorado 80202 (213) 612-2500
(303) 825-8400
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 23, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES
AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
, 1997
3,666,667 SHARES
STARTEK, INC.
COMMON STOCK
Of the 3,666,667 shares of common stock, $.01 par value per share (the
"Common Stock"), offered hereby, 3,000,000 shares are being sold by StarTek,
Inc. ("StarTek" or the "Company") and 666,667 shares are being sold by the
Selling Stockholders named herein. The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders. See "Principal and
Selling Stockholders." Prior to this offering, there has been no public market
for the Common Stock. It is currently estimated that the initial public offering
price will be between $14.00 and $16.00 per share. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "SRT," pending notification of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total(3)................ $ $ $ $
- -------------------------------------------------------------------------------------------
</TABLE>
(1) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE AGREED TO INDEMNIFY THE
SEVERAL UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $500,000. THE
COMPANY HAS AGREED TO PAY THE EXPENSES OF THE SELLING STOCKHOLDERS, OTHER
THAN UNDERWRITING DISCOUNTS AND COMMISSIONS.
(3) THE SELLING STOCKHOLDERS HAVE GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO
PURCHASE UP TO 550,000 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL
PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS, PROCEEDS TO THE
COMPANY AND PROCEEDS TO THE SELLING STOCKHOLDERS WILL BE $ , $ ,
$ AND $ , RESPECTIVELY. SEE "UNDERWRITING."
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if accepted by the Underwriters, subject to
various prior conditions, including their right to reject any order in whole or
in part. It is expected that delivery of share certificates will be made in New
York, New York, on or about , 1997.
<TABLE>
<S> <C>
DONALDSON, LUFKIN & JENRETTE MORGAN STANLEY & CO.
SECURITIES CORPORATION INCORPORATED
</TABLE>
<PAGE>
[StarTek Logo]
Global Integrated Outsourced Solutions
<TABLE>
<S> <C>
Technical Support and Inbound Product
Customer Care
Teleservices Orders Teleservices
[Circle of Arrows]
Value Added
Process Management
Product Distribution Selection and
and Order Fulfillment Management of Suppliers
Management of Product
Assembly and Packaging
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS (I) GIVES EFFECT TO THE
OFFERING RELATED TRANSACTIONS (DEFINED AND DESCRIBED BELOW), (II) GIVES EFFECT
TO A 322.1064 FOR ONE STOCK SPLIT OF THE COMMON STOCK TO BE EFFECTED BY A STOCK
DIVIDEND IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING AND (III) ASSUMES AN
INITIAL PUBLIC OFFERING PRICE OF $15.00 PER SHARE OF COMMON STOCK, THE MIDPOINT
OF THE OFFERING PRICE RANGE SET FORTH ON THE COVER OF THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, REFERENCES TO "STARTEK" AND THE "COMPANY" REFER TO STARTEK,
INC. AND ITS WHOLLY-OWNED SUBSIDIARIES, STARPAK, INC. AND STARPAK INTERNATIONAL,
LTD., COLLECTIVELY, OR, FOR PERIODS PRIOR TO JANUARY 1997, REFER TO STARPAK,
INC. AND STARPAK INTERNATIONAL, LTD., COLLECTIVELY. SEE "OFFERING RELATED
TRANSACTIONS."
THE COMPANY
StarTek is a leading international provider of integrated, value-added
outsourced services primarily for Fortune 500 companies in targeted industries.
The Company's integrated outsourced services encompass a wide spectrum of
process management services and customer-initiated ("inbound") teleservices
throughout a product's life cycle, including product order teleservices,
supplier management, product assembly and packaging, product distribution,
product order fulfillment, and customer care and technical support teleservices.
By focusing on these services as its core business, StarTek allows its clients
to focus on their primary businesses, 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 operates from its Colorado facilities located in Denver
and Greeley and from a facility located in Hartlepool, England. The Company also
operates through a subcontract relationship in Singapore. For the year ended
December 31, 1996, the Company's revenues increased approximately 72.5% to $71.6
million from $41.5 million for the year ended December 31, 1995. Pro forma net
income increased approximately 144% to $3.9 million from $1.6 million during the
same period. For the three months ended March 31, 1997, the Company's revenues
increased approximately 9.5% to $16.7 million from $15.2 million for the three
months ended March 31, 1996. Pro forma net income increased approximately 131%
to $1.1 million from $459,000 during the same period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
StarTek's goal is to grow profitably by focusing on providing high-quality
integrated, value-added outsourced services. StarTek has a strategic partnership
philosophy, through which the Company assesses each of its client's needs and,
together with the client, 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 and retaining clients that outsource non-
core operations. Three of the Company's top four clients have utilized its
outsourced services for more than five years and the fourth client initiated
services with the Company in April 1996.
StarTek has focused primarily on the computer software, computer hardware,
electronics, telecommunications and other technology-related industries because
of their rapid growth, complex and evolving product offerings and large customer
bases, which require frequent, often sophisticated, customer interaction.
Management believes that there are substantial opportunities to cross-sell
StarTek's wide spectrum of outsourced services to its existing base of
approximately 75 clients, which includes Broderbund Software, Inc., Canon Inc.,
Electronic Arts, Inc., Federal Express Corporation, Hewlett-Packard Company,
Microsoft Corporation, Polaroid Corporation, Sony Electronics, Inc., The 3DO
Company, and Viacom International, Inc. The Company intends to capitalize on the
increasing trend toward outsourcing by
3
<PAGE>
focusing on potential clients in additional targeted industries, including
health care, financial services, transportation services and consumer products,
which could benefit from the Company's expertise in developing and delivering
integrated, cost-effective outsourced services.
STARTEK'S INTEGRATED SERVICES
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 a 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 product questions and technical support. Calls are routed to StarTek
customer care or technical support service representatives who have been trained
to support specific products. 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 outsourced services.
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 services. To reach this objective, the
Company intends to:
PROVIDE INTEGRATED OUTSOURCED SERVICES. StarTek seeks to provide integrated
outsourced 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 integrated
value-added outsourced 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
in targeted industries. 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 that 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 MODERN PROCESS MANAGEMENT. StarTek
strives to establish a competitive advantage by frequently redefining its
operational processes to reduce costs and improve quality. StarTek's 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 has received ISO 9002 certification,
an international standard for quality assurance and consistency in operating
procedures, for all of its domestic facilities and services, and expects to
receive
4
<PAGE>
ISO 9002 certification for its United Kingdom facility in mid-1997. Certain of
the Company's existing clients require evidence of ISO 9002 certification, and
the Company anticipates that many potential clients may require ISO 9002
certification prior to selecting an outsourcing provider.
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. 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.
GROWTH STRATEGY
The Company's growth strategy is designed to capitalize on the increasing
demand for outsourced services and improve and expand StarTek's position as an
international provider of integrated, value-added outsourced services. This
strategy includes the following key elements:
INCREASE CAPACITY. Management believes that as a provider of outsourced
services it must be ready to serve its clients in periods of peak demand for its
clients' products or services. Accordingly, the Company intends to continue to
increase product handling and teleservice workstation capacity to meet
anticipated demand for the Company's outsourced services. During 1996, the
Company increased its teleservice workstations by 54.6%, to 558 from 361. In
addition, the Company reengineered and expanded its primary product handling
facility to increase its daily capacity by approximately 200%, to 180,000 units
from 60,000 units for certain types of products.
CROSS-SELL SERVICES TO EXISTING CLIENTS. Management believes there are
substantial opportunities to cross-sell its wide spectrum of outsourced services
to other divisions or operations within its existing clients' organizations.
StarTek capitalizes on its relationships and comprehensive understanding of its
clients' businesses to identify additional divisions and areas where the Company
could provide its services. For example, the Company's two longest current
client relationships, which began in 1987 and 1988 utilizing only one service
each, today utilize substantially all of the Company's outsourced services.
Management further believes that its ability to provide integrated solutions
helps the Company to create strategic partnership relationships and gives the
Company a competitive advantage to be selected as the service provider of
choice.
EXPAND CLIENT BASE. The Company intends to capitalize on its low-cost
position and extensive offering of services to penetrate further the industries
which the Company currently serves and to seek clients in other industries.
Management believes that there are several additional industries, including
health care, financial services, transportation services and consumer products,
which provide significant market opportunities to the Company. To facilitate the
Company's anticipated growth, the Company increased its sales force to 10
full-time professionals as of the date of this offering, from four at the end of
1996.
INCREASE INTERNATIONAL OPERATIONS. The Company currently conducts business
in North America, Europe and Asia. Management believes that many of the trends
leading to the growth of outsourced services in the United States are occurring
in international markets as well. Management also believes that many companies,
including several of its existing multinational clients, are seeking outsourced
services on an international basis. To capitalize on these international
opportunities, the Company intends to expand its international operations.
DEVELOP NEW SERVICES. Management believes that the trend toward outsourcing
and rapid technological advances will result in new products and types of
customer interactions which will create opportunities
5
<PAGE>
for the Company to provide additional outsourced services. StarTek intends to
capitalize upon its strategic long-term relationships to provide new outsourced
services to its clients as opportunities arise.
ACQUIRE COMPLEMENTARY COMPANIES AND EXPAND STRATEGIC ALLIANCES. StarTek
intends to evaluate the acquisition of complementary companies that could extend
its presence into new geographic markets or industries, expand its client base,
add new product or service applications and/or provide operating synergies.
Management believes that there could be many domestic and international
acquisition and strategic alliance opportunities as companies consider selling
their existing in-house operations and as smaller companies seek growth capital
and economies of scale to remain competitive.
The Company is a Delaware corporation with its executive offices at 111
Havana Street, Denver, Colorado 80010, and its telephone number is (303)
361-6000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered:
By the Company.................. 3,000,000 shares
By Selling Stockholders(a)...... 666,667 shares
Total......................... 3,666,667 shares
Common Stock Outstanding after
this Offering(b)................ 13,828,571 shares
Use of Proceeds................... The estimated net proceeds to the Company of $41.4
million from this offering will be used to repay
substantially all outstanding indebtedness of the
Company (including notes payable to the Principal
Stockholders), related prepayment premiums, and for
working capital and other general corporate purposes,
including capital expenditures to increase its capacity
and for possible future acquisitions. See "Use of
Proceeds."
Proposed New York Stock Exchange
Symbol.......................... SRT
</TABLE>
- ------------------------
(a) Assumes no exercise of the over-allotment option to purchase up to 550,000
additional shares granted by the Selling Stockholders to the Underwriters.
See "Principal and Selling Stockholders" and "Underwriting."
(b) Excludes 985,000 shares and 90,000 shares reserved for future issuance under
the Company's Option Plan and Director Option Plan, respectively. See
"Management--Compensation of Directors" and "Management--Stock Option Plan."
6
<PAGE>
SUMMARY FINANCIAL DATA
The following summary historical and pro forma consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER 31,
YEAR ENDED ENDED ---------------------------------------------
JUNE 30, DECEMBER 31, PRO FORMA
1992 1992 1993 1994 1995 1996 1996(A)
---------- ------------ ------- ------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................ $16,791 $11,880 $23,044 $26,341 $41,509 $71,584 $71,584
Gross profit............ 3,518 2,101 5,005 4,986 8,279 14,346 14,346
Management fee expense.. -- 400 1,702 612 2,600 6,172 --
Operating profit
(loss)................ 1,705 432 (176) (115) 338 410 6,582
Income (loss) before
income taxes.......... 1,618 424 (369) (331) (58) 38 6,210
Net income (loss)(b).... 1,031 482 (369) (331) (58) (74) 3,894
Net income per
share(c).............. $0.34
Shares outstanding(c)... 11,293
SELECTED OPERATING DATA:
Capital expenditures.... $136 $153 $1,239 $670 $2,105 $1,333 $1,333
Depreciation and
amortization.......... 149 79 456 588 873 1,438 1,438
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
PRO FORMA
1996 1997 1997 (A)
------- ------- ---------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................ $15,219 $16,667 $16,667
Gross profit............ 2,564 3,935 3,935
Management fee expense.. 199 793 --
Operating profit
(loss)................ 659 978 1,771
Income (loss) before
income taxes.......... 533 894 1,687
Net income (loss)(b).... 533 894 1,058
Net income per
share(c).............. $ 0.09
Shares outstanding(c)... 11,367
SELECTED OPERATING DATA:
Capital expenditures.... $412 $267 $267
Depreciation and
amortization.......... 290 495 495
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-----------------------------------------
ACTUAL PRO FORMA(D) AS ADJUSTED(E)
--------- ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................................. $ 4,874 $ (3,207) $ 35,705
Total assets........................................................... 23,459 23,459 49,863
Total debt............................................................. 7,360 15,441 545
Total stockholders' equity............................................. 8,159 78 41,378
</TABLE>
- ------------------------------
(a) The Company was a C corporation for federal and state income tax purposes
through June 30, 1992. From and after July 1, 1992, the Company has been an
S corporation and, accordingly, has not been subject to federal or state
income taxes. Pro forma net income (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%. See "Offering Related
Transactions."
(b) After the elimination of management fee expense of $612 in 1994, $2,600 in
1995 and $199 in the three months ended March 31, 1996, and including a
provision for federal, state and foreign income taxes, at an effective rate
of 37.3% for each period, of $105 for 1994, $948 for 1995 and $273 for the
three months ended March 31, 1996, pro forma net income was $176, $1,594 and
$459 in 1994, 1995 and the three months ended March 31, 1996, respectively.
(c) Calculated in the manner described in Note 2 to the Consolidated Financial
Statements.
(d) The pro forma consolidated balance sheet at March 31, 1997 reflects notes
payable to the Principal Stockholders and amounts relating to accumulated
retained earnings and additional paid-in capital without reflecting any
proceeds from the sale by the Company of 3,000,000 shares of Common Stock.
(e) Gives effect to the sale by the Company of 3,000,000 shares of Common Stock
in this offering and the application of the estimated net proceeds
therefrom, including repayment of indebtedness of the Company. See "Use of
Proceeds" and "Capitalization."
7
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF COMMON STOCK.
RELIANCE ON PRINCIPAL CLIENT RELATIONSHIPS
A substantial portion of the Company's revenue is generated from relatively
few clients and the loss of a significant client or clients could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company's two largest clients in 1996 and the three
months ended March 31, 1997 were Hewlett-Packard Company ("Hewlett Packard") and
Microsoft Corporation ("Microsoft"). The Company provides various outsourced
services to multiple divisions of Hewlett Packard, which the Company considers
to be separate clients based upon the fact that each division acts through a
relatively autonomous decision maker. In the aggregate, however, Hewlett
Packard's various divisions accounted for approximately 38.4% of the Company's
total revenues during 1996 and 36.1% during the three months ended March 31,
1997. The Company began its outsourcing relationship with Hewlett Packard in
1987. Microsoft, which began its outsourcing relationship with StarTek in April
1996, accounted for approximately 33.4% of the Company's total revenues during
1996 and 44.2% during the three months ended March 31, 1997. There can be no
assurance that the Company will be able to retain its significant clients or
that, if it were to lose one or more of its significant clients, it would be
able to replace such clients with clients that generate a comparable amount of
revenues. See "Business--Clients" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 season. 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 clients' businesses. If the Company's revenues are below management's
expectations in any given quarter, StarTek's operating results could be
materially adversely affected for that quarter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Quarterly Results."
DIFFICULTIES OF MANAGING RAPID GROWTH
The Company 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 and expand its marketing operations; (ii)
recruit, motivate and retain qualified management and other personnel; (iii)
rapidly expand the capacity of the Company's existing facilities or identify,
acquire or lease suitable new facilities on acceptable terms, and complete
build-outs of such facilities in a timely and economic fashion; (iv) maintain
the high quality of the services that StarTek provides to its clients; and (v)
maintain relationships with high-quality and reliable suppliers. The Company's
continued rapid growth can be expected to place a significant strain on the
Company's management, operations, employees and resources. There can be no
assurance that the Company will be able to maintain or accelerate its current
growth, effectively manage its expanding operations or achieve planned growth on
a timely or profitable basis. If the Company is unable to manage growth
effectively, its business, results of operations and financial condition could
be materially adversely affected. See "Business--Growth Strategy."
8
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's success to date has depended in large part on the skills and
efforts of A. Emmet Stephenson, Jr., the Company's co-founder and Chairman of
the Board, and of Michael W. Morgan, the Company's co-founder, President and
Chief Executive Officer. Although A. Emmet Stephenson, Jr. and Michael W. Morgan
will beneficially own approximately 24.3% and 7.2% of the Common Stock of the
Company (23.1% and 6.4% if the Underwriters' over-allotment option is fully
exercised) after this offering, neither has entered into an employment agreement
with the Company and there can be no assurance that the Company can retain the
services of these individuals. The loss of either of Messrs. Stephenson or
Morgan, or the Company's inability to hire or retain other qualified officers or
key employees, could have a material adverse effect on the Company's business,
results of operations, growth prospects and financial condition. See
"Management."
DEPENDENCE ON KEY INDUSTRIES AND TREND TOWARD OUTSOURCING
The Company's clients are primarily Fortune 500 companies involved in
technology-related industries. The Company's business and growth is largely
dependent on the continued demand for the Company's services from clients in
these industries and industries targeted by the Company, and current trends in
such industries to outsource their product order teleservices, supplier
management, product assembly and packaging, product distribution, product order
fulfillment, inbound customer care and technical support teleservices and other
outsourced services offered 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 any of these industries to outsource services
provided by the Company could have a material adverse effect on the Company's
business, results of operations, growth prospects and financial condition. See
"Business--Clients."
RISKS ASSOCIATED WITH THE COMPANY'S CONTRACTS
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 the client; (ii) do not designate the Company as the
client's exclusive outsourced service provider; (iii) do not penalize the client
for early termination; and (iv) hold the Company responsible for products which
fail to meet the clients' specifications. Further, the Company frequently works
on a purchase order basis with no minimum purchase guarantee. Several of the
Company's contracts require the Company to maintain its ISO 9002 certification.
Management believes, however, that maintaining satisfactory relationships with
its clients has a more significant impact on the Company's revenues than the
specific terms of its client contracts. Although several of the Company's
clients have elected not to renew or extend short-term contracts, or have
terminated contracts on relatively short notice to the Company, to date, none of
the foregoing types of contractual provisions has had a material adverse effect
on the Company's business, results of operations or financial condition. See
"Business--Services," "Business--Clients," "Business--Sales and Marketing," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Substantially all of the Company's significant arrangements with its clients
for product order teleservices, supplier management, product assembly and
packaging, product distribution, product order fulfillment and customer care and
technical support teleservices generate revenues based, in large part, on the
number and duration of customer inquiries (subject to certain minimum monthly
payments) and the volume, complexity and type of components involved in the
client's products. Changes in the number or type of components of product units
assembled by the Company may have an effect on the Company's revenues
independent of the number of product units assembled. Consequently, the amount
of revenues generated from any particular client is generally dependent upon
customers' purchase and use of the client's 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. See "Business--Clients" and
"Business--Technology."
9
<PAGE>
RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY
The Company's business is highly dependent on its computer equipment,
telecommunications equipment and software systems. The Company's failure to
maintain sophisticated technological capabilities or to respond effectively to
technological changes could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's future
success also will be highly dependent upon its ability to enhance existing
services and introduce new services to respond to changing technological
developments. Significant advances or changes in technology, which significantly
reduce or eliminate the need for services provided by the Company, could have a
material adverse effect on the Company's business. For example, significant
development of the Internet as a delivery system for computer software and game
play could adversely impact the demand for the Company's product order
teleservices, product order fulfillment, product assembly and packaging and
product distribution services. There can be no assurance that the Company can
successfully develop and bring to market any new services in a timely manner,
that such services will be commercially successful or that clients' and
competitors' technologies or services will not render the Company's services
noncompetitive or obsolete. See "Business--Technology."
RISKS OF BUSINESS INTERRUPTION
The Company's operations are dependent upon its ability to protect its
facilities, clients' products, confidential customer information, computer
equipment, telecommunications equipment and software systems against damage from
fire, power loss, telecommunications 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 contingency plans for such events or emergencies and backs up
its computers daily, there can be no assurance that such plans will be
sufficient. In the event the Company experiences a temporary or permanent
interruption or other emergency at one or more of its facilities through
casualty, operating malfunction, employee malfeasance, disruption of supplier
arrangements or otherwise, the Company's business could be materially adversely
affected and the Company may be required to pay contractual damages to its
clients or allow its clients to terminate or renegotiate their contracts with
the Company. While the Company maintains property and business interruption
insurance, such insurance may not adequately compensate the Company for all
losses that it may incur. See "Business--Services."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
The Company currently conducts business in Europe and Asia, in addition to
its North American operations. Such international operations accounted for
approximately 20.0% of the Company's revenues in 1996 and 15.6% for the three
months ended March 31, 1997. A component of the Company's growth strategy is to
expand 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 acquire companies
or integrate acquired companies to expand international operations. In addition,
there are certain risks inherent in conducting international business, including
exposure to currency fluctuations, longer payment cycles, greater difficulties
in accounts receivable collection, difficulties in complying with a variety of
foreign laws, unexpected changes in government programs and policies, regulatory
requirements and labor laws, difficulties in staffing and managing foreign
operations, political instability and potentially 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. See "Business--Growth Strategy" and
"Business--Services."
10
<PAGE>
DEPENDENCE ON LABOR FORCE
The Company's success is largely dependent on its ability to recruit, hire,
train and retain qualified employees. The Company's business is labor intensive
and has experienced high personnel turnover. Some of the Company's operations,
particularly its technical support teleservices, require specially trained
employees. A significant increase in the Company's employee turnover rate could
increase the Company's recruiting and training costs and decrease operating
efficiency and productivity. Also, the addition of significant new clients or
the implementation of new large-scale programs may require the Company to
recruit, hire and train qualified personnel at an accelerated rate. There can be
no assurance that the Company will be able to continue to recruit, hire, train
and retain sufficient qualified personnel to staff adequately for existing
business or future growth. In addition, because a significant portion of the
Company's operating costs relate to labor costs, an increase in wages (including
an increase in the mandatory minimum wage by the federal government), costs of
employee benefits, or employment taxes could have a material adverse effect on
the Company's business, results of operations and financial condition. Further,
certain of the Company's facilities are located in geographic areas with
relatively low unemployment rates, thus potentially making it more difficult and
costly to hire qualified personnel. See "Business--Employees and Training" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUBSTANTIAL PORTION OF NET PROCEEDS ALLOCATED FOR GENERAL WORKING CAPITAL
A substantial portion ($26.4 million) of the net proceeds to the Company
from this offering has been allocated to working capital and other general
corporate purposes. This amount may increase substantially as other anticipated
uses of net proceeds are funded through cash flow or otherwise reduced. The net
proceeds may be utilized at the discretion of the Board of Directors. As a
result, investors may not know in advance how such net proceeds will be utilized
by the Company. See "Use of Proceeds."
CONTROL BY PRINCIPAL STOCKHOLDERS
Prior to this offering, all of the outstanding capital stock of the Company
was owned or controlled by executive officers of the Company and their
affiliates (collectively, the "Principal Stockholders"). Following closing of
this offering, A. Emmet Stephenson, Jr., Chairman of the Board of the Company,
and his family, will beneficially own approximately 66.3% of the Common Stock of
the Company (approximately 63.1% if the Underwriters' over-allotment option is
fully exercised). As a result, Mr. Stephenson and his family will continue to 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.
Such voting concentration may have the effect of discouraging, delaying or
preventing a change in control of the Company. See "Principal and Selling
Stockholders."
HIGHLY COMPETITIVE MARKET
The markets in which the Company competes 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 clients or 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 Company's markets. Because the in-house operations of the
Company's existing or potential clients are significant competitors of the
Company, the Company's performance and growth could be negatively impacted if
its existing 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 a major client to consolidate its
outsourced services with a company other than StarTek may have an adverse impact
on the Company, particularly due to the fact that the Company is not the largest
supplier of any of the services
11
<PAGE>
currently provided by the Company to any of its largest clients. In addition,
competitive pressures from current or future competitors could result in
significant price erosion, which could have a material adverse effect upon the
Company's business, results of operations and financial condition. See
"Business--Industry and Competition."
DIFFICULTIES OF COMPLETING AND INTEGRATING ACQUISITIONS AND JOINT VENTURES
One component of the Company's growth strategy is to pursue strategic
acquisitions of companies that have services, products, technologies, industry
specializations or geographic coverage that extend or complement the Company's
existing business. The Company has never made an acquisition and there can be no
assurance that the Company will be able to identify or acquire any such
companies on favorable terms. If an acquisition is completed, there can be no
assurance that such acquisition will enhance the Company's business, results of
operations or financial condition. As part of its growth strategy, the Company
may also pursue opportunities to undertake strategic alliances in the form of
joint ventures. Joint ventures involve many of the same risks as acquisitions,
as well as additional risks associated with possible lack of control of the
joint ventures. See "Use of Proceeds" and "Business--Growth Strategy."
NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering, or that the market price
of the Common Stock will not decline below the initial public offering price.
The initial public offering price of the Common Stock offered hereby will be
determined by negotiations among the Company, the Selling Stockholders and the
Underwriters based upon several factors and may not be indicative of the market
price at which the Common Stock will trade after this offering. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price.
The market price of the 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 or services by the
Company or its competitors, changes in financial estimates by securities
analysts or other events or factors. In addition, the stock market has
experienced significant 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 the 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 a diversion of management's attention and resources,
which could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results."
SUBSTANTIAL AND IMMEDIATE DILUTION
Investors in this offering will incur immediate dilution of $12.01 per share
in the pro forma net tangible book value per share of Common Stock (based upon
an initial public offering price of $15.00 per share). See "Dilution."
SUBSTANTIAL NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices of the Common Stock. The Company is unable to
12
<PAGE>
make any prediction as to the effect, if any, that future sales of Common Stock
or the availability of Common Stock for sale may have on the market price of the
Common Stock prevailing from time to time. In addition, any such sale or such
perception could make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company deems appropriate. Upon closing of this offering, the Company will
have 13,828,571 shares of Common Stock outstanding, excluding shares of Common
Stock issuable upon exercise of options outstanding under the StarTek, Inc.
Stock Option Plan (the "Option Plan") and the StarTek, Inc. Director Stock
Option Plan (the "Director Option Plan"). The Company and the Selling
Stockholders have agreed not to offer, sell, contract to sell or otherwise
dispose of, any shares of Common Stock for a period of 180 days after the date
of this offering without the prior consent of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"). Following expiration of that 180-day period,
substantially all of the shares of Common Stock held by the Selling Stockholders
will be eligible for public sale, subject to compliance with certain volume
limitations prescribed by Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). See "Shares Eligible for Future Sale" and
"Underwriting."
ANTI-TAKEOVER PROVISIONS
Upon closing of this offering, the Board of Directors will have the
authority to issue up to 15,000,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any vote or action by the stockholders. The
rights of the holders of the Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The issuance of the preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plan to issue any shares of preferred stock.
Furthermore, certain provisions of the Company's Restated Certificate of
Incorporation, Restated Bylaws and Delaware law could delay or complicate a
merger, tender offer or proxy contest involving the Company. See "Description of
Capital Stock."
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that can be identified
by the use of forward-looking terminology such as "may," "will," "should,"
"expect," "anticipate," "estimate," or "continue" for the negation thereof or
other variations thereon or comparable terminology. The matters set forth under
"Risk Factors" constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties that could cause actual results to differ materially from those in
such forward-looking statements.
13
<PAGE>
OFFERING RELATED TRANSACTIONS
The following transactions will be completed prior to the closing of this
offering (the "Offering Related Transactions").
TERMINATION OF S CORPORATION STATUS
Since July 1, 1992, the Company has been classified as an S corporation
under Subchapter S of the Internal Revenue Code of 1986, as amended (the
"Code"), and comparable state tax laws. As a result, the earnings of the Company
have been taxed for federal and state income tax purposes directly to its
stockholders, rather than to the Company. The S corporation status of the
Company will terminate upon closing of this offering, and, accordingly, from and
after such date, the Company will be directly subject to federal and state
income taxes. Immediately prior to the closing of this offering, the Company
will take certain actions relating to the termination of the S corporation
status of the Company and its subsidiaries, as described below. See "Termination
of Management Fees" and "Notes Payable to Principal Stockholders" below.
TERMINATION OF MANAGEMENT FEES
Historically, the Company has paid certain management fees and bonuses to
the Principal Stockholders, and/or their affiliates, for services rendered to
the Company, in amounts generally equal to the annual earnings of the Company,
in addition to general compensation for services rendered. Upon receipt of such
management fees and bonuses, the Principal Stockholders historically contributed
approximately 53% of such amounts to the Company to provide necessary working
capital, with substantially all of the balance used to pay federal and state
income taxes. Effective with the closing of this offering, the management fee
and bonus arrangements will be discontinued. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Management,"
"Certain Relationships and Related Party Transactions--Management Fees" and Note
1 to the Consolidated Financial Statements.
From and after January 1, 1997, an affiliate of A. Emmet Stephenson, Jr.,
will, however, be paid an advisory fee as described in "Certain Relationships
and Related Party Transactions--Management Fees," and Michael W. Morgan will
receive a salary and may be paid bonuses at the discretion of the Compensation
Committee (as defined below). See "Management--Executive Compensation."
NOTES PAYABLE TO PRINCIPAL STOCKHOLDERS
Immediately prior to the closing of this offering, the Company will declare
a dividend in an amount equal to the estimated additional paid-in capital and
retained earnings of the Company as of the closing date, payable to the
Principal Stockholders pursuant to certain promissory notes, which will equal
approximately $8.1 million, plus an adjustment for any additional paid-in
capital and retained earnings after March 31, 1997 through the closing date. The
promissory notes payable to the Principal Stockholders will be paid from net
proceeds to the Company from this offering. From this amount, the Principal
Stockholders will be required to pay applicable federal and state income taxes
on S corporation earnings of the Company through closing of this offering. See
"Use of Proceeds" and "Certain Relationships and Related Party
Transactions--Notes Payable to Principal Stockholders."
FORMATION OF STARTEK AND HOLDING COMPANY STRUCTURE
The Company was incorporated in Delaware in December 1996. Effective January
1, 1997, stockholders of StarPak, Inc. exchanged all of their outstanding shares
of capital stock for shares of common stock of the Company, and StarPak, Inc.
became a wholly-owned subsidiary of the Company. Effective January 24, 1997,
shareholders of StarPak International, Ltd. contributed all of their outstanding
shares of capital stock to the Company, and StarPak International, Ltd. became a
wholly-owned subsidiary of the Company. Accordingly, the Company became a
holding company for the businesses conducted by StarPak, Inc. and StarPak
International, Ltd.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock by the Company offered hereby, after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company, are estimated to be $41.4 million, assuming an initial public offering
price of $15.00 per share (the midpoint of the offering range set forth on the
cover page of this Prospectus). The Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling Stockholders. See "Principal
and Selling Stockholders."
The Company intends to use approximately $14.9 million of the net proceeds
of this offering to repay substantially all of its outstanding indebtedness,
which includes approximately $5.0 million of bank and mortgage indebtedness,
$1.8 million of capitalized lease obligations and $8.1 million of notes payable
to Principal Stockholders (subject to adjustment as described in "Offering
Related Transactions"). Additionally, the Company will pay approximately $50,000
of prepayment premiums in connection with the repayment of such capitalized
lease obligations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
balance of the net proceeds (approximately $26.4 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 (to increase its number of teleservice workstations and product
handling capacity) and to potentially make strategic acquisitions of
complementary businesses. The Company has not entered into any agreements,
commitments or understandings and is not currently engaged in any negotiations
with respect to any such acquisitions. Pending such uses, the Company plans to
invest the net proceeds to the Company from this offering in investment grade,
interest-bearing securities. See "Risk Factors--Substantial Portion of Net
Proceeds Allocated for General Working Capital," and "Offering Related
Transactions--Notes Payable to Principal Stockholders."
DIVIDEND POLICY
The Company 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
Company expects that any future credit facility will limit or restrict the
payment of dividends. 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.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 on (i) a historical basis, (ii) a pro forma basis to give effect to the
Offering Related Transactions, and (iii) a pro forma as adjusted basis to give
effect to the sale by the Company of 3,000,000 shares of Common Stock in this
offering and the application of the estimated net proceeds therefrom. The
capitalization of the Company should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Use
of Proceeds," "Offering Related Transactions," and the Consolidated Financial
Statements and notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS.................................................... $ 5,684 $ 5,684 $ 32,088
--------- ----------- -----------
--------- ----------- -----------
DEBT:
Line of credit............................................................. $ 3,500 $ 3,500 --
Capital lease obligations.................................................. 2,191 2,191 $ 345
Notes payable to Principal Stockholders.................................... -- 8,081 --
Long-term debt............................................................. 1,669 1,669 200
--------- ----------- -----------
TOTAL DEBT............................................................... 7,360 15,441 545
STOCKHOLDERS' EQUITY:
Preferred stock, undesignated, par value $.01 per share; 15,000,000 shares
authorized, no shares issued and outstanding............................. -- -- --
Common stock, par value $.01 per share; 95,000,000 shares authorized,
10,828,571 shares issued and outstanding, 13,828,571 shares issued and
outstanding, as adjusted(a).............................................. 1 1 31
Additional paid-in capital................................................. 6,148 -- 41,320
Cumulative translation adjustment.......................................... 77 77 77
Retained earnings.......................................................... 1,933 -- (50)
--------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY............................................... 8,159 78 41,378
--------- ----------- -----------
TOTAL CAPITALIZATION..................................................... $ 15,519 $ 15,519 $ 41,923
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(a) Excludes 985,000 shares and 90,000 shares of Common Stock reserved for
issuance under the Option Plan and the Director Option Plan, respectively,
approximately 515,000 shares of which are expected to be subject to options
to be granted upon closing of this offering. See "Management--Compensation
of Directors" and "Management--Stock Option Plan."
16
<PAGE>
DILUTION
As of March 31, 1997, the Company had a pro forma net tangible book value of
$78,000, or $0.01 per share of Common Stock, based upon 10,828,571 shares of
Common Stock outstanding. Pro forma net tangible book value per share is
determined by dividing the pro forma net tangible book value of the Company
(total tangible assets less total liabilities), giving effect to the Offering
Related Transactions on such date, by the number of shares of Common Stock
outstanding as of such date after giving effect to a 322.1064 for one stock
split of the Common Stock. After giving effect to the Offering Related
Transactions, a 322.1064 for one stock split of the Common Stock and the sale by
the Company of the 3,000,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $15.00 per share and
application of the net proceeds therefrom, the Company's pro forma net tangible
book value as of March 31, 1997 would have been $41.4 million, or $2.99 per
share of Common Stock. This represents an immediate increase in pro forma net
tangible book value of $2.98 per share to the Principal Stockholders and an
immediate dilution in net tangible book value of $12.01 per share to new
investors purchasing shares of Common Stock in this offering. The following
table illustrates the per share dilution to the new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 15.00
Pro forma net tangible book value per share as of March 31,
1997........................................................ $ 0.01
Increase in pro forma net tangible book value per share
attributable to new investors............................... 2.98
---------
Pro forma net tangible book value per share after giving
effect to this offering..................................... 2.99
---------
Pro forma net tangible book value dilution per share to new
investors................................................... $ 12.01
---------
---------
</TABLE>
The following table sets forth as of March 31, 1997 the relative investments
of the Principal Stockholders and of the new investors, giving effect to (i) the
sale by the Company of 3,000,000 shares and the sale by the Selling Stockholders
of 666,667 shares of Common Stock being offered hereby, at an assumed initial
public offering price of $15.00 per share, (ii) the 322.1064 for one stock split
and (iii) the payment of the Notes Payable to Principal Stockholders.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- --------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Principal Stockholders........................... 10,161,904 73.48% $ 336 0.00% $ 0.00
New investors.................................... 3,666,667 26.52 55,000,005 100.00 15.00
------------ ------ ------------- ------ -----------
Total.......................................... 13,828,571 100.00% $ 55,000,341 100.00%
------------ ------ ------------- ------
------------ ------ ------------- ------
</TABLE>
The information in the foregoing table excludes 985,000 shares and 90,000 shares
reserved for issuance under the Option Plan and Director Option Plan,
respectively. See "Management--Compensation of Directors" and "Management--Stock
Option Plan."
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1994,
1995 and 1996, and as of December 31, 1995 and 1996 have been derived from the
Consolidated Financial Statements of the Company, which have been audited by
Ernst & Young LLP, included elsewhere in this Prospectus. The selected financial
data for the year ended December 31, 1993 and as of December 31, 1994 have been
derived from consolidated financial statements of the Company, which have been
audited by Ernst & Young LLP. The selected consolidated financial data (i) for
the year ended June 30, 1992, the six months ended December 31, 1992, and the
three months ended March 31, 1996 and 1997, and (ii) as of June 30, 1992,
December 31, 1992 and 1993, and March 31, 1997, is unaudited. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR SIX MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31,
ENDED ENDED --------------------------------------------- --------------------------------
JUNE 30, DECEMBER 31, PRO FORMA PRO FORMA
1992 1992 1993 1994 1995 1996 1996(A) 1996 1997 1997(A)
-------- ------------ ------- ------- ------- ------- --------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Revenues............... $16,791 $11,880 $23,044 $26,341 $41,509 $71,584 $71,584 $15,219 $16,667 $16,667
Cost of services....... 13,273 9,779 18,039 21,355 33,230 57,238 57,238 12,655 12,732 12,732
-------- ------------ ------- ------- ------- ------- --------- ------- ------- -------
Gross profit........... 3,518 2,101 5,005 4,986 8,279 14,346 14,346 2,564 3,935 3,935
Selling, general and
administrative
expenses............. 1,813 1,269 3,479 4,489 5,341 7,764 7,764 1,706 2,164 2,164
Management fee
expense.............. -- 400 1,702 612 2,600 6,172 -- 199 793 --
Operating profit
(loss)............... 1,705 432 (176) (115) 338 410 6,582 659 978 1,771
Net interest expense
and other............ 87 8 193 216 396 372 372 126 84 84
-------- ------------ ------- ------- ------- ------- --------- ------- ------- -------
Income (loss) before
income taxes......... 1,618 424 (369) (331) (58) 38 6,210 533 894 1,687
Income tax expense
(benefit)............ 587 (58) -- -- -- 112 2,316 -- -- 629
-------- ------------ ------- ------- ------- ------- --------- ------- ------- -------
Net income (loss)
(b).................. $ 1,031 $ 482 $ (369) $ (331) $ (58) $ (74) $ 3,894 $ 533 $ 894 $ 1,058
-------- ------------ ------- ------- ------- ------- --------- ------- ------- -------
-------- ------------ ------- ------- ------- ------- --------- ------- ------- -------
Net income per share
(c).................. $0.34 $0.09
Shares outstanding
(c).................. 11,293 11,367
SELECTED OPERATING
DATA:
Capital expenditures... $136 $153 $1,239 $670 $2,105 $1,333 $1,333 $412 $267 $267
Depreciation and
amortization......... 149 79 456 588 873 1,438 1,438 290 495 495
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Working capital.............................. $ 1,058 $ 1,560 $ 943 $ 434 $ 798 $ 2,896
Total assets................................. 4,032 6,614 7,712 12,352 21,580 22,979
Total debt................................... 587 732 2,473 3,288 7,294 6,475
Total stockholders' equity................... 1,637 2,031 2,624 3,006 3,798 7,103
<CAPTION>
PRO FORMA
AS ADJUSTED(D)
---------------
<S> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA (END OF PERIOD):
Working capital.............................. $ 2,033 $ 4,874 $ 35,705
Total assets................................. 20,729 23,459 49,863
Total debt................................... 7,059 7,360 545
Total stockholders' equity................... 4,341 8,159 41,378
</TABLE>
- ----------------------------------
(a) The Company was a C corporation for federal and state income tax purposes
through June 30, 1992. From and after July 1, 1992, the Company has been an
S corporation and, accordingly, has not been subject to federal or state
income taxes. Pro forma net income (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%. See "Offering Related
Transactions."
(b) After the elimination of management fee expense of $612 in 1994, $2,600 in
1995 and $199 in the three months ended March 31, 1996, and including a
provision for federal, state and foreign income taxes, at an effective rate
of 37.3% for each period, of $105 for 1994, $948 for 1995 and $273 for the
three months ended March 31, 1996, pro forma net income was $176, $1,594 and
$459 in 1994, 1995 and the three months ended March 31, 1996, respectively.
(c) Calculated in the manner as described in Note 2 to the Consolidated
Financial Statements.
(d) Gives effect to (i) notes payable to the Principal Stockholders relating to
accumulated retained earnings and additional paid-in capital of
approximately $8,081 and (ii) the sale by the Company of 3,000,000 shares of
Common Stock in this offering and the application of the estimated net
proceeds therefrom, including repayment of indebtedness of the Company. See
"Use of Proceeds" and "Capitalization."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company has grown profitably by developing integrated outsourced
services that enable its clients to provide their customers with high-quality
services at lower costs than the clients' own in-house operations. StarTek has
continuously expanded its business and facilities to offer additional services
in response to the growing needs of its clients and to capitalize on market
opportunities both domestically and internationally. From 1993 to 1996, the
Company's revenues grew at a compound annual growth rate of 45.9%. For the year
ended December 31, 1996, the Company's revenues increased approximately 72.5% to
$71.6 million from $41.5 million for the year ended December 31, 1995. For the
three months ended March 31, 1997, the Company's revenues increased
approximately 9.5% to $16.7 million from $15.2 million for the three months
ended March 31, 1996. For the year ended December 31, 1996, pro forma net income
increased approximately 144% to $3.9 million from $1.6 million for the year
ended December 31, 1995. For the three months ended March 31, 1997, pro forma
net income increased approximately 131% to $1.1 million from $459,000 for the
three months ended March 31, 1996. Management attributes this growth to the
successful implementation of the Company's strategy of developing long-term
strategic relationships with large clients in targeted industries.
StarTek generates its revenues by providing integrated outsourced services
throughout a product's life cycle, including product order teleservices,
supplier management, product assembly and packaging, product distribution,
product order fulfillment, and inbound customer care and technical support
teleservices. The Company generally recognizes revenues as services are
performed under each contract. 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 (subject to certain
minimum monthly payments) and the volume, complexity and type of components
involved in the handling of the client's products. Changes in the number 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 respond quickly to the needs of new clients or the increased needs
of existing clients. The Company's 138,000-square-foot facility in Denver,
Colorado, which was initially occupied at the end of 1995, is approximately
one-third utilized and can be expanded to accommodate additional outsourced
services. Management also believes that it can expand significantly the capacity
of its Greeley, Colorado and Hartlepool, England facilities.
The Company's cost of services primarily includes labor, telecommunications,
materials and freight charges that are variable in nature, as well as certain
facilities charges. Competitive vendor rates for materials, printing, compact
disc duplication and packaging costs, together with competitive labor rates
which comprise the majority of the Company's costs, have been and are expected
to continue to be a key component of the Company's expenses. All other expenses,
including expenses attributable to technology support, sales and marketing,
human resource management and other administrative functions that are not
allocable to specific client services, are recorded as selling, general and
administrative ("SG&A") expenses. SG&A expenses tend to be either semi-variable
or fixed in nature.
Since July 1992, the Company has operated as an S corporation and,
accordingly, has not been subject to federal or state income taxes. As an S
corporation, in addition to general compensation for services rendered, the
Company has historically paid certain management fees, bonuses and other fees to
the Principal Stockholders and/or their affiliates in amounts on an annual basis
which have generally been approximately equal to the annual earnings of the
Company, and all of such amounts are reflected as
19
<PAGE>
management fee expense on its 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 sheet. Effective with the closing of this offering, these
management fee and bonus arrangements will be discontinued. See Note 1 to the
Consolidated Financial Statements.
From and after January 1, 1997 (including the period following this
offering), compensation will continue to be payable to persons who are now
stockholders of the Company (or an affiliate of such stockholder) as general
compensation for services rendered in the form of salaries, bonuses or advisory
fees and all such payments will be reflected in SG&A expenses on the
consolidated statement of operations. At current rates, such payments will
aggregate $516,000 annually. See "Management-- Executive Compensation,"
"Offering Related Transactions--Termination of Management Fees" and Note 1 to
the Consolidated Financial Statements.
The S corporation status of the Company will terminate upon closing of this
offering and, thereafter, the Company will be subject to federal and state
income taxes. Pro forma net income (i) reflects elimination of management fee
expense and (ii) includes a provision for federal, state and foreign income
taxes at an effective rate of 37.3%.
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 shown as raw
materials inventory in the Company's balance sheet. At the close of an
accounting period, packaged and assembled products (together with other
associated costs) are reflected as finished goods inventory, pending shipment.
The Company generally has the right to be reimbursed by the client for unused
inventory. Client-owned inventories are not reflected on the Company's
consolidated balance sheet.
The Company's business is highly seasonal. Certain of the Company's services
related to product assembly and packaging are heavily utilized in the fourth
quarter in preparation for the Christmas holiday season. Historically, the
Company's revenues have been substantially higher in the fourth quarter than in
the first, second and third quarters.
QUARTERLY RESULTS
The following table sets forth certain unaudited statement of operations
data for the quarters in the years ended December 31, 1995 and 1996 and the
quarter ended March 31, 1997. The unaudited 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.
<TABLE>
<CAPTION>
1995 QUARTERS ENDED 1996 QUARTERS ENDED
-------------------------------------------------------- --------------------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31 MARCH 31 JUNE 30 SEPT 30 DEC 31
------------- ------------- ------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues........ $ 7,964 $ 6,146 $ 9,683 $ 17,716 $ 15,219 $ 14,108 $ 15,479 $ 26,778
Cost of
services...... 6,380 4,758 7,536 14,556 12,655 11,121 12,198 21,264
SG&A expenses... 1,226 1,194 1,301 1,620 1,706 1,857 1,756 2,445
Management fee
expense....... 192 83 682 1,643 199 700 498 4,775
------ ------ ------ ----------- ----------- ----------- ----------- -----------
Operating profit
(loss)........ 166 111 164 (103) 659 430 1,027 (1,706)
<CAPTION>
QUARTER ENDED
MARCH 31, 1997
---------------
<S> <C>
Revenues........ $ 16,667
Cost of
services...... 12,732
SG&A expenses... 2,164
Management fee
expense....... 793
-------
Operating profit
(loss)........ 978
</TABLE>
20
<PAGE>
The following table sets forth certain unaudited statement of operations
data, expressed as a percentage of revenues.
<TABLE>
<CAPTION>
1995 QUARTERS ENDED 1996 QUARTERS ENDED
---------------------------------------------------------- -------------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31 MARCH 31 JUNE 30 SEPT 30
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of
services...... 80.1 77.4 77.8 82.2 83.2 78.8 78.8
SG&A expenses... 15.4 19.4 13.5 9.1 11.2 13.2 11.3
Management fee
expense....... 2.4 1.4 7.0 9.3 1.3 5.0 3.2
----- ----- ----- ----- ----- ----- -----
Operating profit
(loss)........ 2.1 1.8 1.7 (0.6) 4.3 3.0 6.7
<CAPTION>
QUARTER ENDED
DEC 31 MARCH 31, 1997
------------- -----------------
<S> <C> <C>
Revenues........ 100.0% 100.0%
Cost of
services...... 79.4 76.4
SG&A expenses... 9.1 13.0
Management fee
expense....... 17.8 4.7
----- -----
Operating profit
(loss)........ (6.3) 5.9
</TABLE>
The following table sets forth certain unaudited pro forma statement of
operations data for the quarters in the year ended December 31, 1996 and the
quarter ended March 31, 1997.
<TABLE>
<CAPTION>
1996 QUARTERS ENDED
-------------------------------------------------- QUARTER ENDED
MARCH 31 JUNE 30 SEPT 30 DEC 31 MARCH 31, 1997
----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues............................................. $ 15,219 $ 14,108 $ 15,479 $ 26,778 $ 16,667
Cost of services..................................... 12,655 11,121 12,198 21,264 12,732
SG&A expenses........................................ 1,706 1,857 1,756 2,445 2,164
Management fee expense............................... -- -- -- -- --
----------- ----------- ----------- ----------- -------
Operating profit..................................... 858 1,130 1,525 3,069 1,771
</TABLE>
The following table sets forth certain unaudited pro forma statement of
operations data, expressed as a percentage of revenues.
<TABLE>
<CAPTION>
1996 QUARTERS ENDED
-------------------------------------------------- QUARTER ENDED
MARCH 31 JUNE 30 SEPT 30 DEC 31 MARCH 31, 1997
----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services...................................... 83.2 78.8 78.8 79.4 76.4
SG&A expenses......................................... 11.2 13.2 11.3 9.1 13.0
Management fee expense................................ -- -- -- -- --
----------- ----------- ----------- ----------- -------
Operating profit...................................... 5.6 8.0 9.9 11.5 10.6
</TABLE>
The Company has experienced, and expects to experience in the future,
quarterly variations in revenues and earnings as a result of a variety of
factors, many of which are outside the Company's control, including (i) the
seasonal pattern of certain of the businesses served by the Company; (ii) the
timing of new projects; (iii) the expiration or termination of existing
projects; and (iv) the timing of increased expenses incurred to obtain and
support new business. See "Risk Factors--Variability of Quarterly Operating
Results."
For the quarterly periods in 1995 and 1996 and first quarter of 1997,
revenues fluctuated principally due to the seasonal pattern of certain of the
businesses served by the Company and the addition of new client programs.
Revenues in the first quarter of 1996 as compared to the fourth quarter of 1995
and in the first quarter of 1997 as compared to the fourth quarter of 1996
declined principally due to the seasonal pattern of certain businesses serviced
by the Company. Revenues in the second quarter of 1996 were higher than
expected, as compared to prior seasonal patterns, due to increased activities
for a significant new client that began business with the Company in that
quarter.
For the quarterly periods in 1995 and 1996 and the first quarter of 1997,
cost of services as a percentage of revenues fluctuated principally due to the
mix of services performed for clients. Cost of
21
<PAGE>
services in the fourth quarter of 1995 was adversely affected by start-up costs
of the Denver facility, which opened at the end of 1995, and costs incurred in
connection with the switch by certain of the Company's clients to compact discs
from 3 1/2 inch floppy disks. Cost of services as a percentage of revenues was
higher in the first and second quarters of 1996, partially as a result of
product recall and rework costs incurred on a certain product distributed from
the United Kingdom facility. The product recall related to certain anomalies
detected by the Company in a portion of finished product assembled, packaged and
distributed from the Company's United Kingdom facility. Upon detection of the
anomalies, the Company initiated the recall and inspected all potentially
affected products. The circumstances necessitating the recall were discovered in
March 1996 and the recall and related reworking of products was completed in
October 1996. In addition, the first quarter of 1996 was adversely affected by
start-up costs of the Denver facility, which opened at the end of 1995. Costs of
services as a percentage of revenues in the first quarter of 1997 as compared to
the fourth quarter of 1996 decreased principally because of improved labor
utilization and the mix of services performed for clients.
For the quarterly periods in 1995 and 1996 and the first quarter of 1997,
SG&A 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 1995 and 1996, management fee expense
fluctuated as a percentage of revenues generally based on estimated tax
requirements of the recipients of the management fees and bonuses in the first
three quarters of each year and, in the fourth quarter of each year, on
cumulative operating profits for the entire year less management fee expense for
the preceding three quarters. For the first quarter of 1997, management fees and
bonuses were accrued based on estimated tax requirements of the recipients of
the management fees and bonuses. Effective with the closing of this offering,
these management fee and bonus arrangements will be discontinued.
Operating profit (loss) and income (loss) before income taxes fluctuated
within the quarterly periods of 1995, 1996 and the quarter ended March 31, 1997
based primarily on the factors noted above.
The unaudited pro forma quarterly information for 1996 and the quarter ended
March 31, 1997 presents the effects on operating profit of the elimination of
management fee expense paid to stockholders and their affiliates as these fees
will be discontinued effective with closing of this offering and no further
management fees will be payable thereafter by the Company. For the quarterly
periods of 1995, pro forma management fee expense would be zero for each quarter
and operating profits for the first, second, third and fourth quarters of 1995
would be $358,000, $194,000, $846,000 and $1.5 million, respectively, which
represents 4.5%, 3.2%, 8.7% and 8.7% of revenues for the respective quarterly
periods.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------- ---------------------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1997 1997
----------- ----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services................ 81.1 80.1 80.0 80.0 83.2 76.4 76.4
----------- ----------- ----------- ----- ----- ----- -----
Gross profit.................... 18.9 19.9 20.0 20.0 16.8 23.6 23.6
SG&A expenses................... 17.0 12.8 10.8 10.8 11.2 13.0 13.0
Management fee expense.......... 2.3 6.3 8.6 -- 1.3 4.7 --
----------- ----------- ----------- ----- ----- ----- -----
Operating profit (loss)......... (0.4) 0.8 0.6 9.2 4.3 5.9 10.6
Net interest expense and
other......................... 0.8 1.0 0.5 0.5 0.8 0.5 0.5
----------- ----------- ----------- ----- ----- ----- -----
Income (loss) before income
taxes......................... (1.2) (0.2) 0.1 8.7 3.5 5.4 10.1
Income tax expense.............. -- -- 0.2 3.3 -- -- 3.8
----------- ----------- ----------- ----- ----- ----- -----
Net income (loss)............... (1.2)% (0.2)% (0.1)% 5.4% 3.5% 5.4% 6.3%
----------- ----------- ----------- ----- ----- ----- -----
----------- ----------- ----------- ----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUES. Revenues increased $1.5 million, or 9.5%, to $16.7 million for
the three months ended March 31, 1997 from $15.2 million for the three months
ended March 31, 1996. Revenues of $7.9 million for the three months ended March
31, 1997 were attributable to new clients. Revenues from 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 three months ended March 31, 1996 were attributable to two
large projects, which generated unusually high revenues.
COST OF SERVICES. Cost of services was relatively unchanged at $12.7
million for each of the three months ended March 31, 1996 and 1997. As a
percentage of revenues, cost of services decreased to 76.4% for the three months
ended March 31, 1997 from 83.2% for the three months ended March 31, 1996. This
change was primarily due to improved labor utilization. Additionally, the three
months ended March 31, 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 by the
discontinuation of certain lower margin projects.
GROSS PROFIT. As a result of the foregoing factors, gross profit increased
$1.3 million, or 53.5%, to $3.9 million for the three months ended March 31,
1997 from $2.6 million for the three months ended March 31, 1996. As a
percentage of revenues, gross profit increased to 23.6% for the three months
ended March 31, 1997 from 16.8% for the three months ended March 31, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $0.5
million, or 26.8%, to $2.2 million for the three months ended March 31, 1997
from $1.7 million for the three months ended March 31, 1996, primarily as a
result of increased personnel costs incurred to service increasing business. As
a percentage of revenues, SG&A expenses increased to 13.0% for the three months
ended March 31, 1997 from 11.2% for the three months ended March 31, 1996,
reflecting a greater relative increase in SG&A expense as compared to the
increase in revenues.
23
<PAGE>
MANAGEMENT FEE EXPENSE. Management fee expense increased $0.6 million, or
299%, to $0.8 million for the three months ended March 31, 1997 from $0.2
million for the three months ended March 31, 1996. As a percentage of revenues,
management fee expense increased to 4.7% for the three months ended March 31,
1997 from 1.3% for the three months ended March 31, 1996. For the three months
ended March 31, 1996, management fee expense was accrued based on estimated tax
requirements of the recipients. Effective with the closing of this offering,
these management fee and bonus arrangements will be discontinued.
OPERATING PROFIT (LOSS). As a result of the foregoing factors, operating
profit increased $0.3 million, or 48.4%, to $1.0 million for the three months
ended March 31, 1997 from $0.7 million for the three months ended March 31,
1996. As a percentage of revenues, operating profit increased to 5.9% for the
three months ended March 31, 1997 from 4.3% for the three months ended March 31,
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 March
31, 1996 and 1997. As a percentage of revenues, net interest expense and other
decreased to 0.5% for the three months ended March 31, 1997 from 0.8% for the
three months ended March 31, 1996, reflecting lower outstanding average
borrowings relative to revenues of the Company.
INCOME (LOSS) BEFORE INCOME TAXES. As a result of the foregoing factors,
income before income taxes increased $0.4 million, or 67.7%, to $0.9 million for
the three months ended March 31, 1997 from $0.5 million income before taxes for
the three months ended March 31, 1996. As a percentage of revenues, income
before income taxes increased to 5.4% for the three months ended March 31, 1997
from 3.5% for the three months ended March 31, 1996.
INCOME TAX EXPENSE. The Company has operated as an S corporation for
federal and state income tax purposes and, accordingly, was not subject to
federal or state income taxes. No provision for income taxes was made in the
three months ended March 31, 1996 and 1997.
NET INCOME (LOSS). Based on its S corporation status and the factors
discussed above, net income increased $0.4 million, or 67.7%, to $0.9 million
for the three months ended March 31, 1997 from $0.5 million net income for the
three months ended March 31, 1996. As a percentage of revenues, net income
increased to 5.4% for the three months ended March 31, 1997 from 3.5% for the
three months ended March 31, 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 accrued management fees
and bonuses payable to stockholders and their affiliates as these fees and
bonuses will be discontinued upon the closing of this 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 March 31, 1996 and 1997; (ii) pro
forma operating profit increased $0.9 million, or 106%, to $1.8 million for the
three months ended March 31, 1997 from $0.9 million for the three months ended
March 31, 1996; (iii) pro forma income before income taxes increased $1.0
million, or 131%, to $1.7 million for the three months ended March 31, 1997 from
$0.7 million for the three months ended March 31, 1996; (iv) pro forma income
taxes increased $0.3 million, or 130%, to $0.6 million for the three months
ended March 31, 1997 from $0.3 million for the three months ended March 31,
1996; and (v) pro forma net income increased $599,000, or 131%, to $1.1 million
for the three months ended March 31, 1997 from $459,000 for the three months
ended March 31, 1996.
24
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased $30.1 million, or 72.5%, to $71.6 million for
the year ended December 31, 1996 from $41.5 million for the year ended December
31, 1995. New clients accounted for $25.2 million of this increase, primarily
attributable to the addition of a significant new client in April 1996, while
existing clients accounted for the remaining $4.9 million of this increase.
Revenues for 1996 reflect the addition of the Denver facility, which opened at
the end of 1995.
COST OF SERVICES. Cost of services increased $24.0 million, or 72.2%, to
$57.2 million for the year ended December 31, 1996 from $33.2 million for the
year ended December 31, 1995. As a percentage of revenues, cost of services was
relatively unchanged at 80.0% for the year ended December 31, 1996 from 80.1%
for the year ended December 31, 1995.
GROSS PROFIT. As a result of the foregoing factors, gross profit increased
$6.0 million, or 73.3%, to $14.3 million for the year ended December 31, 1996
from $8.3 million for the year ended December 31, 1995. As a percentage of
revenues, gross profit was relatively unchanged at 20.0% for the year ended
December 31, 1996 from 19.9% for the year ended December 31, 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $2.4
million, or 45.4%, to $7.8 million for the year ended December 31, 1996 from
$5.3 million for the year ended December 31, 1995. As a percentage of revenues,
SG&A expenses decreased to 10.8% for the year ended December 31, 1996 from 12.8%
for the year ended December 31, 1995, reflecting the spreading of fixed and
semi-variable costs over a larger revenue base.
MANAGEMENT FEE EXPENSE. Management fee expense increased $3.6 million, or
137.4%, to $6.2 million for the year ended December 31, 1996 from $2.6 million
for the year ended December 31, 1995. As a percentage of revenues, management
fee expense increased to 8.6% for the year ended December 31, 1996 from 6.3% for
the year ended December 31, 1995. Management fee expense was determined by the
Board of Directors and related primarily to changes in operating profit of the
Company. Effective with the closing of this offering, these management fee and
bonus arrangements will be discontinued.
OPERATING PROFIT. As a result of the foregoing factors, operating profit
increased $0.1 million, or 21.3%, to $0.4 million for the year ended December
31, 1996 from $0.3 million for the year ended December 31, 1995. As a percentage
of revenues, operating profit decreased to 0.6% for the year ended December 31,
1996 from 0.8% for the year ended December 31, 1995.
NET INTEREST EXPENSE AND OTHER. Net interest expense and other remained
relatively unchanged at $0.4 million for the year ended December 31, 1996 and
for the year ended December 31, 1995. As a percentage of revenues, net interest
expense and other decreased to 0.5% for the year ended December 31, 1996 from
1.0% for the year ended December 31, 1995, reflecting lower outstanding
borrowings relative to revenues of the Company.
INCOME (LOSS) BEFORE INCOME TAXES. As a result of the foregoing factors,
income before income taxes increased $0.1 million to zero for the year ended
December 31, 1996 from $(0.1) million loss before income taxes for the year
ended December 31, 1995. As a percentage of revenues, income before income taxes
increased to 0.1% for the year ended December 31, 1996 from (0.2)% for the year
ended December 31, 1995.
INCOME TAX EXPENSE. The Company has operated as an S corporation for
federal and state income tax purposes and, accordingly, was not subject to
federal or state income taxes. The Company was, however, subject to certain
foreign income taxes.
NET INCOME (LOSS). Based upon its S corporation status and the factors
discussed above, net loss remained relatively unchanged at $(0.1) million for
the year ended December 31, 1996 and for the year
25
<PAGE>
ended December 31, 1995. As a percentage of revenues, net loss for the year
ended December 31, 1996 and for the year ended December 31, 1995 remained
relatively unchanged at 0.1% and 0.2%, respectively.
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 will
be discontinued upon closing of this 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 1995 and 1996; (2) pro forma operating profit increased $3.6
million, or 124%, to $6.6 million for the year ended December 31, 1996 from $2.9
million for the year ended December 31, 1995; (3) pro forma income before income
taxes increased $3.7 million, or 144%, to $6.2 million for the year ended
December 31, 1996 from $2.5 million for the year ended December 31, 1995; (4)
pro forma income taxes increased $1.4 million, or 144%, to $2.3 million for the
year ended December 31, 1996 from $0.9 million for the year ended December 31,
1995; and (5) pro forma net income increased $2.3 million, or 144%, to $3.9
million for the year ended December 31, 1996 from $1.6 million for the year
ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased $15.2 million, or 57.6%, to $41.5 million in
1995 from $26.3 million in 1994. New clients accounted for $6.1 million of this
increase, while existing clients accounted for the remaining $9.1 million of
this increase.
COST OF SERVICES. Cost of services increased $11.9 million, or 55.6%, to
$33.2 million in 1995 from $21.4 million in 1994. As a percentage of revenues,
cost of services decreased to 80.1% in 1995 from 81.1% in 1994. This change was
primarily due to improvement in profit margins at the United Kingdom facility as
productivity improved, and improvement in product fulfillment profit margins in
domestic operations as improved product fulfillment systems were placed in
service. As a result of technological changes in software distribution, the
foregoing improvements were partially offset by lower profit margins realized
from the switch by certain of the Company's clients to lower-margin compact
discs from higher-margin 3 1/2 inch floppy disks included in such clients' final
products.
GROSS PROFIT. As a result of the foregoing factors, gross profit increased
$3.3 million, or 66.0%, to $8.3 million for the year ended December 31, 1996
from $5.0 for the year ended December 31, 1995. As a percentage of revenues,
gross profit increased to 19.9% in 1995 from 18.9% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $0.9
million, or 19.0%, to $5.3 million in 1995 from $4.5 million in 1994. As a
percentage of revenues, SG&A expenses decreased to 12.8% in 1995 from 17.0% in
1994, reflecting the spreading of fixed and semi-variable costs over a larger
revenue base.
MANAGEMENT FEE EXPENSE. Management fee expense increased $2.0 million, or
325%, to $2.6 million in 1995 from $0.6 million in 1994. As a percentage of
revenues, management fee expense increased to 6.3% in 1995 from 2.3% in 1994.
Management fee expense was determined by the Board of Directors of the Company
and related primarily to changes in operating profit of the Company. Effective
with the closing of this offering, these management fee and bonus arrangements
will be discontinued.
OPERATING PROFIT (LOSS). As a result of the foregoing factors, operating
profit increased $0.5 million to $0.4 million in 1995 from $(0.1) million in
1994. As a percentage of revenues, operating profit increased to 0.8% in 1995
from (0.4)% in 1994.
NET INTEREST EXPENSE AND OTHER. Net interest expense and other increased
$0.2 million, or 83.3%, to $0.4 million in 1995 from $0.2 million in 1994. As a
percentage of revenues, net interest expense and other
26
<PAGE>
increased to 1.0% in 1995 from 0.8% in 1994, reflecting higher outstanding
borrowings relative to revenues of the Company.
LOSS BEFORE INCOME TAXES. As a result of the foregoing factors, loss before
income taxes decreased $0.3, or 82.5%, to $(0.1) million in 1995 from $(0.3)
million in 1994. As a percentage of revenues, loss before income taxes decreased
to (0.2)% in 1995 from (1.2)% in 1994.
NET INCOME (LOSS). Based upon the S corporation status of the Company and
the factors discussed above, net loss decreased $0.2 million, or 82.5%, to $0.1
million in 1995 from $0.3 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has 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%. At March 31,
1997, $3.5 million of borrowings were outstanding under the line of credit,
accruing interest at 9.5%. Borrowings under the line of credit have been used
primarily for general corporate purposes. Outstanding borrowings will be repaid
in full from net proceeds to the Company from this offering. See "Use of
Proceeds."
The Company has entered into several capital leases with three to five year
terms. At March 31, 1997, the outstanding lease obligations were $2.2 million,
accruing interest at rates ranging from 8.7% to 13.0%. Substantially all of
these outstanding capital lease obligations will be repaid in full from net
proceeds to the Company from this offering. See "Use of Proceeds."
In February and April 1997, the Company ordered telecommunications computer
hardware and software with an aggregate purchase price of $1.0 million. The
Company has agreed to finance this computer equipment through a 36 month
operating lease, which operating lease will become effective upon completion of
the installation of the computer equipment. A portion of the computer equipment
was installed in April 1997 and the remaining portion is scheduled for
installation in June 1997.
Net cash provided by operating activities decreased to $2.1 million for the
three months ended March 31, 1997 from $2.9 million for the same period in the
prior year. The principal causes of this decrease were (i) an increase in
accounts receivable and (ii) a decrease in accrued and other liabilities,
partially offset by an increase in net income and accrued management fees. Net
cash provided by operating activities increased to $1.4 million for the year
ended December 31, 1996 from net cash used in operating activities of $1.5
million for 1995. The principal causes of this $2.9 million change were (i) an
increase in depreciation and amortization and (ii) a decrease in accounts
receivable, partially offset by a decrease in accounts payable (net of an
increase in accrued and other liabilities) and an increase in inventories. Net
cash used in operating activities in 1995 was $1.5 million as compared to $0.4
million of net cash provided by operating activities in 1994. The principal
cause of this decrease in net cash flow from operating activities between the
periods was an increase in accounts receivable, partially offset by an increase
in accounts payable.
Net cash used in investing activities decreased to $0.1 million for the
three months ended March 31, 1997 from $0.4 million for the same period in the
prior year. The cause of this decrease was a decrease in purchases of property
and equipment and receipt of payment on a note receivable due from a
stockholder. Net cash used in investing activities was $0.7 million for the year
ended December 31, 1996 as compared to $1.3 million of net cash used in
investing activities for 1995. The principal cause for this decrease related to
reduced purchases of property, plant and equipment in 1996. During 1994 and
1995, the Company's net cash used in investing activities did not change
significantly; however, the components of investing expenditures varied due to
(i) the purchase of the Denver facility in October 1995, (ii) collections of
notes
27
<PAGE>
receivable--affiliates and stockholders in 1995 and (iii) advances made to
stockholders and affiliates in 1994.
Net cash provided from financing activities increased to $0.9 million from
$(0.5) used in financing activities for the same period in the prior year. The
principal cause for this increase in cash was an increase in borrowings on a
mortgage note, partially offset by repayments on other borrowings. Net cash
provided by financing activities decreased to $1.4 million for the year ended
December 31, 1996 from $3.2 million for 1995. The principal causes for this
decrease were (i) reduced bank borrowings in 1996 and (ii) payments of notes
payable--affiliate and stockholder in 1996, partially offset by increases in
contributed capital. Net cash provided by financing activities increased to $3.2
million in 1995 from $1.1 million in 1994. The principal causes for this
increase were (i) mortgage borrowings relating to the purchase of the Denver
facility in 1995, (ii) an increase in borrowings from an affiliate in 1995 and
(iii) an increase in bank borrowings and capital lease payments in 1995.
The principal sources of the Company's liquidity have been cash flow from
operations, borrowings under the Company's line of credit, capital lease
financing, operating leases, borrowings from stockholders and their affiliates,
and capital contributions from stockholders. The Company expects to maintain a
$3.5 million credit facility. The credit facility is expected to contain
covenants which restrict, to a certain extent, dividends, capital expenditures
and loans to affiliates and stockholders, without prior written consent of the
lender. StarTek intends to use a portion of the net proceeds to the Company from
this offering to repay substantially all of its outstanding indebtedness and
capitalized lease obligations, and approximately $8.0 million for capital
expenditures to expand and build-out its existing facilities to provide
additional teleservices, product assembly and inventory management capacity.
The Company believes that cash flow from operations and net proceeds to the
Company from this 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
additional funds through public or private financings. 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.
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.
28
<PAGE>
BUSINESS
GENERAL
StarTek is a leading international provider of integrated, value-added
outsourced services primarily for Fortune 500 companies in targeted industries.
The Company's integrated outsourced services encompass a wide spectrum of
process management services and customer-initiated ("inbound") teleservices
throughout a product's life cycle, including product order teleservices,
supplier management, product assembly and packaging, product distribution,
product order fulfillment, and customer care and technical support teleservices.
By focusing on these services as its core business, StarTek allows its clients
to focus on their primary businesses, 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 operates from its Colorado facilities located in Denver
and Greeley and from a facility located in Hartlepool, England. The Company also
operates through a subcontract relationship in Singapore. For the year ended
December 31, 1996, the Company's revenues increased approximately 72.5% to $71.6
million from $41.5 million for the year ended December 31, 1995. Pro forma net
income increased approximately 144% to $3.9 million from $1.6 million during the
same period. For the three months ended March 31, 1997, the Company's revenues
increased approximately 9.5% to $16.7 million from $15.2 million for the three
months ended March 31, 1996. Pro forma net income increased approximately 131%
to $1.1 million from $459,000 during the same period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
StarTek's goal is to grow profitably by focusing on providing high-quality
integrated, value-added outsourced services. StarTek has a strategic partnership
philosophy, through which the Company assesses each of its client's needs and,
together with the client, 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 and retaining clients that outsource non-
core operations. Three of the Company's top four clients have utilized its
outsourced services for more than five years and the fourth client initiated
services with the Company in April 1996.
StarTek has focused primarily on the computer software, computer hardware,
electronics, telecommunications and other technology-related industries because
of their rapid growth, complex and evolving product offerings and large customer
bases, which require frequent, often sophisticated, customer interaction.
Management believes that there are substantial opportunities to cross-sell
StarTek's wide spectrum of outsourced services to its existing base of
approximately 75 clients, which includes Broderbund Software, Inc., Canon Inc.,
Electronic Arts, Inc., Federal Express Corporation, Hewlett Packard, Microsoft,
Polaroid Corporation, Sony Electronics, Inc., The 3DO Company, and Viacom
International, Inc. The Company intends to capitalize on the increasing trend
toward outsourcing by focusing on potential clients in additional targeted
industries, including health care, financial services, transportation services
and consumer products, which could benefit from the Company's expertise in
developing and delivering integrated, cost-effective outsourced services.
STARTEK'S INTEGRATED SERVICES
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 a client or the Company may manage the production
29
<PAGE>
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 product questions and technical support. Calls are routed to StarTek
customer care or technical support service representatives who have been trained
to support specific products. 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 outsourced services.
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 services. To reach this objective, the Company
intends to:
PROVIDE INTEGRATED OUTSOURCED SERVICES. StarTek seeks to provide integrated
outsourced 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 integrated,
value-added outsourced 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
in targeted industries. 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 that 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 MODERN PROCESS MANAGEMENT. StarTek
strives to establish a competitive advantage by frequently redefining its
operational processes to reduce costs and improve quality. StarTek's 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 has received ISO 9002 certification,
an international standard for quality assurance and consistency in operating
procedures, for all of its domestic facilities and services, and expects to
receive ISO 9002 certification for its United Kingdom facility in mid-1997.
Certain of the Company's existing clients require evidence of ISO 9002
certification, and the Company anticipates that many potential clients may
require ISO 9002 certification prior to selecting an outsourcing provider.
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. 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.
30
<PAGE>
GROWTH STRATEGY
The Company's growth strategy is designed to capitalize on the increasing
demand for outsourced services and improve and expand StarTek's position as an
international provider of integrated value-added outsourced services. This
strategy includes the following key elements:
INCREASE CAPACITY. Management believes that as a provider of outsourced
services it must be ready to serve its clients in periods of peak demand for its
clients' products or services. Accordingly, the Company intends to continue to
increase product handling and teleservice workstation capacity to meet
anticipated demand for the Company's outsourced services. During 1996, the
Company increased its teleservice workstations by 54.6%, to 558 from 361. In
addition, the Company reengineered and expanded its primary product handling
facility to increase its daily capacity by approximately 200% to 180,000 units
from 60,000 units for certain types of products.
CROSS-SELL SERVICES TO EXISTING CLIENTS. Management believes there are
substantial opportunities to cross-sell its wide spectrum of outsourced services
to other divisions or operations within its existing clients' organizations.
StarTek capitalizes on its relationships and comprehensive understanding of its
clients' businesses to identify additional divisions and areas where the Company
could provide its services. For example, the Company's two longest current
client relationships, which began in 1987 and 1988 utilizing only one service
each, today utilize substantially all of the Company's outsourced services.
Management further believes that its ability to provide integrated solutions
helps the Company to create strategic partnership relationships and gives the
Company a competitive advantage to be selected as the service provider of
choice.
EXPAND CLIENT BASE. The Company intends to capitalize on its low-cost
position and extensive offering of services to penetrate further the industries
which the Company currently serves and to seek clients in other industries.
Management believes that there are several additional industries, including
health care, financial services, transportation services and consumer products,
which provide significant market opportunities to the Company. To facilitate the
Company's anticipated growth, the Company increased its sales force to 10
full-time professionals as of the date of this offering, from four at the end of
1996.
INCREASE INTERNATIONAL OPERATIONS. The Company currently conducts business
in North America, Europe and Asia. Management believes that many of the trends
leading to the growth of outsourced services in the United States are occurring
in international markets as well. Management also believes that many companies,
including several of its existing multinational clients, are seeking outsourced
services on an international basis. To capitalize on these international
opportunities, the Company intends to expand its international operations.
DEVELOP NEW SERVICES. Management believes that the trend toward outsourcing
and rapid technological advances will result in new products and types of
customer interactions which will create opportunities for the Company to provide
additional outsourced services. StarTek intends to capitalize upon its strategic
long-term relationships to provide new outsourced services to its clients as
opportunities arise.
ACQUIRE COMPLEMENTARY COMPANIES AND EXPAND STRATEGIC ALLIANCES. StarTek
intends to evaluate the acquisition of complementary companies that could extend
its presence into new geographic markets or industries, expand its client base,
add new product or service applications and/or provide operating synergies.
Management believes that there could be many domestic and international
acquisition and strategic alliance opportunities as companies consider selling
their existing in-house operations and as smaller companies seek growth capital
and economies of scale to remain competitive.
31
<PAGE>
SERVICES
The Company offers a wide spectrum of outsourced services throughout a
product's life cycle, designed to provide cost-effective and efficient
management of the ancillary operations of its clients. The Company works closely
with its clients to develop, refine and implement efficient and productive
integrated outsourced solutions that link StarTek with such 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 fulfillment,
customer care and technical support. Substantially all of the Company's
teleservice activities are inbound telephone calls, rather than outbound calls.
Specific services that StarTek provides to its clients include the following:
PRODUCT ORDER TELESERVICES. Product order teleservices is generally the
process by which a call from a client's customer is received, identified and
routed to a StarTek service representative. Typically, a customer calls 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 call 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.
To properly handle these and other teleservices, 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 StarTek service
representative offering products in connection with a customer care or technical
support call. To facilitate product orders, the Company can process credit card
charges and other payment methods in connection with its product order
teleservices.
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 product and related components are then assembled and packaged at
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 and has
a global capacity of approximately 400,000 units per day, which capacity varies
depending on the size and complexity of the product. 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. During
peak periods, the Company has expanded assembly production to approximately four
times the output of slower periods.
PRODUCT DISTRIBUTION. The Company's sophisticated inventory management
systems enable the Company to ship and track products to distribution centers,
to individual stores and to its clients' customers directly. Product orders are
received by the Company via file transfer protocol (FTP), the Internet,
32
<PAGE>
electronic data interchange (EDI) and facsimile, as well as through the
Company's product order teleservices described above.
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.
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 can enter customer information into the Company's call-tracking system,
listen to a question, and quickly access a proprietary networked 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 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.
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 the applicable product. Each StarTek service representative
acts as a transparent extension of its clients when resolving complaints,
diagnosing and resolving product or service problems, or answering technical
questions.
INTERNATIONAL OPERATIONS
StarTek provides its outsourced services on an international basis from the
United Kingdom and Singapore. The Company's facility in the United Kingdom
provides the full range of the Company's outsourced services for clients
throughout Europe, including inbound product order, customer care and technical
support teleservices in five languages. The Company currently provides supplier
management, product assembly and packaging and product distribution for one of
its major clients through a subcontract relationship with a company in
Singapore. This subcontract relationship operates on a purchase order basis.
CLIENTS
StarTek provided services to approximately 75 clients in North America,
Europe and Asia during 1996. StarTek's clients include companies engaged
primarily in the computer software, computer hardware, electronics,
communications and other technology-related industries. Approximately 38.4% and
33.4% of the Company's revenues in 1996 were attributable to Hewlett Packard and
Microsoft, respectively. Approximately 36.1% and 44.2% of the Company's revenues
in the three months ended March 31, 1997
33
<PAGE>
were attributable to Hewlett Packard and Microsoft, respectively. Based upon
1996 revenues, StarTek's ten largest clients, listed alphabetically, were:
<TABLE>
<S> <C>
Broderbund Software, Inc. Microsoft Corporation
Canon Inc. Polaroid Corporation
Electronic Arts, Inc. Sony Electronics, Inc.
Federal Express Corporation The 3DO Company
Hewlett-Packard Company Viacom International, Inc.
</TABLE>
The Company typically enters into a written agreement 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,
the Company generates revenues based in large part, on the number and duration
of customer inquiries (subject to certain minimum monthly payments) and the
volume, complexity and type of components involved in the clients products.
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 the client, (ii) do not designate the Company as the
client's exclusive outsourced service provider and (iii) do not penalize the
client for early termination. To the extent the Company works on a purchase
order basis, the agreement with the client frequently does not provide for
minimum purchase requirements, except in connection with its customer care and
technical support services. See "Risk Factors-- Risks Associated with the
Company's Contracts."
Hewlett Packard began its outsourcing relationship with the Company in 1987.
The Company currently performs the full range of its services for numerous
separate divisions of Hewlett Packard. Services are performed on a purchase
order or project-specific agreement basis, subject to a master purchase
agreement (the "HP Agreement"). The HP Agreement provides that the engagement of
the Company is non-exclusive and does not provide any minimum guarantee by
Hewlett Packard of a specific level of business for the Company. The HP
Agreement has an 18 month term, and is subject to renewal by agreement of the
parties.
Microsoft began its outsourcing relationship with the Company in April 1996.
The Company currently performs supplier management, product manufacturing, and
product distribution services for Microsoft. Services are performed on a
purchase order basis, subject to a supply, manufacturing and services agreement
(the "MS Agreement"). The MS Agreement provides that the engagement of the
Company is non-exclusive and does not guarantee the Company a minimum level of
business from Microsoft. Such agreement renews automatically for one-year
periods, subject to termination, at any time, upon 90 days prior written notice.
The Company has agreed to maintain ISO 9002 certification of its facility in
Greeley, Colorado, and a product manufacturing capacity at such facility of not
less than 400,000 units per week, at a rate of 80,000 units per day. The Company
currently maintains capacity at this facility sufficient to satisfy its
obligations under the MS Agreement and the ongoing product manufacturing,
assembly, packaging and distribution needs of other clients.
SALES AND MARKETING
The Company's marketing objective is to develop long-term relationships with
existing and potential clients to become the preferred worldwide vendor of
outsourced services. StarTek invests significant resources to create a strategic
partnership relationship 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.
34
<PAGE>
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 the cross-selling of services to
existing clients. In order to enhance its marketing efforts, the Company
increased its sales force to 10 full-time professionals as of the date of this
offering, from four at the end of 1996. 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 a new client's outsourcing
goals promptly, as well as the ability to implement operations for such client
quickly and accurately. In order to achieve these goals, the Company currently
maintains a level of excess capacity to expand its operations as necessary to
meet increased client demand.
TECHNOLOGY
The Company employs sophisticated technology and proprietary software that
incorporates digital switching, relational database management systems, call
tracking systems, workforce management systems, object-oriented software modules
and telephone-computer integration. The Company's digital switching technology
enables 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. A portion of the net proceeds of this offering allocated
for working capital and general corporate purposes will be used by the Company
to enhance its existing telecommunications equipment and computer and software
systems. See "Use of Proceeds."
EMPLOYEES AND TRAINING
StarTek's success in recruiting, hiring, and training large numbers of
full-time, skilled employees and obtaining large numbers of hourly employees
during peak periods for product assembly, packaging and distribution services 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 primarily full-time employees who are eligible to receive
the full range of employee benefits, and provides employees with clear, visible
career paths. As of April 30, 1997, the Company had 1,067 employees, of which
approximately 93% were full-time. The number of temporary employees varies
significantly during the year due to the seasonal variations of the Company's
business. Management believes that the demographics surrounding its facilities,
and its reputation, stability and compensation plans should allow the Company to
continue to attract and retain qualified employees. The Company considers its
employee relations to be good. See "Risk Factors--Dependence on Labor Force."
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
teleservice representatives. StarTek also maintains an employee quality program
to backup every employee, including specialized quality coordinators who teach
problem solving, assist with teleservice calls and offer immediate performance
feedback. On a more informal basis, the Company provides on-the-job process
training and tutoring for all process management 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.
35
<PAGE>
The Company's in-house training program for customer care and technical
support teleservicing employees is founded on an in-depth, structured learning
environment that builds technical competence and teaches critical software
skills necessary to provide effective customer care and technical support
teleservices. Each teleservice representative is specially designated and
trained to support a particular product or group of products for a particular
client. A teleservice representative receives 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 teleservices. 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
With the goal of focusing on their core businesses, companies are
increasingly turning to outsourced service companies to perform specialized
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.
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 teleservice, customer service and logistics
management operations of its current and potential clients. StarTek also
competes with certain companies that provide similar services on an outsourced
basis including, APAC Teleservices, Inc., Kao Corporation, Logistix Corporation,
MATRIXX Marketing Inc., National TechTeam, Inc., Precision Response Corp., SITEL
Corporation, Stream International Inc., Sykes Enterprises Incorporated, TeleTech
Holdings, Inc. and West Teleservices Corporation. In addition, there are
numerous competitors of all sizes that provide product order teleservices and
product fulfillment distribution services.
FACILITIES
StarTek's facilities include a Company-owned 138,000-square-foot building in
Denver, Colorado (which also contains the Company's executive offices), and a
100,000-square-foot Company-owned building and a 10,500-square-foot
Company-owned building, both located in Greeley, Colorado. StarTek performs its
international outsourced services from a leased 53,000-square-foot building in
Hartlepool, County Durham on the northeast coast of England. In Asia, the
Company utilizes a subcontractor that operates from a 25,000-square-foot
facility located in Singapore.
Of the Company's 532 teleservice workstations in the United States as of
April 30, 1997, 244 were located in the Denver building (which has space to
expand to approximately 1,250 workstations) and 288 were located in the Greeley
buildings. The Company's process management services in the United States
primarily operate from the Company's Greeley facilities. The Company's United
Kingdom facility provides space for each of the Company's outsourced services
and the Company's subcontractor in Singapore
36
<PAGE>
provides space for the Company's supplier management, product assembly and
packaging and product distribution services. Management believes that its
existing facilities are adequate for its current operations, but that additional
facility capacity will be required to support continued growth. The Company
intends to use a portion of the net proceeds to the Company from this offering
to expand its existing facilities. See "Use of Proceeds."
INTELLECTUAL PROPERTY
The Company owns the servicemarks "StarTek" and "StarPak," and has filed for
federal registration of these servicemarks. Due to the common use of identical
or phonetically similar servicemarks by other companies in different businesses,
there can be no assurance that the United States Patent and Trademark Office
will grant the Company registration of its servicemarks, or that such
servicemarks will not be challenged by other users. The Company does not believe
that it owns or utilizes any other servicemarks that are material to its
business. The Company's operations, however, frequently incorporate proprietary
and confidential information. In accordance with industry practice, the Company
relies upon a combination of contract provisions and trade secret laws to
protect the proprietary technology it uses and to deter misappropriation of its
proprietary rights and trade secrets.
LEGAL PROCEEDINGS
The Company has been involved from time to time in litigation arising in the
normal course of business, none of which is expected by management to have a
material adverse effect on the business, financial condition or results of
operations of the Company.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- -------------------------------------------------
<S> <C> <C>
A. Emmet Stephenson, Jr..... 51 Chairman of the Board and Director
Michael W. Morgan........... 36 President, Chief Executive Officer and Director
E. Preston Sumner, Jr....... 44 Executive Vice President and Chief Operating
Officer
Dennis M. Swenson........... 62 Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
Thomas O. Ryder............. 52 Director
Ed Zschau................... 57 Director
</TABLE>
A. EMMET STEPHENSON, JR. co-founded the Company in 1987 and has served as
Chairman of the Board of the Company since its formation. Mr. Stephenson has
also served as President of Stephenson and Company, a private investment firm in
Denver, Colorado, for more than five years. Mr. Stephenson is a director of
Danaher Corporation and serves on the Advisory Boards of First Berkshire Fund
and Capital Resource Partners, L.P.
MICHAEL W. MORGAN co-founded the Company in 1987 and has held managerial
positions in companies providing outsourced services since 1984. Mr. Morgan has
served as President and Chief Executive Officer of the Company since May 1990
and has served as a Director of the Company since January 1997.
E. PRESTON SUMNER, JR. co-founded the Company in 1987, served as
Vice-Chairman of the Board from inception of the Company through December 1994
and rejoined the Company in February 1997 as Executive Vice President and Chief
Operating Officer. Mr. Sumner was also a managing director of Stephenson
Merchant Banking, a private investment firm in Denver, Colorado from 1986
through December 1994. From January 1995 through February 1997, Mr. Sumner was a
director and Vice President--Corporate Development of Merrick & Company, an
engineering and architectural firm, and will continue to serve as a director and
non-executive chairman of the board of such company.
DENNIS M. SWENSON has served as Chief Financial Officer of the Company since
October 1995 and as Executive Vice President since October 1996. From October
1991 to September 1995, Mr. Swenson was an independent financial consultant. Mr.
Swenson was a partner of Ernst & Young LLP from 1973 until 1991.
THOMAS O. RYDER has served as a Director of the Company since January 1997.
He has been President of Travel Related Services International for American
Express TRS Company, Inc. since October 1995. Mr. Ryder has also been Chairman
of the Board of American Express Publishing Corporation since December 1991.
From February 1992 through October 1995, he served as President of American
Express Establishment Services Worldwide. From January 1988 through February
1992, Mr. Ryder served as President of Direct Marketing Group, which included
American Express Merchandise Services, American Express Publishing Corporation
and Epsilon Data Management Corporation. He is a director of Club Mediterranee.
ED ZSCHAU has served as a Director of the Company since January 1997. He has
been a Senior Lecturer of Business Administration at Harvard University since
February 1996. From April 1993 to July 1995, Mr. Zschau was General Manager,
Storage System Division at IBM Corporation. From July 1988 to April 1993, he was
Chairman and Chief Executive Officer of Censtor Corp., a company that researches
and develops magnetic recording components for disk drives. Mr. Zschau is a
director of Indentix, Inc., GenRad, Inc. and Censtor Corp.
The executive officers of the Company serve at the discretion of its Board
of Directors. Directors of the Company hold office until the next annual meeting
of the Company's stockholders and until their
38
<PAGE>
successors have been duly elected and qualified, or until their earlier
resignation, removal from office or death.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors established a compensation committee and an audit
committee of its Board of Directors in January 1997.
COMPENSATION COMMITTEE. The Compensation Committee, which consists of
Messrs. Stephenson, Ryder and Zschau, will determine the compensation to be paid
to all executive officers of the Company. The current executive officer salaries
were set by the Board of Directors prior to establishment of the Compensation
Committee.
AUDIT COMMITTEE. The Audit Committee, which is comprised of Messrs. Ryder
and Zschau, the Company's two independent directors, will be responsible to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review independence of the independent public accountants,
consider the range of audit and non-audit fees and review the adequacy of the
Company's internal accounting controls and financial management practices.
COMPENSATION OF DIRECTORS
StarTek does not pay its directors any cash compensation for their services
as directors. Directors will be reimbursed for expenses incurred in connection
with meetings of the Board of Directors or committees thereof.
The Company has adopted the Director Option Plan, which provides for an
automatic initial grant and an annual grant to each director who is not an
employee or officer of the Company (a "non-employee director") of options to
acquire shares of Common Stock. A total of 90,000 shares of Common Stock have
been reserved for issuance pursuant to options granted under the Director Option
Plan. All options granted under the Director Option Plan will be non-qualified
options that are not intended to qualify under Section 422 of the Code.
The Director Option Plan provides that each non-employee director will
receive (i) options to acquire 10,000 shares of Common Stock upon the later of
the closing of an initial public offering of Common Stock or such director's
initial election to the Board of Directors and (ii) options to acquire 3,000
shares of Common Stock on the date of each annual meeting of stockholders
thereafter at which such director is reelected. The exercise price of each
option granted under the Director Option Plan will equal the fair market value
of the Common Stock on the date of grant. Options granted under the Director
Option Plan will (a) vest immediately and (b) expire on the earliest to occur of
the tenth anniversary of the date of grant, one year following the director's
death or immediately upon the director's termination of membership on the Board
of Directors for "cause" (as defined in the Director Option Plan).
Upon closing of this offering, Thomas O. Ryder and Ed Zschau will each
receive options to acquire 10,000 shares of Common Stock, at an exercise price
per share equal to the initial public offering price, pursuant to the terms of
the Director Option Plan. The options will be fully vested and exercisable upon
closing of this offering. These options will not be adjusted for the 322.1064
for one stock split to be effected immediately prior to the closing of this
offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1996, the Company did not have a
Compensation Committee of its Board of Directors, or other board committee
performing equivalent functions. Decisions concerning the compensation of
executive officers were made by the Board of Directors of each of the operating
39
<PAGE>
subsidiaries of the Company. Except for A. Emmet Stephenson, Jr., there are no
officers or employees of the Company who participated in deliberations
concerning such compensation matters.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain
information concerning the compensation paid by the Company to the President and
Chief Executive Officer. No other executive officer of the Company earned or was
paid compensation of more than $100,000 for the year ended December 31, 1996.
See "Certain Relationships and Related Party Transactions." The Company does not
have a pension plan or a long-term incentive plan, has not issued any restricted
stock awards and did not grant any stock options during its most recent fiscal
year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 ANNUAL COMPENSATION
----------------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Michael W. Morgan.............................................. $ 271,059(a) $ 666,893(b)
President and Chief Executive Officer
</TABLE>
- ------------------------
(a) Mr. Morgan's base salary is and following this offering will continue to be
$271,059, subject to modification by the Compensation Committee.
(b) Mr. Morgan recontributed $337,971 of the bonus compensation to the Company
as additional capital. Substantially all of the balance was used by Mr.
Morgan to pay applicable federal and state income taxes on such bonus. On
April 15, 1997, Mr. Morgan was paid a bonus of approximately $280,000, of
which $147,000 was recontributed by Mr. Morgan to the Company as additional
capital. Substantially all of the balance was used by Mr. Morgan to pay
applicable federal and state income taxes. These bonus arrangements will
terminate effective as of the closing of this offering. See "Offering
Related Transactions--Termination of S Corporation Status" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Historically, the Company has paid an annual management fee of approximately
$200,000 to A. Emmet Stephenson, Jr., Inc., which is wholly-owned by A. Emmet
Stephenson, Jr., Chairman of the Board of the Company, for services rendered by
Mr. Stephenson to the Company, and $70,000 annually to Stephenson Properties as
rental for certain Company facilities. This management fee and rental
arrangement terminated effective as of December 31, 1997. See "Certain
Relationships and Related Party Transactions--Management Fees" and "--Real
Property." From and after January 1, 1997, the Company will pay an annual
advisory fee of $245,000 to A. Emmet Stephenson, Jr., Inc.
Effective as of February 18, 1997, the Company will pay E. Preston Sumner,
Jr., Executive Vice President and Chief Operating Officer of the Company, an
annual base salary of $150,000.
Effective as of January 1, 1997, the Company will pay Dennis M. Swenson,
Executive Vice President and Chief Financial Officer of the Company, an annual
base salary of $126,000.
STOCK OPTION PLAN
The Company has adopted the StarTek, Inc. Stock Option Plan (the "Option
Plan"), which authorizes the issuance of up to 985,000 shares of Common Stock
through the grant of (i) incentive stock options ("ISOs") within the meaning of
Section 422 of the Code, (ii) stock options that are not intended to qualify
under Section 422 of the Code ("NSOs" and together with ISOs, "Options"), and
(iii) stock appreciation rights ("SARs"). Directors (other than non-employee
directors), officers, employees, consultants and
40
<PAGE>
independent contractors of the Company or any subsidiary of the Company, as
selected from time to time by the committee administering the Option Plan, will
be eligible to participate in the Option Plan.
The Option Plan provides that it is to be administered by a committee
comprised of two or more non-employee directors appointed by the Board of
Directors (the "Committee"). Subject to certain limitations, the Committee has
complete discretion to determine which eligible individuals are to receive
awards under the Option Plan, the form and vesting schedule of awards, the
number of shares subject to each award and the exercise price, the manner of
payment and expiration date applicable to each award. The Board of Directors has
appointed Thomas O. Ryder and Ed Zschau as members of the Committee.
Set forth below is a summary of the terms of the Option Plan that will be
applicable to each of the various types of awards covered thereby.
OPTIONS. All options will expire on the date that is the earliest of three
months after the holder's termination of employment with the Company (other than
termination for cause), six months after the holder's death and 10 years after
the date of grant. Options will be subject to forfeiture upon termination of
employment for "cause." The exercise price per share of an ISO will be
determined by the Committee at the time of grant, but in no event may be less
than the fair market value of the Common Stock on the date of grant.
Notwithstanding the foregoing, if an ISO is granted to a participant who owns
more than 10% of the voting power of all classes of stock of the Company, the
exercise price will be at least 110% of the fair market value of the Common
Stock on the date of grant and the exercise period will not exceed five years
from the date of grant. The exercise price per share of an NSO will be
determined by the Committee in its sole discretion.
STOCK APPRECIATION RIGHTS. SARs may be issued only in connection with an
NSO (a "Tandem SAR"), in which case the Tandem SAR terminates simultaneously
upon the expiration of the related NSO. A Tandem SAR will be exercisable only if
the fair market value of a share of Common Stock exceeds the exercise price of
the related NSO.
Upon the closing of this offering, Messrs. Sumner and Swenson will be
granted ISOs to purchase 100,000 shares and 70,000 shares of Common Stock,
respectively, at an exercise price equal to the initial public offering price.
The Committee presently expects to grant to other employees of the Company, on
or prior to closing of this offering, ISOs to purchase approximately 325,000
shares of Common Stock, at an exercise price per share equal to the initial
public offering price. The foregoing Options will have a term of ten years and,
except as otherwise determined by the Committee, will vest 20% per year for a
five-year period commencing on the first anniversary of closing this offering.
These options will not be adjusted for the 322.1064 for one stock split to be
effected immediately prior to the closing of this offering.
41
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
MANAGEMENT FEES
For the years ended December 31, 1994, 1995 and 1996, the Company incurred
management fees of approximately $737,000, $2.5 million and $5.7 million,
respectively (approximately $200,000 of which has been included in SG&A expenses
for financial statement purposes for each of the relevant years), payable to A.
Emmet Stephenson, Jr., Inc., which is wholly-owned by A. Emmet Stephenson, Jr.,
Chairman of the Board of the Company and a Principal Stockholder. On April 15,
1997, the Company paid a management fee to A. Emmet Stephenson, Jr., Inc. of
approximately $2.4 million, after giving consideration to operating profits of
the Company for the first quarter and the effects of certain expense timing
differences for book and tax purposes. Mr. Stephenson and Toni E. Stephenson,
his spouse and a Principal Stockholder, made capital contributions to the
Company equal to approximately 53% of such management fees, with the remainder
being used to pay applicable federal and state income taxes on such fees. The
Company will terminate this management fee arrangement effective as of the
closing of this offering. Effective January 1, 1997, the Company began paying an
annual advisory fee of $245,000 to A. Emmet Stephenson, Jr., Inc.
REAL PROPERTY
The Company leased office space at 100 Garfield Street, Denver, Colorado,
from Stephenson Properties, a partnership (the "Lessor") in which A. Emmet
Stephenson, Jr., the Company's Chairman of the Board and a Principal
Stockholder, is general partner, and Toni E. Stephenson, a Principal
Stockholder, is a limited partner. The total annual lease payments for 1994,
1995 and 1996 made to the Lessor by the Company were $70,000 each year (which
has been included in SG&A expenses for financial statement purposes for each of
the relevant years). This office lease was terminated effective December 31,
1996.
LOANS
In 1994, StarPak, Inc. loaned an aggregate amount of $663,494 to its
stockholders, with interest at 8.5% per annum. These notes were refinanced
annually and repaid by the stockholders in full on November 22, 1996. After
receipt of such loan proceeds in 1994, the stockholders of StarPak, Inc. loaned
$663,494 to StarPak International, Ltd., with interest at 8.5% per annum, for
working capital purposes. These notes were refinanced annually and repaid by
StarPak International, Ltd. on November 22, 1996.
On December 31, 1994, StarPak, Inc. loaned $77,779 to Michael W. Morgan,
President and Chief Executive Officer of the Company, payable on demand without
interest. The loan was repaid in full in August 1995.
On December 31, 1994, the Company loaned $667,800 to A. Emmet Stephenson,
Jr., Inc., which is wholly-owned by Mr. Stephenson. The loan was repaid in full
in August 1995.
In 1994, StarPak International, Ltd. borrowed $75,000 from Mr. and Mrs.
Stephenson for working capital purposes, with interest at 12% per annum. The
loan was refinanced annually until November 22, 1996, when the loan was repaid
in full.
On December 29, 1995, the Company borrowed approximately $1.1 million from
General Communications, Inc., a corporation owned by A. Emmet Stephenson, Jr.,
the Company's Chairman of the Board and a Principal Stockholder, and Toni E.
Stephenson, a Principal Stockholder, for working capital purposes. The loan
accrued interest equal to the Company's line of credit rate (10% at December 31,
1995) and was to mature on January 31, 1997. The Company repaid the loan in full
in April 1996.
On January 9, 1996, the Company borrowed $90,000 from Michael W. Morgan, the
Company's President and Chief Executive Officer and a Principal Stockholder, for
working capital purposes. The loan accrued interest equal to the Company's line
of credit rate (10% at December 31, 1995) and matured in April 1996. The loan
and all accrued interest was repaid at such time.
42
<PAGE>
During 1995, Michael W. Morgan, President and Chief Executive Officer of the
Company, exercised certain options to acquire shares of common stock of StarPak,
Inc. and delivered his promissory note in payment of the exercise price, bearing
interest at 4.63%, payable in installments during 1999. The note was repaid in
full in January 1997.
NOTES PAYABLE TO PRINCIPAL STOCKHOLDERS
Immediately prior to closing this offering, the Company will declare a
dividend in an amount equal to the estimated additional paid-in capital and
retained earnings of the Company as of the closing date, payable to the
Principal Stockholders pursuant to certain promissory notes, which will equal
approximately $8.1 million, plus an adjustment for any additional paid-in
capital and retained earnings after March 31, 1997 through the closing date. The
promissory notes payable to the Principal Stockholders will be paid from net
proceeds to the Company from this offering. From this amount, the Principal
Stockholders will be required to pay applicable federal and state income taxes
on S corporation earnings of the Company through closing of this offering. See
"Use of Proceeds."
FUTURE TRANSACTIONS
The Company has implemented a policy requiring that any material transaction
between the Company and its officers, directors or an affiliated party is
subject to approval by a majority of the directors not interested in such
transaction, who must determine that the terms of any such transaction are no
less favorable to the Company than can be obtained from an unaffiliated third
party.
43
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, and
as adjusted to reflect the sale of the shares of Common Stock being offered
hereby, by (i) each stockholder who is known by the Company to beneficially own
more than 5% of the currently outstanding shares of Common Stock; (ii) each of
the Company's Directors and executive officers; (iii) all Directors and
executive officers of the Company as a group; and (iv) the Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR NUMBER OF OWNED AFTER
TO THE OFFERING SHARES THE OFFERING(A)
NAME AND ADDRESS OF ----------------------- BEING --------------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED(A) NUMBER PERCENT
- --------------------------------------------------- ---------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
A. Emmet Stephenson, Jr. (b)(c).................... 3,554,444 32.8% 195,462 3,358,982 24.3%
Michael W. Morgan (b)(d)........................... 1,129,949 10.4 133,333 996,616 7.2
E. Preston Sumner, Jr. (b)(e)...................... -- * -- -- *
Dennis M. Swenson (b)(f)........................... -- * -- -- *
Toni E. Stephenson (b)(g).......................... 3,554,444 32.8 195,462 3,358,982 24.3
FASSET Trust (b)................................... 1,294,867 12.0 71,205 1,223,662 8.8
MASSET Trust (b)................................... 1,294,867 12.0 71,205 1,223,662 8.8
Pamela S. Oliver (b)(h)............................ 2,589,734 24.0 -- 2,447,324 17.6
Thomas O. Ryder (j)................................ -- * -- 10,000(i) *
Ed Zschau (k)...................................... -- * -- 10,000(i) *
All directors and executive officers
as a group (6 persons)........................... 4,684,393 43.2% 328,795 4,375,598 31.6%
</TABLE>
- ------------------------
* Less than one percent.
(a) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is fully exercised, A. Emmet Stephenson,
Jr., Michael W. Morgan, Toni E. Stephenson, FASSET Trust and MASSET Trust
(the "Selling Stockholders") will sell up to 550,000 additional shares, pro
rata based upon the number of shares of Common Stock being offered hereby by
the Selling Stockholders.
(b) The address of each person, trust or trustee is c/o the Company, 111 Havana
Street, Denver, Colorado 80010.
(c) Mr. Stephenson is the Chairman of the Board of the Company. See
"Management." Mr. Stephenson is the husband of Toni E. Stephenson. Mrs.
Stephenson disclaims beneficial ownership of shares owned by Mr. Stephenson.
(d) Mr. Morgan is President and Chief Executive Officer of the Company. See
"Management."
(e) Does not include 100,000 shares of Common Stock issuable upon the exercise
of stock options to be granted to Mr. Sumner upon closing of this offering.
See "Management--Stock Option Plan." Mr. Sumner is Executive Vice President
and Chief Operating Officer of the Company. See "Management."
(f) Does not include 70,000 shares of Common Stock issuable upon the exercise of
stock options to be granted to Mr. Swenson upon closing of this offering.
See "Management--Stock Option Plan." Mr. Swenson is Executive Vice President
and Chief Financial Officer of the Company. See "Management."
(g) Mrs. Stephenson is the wife of A. Emmet Stephenson, Jr. Mr. Stephenson
disclaims beneficial ownership of shares owned by Mrs. Stephenson. From the
inception of StarPak, Inc. and StarPak International, Ltd. until January 23,
1997, Mrs. Stephenson was a director of each such company, and will continue
to act as a vice president of such companies, without compensation.
44
<PAGE>
(h) Represents shares owned by the FASSET Trust and MASSET Trust. Mrs. Oliver is
the sole trustee of each of the trusts and has sole voting power and
investment power with respect to the Common Stock held by the trusts. Mrs.
Oliver is Mr. Stephenson's sister. From the inception of StarPak, Inc. and
StarPak International, Ltd. until January 23, 1997, Mrs. Oliver was a
director of each such company, and will continue to act as a vice president
of such companies, without compensation.
(i) Includes 10,000 shares of Common Stock issuable upon the exercise of stock
options to be granted to each of Messrs. Ryder and Zschau upon closing of
this offering. See "Management--Compensation of Directors."
(j) Mr. Ryder's business address is 200 Vesey Street, New York, New York 10285.
(k) Mr. Zschau's business address is Harvard Business School, Baker Library 371,
Boston, Massachusetts 02163.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have 13,828,571 shares
of Common Stock outstanding. All of the shares offered hereby will be freely
tradeable without restriction or registration under the Securities Act, except
for any shares purchased by an "affiliate" of the Company (in general, a person
who has a control relationship with the Company), which will be subject to the
limitations of Rule 144 promulgated under the Securities Act. All of the
remaining 10,161,904 outstanding shares of Common Stock (or 9,611,904 shares if
the Underwriters' over-allotment option is fully exercised) are deemed to be
"restricted securities" as that term is defined in Rule 144. Beginning 180 days
after the date of this Prospectus, upon the expiration of lock-up agreements
with DLJ (described below), 10,006,630 of these restricted shares (9,566,630
shares if the Underwriters' over-allotment option is fully exercised) will be
available for sale subject to compliance with Rule 144 volume and other
requirements. The remaining 155,274 shares of restricted securities (45,274
shares if the Underwriters' over-allotment option is fully exercised) will be
eligible for sale beginning January 21, 1998, subject to compliance with Rule
144 volume and other requirements.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
within the meaning of Rule 144 ("Restricted Shares") for at least one year,
including the holding period of any prior owner except an affiliate, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) one percent of the then outstanding shares of Common
Stock (approximately 138,286 shares after giving effect to this offering) or
(ii) the average weekly trading volume of the Common Stock on the NYSE during
the four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain "manner of sale"
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who has beneficially owned shares
for at least two years (including any period of ownership of preceding
nonaffiliated owners), would be entitled to sell such shares under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
The Selling Stockholders and the Company have agreed with DLJ that until 180
days after the date of this Prospectus they will not, directly or indirectly,
offer, sell, contract to sell, grant any option to purchase or otherwise dispose
of any Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or in any manner transfer all or a portion of the
economic consequences associated with the ownership of the Common Stock, or
cause a registration statement covering any shares of Common Stock to be filed,
without the prior written consent of DLJ, subject to certain limited exceptions,
including grants of options pursuant to, and issuance of shares of Common Stock
upon exercise of options under, the Option Plan and the Director Option Plan.
See "Risk Factors--Substantial Number of Shares Eligible for Future Sale."
Prior to this offering, there has been no public market for the Common
Stock. The Company can make no predictions as to the effect, if any, that public
sales of shares of Common Stock or the availability of shares for sale will have
on the market price from time to time. Nevertheless, sales of substantial
amounts of the Common Stock in the public market or the perception that such
sales could occur, could adversely affect the prevailing market prices of the
Common Stock and could impair the Company's future ability to raise capital
through an offering of its equity securities.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 95,000,000 shares of
Common Stock, and 15,000,000 shares of Preferred Stock, $.01 par value
("Preferred Stock"), which may be issued in one or more series. As of the date
of this Prospectus, the Company's issued and outstanding Common Stock is held by
five holders of record. Immediately following the completion of this offering,
an aggregate of 13,828,571 shares of Common Stock will be issued and
outstanding, and no shares of Preferred Stock will be issued or outstanding.
The following description of the Company's capital stock is a summary of the
material terms of such stock. It does not purport to be complete and is subject
in all respects to applicable Delaware law and to the provisions of the
Company's Restated Certificate of Incorporation and Restated Bylaws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
The Board of Directors of the Company in its sole discretion may issue
shares of Common Stock from the authorized and unissued shares of Common Stock.
Holders of Common Stock are entitled to one vote per share on all matters to be
voted upon by the stockholders, including the election of directors. The
Company's Restated Certificate of Incorporation does not provide for cumulative
voting in the election of directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying any cash dividends in
the foreseeable future. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and after
satisfaction of the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, conversion or redemption rights
and are not subject to further assessments by the Company. Upon consummation of
this offering, all of the then outstanding shares of Common Stock will be
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of Preferred Stock with such dividend,
redemption, conversion and exchange provisions as may be provided for the
particular series. Any series of Preferred Stock may possess voting, dividend,
liquidation and redemption rights superior to those of the Common Stock. The
rights of the holders of Common Stock will be subject to and may be adversely
affected by the rights of the holders of any Preferred Stock that may be issued
in the future. Issuance of a new series of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire,
or discourage a third party from acquiring, the outstanding voting stock of the
Company, and make removal of the present Board of Directors more difficult. The
Company has no present plans to issue any shares of Preferred Stock. See "Risk
Factors--Anti-Takeover Provisions."
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("DGCL"). In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder
47
<PAGE>
became an interested stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (excluding shares owned by persons who are both officers and directors
of the corporation and shares held by certain employee stock ownership plans) or
(iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of at least two-thirds of the outstanding voting stock of
the corporation not owned by the interested stockholder.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Restated Certificate of Incorporation and Restated Bylaws
provide that, to the fullest extent permitted by the DGCL, a director of the
Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director. Under the DGCL, liability of
a director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of the provisions of the Company's
Restated Certificate of Incorporation and Restated Bylaws is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior), except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of the Company or any stockholder to seek
nonmonetary relief such as an injunction or rescission in the event of a breach
of a director's duty of loyalty. In addition, the Company's Restated Certificate
of Incorporation and Restated Bylaws provide that the Company shall indemnify
its directors and officers, against losses incurred by any such person by reason
of the fact that such person was acting in such capacity.
CERTAIN ANTI-TAKEOVER EFFECTS
The provisions of the Restated Certificate of Incorporation and the Restated
Bylaws of the Company summarized above may be deemed to have anti-takeover
effects and may delay, defer or prevent a tender offer or takeover attempt that
a stockholder might consider to be in such stockholder's best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders. See "Risk Factors--Anti-Takeover
Provisions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is UMB Bank, N.A.,
Kansas City, Missouri.
48
<PAGE>
UNDERWRITING
Subject to certain terms and conditions contained in an underwriting
agreement (the "Underwriting Agreement"), the Underwriters named below for whom
DLJ and Morgan Stanley & Co. Incorporated are serving as representatives (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Stockholders, the respective number of shares of Common Stock set forth
opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........................................
Morgan Stanley & Co. Incorporated..........................................................
----------
Total.................................................................................... 3,666,667
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all of the shares of Common Stock (other than the shares
of Common Stock covered by the Underwriters' over-allotment option described
below) must be so purchased.
Prior to this offering, there has been no established trading market for the
Common Stock. The initial price to the public for the Common Stock offered
hereby will be determined by negotiation between the Company and the
Representatives. The factors to be considered in determining the initial price
to the public include the history of and the prospects for the industry in which
the Company competes, the performance and ability of the Company's management,
the past and present operations of the Company, the historical results of
operations of the Company, the prospects for future earnings of the Company, the
general condition of the securities markets at the time of this offering and the
recent market prices of securities of generally comparable companies. The
estimated initial public offering price range set forth on the cover page of
this Prospectus is subject to change as a result of market conditions and other
factors.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the price
to the public set forth on the cover page of this Prospectus and to certain
dealers (who may include the Underwriters) at such price less a concession not
to exceed $ per share. The Underwriters may allow, and such dealers may
reallow, discounts not in excess of $ per share to any other Underwriter
and certain other dealers. After this offering, the offering price and other
selling terms may be changed by the Underwriters.
The Selling Stockholders have granted to the Underwriters an option to
purchase up to an aggregate of 550,000 additional shares of Common Stock, pro
rata based on the number of shares of Common Stock being offered hereby by the
Selling Stockholders, at the initial public offering price less underwriting
discounts and commissions, solely to cover over-allotments. Such option may be
exercised in whole or in part from time to time during the 30-day period after
the date of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase from the Selling Stockholders on a pro rata basis a
number of option shares proportionate to such Underwriter's initial commitment
as indicated in the preceding table.
49
<PAGE>
The Underwriters have reserved up to 5% of the shares of Common Stock
offered hereby for sale at the initial public offering price to certain
employees, consultants and other persons associated with the Company. The number
of shares of Common Stock available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same basis as the other shares offered hereby. This program will
be administered by DLJ.
The Company and the Selling Stockholders have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
in any manner transfer all or a portion of the economic consequences associated
with the ownership of such Common Stock, or to cause a registration statement
covering any shares of Common Stock to be filed, for 180 days after the date of
this Prospectus without the prior written consent of DLJ, subject to certain
limited exceptions, and provided that the Company may grant options pursuant to,
and issue shares of Common Stock upon the exercise of options under the Option
Plan and the Director Option Plan. See "Shares Eligible for Future Sale."
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members in
the offering, if the syndicate repurchases previously distributed Common Stock
in syndicate covering transactions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the Common
Stock above independent market levels. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
The Representatives have informed the Company that they do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of % of the number of shares of Common Stock offered hereby.
The Common Stock has been approved for listing on the New York Stock
Exchange ("NYSE") under the symbol "SRT," pending notification of issuance. In
order to meet the requirements for listing on the NYSE, the Underwriters have
undertaken to sell lots of 100 or more shares of Common Stock to a minimum of
2,000 beneficial holders.
50
<PAGE>
LEGAL MATTERS
The validity of the shares of the Common Stock offered hereby will be passed
upon for the Company by Otten, Johnson, Robinson, Neff & Ragonetti, P.C.,
Denver, Colorado. Certain legal matters will be passed upon for the Underwriters
by Morgan, Lewis & Bockius LLP, Los Angeles, California.
EXPERTS
The Consolidated Financial Statements of StarTek, Inc. and subsidiaries at
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and the Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement"), of which this Prospectus forms a part, covering the Common Stock to
be sold pursuant to this offering. As permitted by the rules and regulations of
the Commission, this Prospectus omits certain information, exhibits and
undertakings contained in the Registration Statement. Such additional
information, exhibits and undertakings can be inspected at and obtained from the
Commission at prescribed rates at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 and at certain regional offices of the Commission located
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 13th Floor, 7 World Trade Center, New York, New York, 10048.
The Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. In addition, the Company intends
to file an application to list the Common Stock on the NYSE, and following such
filing, the reports and other information concerning the Company may be
inspected at the offices of such exchange. For additional information with
respect to the Company, the Common Stock and related matters and documents,
reference is made to the Registration Statement. Statements contained herein
concerning any such document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety by such
reference.
The Company intends to furnish its stockholders with annual reports, which
will include audited consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States and a report
of its independent public accountants with respect to the examination of such
financial statements. In addition, the Company will make available to or furnish
its stockholders with such other interim reports as the Company deems
appropriate or as may be required by law.
51
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997............................ F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the three
months ended March 31, 1996 and 1997..................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 and
the three months ended March 31, 1996 and 1997........................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the three
months ended March 31, 1996 and 1997..................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
StarTek, Inc.
We have audited the accompanying consolidated balance sheets of StarTek,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. 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 a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of StarTek, Inc.
and subsidiaries at December 31, 1995 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Denver, Colorado
February 18, 1997
F-2
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
(NOTE 1)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------------- MARCH 31, MARCH 31,
1995 1996 1997 1997(NOTE 2)
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 451,456 $ 2,742,313 $ 5,684,058 $5,684,058
Trade accounts receivable, less allowance for doubtful
accounts of $197,747, $311,172 and $373,609 in 1995,
1996 and 1997, respectively.......................... 13,261,904 11,030,948 8,349,298 8,349,298
Inventories (Note 3)................................... 1,357,843 2,535,091 2,640,031 2,640,031
Prepaid expenses and other............................. 225,162 140,132 506,199 506,199
Notes receivable--stockholders (Note 13)................. 663,494 -- -- --
------------ ------------ ------------ ------------
Total current assets..................................... 15,959,859 16,448,484 17,179,586 17,179,586
Property, plant and equipment, net (Note 4).............. 5,614,670 6,527,238 6,276,601 6,276,601
Other assets............................................. 5,627 3,000 3,000 3,000
------------ ------------ ------------ ------------
Total assets............................................. $ 21,580,156 $ 22,978,722 $ 23,459,187 $23,459,187
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 5)................................ $ 3,450,708 $ 3,500,000 $ 3,500,000 $3,500,000
Accounts payable....................................... 9,705,673 6,961,675 5,430,335 5,430,335
Accrued liabilities.................................... 551,588 1,584,347 736,499 736,499
Current portion of capital lease obligations........... 547,595 917,244 910,775 910,775
Current portion of long-term debt...................... 7,059 5,673 187,500 187,500
Accrued amounts due stockholders (Note 13)............. -- -- 792,835 792,835
Notes payable--stockholders (Note 13).................. 738,494 -- -- --
Other.................................................. 161,049 583,813 747,398 747,398
Notes payable to Principal Stockholders (Note 14)...... -- -- -- 8,080,779
------------ ------------ ------------ ------------
Total current liabilities................................ 15,162,166 13,552,752 12,305,342 20,386,121
Capital lease obligations, less current portion (Note
6)..................................................... 1,084,575 1,503,702 1,280,543 1,280,543
Long-term debt, less current portion (Note 7)............ 353,787 548,175 1,481,250 1,481,250
Note payable--affiliate (Note 13)........................ 1,111,844 -- -- --
Other.................................................... 69,885 271,305 234,183 234,183
Commitments (Note 6)
Stockholders' equity (Notes 9 and 10)
Common stock............................................. 432 432 336 336
Additional paid-in capital............................... 2,907,826 6,148,196 6,148,292 --
Cumulative translation adjustment........................ (9,922) 129,056 76,754 76,754
Retained earnings........................................ 1,112,897 1,038,438 1,932,487 --
Note receivable--stockholder for the exercise of stock
options (Note 10)...................................... (213,334) (213,334) -- --
------------ ------------ ------------ ------------
Total stockholders' equity............................... 3,797,899 7,102,788 8,157,869 77,090
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity............... $ 21,580,156 $ 22,978,722 $ 23,459,187 $23,459,187
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying Notes.
F-3
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
(NOTE 1)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS
YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED MARCH 31, PRO FORMA
------------------------------------- 1996 ------------------------ MARCH 31,
1994 1995 1996 (NOTE 2) 1996 1997 1997(NOTE 2)
----------- ----------- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues............................ $26,340,985 $41,509,363 $71,583,861 $ 71,583,861 $15,219,397 $16,666,614 $16,666,614
Cost of services.................... 21,354,828 33,230,050 57,238,261 57,238,261 12,655,001 12,731,930 12,731,930
----------- ----------- ----------- ------------- ----------- ----------- ------------
Gross profit........................ 4,986,157 8,279,313 14,345,600 14,345,600 2,564,396 3,934,684 3,934,684
Selling, general and administrative
expenses.......................... 4,489,529 5,341,384 7,763,900 7,763,900 1,706,386 2,163,423 2,163,423
Management fee expense (Note 2)..... 612,440 2,599,612 6,172,135 -- 199,030 792,835 --
----------- ----------- ----------- ------------- ----------- ----------- ------------
Operating profit (loss)............. (115,812) 338,317 409,565 6,581,700 658,980 978,426 1,771,261
Net interest expense and other (Note
8)................................ 215,541 396,255 372,134 372,134 125,703 84,377 84,377
----------- ----------- ----------- ------------- ----------- ----------- ------------
Income (loss) before income taxes... (331,353) (57,938) 37,431 6,209,566 533,277 894,049 1,686,884
Income tax expense (Note 2)......... -- -- 111,890 2,316,168 -- -- 629,208
----------- ----------- ----------- ------------- ----------- ----------- ------------
Net income (loss)................... $ (331,353) $ (57,938) $ (74,459) $ 3,893,398 $ 533,277 $ 894,049 $ 1,057,676
----------- ----------- ----------- ------------- ----------- ----------- ------------
----------- ----------- ----------- ------------- ----------- ----------- ------------
Pro forma net income per share (Note
2)................................ $ 0.34 $ 0.09
Shares outstanding (Note 2)......... 11,293,458 11,367,290
</TABLE>
See accompanying Notes.
F-4
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
(NOTE 1)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL NOTE CUMULATIVE
PAID-IN RETAINED RECEIVABLE-- TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDER ADJUSTMENT
--------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994................... 35,612 $ 355 $ 1,123,419 $ 1,502,188 $ -- $ (2,121)
Issuance of stock for cash............... 6,925 70 726,816 -- -- --
Translation loss......................... -- -- -- -- -- (12,928)
Net loss................................. -- -- -- (331,353) -- --
--------- ----- ----------- ----------- ------------ -----------
Balance, December 31, 1994................. 42,537 425 1,850,235 1,170,835 -- (15,049)
Issuance of stock for cash............... 820 8 89,195 -- -- --
Issuance of stock for options exercised.. 1,728 17 231,147 -- -- --
Note receivable--stockholder............. -- -- -- -- (213,334) --
Repurchase of stock...................... (1,885) (18) (129,724) -- -- --
Contributed capital...................... -- -- 866,973 -- -- --
Translation gain......................... -- -- -- -- -- 5,127
Net loss................................. -- -- -- (57,938) -- --
--------- ----- ----------- ----------- ------------ -----------
Balance, December 31, 1995................. 43,200 432 2,907,826 1,112,897 (213,334) (9,922)
Contributed capital...................... -- -- 3,240,370 -- -- --
Translation gain......................... -- -- -- -- -- 138,978
Net loss................................. -- -- -- (74,459) -- --
--------- ----- ----------- ----------- ------------ -----------
Balance, December 31, 1996................. 43,200 432 6,148,196 1,038,438 (213,334) 129,056
Payment of note receivable--stockholder
(unaudited)............................ -- -- -- -- 213,334 --
Contribution of StarPak International,
Ltd. (unaudited)....................... (9,582) (96) 96 -- -- --
Translation loss (unaudited)............. -- -- -- -- -- (52,302)
Net income (unaudited)................... -- -- -- 894,049 -- --
--------- ----- ----------- ----------- ------------ -----------
Balance, March 31, 1997 (unaudited)........ 33,618 $ 336 $ 6,148,292 $ 1,932,487 $ -- $ 76,754
--------- ----- ----------- ----------- ------------ -----------
--------- ----- ----------- ----------- ------------ -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance, January 1, 1994................... $2,623,841
Issuance of stock for cash............... 726,886
Translation loss......................... (12,928)
Net loss................................. (331,353)
------------
Balance, December 31, 1994................. 3,006,446
Issuance of stock for cash............... 89,203
Issuance of stock for options exercised.. 231,164
Note receivable--stockholder............. (213,334)
Repurchase of stock...................... (129,742)
Contributed capital...................... 866,973
Translation gain......................... 5,127
Net loss................................. (57,938)
------------
Balance, December 31, 1995................. 3,797,899
Contributed capital...................... 3,240,370
Translation gain......................... 138,978
Net loss................................. (74,459)
------------
Balance, December 31, 1996................. 7,102,788
Payment of note receivable--stockholder
(unaudited)............................ 213,334
Contribution of StarPak International,
Ltd. (unaudited)....................... --
Translation loss (unaudited)............. (52,302)
Net income (unaudited)................... 894,049
------------
Balance, March 31, 1997 (unaudited)........ $8,157,869
------------
------------
</TABLE>
See accompanying Notes.
F-5
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
(NOTE 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ (331,353) $ (57,938) $ (74,459) $ 533,277 $ 894,049
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 588,222 873,246 1,437,843 290,277 495,000
Changes in operating assets and liabilities:
Accounts receivable................................... (3,332,112) (6,225,471) 2,230,956 4,023,630 2,681,650
Inventories........................................... 14,759 (471,348) (1,177,248) (712,451) (104,940)
Prepaid expenses and other assets..................... 15,710 (74,844) 87,657 (28,264) (366,067)
Accounts payable...................................... 3,172,354 4,147,286 (2,743,998) (1,619,082) (1,531,340)
Accrued and other liabilities......................... 270,611 283,519 1,656,943 231,471 (721,385)
Accrued management fees............................... -- -- -- 199,030 792,835
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities....... 398,191 (1,525,550) 1,417,694 2,917,888 2,139,802
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (670,218) (2,104,525) (1,333,316) (411,634) (266,971)
Collections (advances) on notes receivable--stockholders.. (97,049) 110,381 663,494 -- 213,334
Collections (advances) on notes receivable--affiliate..... (587,133) 667,800 -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities..................... (1,354,400) (1,326,344) (669,822) (411,634) (53,637)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit borrowings............... 1,209,052 1,451,656 49,292 (543,608) --
Principal payments on borrowings.......................... (364,282) (1,654) (6,998) (1,692) (385,098)
Proceeds from borrowings and capital lease obligations.... -- 362,500 819,025 200,749 1,500,000
Principal payments on capital lease obligations........... (395,412) (589,624) (847,344) (207,616) (229,628)
Principal payments on notes payable--stockholders......... -- -- (738,494) -- --
Proceeds from (principal payments on) note payable--
affiliate............................................... (100,000) 1,111,844 (1,111,844) 90,000 --
Issuance of common stock.................................. 726,886 107,033 -- -- --
Contributed capital....................................... -- 866,973 3,240,370 -- --
Repurchase of common stock................................ -- (129,742) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities................. 1,076,244 3,178,986 1,404,007 (462,167) 885,274
Effect of exchange rate changes on cash................... (12,928) 5,127 138,978 36,779 (29,694)
----------- ----------- ----------- ----------- -----------
Net increase in cash and cash equivalents................. 107,107 332,219 2,290,857 2,080,866 2,941,745
Cash and cash equivalents at beginning of period.......... 12,130 119,237 451,456 451,456 2,742,313
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period................ $ 119,237 $ 451,456 $ 2,742,313 $ 2,532,322 $ 5,684,058
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................... $ 212,981 $ 365,880 $ 535,107 $ 144,757 $ 113,152
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Equipment acquired or refinanced under capital leases..... $ 65,153 $ 1,671,504 $ 1,017,095 $ 226,914 --
Note received in exchange for the purchase of common stock
from options exercised.................................. -- $ 213,334 -- -- --
Contributed common stock.................................. -- -- -- -- $ 96
</TABLE>
See accompanying Notes.
F-6
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
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, StarPak, Inc. and
StarPak International, Ltd. (whose stockholder groups were substantially
identical) conducted business as affiliates under common control. Effective
January 1, 1997, the stockholders of StarPak, Inc. exchanged all of the
outstanding shares of capital stock of StarPak, Inc. for shares of common stock
of the Company, and StarPak, Inc. became a wholly-owned subsidiary of the
Company. Effective January 24, 1997, the shareholders of StarPak International,
Ltd. contributed all of its outstanding shares of capital stock to the Company,
and StarPak International, Ltd. became a wholly-owned subsidiary of the Company.
Because the shareholder groups of StarPak, Inc. and StarPak International, 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 StarPak, Inc. and StarPak International, Ltd. After January
1, 1997, the accompanying consolidated financial statements include the accounts
of StarTek, Inc. and its wholly-owned subsidiaries, StarPak, Inc. and StarPak
International, Ltd. All significant intercompany transactions have been
eliminated.
BUSINESS OPERATIONS
The Company is an international provider of integrated outsourced services
primarily for Fortune 500 companies in targeted industries. The Company offers a
wide spectrum of services throughout a product's life cycle, including product
order teleservices, supplier management, product assembly and packaging, product
distribution, product fulfillment, customer care and technical support
teleservices. The Company has operations in North America, Europe and Asia.
INTERIM FINANCIAL INFORMATION
The consolidated financial information as of March 31, 1997 and for the
three months ended March 31, 1996 and 1997 is unaudited, but includes all
adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the financial position at
March 31, 1997, and the results of operations and cash flows for the periods
ended March 31, 1996 and 1997. Interim results are not necessarily indicative of
the results which may be expected for any other interim period or for a full
year.
FOREIGN CURRENCY TRANSLATION
Translation gains and losses are accumulated as a separate component of
stockholders' equity. Translation gains and losses were not material for any
period presented. Foreign currency transaction gains and losses are included in
determining net income. Such gains and losses were not material for any period
presented.
NEW ACCOUNTING STANDARDS
In March 1995, FAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, was issued, which requires
impairment losses to be recorded on long-lived assets
F-7
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. FAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted FAS
No. 121 in the first quarter of 1996. The effect of adoption was not material.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement No. 128 on the
calculation of earnings per share is not expected to be material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized as services are performed under each client
contract, which services may include product order teleservices, supplier
management, product assembly and packaging, product distribution, product order
fulfillment, and customer care and technical support teleservices.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents, accounts
receivable and payable, notes receivable, debt and capital lease obligations.
The carrying values of cash and accounts receivable and payable approximate fair
value. Management believes the difference between the fair values and carrying
values of the notes receivable, debt and capital lease obligations would not be
materially different since interest rates approximate market rates for material
items.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
F-8
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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. Costs related to the internal development of software are
expensed as incurred.
Depreciation and amortization of equipment acquired under capital leases are
computed using the straight-line method based on the following estimated useful
lives:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE
--------------------
<S> <C>
Buildings............................................................... 30 years
Equipment, and equipment acquired under capital leases.................. 3 to 5 years
Furniture and fixtures.................................................. 7 years
</TABLE>
INCOME TAXES
Effective July 1, 1992, StarPak, Inc. elected Subchapter S status for income
tax purposes, and StarPak International, Ltd. has maintained Subchapter S status
since inception. As such, the income and expenses of the Company are reportable
on the tax returns of the stockholders, and no provision has been made for
federal and state income taxes. The Company is subject to foreign income taxes
on certain of its operations.
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 expense, 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 offering, these management fees,
bonuses and other fees will be discontinued.
After the closing of the 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 $516,000 annually) and will be included in selling,
general and administrative expenses. Such advisory fees and salaries, together
with payments under the operating lease described in Note 6, are reflected as
selling, general and administrative expense as set forth below.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Selling general and administrative
expense......................................... $ 660,973 $ 560,002 $ 564,198 $ 135,205 $ 128,950
Management fee expense........................... $ 612,440 $ 2,599,612 $ 6,172,135 $ 199,030 $ 792,835
</TABLE>
F-9
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(CONTINUED)
2. PRO FORMA INFORMATION (UNAUDITED) (SEE NOTE 14)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The pro forma consolidated statement of operations for the year ended
December 31, 1996 and the three months ended March 31, 1997 presents the effect
on the historical consolidated financial statements of the elimination of
management fee expense paid to stockholders and their affiliates as these fees
will be discontinued upon the completion of the offering and to provide related
income taxes as if the Company were taxed as a C corporation.
PRO FORMA CONSOLIDATED BALANCE SHEET
The pro forma consolidated balance sheet at March 31, 1997 reflects, as
notes payable to the Principal Stockholders, amounts relating to accumulated
retained earnings and additional paid-in capital without reflecting any proceeds
from the offering.
INCOME TAXES
Upon closing of the proposed public offering, the Company's S corporation
status will terminate. The pro forma consolidated statement of operations
reflects a provision for federal, state and foreign income taxes at an effective
rate of 37.3%.
PRO FORMA NET INCOME PER COMMON SHARE
Pro forma net income per common share is based on the number of shares of
StarTek common stock to be outstanding after contribution of all StarPak, Inc.
and StarPak International, Ltd. shares, after giving effect to a 322.1064 for
one stock split of the common stock of StarTek, Inc. In addition, the
calculation includes 464,887 and 538,719 shares at December 31, 1996 and March
31, 1997, respectively, deemed to be outstanding, representing the number of
shares (at an assumed initial public offering price of $15.00 per share)
sufficient to fund payment of the Notes Payable to Principal Stockholders.
3. 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. These components are shown as raw
materials inventory in the Company's balance sheet. At the close of an
accounting period, packaged and assembled products (together with other
associated costs) are reflected as finished goods inventory, pending shipment.
The Company generally has the right to be reimbursed by the client for unused
inventory. Client-owned inventories are not reflected in the Company's balance
sheet.
Total inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996 MARCH 31, 1997
------------ ------------ --------------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials.................................... $ 1,281,363 $ 2,326,942 $ 2,317,766
Finished goods................................... 76,480 208,149 322,265
------------ ------------ --------------
$ 1,357,843 $ 2,535,091 $ 2,640,031
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
F-10
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996 MARCH 31, 1997
------------ ------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Land............................................ $ 374,234 $ 374,234 $ 374,234
Buildings....................................... 1,553,028 1,553,028 1,553,028
Equipment....................................... 5,026,605 7,340,059 7,575,978
Furniture and fixtures.......................... 890,371 927,328 925,861
------------ ------------- --------------
7,844,238 10,194,649 10,429,101
Less accumulated depreciation and
amortization.................................. (2,229,568) (3,667,411) (4,152,500)
------------ ------------- --------------
Property, plant and equipment, net.............. $ 5,614,670 $ 6,527,238 $ 6,276,601
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
5. LINE OF CREDIT
At December 31, 1996 and March 31, 1997, the Company had a revolving line of
credit agreement with a bank whereby the bank agreed to loan the Company up to
$4,500,000 and $3,500,000, respectively. Interest was payable monthly and
accrued at the bank's base rate plus 1% at December 31, 1996 (9.25%) and March
31, 1997 (9.5%), payable monthly. This revolving line of credit will mature on
June 30, 1999. At December 31, 1996 and March 31, 1997, the Company had drawn
$3,500,000 and $3,500,000, respectively, against this line.
Under the revolving line of credit agreement the Company has pledged as
security all of its equipment, inventories and receivables. The Company must
also maintain certain financial ratios, and is subject to certain restrictions
on the payment of dividends, capital expenditures and loans to affiliates and
stockholders.
6. LEASES
The Company had an operating lease for office space with a partnership in
which major stockholders of the Company are the general partner and a limited
partner. Payments under the lease for the years ended December 31, 1994, 1995
and 1996 were $70,000 each year. The lease was cancelled effective December 31,
1996.
The Company's property held under capital leases consists of the following,
which is included in property, plant and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Equipment......................................... $ 3,014,273 $ 4,650,393 $ 3,149,520
Less accumulated amortization..................... (998,286) (1,930,257) (1,106,897)
------------ ------------- -------------
$ 2,015,987 $ 2,720,136 $ 2,042,623
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
F-11
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(CONTINUED)
6. LEASES (CONTINUED)
As of December 31, 1996, future minimum rental commitments, by year and in
the aggregate, for the capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED DECEMBER 31, LEASES LEASES
- -------------------------------------------------------------------- ------------ ----------
<S> <C> <C>
1997................................................................ $ 1,101,782 $ 126,828
1998................................................................ 941,393 42,708
1999................................................................ 492,275 --
2000................................................................ 186,155 --
2001................................................................ 52,895 --
------------ ----------
Total minimum lease payments........................................ 2,774,500 $ 169,536
----------
----------
Amounts representing interest....................................... (353,554)
------------
Present value of net minimum lease payments......................... $ 2,420,946
------------
------------
</TABLE>
During the three months ended March 31, 1997 and in April 1997, the Company
entered into operating leases which require payments of $22,082 per month from
April 1997 through March 2000 and $5,191 per month from June 1997 through May
2000.
Rental expense, including equipment rentals, for 1994, 1995, 1996, and the
three months ended March 31, 1996 and 1997, was $229,925, $294,714, $382,480,
$62,839 and $80,643, respectively.
7. LONG-TERM DEBT
During 1995, the Company purchased land and an existing building for
approximately $1,500,000. The purchase was financed through the Company's
revolving line of credit and a mortgage loan in the amount of $362,500. In
January 1997, the outstanding balance of $353,848 was refinanced from proceeds
of a $1,500,000 mortgage loan on the same property. The loan bears interest at
the bank's base rate plus 2% (10.50% at March 31, 1997). The loan is payable in
monthly installments of $15,625 plus accrued interest until the earlier of June
30, 1999 or the date of termination of the revolving line of credit, when the
remaining principal balance is due.
In December 1996, the Company received a $200,000 economic development loan
which bears interest at 6% per annum and is collateralized by certain equipment.
Interest payments are due quarterly and, beginning January 1, 1999 and
continuing through January 1, 2001, principal payments of $30,000 are due
semi-annually. A final principal payment of $50,000 is due on July 1, 2001.
Future scheduled annual principal payments of long-term debt as of December
31, 1996 (including the effects of the above-described loan refinanced by the
Company in January 1997) are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 187,500
1998............................................................ 187,500
1999............................................................ 1,185,000
2000............................................................ 60,000
2001............................................................ 80,000
---------
$1,700,000
---------
---------
</TABLE>
F-12
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(CONTINUED)
8. NET INTEREST EXPENSE AND OTHER
Net interest expense and other consists of the following items:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Interest expense............ $ (239,068) $ (445,849) $ (443,764) $ (178,046) $ (141,469)
Interest income............. 12,782 2,595 18,288 28,777 48,960
Other income and expense.... 10,745 46,999 53,342 23,566 8,132
----------- ----------- ----------- ----------- -----------
Total....................... $ (215,541) $ (396,255) $ (372,134) $ (125,703) $ (84,377)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
9. STOCKHOLDERS' EQUITY
The consolidated common stock and additional paid-in capital on a
company-by-company basis as of December 31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN
STOCK CAPITAL
----------- ------------
<S> <C> <C>
DECEMBER 31, 1995
StarPak, Inc.--5,000,000 shares, $.01 par value, authorized; 33,618 shares
outstanding.................................................................. $ 336 $ 2,703,497
StarPak International, Ltd.--5,000,000 shares, $.01 par value, authorized;
9,582 shares outstanding..................................................... 96 204,329
----- ------------
$ 432 $ 2,907,826
----- ------------
----- ------------
DECEMBER 31, 1996
StarPak, Inc.--5,000,000 shares, $.01 par value, authorized; 33,618 shares
outstanding.................................................................. $ 336 $ 5,638,771
StarPak International, Ltd.--5,000,000 shares, $.01 par value, authorized;
9,582 shares outstanding..................................................... 96 509,425
----- ------------
$ 432 $ 6,148,196
----- ------------
----- ------------
</TABLE>
The capital stock and additional paid-in capital of StarTek as of March 31,
1997 was as follows:
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL
----------- ----------- ------------
<S> <C> <C> <C>
(UNAUDITED)
MARCH 31, 1997
StarTek, Inc.--undesignated, 15,000,000 shares, $.01 par value,
authorized; no shares outstanding................................. -- -- --
StarTek, Inc.--95,000,000 shares, $.01 par value, authorized; 33,618
shares outstanding................................................ -- $ 336 $ 6,148,292
----------- ----- ------------
----------- ----- ------------
</TABLE>
F-13
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(CONTINUED)
10. STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under FAS Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense has been
recognized.
Effective July 24, 1987, the stockholders of StarPak, 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 could be exercised for a period of not more than ten
years and one month from the date of grant, or any shorter period as determined
by StarPak, 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 the 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.
This Plan was terminated effective January 24, 1997.
On February 13, 1997, the Company's Board of Directors approved the StarTek,
Inc. Stock Option Plan ("Option Plan") and, on January 27, 1997, the Director
Stock Option Plan ("Director Option Plan").
The Option Plan was established to provide stock options, SARs and incentive
stock options (cumulatively referred to as "Options") to key employees,
directors (other than non-employee directors), consultants, and other
independent contractors. The plan provides for Options to be granted for a
maximum of 985,000 shares of common stock, which are to be awarded by
determination of a committee of non-employee directors. Unless otherwise
determined by the committee, all Options granted under the Option Plan vest 20%
annually beginning on the first anniversary of the Option's 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 option's grant date, (ii) three
months after the termination of employment of the participant as outlined by the
plan, or (iii) the date six months after the participant's death.
The Director Option Plan was established to provide stock options to
non-employee directors who are elected prior to the option's grant date and
serve continuously from the commencement of their term. The plan provides for
stock options to be granted for a maximum of 90,000 shares of common stock.
Participants are automatically granted options to acquire 10,000 shares of
common stock upon the later of their election as a director or the closing of
the initial public offering of the Company's common stock (see Note 14).
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 director is reelected. All options granted under the
Director Option Plan are fully vested upon grant and expire at the earlier of
(i) the date of the participant's membership on the board is terminated for
cause, (ii) ten years from the option grant date, or (iii) the date one year
after the director's death.
F-14
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(CONTINUED)
10. STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
------------------------------- ENDED MARCH
1994 1995 1996 31, 1997
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Outstanding-beginning of period..................... 1,728 1,728 -- --
Granted............................................. -- -- -- --
Exercised........................................... -- 1,728 -- --
Canceled............................................ -- -- -- --
--------- --------- --------- -------
Outstanding at end of period........................ 1,728 -- -- --
--------- --------- --------- -------
--------- --------- --------- -------
Exercisable at end of period........................ 472 -- -- --
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
Exercise prices for options outstanding as of December 31, 1994 and
exercised during 1995 ranged from $21 to $320 and had a weighted average price
of $134. Options for 6,597 shares of common stock were available for grant at
the beginning and end of the years 1994, 1995, and 1996.
During 1995, StarPak, Inc.'s Board of Directors accelerated the vesting on
all outstanding options to allow the holders to exercise any granted option.
Subsequently, all outstanding options were exercised. In aggregate, the option
holders paid $17,830 in cash and delivered a note of $213,334 bearing interest
at 4.63% to StarPak, Inc. in exchange for shares of common stock. This note was
secured by 896 shares of StarPak, Inc. common stock. On January 22, 1997, the
note and all accrued interest thereon was repaid in full.
11. GEOGRAPHIC AREA INFORMATION
To date, the Company operates in North America, Europe and Asia. The
Company's operations in Asia were not material and have been combined with North
America in the following table. Prior to fiscal 1995, the Company operated
primarily in North America.
Information regarding geographical areas is as follows:
<TABLE>
<CAPTION>
NORTH AMERICA EUROPE ELIMINATIONS TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenues................................... $ 37,376,167 $ 4,133,196 -- $ 41,509,363
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Operating profit........................... $ 173,678 $ 164,639 -- $ 338,317
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Identifiable assets........................ $ 19,355,906 $ 3,090,170 $ (865,920) $ 21,580,156
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
YEAR ENDED DECEMBER 31, 1996
Revenues................................... $ 59,562,623 $ 12,021,238 -- $ 71,583,861
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Operating profit........................... $ 376,841 $ 32,724 -- $ 409,565
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Identifiable assets........................ $ 21,235,666 $ 3,459,106 $ (1,716,050) $ 22,978,722
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
F-15
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(CONTINUED)
12. SIGNIFICANT CLIENTS
Two clients accounted for 39.6% and 15.9% of revenues for the year ended
December 31, 1994. Two clients accounted for 46.3% and 10.9% of revenues for the
year ended December 31, 1995. Two clients accounted for 38.4% and 33.4% of
revenues for the year ended December 31, 1996. Two clients accounted for 44.2%
and 36.1% of revenues for the three months ended March 31, 1997.
The loss of one or more of its significant clients 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 significant
credit risk exists at December 31, 1996 or March 31, 1997.
13. RELATED PARTY TRANSACTIONS
The Company had the following notes receivable and payable from related
parties for the noted periods:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Notes receivable from stockholders bearing interest of 8.5%
and refinanced annually to be due at the end of the
following fiscal year. These notes were repaid by the
stockholders on November 22, 1996........................... $ 663,494 -- --
Notes payable to stockholders bearing interest of 8.5% and
refinanced annually to be due at the end of the following
fiscal year. These notes were repaid by the Company on
November 22, 1996........................................... $ 663,494 -- --
Notes payable to stockholders bearing interest at 12% and
refinanced annually to be due at the end of the following
fiscal year. These notes were repaid by the Company on
November 22, 1996........................................... $ 75,000 -- --
Note payable to affiliate bearing interest equal to the
Company's line of credit rate and due on January 31,
1997........................................................ $ 1,111,844 -- --
</TABLE>
For the three months ended March 31, 1997, the Company accrued management
fees and bonuses of approximately $793,000 based on estimated tax requirements
of the recipients of the management fees and bonuses. On April 15, 1997, the
Company paid management fees and bonuses of approximately $2.7 million after
giving consideration to operating profits for the first quarter and the effects
of certain expense timing differences for book and tax purposes. From the
management fees and bonuses received, the Principal Stockholders contributed
approximately $1.4 million to the capital of the Company.
F-16
<PAGE>
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(CONTINUED)
14. PLANNED EVENTS SUBSEQUENT TO MARCH 31, 1997 (UNAUDITED)
The Company is contemplating an initial public offering of its common stock.
Immediately prior to closing the offering, the Company will declare a
322.1064 for one stock split to be effected by a stock dividend, and declare a
dividend in an amount equal to the estimated additional paid-in capital and
retained earnings of the Company as of the closing date, payable to the
principal stockholders (the "Principal Stockholders") pursuant to certain
promissory notes, which will equal approximately $8.1 million, plus an
adjustment for any additional paid-in capital and retained earnings after March
31, 1997 through the closing date. The promissory notes payable to the Principal
Stockholders will be paid from net proceeds of the offering to the Company.
Upon closing of the offering, the S corporation status of the Company will
be terminated and the Company will be taxed as a C corporation thereafter. Upon
termination of the Company's S corporation status, the Company will be required
to record a one-time credit to earnings to record a net deferred tax asset. If
this credit were recorded at March 31, 1997, the amount would have been
approximately $299,000, relating to temporary differences primarily resulting
from accrued expense and depreciation. Additionally, the management fee, bonus
and other fee arrangements as described in Note 2 will be discontinued upon
completion of the offering.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFERING OR SOLICITATION
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Offering Related Transactions................... 14
Use of Proceeds................................. 15
Dividend Policy................................. 15
Capitalization.................................. 16
Dilution........................................ 17
Selected Financial Data......................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 19
Business........................................ 29
Management...................................... 38
Certain Relationships and Related Party
Transactions.................................. 42
Principal and Selling Stockholders.............. 44
Shares Eligible for Future Sale................. 46
Description of Capital Stock.................... 47
Underwriting.................................... 49
Legal Matters................................... 51
Experts......................................... 51
Additional Information.......................... 51
Index to Consolidated Financial Statements...... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,666,667 SHARES
[LOGO AND ART]
------------------------
COMMON STOCK
---------------------
PROSPECTUS
---------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY & CO.
INCORPORATED
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses (other than the underwriting discounts and commissions)
payable in connection with the issuance and distribution of the securities to be
registered hereunder are as follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 20,445
NASD filing fee................................................... 6,947
NYSE listing fee.................................................. 118,000
Printing and engraving expenses................................... 45,000
Legal fees and expenses........................................... 140,000
Accounting fees and expenses...................................... 150,000
Blue Sky fees and expenses (including legal fees)................. 10,000
Transfer agent and registrar fees and expenses.................... 7,000
Miscellaneous..................................................... 2,608
---------
Total......................................................... $ 500,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Certificate of Incorporation and Restated Bylaws
provide that to the fullest extent permitted by the DGCL, a director of the
Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director. Under the DGCL, liability of
a director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders; (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law;
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases; and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of the provisions of the Company's
Restated Certificate of Incorporation and Restated Bylaws is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior), except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of the Company or any stockholder to seek
nonmonetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. In addition, the Company's Restated Certificate of
Incorporation and Restated Bylaws provide that the Company shall indemnify its
directors and officers, against losses incurred by any such person by reason of
the fact that such person was acting in such capacity.
The Form of Underwriting Agreement filed as Exhibit 1.1 to the Registration
Statement provides for indemnification by the Underwriters of the Company and
its directors and officers for certain liabilities arising under the Securities
Act or otherwise.
Prior to closing this offering, the Company may obtain an annually renewable
directors' and officers' insurance policy insuring directors and officers of the
Company against claims made against them in their individual capacities in an
amount of up to $5,000,000 in the aggregate (with certain restrictions) in
conjunction with their duties as directors and officers of the Company; however,
the Company is not obligated to obtain any such insurance coverage.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Described below is information regarding all unregistered securities that
have been issued by the Company during the past three years. The number of
shares of Common Stock set forth in this Item 15 have not been adjusted to give
effect to the 322.1064 for one stock split of the Company's Common Stock to be
effected by a stock dividend immediately prior to and subject to closing this
offering.
On January 1, 1997, the Company issued 33,618 shares of Common Stock to the
Principal Stockholders in exchange for the assignment to the Company by the
Principal Stockholders of all of the issued and outstanding shares of common
stock of StarPak, Inc., in reliance upon Section 4(2) of the Securities Act as a
transaction not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------
<C> <S>
*1.1 Form of Underwriting Agreement
*1.2 Form of Lock-up Agreement
*3.1 Restated Certificate of Incorporation of the Company
*3.2 Restated Bylaws of the Company
*4.1 Specimen Common Stock certificate
*5.1 Opinion and Consent of Otten, Johnson, Robinson, Neff & Ragonetti, P.C.
*10.1 StarTek, Inc. Stock Option Plan
*10.2 Form of Stock Option Agreement
*10.3 Form of StarTek, Inc. Director Stock Option Plan
*10.4 Lease by and between East Mercia Developments Limited and StarPak International, Ltd. and StarPak,
Inc.
*10.5 Promissory Note of StarPak, Inc. dated December 29, 1995 in the principal amount of $1,111,844.17
payable to the order of General Communications, Inc.
***10.6 HP Purchase Agreement dated September 1, 1995 by and between Hewlett-Packard Company, StarPak, Inc.
and StarPak International Ltd.
***10.7 Microsoft Supply, Manufacturing and Services Agreement dated March 28, 1996 by and between Microsoft
Corporation and StarPak, Inc.
****10.8 Equipment Lease (Schedule No. 01) between Varilease Corporation, as Lessor, and StarPak, Inc., as
Lessee, dated March 7, 1997.
****10.9 Equipment Lease (Schedule No. 02) between Varilease Corporation, as Lessor, and StarPak, Inc., as
Lessee, dated April 15, 1997.
*21.1 List of Subsidiaries of the Company
**23.1 Consent of Ernst & Young LLP
*23.2 Consent of Otten, Johnson, Robinson, Neff & Ragonetti, P.C. (included in Exhibit 5.1)
*24.1 Power of Attorney (contained on page II-4)
**27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
** Revised and refiled herewith.
*** Certain portions of the Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with the Commission.
****Filed herewith.
II-2
<PAGE>
(b) Consolidated Financial Statement Schedules
All financial statement schedules are omitted because of the absence of
conditions under which they are required.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DENVER, STATE OF
COLORADO, ON THIS 23RD DAY OF MAY, 1997.
STARTEK, INC.
By: /s/ A. EMMET STEPHENSON, JR.
-----------------------------------------
A. Emmet Stephenson, Jr.
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ A. EMMET STEPHENSON, JR. Chairman of the Board and May 23, 1997
- ------------------------------ Director
A. Emmet Stephenson, Jr.
/s/ MICHAEL W. MORGAN Director, President and May 23, 1997
- ------------------------------ Chief Executive Officer
Michael W. Morgan (Principal Executive
Officer)
/s/ DENNIS M. SWENSON Executive Vice President May 23, 1997
- ------------------------------ and Chief Financial
Dennis M. Swenson Officer (Principal
Financial Officer and
Principal Accounting
Officer)
ED ZSCHAU* Director May 23, 1997
- ------------------------------
Ed Zschau
THOMAS O. RYDER* Director May 23, 1997
- ------------------------------
Thomas O. Ryder
*By: /s/ A. EMMET STEPHENSON
-------------------------
A. Emmet Stephenson, Jr.,
Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
10.8 Equipment Lease (Schedule No. 01) beteen Varilease Corporation, as Lessor, and StarPak, Inc., as
Lessee, dated March 7, 1997.
10.9 Equipment Lease (Schedule No. 02) between Varilease Corporation, as Lessor, and StarPak, Inc., as
Lessee, dated April 15, 1997.
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
II-5
<PAGE>
SCHEDULE NO. 01
dated March 7, 1997
incorporating by reference
Master Agreement dated March 7, 1997
between VARILEASE CORPORATION, as Lessor,
and STARPAK, INC., as Lessee.
LESSEE AGREES TO LEASE THE DESCRIBED EQUIPMENT FROM LESSOR, AND LESSOR BY
ACCEPTANCE OF THIS LEASE, AGREES TO LEASE THE EQUIPMENT TO LESSEE ON THE
TERMS AND CONDITIONS SET FORTH IN THIS SCHEDULE AND THE MASTER AGREEMENT,
WHICH IS INCORPORATED HEREIN BY REFERENCE.
1. Equipment Description:
Value for
Calculation
Model/ of Stip.
Qty Mfgr Feature Description Loss Value
Aspect Automatic Call Director $824,876.60
(As more fully described on Attachment A attached hereto and made a part hereof)
2. Base Monthly Rental: $22,082.00
3. Equipment Location: 111 Havana Street
Denver, CO 80114
4. Equipment Return Location: To Be Advised
5. Expected Delivery Date: April 1997
6. Base Term: 36 months
7. Riders: If there are no Riders, please check here:__. If there are
Riders, attach and describe here:
FMV Renewal Option
FMV Purchase Option
8. Special Terms:
A) The thirty-sixth (36th) Base Monthly Rental is due and payable on the
Rent Commencement Date.
B) Vendor Progress Payment. Lessor and Lessee acknowledge that Lessor
may make a certain "Progress Payment" to the Equipment vendor, Aspect
Telecommunications, Inc. ("Vendor"), in advance of Lessee's acceptance of the
Equipment. In consideration of Lessor's payment of any such Progress
Payment, Lessee agrees that in the
<PAGE>
event Lessee shall not deliver Lessee's Installation certificate in respect
of the Equipment to Lessor on or before thirty (30) days following the
Installation Date (unless such period is extended by mutual agreement of
Lessor and Lessee), Lessee shall pay to Lessor, or Lessor's Assignee, upon
demand, an amount equal to the sum of the Progress Payment made by Lessor
pursuant hereto, together with unpaid interest thereon at a per annum
interest rate equal to one and one half (1.5) percentage points over the
prime rate of interest. Lessor and Lessee acknowledge and agree that Lessor
may make the following Progress Payment to Vendor as follows: Seventy (70%)
Percent Fifteen (15) days after delivery of the Equipment, Twenty (20%)
Percent upon cutover along with the Ten (10%) Percent deposit made by Lessee
to be reimbursed upon final funding.
9. Lessee Address for Notices (if different than Master Agreement):
Notwithstanding anything herein or in the Master Agreement to the contrary,
Lessee acknowledges and agrees, that Lessor shall be entitled to claim for
federal income tax purposes, without limitation, all benefits, credits and
deductions related to the Equipment.
The undersigned Lessee acknowledges that this Schedule authorizes the Lessor
or its agents or assignee(s) to sign and execute on its behalf any and all
necessary documents to make public this lease transaction. The parties
intend this transaction to be a true lease, but if any court or tribunal,
having power to bind the parties, should conclude that all or part of this
Schedule is not a true lease but is in the nature of a sale, consignment, or
other transaction, the parties intend and the Lessee hereby grants a
continuing security interest in the Equipment from the date of this Schedule
to secure the payment of all Lessee's indebtedness to Lessor.
THIS SCHEDULE TOGETHER WITH EXHIBIT A AND ANY ADDITIONAL PROVISION(S)
REFERRED TO IN ITEM 7 CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE LESSOR AND
LESSEE AS TO THE LEASE AND THE EQUIPMENT. LESSEE ACKNOWLEDGES THAT ON OR
BEFORE LESSEE'S SIGNING OF THIS SCHEDULE IT RECEIVED A COPY OF THE CONTRACT
EVIDENCING LESSOR'S ACQUISITION OF THE EQUIPMENT.
LESSOR: LESSEE:
VARILEASE CORPORATION STARPAK, INC.
By: /s/ Gary F. Miller By: /s/ Dennis M. Swenson
Name: Gary F. Miller Name: Dennis M. Swenson
Title: Senior Vice President Title: Vice President
<PAGE>
Rider No. 01
RENEWAL OPTION
To Schedule No. 01 dated March 7, 1997
Master Agreement dated March 7, 1997
Lessor: Varilease Corporation
Lessee: Starpak, Inc.
Provided no Event of Default or event which with the giving of notice or
lapse of time, or both, would constitute an Event of Default has occurred and
is continuing, Lessee shall have the option to extent the term of the Lease
as to all, but not less than all, of the Equipment at the end of the Base
Term or any prior renewal term subject to the following terms and conditions:
1. Lessee must notify Lessor of its exercise of the option at least
180 days prior to the expiration of the Base Term or renewal term,
if applicable.
2. All of the terms and conditions of the Lease, other than the Base
Monthly Rental, which shall be the then Fair Rental Value of the
Equipment at the commencement of such renewal term, shall remain the
same. For purposes of this Renewal Option, the "Fair Rental Value"
is defined as the value upon which a willing lessor and a willing
lessee would agree, for the term involved, each respectively under
no compulsion to lease. Fair Rental Value shall be determined by
agreement of Lessor and Lessee, or, if they are unable to agree, Fair
Rental Value shall be determined by an independent appraiser
selected by Lessor and satisfactory to Lessee. The cost of such
appraisal shall be borne equally by Lessor and Lessee.
<PAGE>
Rider No. 02
PURCHASE OPTION
To Schedule No. 01 dated March 7, 1997
Master Agreement dated March 7, 1997
Lessor: Varilease Corporation
Lessee: Starpak, Inc.
Provided no Event of Default or event which with the giving of
notice or lapse of time, or both, would constitute an Event of
Default has occurred and is continuing, and provided Lessee has
given Lessor at least 180 days written notice prior to the
expiration of the Base Term of any extension, Lessee shall have
the option at the end of such Base Term or any extension to
purchase all, but not less than all, of the Equipment for an
amount equal to the then Fair Market Value of the Equipment.
For purposes of this Purchase Option, "Fair Market Value" shall be
defined as the purchase price of the Equipment (delivered and
installed at Lessee's location) that would be obtained in an arm's
length transaction between a willing seller and a willing
purchaser, neither under a compulsion to buy or sell. In the
event Lessor and Lessee cannot agree upon the Fair Market Value,
then such amount shall be determined by an independent appraiser
selected by Lessor but satisfactory to Lessee. The cost of such
appraisal shall be borne equally by Lessor and Lessee.
Upon receipt of the Fair Market Value, plus any taxes, Lessor
shall execute and deliver to Lessee a bill of sale without
representation or warranty except that the Equipment is free and
clear of any liens, claims or encumbrances created by Lessor.
<PAGE>
Attachment A
[LOGO] ASPECT 29117
Order
Schedule
Date No. Page
2/10/97 OS-2747 1
ORDER SCHEDULE
Aspect Telecommunications, Inc.
1730 Fox Drive
San Jose, CA 95131-2312
SOLD TO: BILL TO:
Debbie Grosskopf Debbie Grosskopf
StarTek Inc. StarTek Inc.
237 22nd Street 237 22nd Street
Greeley, CO 80631 Greeley, CO 80631
USA USA
970/346-5344 970/346-5344
SHIP TO:
This order is submitted by the Debbie Grosskopf
customer with the understanding StarTek Inc.
that the terms and conditions 1111 Havana Street
with respect to this order apply Denver, CO 80114
as defined in the Customer USA
Agreement as of the date of this 970/346-5344
order.
Revised Price configuration:
Equipped 286 Telesets, 25 T/s
Agility App Dev.
Quotation Number: Requested Delivery Date: 3/14/97
P.O. Number: Sales Representative: Brad Lenane
Type of Support: Comprehensive with TeleSet Participation
Support Zone: A
UNIT EXTENDED
QTY MODEL DESCRIPTION PRICE PRICE
CallCenter Hardware and
Software: Aurora
1 1417 Aspect Switching Shelf
Model 400-R 42400.00 42400.00
2 3404 Main Distribution Frame- Included in CallCenter
Fixed Hardware
1 3030 Cluster Controller Included in CallCenter
Hardware
1 3101 68030X 4MB/16MHz Included in CallCenter
Processor Hardware
2 3202 Slide-in System Disk Drive Included in CallCenter
2GB Hardware
1 3011 Music Recording Adapter Included in CallCenter
Hardware
2 3102 68030X 16MB/25MHz Call Included in CallCenter
<PAGE>
Processor Hardware
2 3103 68060U 32MB/50MHz Admin Included in CallCenter
Processor Hardware
1 4045 Voice Subsystem Interface Included in CallCenter
Card (8 ports) Hardware
2 4049 DTMF Receiver Card Included in CallCenter
Hardware
1 3630 Data Exchange Link Kit Included in CallCenter
(Redundant)
1 3029 Management Workstation- Included in CallCenter
Release 6 Hardware
2 3560 110 Punch Down Block Included in CallCenter
Hardware
1 1453 CallCenter System Software 52360.00 52360.00
400R
1 6431 ANI Applications Software Included in CallCenter
Package Hardware
1 6640 CallCenter Software Included in CallCenter
Release 6.1-NA Hardware
1 6210 CallCenter Database Included in CallCenter
Software Hardware
1 6244 CV Standard/Personnel Included in CallCenter
ReportFolios Hardware
1 6475 Custom View ReportRunner Included in CallCenter
Hardware
1 6490 ReportRunner CallCenter Included in CallCenter
6.0 Update Hardware
1 6710 Custom View Director- Included in CallCenter
Single Copy Hardware
2 3257 1,500,000 Call Records 2497.50 4995.00
Storage
1 4043 External Music on Hold 877.80 877.80
Interface Card
<PAGE>
[LOGO] ASPECT Order
Schedule
Date No. Page
2/10/97 OS- 2
ORDER SCHEDULE
Aspect Telecommunications, Inc.
1730 Fox Drive
San Jose, CA 95131-2312
UNIT EXTENDED
QTY MODEL DESCRIPTION PRICE PRICE
2 4045 Voice Subsystem Interface 8495.00 16990.00
Card (8 ports)
2 3273 Voice Storage Expansion 3847.25 7694.50
Module
1 3017 Call Recording Adaptor 41.80 41.80
250 3190 Aspect TeleSet, Standard 437.25 109312.50
36 3192 Aspect TeleSet, Handsfree 492.25 17721.00
36 3197 Standard Handset and Cradle 13.20 475.20
22 4061 Aspect TeleSet Interface 6597.80 145151.60
Card (16 port)
13 4028 Digital Trunk Interface 5995.00 77935.00
Card - II
12 4029 Digital Trunk Interface 5995.00 71940.00
Expansion
1 4310 Agent Monitoring Card (AMC) 5720.00 5720.00
1 6401 Application Bridge Access 1250.00 1250.00
License
1 6411 Application Bridge 7500.00 7500.00
Developer's License
1 6412 Application Intf. Included in Installation
Consultation PC
3 6244 CV Standard/Personne l0.00 0.00
ReportFolios
2 6475 Custom View ReportRunner 877.80 1755.60
2 6490 ReportRunner CallCenter 0.00 0.00
6.0 Update
9 6710 Custom View Director- 261.80 2356.20
Single Copy
1 6253 ANI ReportFolio 0.00 0.00
1 6480 Custom View ReportWriter 3517.80 3517.80
1 6485 ReportWriter CallCenter 0.00 0.00
6.0 Update
1 6700 Custom View Producer- 4397.80 4397.80
First Copy
1 3060 Aspect TeleCaster 2747.25 2747.25
1 3068 Local Laser Printer 17.60 17.60
Adapter Kit
1 6810 Management Workstation 695.00 695.00
Window
4 3019 Administrative Telephone 60.50 242.00
7 4072 Station Line Interface Card 2197.80 15384.60
1 3405 Utility Shelf-MDF 151.80 151.80
<PAGE>
3 3588 Power Conduit, 50 Foot- 173.80 521.40
A50F50 or MZ60
1 3403 Secondary Circuit Protection 41.80 41.80
Block Kit
1 3061 Ring Voltage Generator 789.80 789.80
1 3449 Cable Extension 286.00 286.00
Non-Redundant
1 3450 Cable Extension Redundancy 217.80 217.80
Upgrade
2 3311 Cable Extension/Universal 33.00 66.00
Link Ports
33 3313 Cable Extension/Analog 22.00 726.00
Trunks and TeleSets
25 3314 Cable Extension/Digital 33.00 825.00
Trunks
Agility Hardware & Software
1 3750 Aspect IAM Management1 395.00 1395.00
Workstation
1 3961 Integrated Applications 2317.10 2317.10
Module Cabinet
1 3964 Agility Modem for Aspect 0.00 0.00
IAM Mgmt/Wkstn.
1 3968 Agility Ethernet Converter 452.40 452.40
1 6555 Agility Release 2.0 World 14500.00 14500.00
Wide
Agility Module #1: Star:
24 6993 Action Agent Software 1-30 609.00 14616.00
<PAGE>
[LOGO] ASPECT Order
Schedule
Date No. Page
2/10/97 OS- 3
ORDER SCHEDULE
Aspect Telecommunications, Inc.
1730 Fox Drive
San Jose, CA 95131-2312
UNIT EXTENDED
QTY MODEL DESCRIPTION PRICE PRICE
1 6118 Web Software License to 8700.00 8700.00
30 Agents
1 6968 Facsimile Runtime License 1160.00 1160.00
to 30 Agents
1 6974 Remote Database License 1450.00 1450.00
to 30 Agents
1 6983 Supervisor/Action Agent 6960.00 6960.00
Env. to 30 Agents
1 3902 Agility Application CPU- 1702.30 1702.30
Pentium, 90 MHz
1 3908 Agility Application Memory 3511.90 3511.90
- 128MB
1 3923 Agility 2 Gigabyte Disk 974.40 974.40
Drive
1 3960 Agility Integrated 2030.00 2030.00
Applications Module
1 3965 Agility Tape Backup Assy- 571.30 571.30
3.5 Inch
1 4101 Agility 24 Port Voice 7920.00 7920.00
Interface
1 4120 Agility 4 Port Fax 3021.80 3021.80
Interface
1 6140 Agility Database Client 0.00 0.00
Support
1 6141 Agility Net Client Support 0.00 0.00
Agility Module #2:Developer:
1 6992 Web Development 11571.00 11571.00
Environment
1 3902 Agility Application CPU- 1702.30 1702.30
Pentium, 90 MHz
1 3906 Agility Application Memory 1757.40 1757.40
- 64MB
1 3923 Agility 2 Gigabyte Disk 974.40 974.40
Drive
1 3969 Agility Tape Backup 571.30 571.30
Assembly - 5.25 In.
1 3972 Deskside Applications 3462.25 3462.25
Module
1 4104 Agility 4 Port Analog 693.10 693.10
Voice Interface
1 6140 Agility Database Client 0.00 0.00
<PAGE>
Support
1 6141 Agility Net Client Support 0.00 0.00
6 5190 Spare Aspect TeleSet, 349.80 2098.80
Standard
1 9510 CV ReportWriter Training 1500.00 1500.00
Class/Voucher
1 6549 Ap. Development Services 195.00 38760.00
*See budgetary note
Purchase Price $731,476.60
CallCenter Installation $82,635.00
Agility Installation $10,765.00
Acquisition Price $824,876.60
<PAGE>
EXHIBIT A
MASTER LEASE AGREEMENT
MASTER LEASE AGREEMENT ("Master Agreement") made as of March 7, 1997, between
VARILEASE CORPORATION, a Michigan corporation, having its chief executive
offices at 28525 Orchard Lake Road, Farmington Hills, MI 48334 ("Lessor") and
STARPAK, INC., a Colorado corporation having its chief executive offices at
237 22nd Street, Greeley, CO 80631 ("Lessee").
1. LEASE
On the terms and conditions of this Master Agreement, Lessor shall lease to
Lessee, and Lessee shall hire from Lessor, the items of personal property
described in the Schedule(s) (collectively the "Equipment," and individually
an "Item") which shall incorporate this Master Agreement. Each Schedule
shall constitute a separate and independent lease and contractual obligation
of Lessee. The term "Lease" shall refer to an individual Schedule which
incorporates this Master Agreement. In the event of a conflict between this
Master Agreement and any Schedule, the language of the Schedule shall prevail.
The Lease shall be effective upon execution by Lessor at its offices.
2. TERM
(a) The term of the Lease shall be comprised of a Delivery Term,
Installation Term and Base Term. The Delivery Term for each Item shall
commence on the date the Item is delivered to Lessee and shall end on the
Installation Date. The Installation Term shall commence on the Installation
Date and terminate on the first day of the month following the Installation
Date for the last Item to be installed (the "Base Term Commencement Date").
The Base Term of the Lease shall begin on the Base Term Commencement Date,
and may, subject to Subsection 2(b), terminate on the last day of the last
month of the Base Term. The date of installation (the "Installation Date")
for any Item shall be the earlier of either (i) the date on which the entity
responsible for installing such Item certifies that the Item is installed and
placed in good working order, or (ii) if Lessee has caused a delay in the
installation of an Item, seven days from the date the Item is delivered to
the equipment location specified in the Schedule, or (iii) if Lessee is to
install the Item, the third day after delivery. In the event the Equipment
is already installed at the equipment location of Lessee and has been
previously paid for by Lessee, the Installation Date shall be the date on
which the Lessor pays Lessee for the Equipment.
(b) A Lease may be terminated as of the last day of the last month of the
Base Term by written notice given by either Lessor or Lessee not less than
six (6) months prior to the date of termination of the Base Term. If the
Lease is not so terminated at the end of the Base Term, the Base Term shall
be automatically extended for
<PAGE>
successive six (6) month periods until such six (6) month notice is given.
The Base Monthly Rental, as hereinafter defined, shall continue to be due and
payable by Lessee until the Equipment redelivered to Lessor upon the
termination of the Base Term or any extension term, and throughout any such
extension term(s). No notice of termination may be revoked without the
written consent of the other party. Lessor will notify Lessee in writing
seven (7) months prior to lease termination of the date of the completion of
lease term.
3. RENTAL
(a) The rental amount payable to Lessor by Lessee for the Equipment will be
as set forth on the Schedule ("Base Monthly Rental"). As rent for Equipment,
Lessee shall pay Lessor in immediately available funds and in advance on the
Base Term Commencement Date and on the first day of each month during the
Base Term of the Lease the Base Monthly Rental, per month, and (ii) on the
Installation Date an amount equal to 1/30th of the Base Monthly Rental for
each Item times the number of days which will elapse from the Installation
Date of such Item to the Base Term Commencement Date of the Lease. Each
remittance from Lessee to Lessor shall contain information as to the Lease
for which payment is made.
(b) For any payment of rent or other amount due under a Lease which is past
due for more than five (5) days, interest shall accrue at the rate of 2% per
month, from the date such payment was due until payment is received by
Lessor, or if such rate shall exceed the maximum rate of interest allowed by
law, then at such maximum rate.
4. TAXES
The term "Taxes" shall mean all taxes, fees and assessments due, assessed or
levied by any foreign, federal, state or local government or taxing
authority, and/or any penalties, fines or interest, which are imposed against
or on the Equipment, its use, operation, or ownership, or the rentals or
receipts due under the Lease, or penalties arising from the failure to file a
return with respect to the Taxes, but shall not include any federal or state
taxes based upon or measured by the net income of Lessor. As of the
commencement of the term of the Lease, Lessee shall promptly report, file,
pay and indemnify, and hold Lessor harmless with respect to any and all
Taxes. Lessee will, upon request by Lessor, submit to Lessor written
evidence of Lessee's payment of all Taxes.
5. NET LEASE
The Lease is a net lease, it being the intention of the parties that all
costs, expenses and liabilities associated with the Equipment or its lease
shall be borne by Lessee. Lessee's agreement to pay all obligations under
the Lease, including but not limited to Base Monthly Rental, is absolute and
unconditional and
<PAGE>
such agreement is for the benefit of Lessor and its Assignee(s). Lessee's
obligations shall not be subject to any abatement, deferment, reduction,
setoff, defense, counterclaim or recoupment for any reason whatsoever.
Except as may be otherwise expressly provided in the Lease, it shall not
terminate, nor shall the obligations of Lessee be affected by reason of any
defect in or damage to, or any loss or destruction of, no obsolescence of,
the Equipment or any Item from any cause whatsoever, or the interference with
its use by any private person, corporation or governmental authority, or as a
result of any war, riot, insurrection or an Act of God. It is the express
intention of Lessor and Lessee that all rent and other sums payable by Lessee
under the Lease shall be, and continue to be, payable in all events
throughout the term of the Lease. The Lease shall be binding upon the
Lessee, its successors and permitted assigns and shall inure to the benefit
of Lessor and its Assignee(s).
6. INSTALLATION, RETURN AND USE OF EQUIPMENT
(a) Upon delivery of the Equipment to Lessee, Lessee shall pay all
transportation, installation, rigging, packing and insurance charges with
respect to the Equipment. In the case of a sale and leaseback transaction,
Lessee shall, upon the request of Lessor, certify the date the Equipment was
first put into use. Lessee will provide the required electric current and a
suitable place of installation for the Equipment with all appropriate
facilities as specified by the manufacturer. No cards, tapes, disks, data
cells or other input/output and storage media may be used by Lessee to
operate any Item unless it meets the specifications of the manufacturer.
Lessee agrees that it will not install, or permit the installation of, the
Equipment without Lessor's consent.
(b) Lessee shall, at all times during the term of the Lease, be entitled to
unlimited use of the Equipment. Lessee will at all times keep the Equipment
in its sole possession and control. The Equipment shall not be moved from
the location stated in the Schedule without the prior written consent of
Lessor and in no event shall the Equipment be moved outside the continental,
contiguous United States. Lessee will comply with all laws, regulations, and
ordinances, and all applicable requirements of the manufacturer of the
Equipment which apply to the physical possession, use, operation, condition,
and maintenance of the Equipment. Lessee agrees to obtain all permits and
licenses necessary for the operation of the Equipment.
(c) Lessee shall not without the prior written consent of Lessor, affix or
install any accessory, feature, equipment or device to the Equipment or make
any improvement, upgrade, modification, alteration or addition to the
Equipment (any such accessory, feature, equipment, device or improvement,
upgrade, modification, alteration or addition affixed or installed is an
"Improvement"). Title to all Improvements shall, without further act, upon
the making, affixing or installation of such Improvement, vest solely in
Lessor, except such Improvements as may be readily removed
<PAGE>
without causing material damage to the Equipment and without in any way
affecting or impairing the originally intended function, value or use of the
Equipment. Removal of the Improvement shall be performed by the manufacturer,
at the sole expense of Lessee. Provided the Equipment is returned to Lessor
in the condition required by the Lease, including, but not limited to
coverage under the manufacturer's standard maintenance contract, title to the
Improvement shall vest in the Lessee upon removal. Any Improvement not
removed from the Equipment prior to return shall at Lessor's option remain
the property of Lessor and shall be certified for maintenance by the
manufacturer, at Lessee's expense.
Lessee shall notify Lessor in writing no less than 60 days prior to the
desired installation date of the type of Improvement Lessee desires to
obtain. Lessor may, at any time within 10 days after receipt of the notice
offer to provide the Improvement to Lessee upon terms and conditions to be
mutually agreed upon. Lessee shall notify Lessor of any third party offers
and shall lease the Improvement from Lessor if Lessor meets the terms of the
third party offer.
If Lessee leases an Improvement from Lessor, such lease shall be under a
separate Schedule, the Improvement shall not be placed in service by Lessee
prior to acquisition by Lessor, and Lessee shall execute and deliver any
document necessary to vest title to such Improvement in Lessor.
During the term of the Lease term and any renewal term, Lessee shall
cause all Improvements to be maintained, at Lessee's expense, in accordance
with the requirements of Section 7. Unless otherwise agreed to by Lessor,
upon the expiration or earlier termination of the term of the Lease, any
Improvement shall be de-installed and removed from the Equipment by the
manufacturer, at Lessee's expense. If the Improvement is removed, the
Equipment shall be restored to its unmodified condition and shall be
certified for maintenance by the manufacturer, at Lessee's expense.
In the event an Improvement is provided to Lessee by a party other than
Lessor, Lessee shall cause such party to execute and deliver to Lessor such
documents as shall be required by Lessor to protect the interests of Lessor
and any Assignee in the Equipment, this Master Agreement and any Schedule.
(d) Lessee shall, at the termination of the Lease, at its expense,
de-install, pack and return the Equipment to Lessor at such location within
the continental United States as shall be designated by Lessor in the same
operating order, repair, condition and appearance as of the Installation
Date, reasonable wear and tear excepted, with all current engineering changes
prescribed by the manufacturer of the Equipment or a maintenance contractor
approved by Lessor (the "Maintenance Organization") incorporated in the
Equipment. Until the return of the Equipment to Lessor, Lessee shall be
obligated to pay the Base Monthly Rental and all other sums due under the
Lease. Upon redelivery to Lessor, Lessee shall
<PAGE>
arrange and pay for such repairs (if any) as are necessary for the
manufacturer of the Equipment to accept the Equipment under a maintenance
contract at its then standard rates.
7. MAINTENANCE AND REPAIRS
Lessee shall, during the term of the Lease, maintain in full force and effect
a contract with the manufacturer of the Equipment or Maintenance Organization
covering at least prime shift maintenance of the Equipment. Lessee upon
request shall furnish Lessor with a copy of such maintenance contract as
amended or supplemented. During the term of the Lease, Lessee shall, at its
expense, keep the Equipment in good working order, repair, appearance and
condition and make all necessary adjustments, repairs and replacements, all
of which shall become the property of Lessor. Lessee shall not use or permit
the use of the Equipment for any purpose for which, in the opinion of the
manufacturer of the Equipment or Maintenance Organization, the Equipment is
not designed or intended.
8. OWNERSHIP, LIENS AND INSPECTIONS
(a) Lessee shall keep the Equipment free from any marking or labeling which
might be interpreted as a claim of ownership by Lessee or any party other
than Lessor and its Assignee(s), and shall affix and maintain tags, decals or
plates furnished by Lessor on the Equipment indicating ownership and title to
the Equipment in Lessor or its Assignee(s). Upon reasonable notice to
Lessee, Lessor or its agents shall have access to the Equipment and Lessee's
books and records with respect to the Lease and the Equipment at reasonable
times for the purpose of inspection and for any other purposes contemplated
by the Lease, subject to the reasonable security requirements of Lessee.
(b) Lessee shall execute and deliver such instruments, including Uniform
Commercial Code financing statements, as are required to be filed to evidence
the interest of Lessor and its Assignee(s) in the Equipment or the Lease.
Lessee has no interest in the Equipment except as expressly set forth in the
Lease, and that interest is a lease-hold interest. Lessor and Lessee agree,
and Lessee represents for the benefit of Lessor and its Assignee(s) that the
Lease is intended to be a "finance lease" and not a "lease intended as
security" as those terms are used in the Uniform Commercial Code, and that
the Lease is intended to be a "true lease" as the term is commonly used under
the Internal Revenue Code of 1986, as amended.
(c) LESSEE SHALL KEEP THE LEASE, THE EQUIPMENT AND ANY IMPROVEMENTS FREE AND
CLEAR OF ALL LIENS AND ENCUMBRANCES OF WHATSOEVER KIND (EXCEPT THOSE CREATED
BY LESSOR) AND LESSEE SHALL NOT ASSIGN THE LEASE OR ANY OF ITS RIGHTS UNDER
THE LEASE OR SUBLEASE ANY OF THE EQUIPMENT OR GRANT ANY RIGHTS TO THE
EQUIPMENT WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR. No permitted
assignment or sublease shall relieve Lessee of any of its
<PAGE>
obligations under the Lease and Lessee agrees to pay all costs and expenses
Lessor may incur in connection with such sublease or assignment. Lessee
grants to Lessor the right of first refusal on any sublease or other grant of
Lessee's rights to the Equipment.
9. DISCLAIMER OF WARRANTIES
(a) LESSOR LEASES THE EQUIPMENT "AS IS," AND BEING NEITHER THE MANUFACTURER
OF THE EQUIPMENT NOR THE AGENT OF EITHER THE MANUFACTURER OR SELLER, LESSOR
DISCLAIMS ANY REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED,
WITH RESPECT TO THE CONDITION OR PERFORMANCE OF THE EQUIPMENT, ITS
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WITH RESPECT TO PATENT
INFRINGEMENTS OR THE LIKE, LESSOR SHALL HAVE NO LIABILITY TO LESSEE FOR ANY
CLAIM, LOSS OR DAMAGE OF ANY KIND OR NATURE WHATSOEVER, NOR SHALL THERE BE
ANY ABATEMENT OF RENTAL FOR ANY REASON INCLUDING CLAIMS ARISING OUT OF OR IN
CONNECTION WITH (i) THE DEFICIENCY OR INADEQUACY OF THE EQUIPMENT FOR ANY
PURPOSE, WHETHER OR NOT KNOWN OR DISCLOSED TO LESSOR, (ii) ANY DEFICIENCY OR
DEFECT IN THE EQUIPMENT, (iii) THE USE OR PERFORMANCE OF THE EQUIPMENT, OR
(iv) ANY LOSS OF BUSINESS OR OTHER CONSEQUENTIAL LOSS OR DAMAGE, WHETHER OR
NOT RESULTING FROM ANY OF THE FOREGOING.
(b) For the term of the Lease, Lessor assigns to Lessee (to the extent
possible), and Lessee may have the benefit of, any and all manufacturer's
warranties, service agreements and patent indemnities, if any, with respect
to the Equipment; provided, however, that Lessee's sole remedy for the breach
of any such warranty, indemnification or service agreement shall be against
the manufacturer of the Equipment and not against Lessor, nor shall any such
breach have any effect whatsoever on the rights and obligations of Lessor or
Lessee with respect to the Lease.
(c) NO REPRESENTATIONS OR WARRANTIES OF THE MANUFACTURER OR DISTRIBUTOR OF
THE EQUIPMENT, OR ANY OTHER THIRD PARTY, CAN BIND LESSOR, AND LESSEE
ACKNOWLEDGES AND AGREES THAT LESSOR SHALL HAVE NO OBLIGATIONS WITH RESPECT TO
THE EQUIPMENT EXCEPT AS SPECIFICALLY SET FORTH HEREIN OR OTHER DOCUMENT
EXECUTED BY LESSOR.
10. ASSIGNMENT
(a) Lessee acknowledges and understands that Lessor may assign to a
successor, financing lender and/or purchaser (the "Assignee"), all or any
part of the Lessor's right, title and interest in and to the Lease and the
Equipment and Lessee hereby consents to such assignment(s). In the event
Lessor transfers or assigns, or retransfers or reassigns, to an Assignee all
or part of Lessor's interest in the Lease, the Equipment or any sums payable
under the Lease, whether as collateral security for loans or advances made or
to be made to Lessor by such Assignee or otherwise, Lessee covenants that,
upon receipt of notice of any such transfer or assignment and instructions
from Lessor,
<PAGE>
(i) Lessee shall, if so instructed, pay and perform its obligations under
the Lease to the Assignee (or to any other party designated by Assignee), and
shall not assign the Lease or any of its rights under the Lease or permit the
Lease to be amended, modified, or terminated without the prior written consent
of Assignee; and
(ii) Lessee's obligations under the Lease with respect to Assignee shall be
absolute and unconditional and not be subject to any abatement, reduction,
recoupment, defense, offset or counterclaim for any reason, alleged or proven,
including, but not limited to, defect in the Equipment, the condition, design,
operation or fitness for use of the Equipment or any loss or destruction or
obsolescence of the Equipment or any part, the prohibition of or other
restrictions against Lessee's use of the Equipment, the interference with such
use by any person or entity, any failure by Lessor to perform any of its
obligations contained in the Lease, any insolvency or bankruptcy of Lessor, or
for any other cause; and
(iii) Lessee shall, upon request of Lessor, submit documents and
certificates as may be reasonably required by Assignee to secure and complete
such transfer or assignment, including but not limited to the documents set
forth in Section 15(c) of this Master Agreement.
(iv) Lessee shall deliver to Assignee copies of any notices which are
required under the Lease to be sent to Lessor; and
(v) Lessee shall, if requested, restate to Assignee the representations,
warranties and covenants contained in the Lease (upon which Lessee
acknowledges Assignee may rely) and shall make such other representations,
warranties and covenants to Assignee as may be reasonably required to give
effect to the assignment.
(b) Lessor shall not make an assignment or transfer to any Assignee who
shall not agree that, so long as Lessee is not in default under the Lease,
such Assignee shall take no action to interfere with Lessee's quiet enjoyment
and use of the Equipment in accordance with the terms of the Lease. No such
assignment or conveyance shall relieve Lessor of its obligations under the
Lease and Lessee agrees it shall not look to any Assignee to perform any of
Lessor's obligations under the Lease. No such assignment shall increase
Lessee's obligations nor decrease Lessee's rights hereunder.
11. QUIET ENJOYMENT
Lessor covenants that so long as Lessee is not in default under a Lease,
Lessor shall take no action to interfere with Lessee's possession and use of
the Equipment subject to and in accordance with the provisions of the Lease.
12. INDEMNIFICATION
<PAGE>
Except for the sole and gross negligence or willful misconduct of Lessor or
Assignee, Lessee shall and does agree to indemnify, protect, defend, save and
keep harmless Lessor and its Assignee(s) from and against any and all
liabilities, obligations, losses, damages, penalties, claims, actions, suits,
costs, or expenses of any kind and nature whatsoever, including but not
limited to attorneys fees, including without limitation attorneys fees in
connection with the enforcement of this indemnification, which may be imposed
upon, incurred by or asserted against Lessor or its Assignee(s) in any way
relating to or arising out of the Lease, the manufacture, ownership, lease,
possession, use condition, operation, or accident in connection with the
Equipment (including, without limitation, those claims based on latent and
other defects, whether or not discoverable, or claims based on strict
liability, or any claim for patent, trademark or copyright infringement).
Lessor's rights arising from this Section shall survive the expiration or
other termination of the Lease. Nothing in this Section shall limit or waive
any right of Lessee to proceed against the manufacturer of the Equipment.
13. RISK OF LOSS
(a) Lessee assumes and shall bear the entire risk of loss and damage,
whether or not insured against, of the Equipment from any and every cause
whatsoever as of the date the Equipment is delivered to Lessee.
(b) In the event of loss or damage of any kind to any Item, Lessee shall use
all reasonable efforts to place the Item in good repair, condition and
working order to the reasonable satisfaction of Lessor within sixty (60) days
of such loss or damage, unless the manufacturer of the Equipment determines
that such Item has been irreparably damaged, in which case Lessee shall,
within ten (10) days of the manufacturer's determination of irreparable loss,
make its election to either pay Lessor the Stipulated Loss Value (as set
forth in Attachment A to this Master Agreement) for the irreparably damaged
Item or replace the irreparably damaged Item, all as provided in this
Section. To the extent that the Item is damaged but not irreparably damaged
and if Lessee is entitled, pursuant to the insurance coverage, to obtain
proceeds from such insurance for the repair of the Item, Lessee (provided no
Event of Default has occurred under the Lease) may arrange for the
disbursement of such proceeds to the manufacturer or other entity approved by
Lessor to perform the repairs to pay the cost of repair. However, Lessee's
obligation to timely repair the damaged Item is not contingent upon receipt
of such insurance proceeds.
(c) In the event that Lessee elects to pay Lessor the Stipulated Loss Value
for the irreparably damaged Item, Lessee shall (i) pay such amount (computed
as of the first day of the month following the determination of the
irreparable damage by the manufacturer) to Lessor on the first day of the
month following the election by Lessee as provided in (b) above, (ii) pay all
Base Monthly Rental for the Item up to the date that the Stipulated Loss
Value is paid
<PAGE>
to Lessor; and (iii) arrange with the applicable insurance company (with the
consent of Lessor) for the disposition of the irreparably damaged Item. If
not all the Equipment is irreparably damaged, the Value for Calculation of
Stipulated Loss Value ("Value") as set forth on the Schedule for the
irreparably damaged Item shall be multiplied by the applicable percentage set
forth in Attachment A to compute the Stipulated Loss Value for such
irreparably damaged Item, and the Base Monthly Rental for the undamaged
Equipment remaining due (after payment of the Stipulated Loss Value for the
irreparably damaged Item) shall be that amount resulting from multiplying the
original Base Monthly Rental by the ratio of the Value of the undamaged
Equipment divided by the Value for all the Equipment prior to the damage.
(d) If Lessee elects to replace the irreparably damaged Item, Lessee shall
continue all payments under the Lease without interruption, as if no such
damage, loss or destruction had occurred, and shall replace such irreparably
damaged Item, paying all such costs, associated with the replacement, and
Lessee shall be entitled to insurance proceeds up to the amount expended by
Lessee in effecting the replacement. Lessee shall within twenty (20) days
following the date of determination of irreparable damage by the
manufacturer, effect the replacement by replacing the irreparably damaged
Item with a "Replacement Item" so that Lessor has good, marketable and
unencumbered title to such Replacement Item. The Replacement Item shall have
a fair market value equal to or greater than the Item replaced, and
anticipated to have a fair market value at the expiration of the Base Term
equal to the fair market value that the replaced Item would have had at the
end of the Base Term, and be the same manufacture, model and type and of at
least equal capacity to the Item for which the replacement is being made.
Upon delivery, such Replacement Item shall become subject to all of the terms
and conditions of the Lease. Lessee shall execute all instruments or
documents necessary to effect the foregoing.
(e) For purposes of this Lease, the term "fair market value" shall mean the
price of the Equipment delivered and installed at Lessee's location that
would be obtained in an arm's-length transaction between an informed and
willing buyer-lessee under no compulsion to buy or lease and an informed and
willing seller-lessor under no compulsion to sell or lease. If Lessor and
Lessee are unable to agree upon fair market value, such value shall be
determined, at Lessee's expense, in accordance with the foregoing definition,
by three independent appraisers, one to be appointed by Lessee, one to be
appointed by Lessor and the third to be appointed by the first two.
14. INSURANCE
During the term of the Lease, Lessee, at its own expense, shall maintain in
regard to the Equipment all risk insurance (in an amount not less than the
Stipulated Loss Value as identified on Attachment A) and comprehensive public
liability insurance in
<PAGE>
amounts and with carriers reasonably satisfactory to Lessor. Any such
insurance shall name Lessor and the Assignee(s) as additional insured and, as
for the all risk insurance, loss payees as their interests may appear. All
such insurance shall provide that it may not be terminated, canceled or
altered without at least thirty (30) days' prior written notice to Lessor and
its Assignee(s). Coverage afforded to Lessor shall not be rescinded,
impaired, or invalidated by any act or neglect of Lessee. Lessee agrees to
supply to Lessor, upon request, evidence of such insurance.
15. REPRESENTATIONS AND WARRANTIES OF LESSEE; FINANCIAL STATEMENTS
(a) Lessee represents and warrants to Lessor and its Assignee(s) (i) that
the execution, delivery and performance of this Master Agreement and the
Lease was duly authorized and that upon execution of this Master Agreement
and the Lease by Lessee and Lessor, the Master Agreement and the Lease will
be in full force and effect and constitute a valid legal and binding
obligation of Lessee, and enforceable against Lessee in accordance with their
respective terms; (ii) the Equipment is accurately described in the Lease and
all documents of Lessee relating to the Lease; (iii) that Lessee is in good
standing in the jurisdiction of its incorporation and in any jurisdiction in
which any of the Equipment is located; (iv) that no consent or approval of,
giving of notice to, registration with, or taking of any other action in
respect of, any state, federal or other government authority or agency is
required with respect to the execution, delivery and performance by the
Lessee of this Master Agreement or the Lease or, if any such approval,
notice, registration or action is required, it has been obtained; (v) that
the entering into and performance of this Master Agreement and the Lease will
not violate any judgment, order, law or regulation applicable to Lessee or
any provision of Lessee's Articles of Incorporation or Bylaws or result in
any breach of, or constitute a default under, or result in the creation of
any lien, charge, security interest or other encumbrance upon any assets of
Lessee or upon the Equipment pursuant to any instrument to which Lessee is a
party or by which it or its property may be bound; (vi) there are no actions,
suits or proceedings pending, or to the knowledge of Lessee, threatened,
before any court or administrative agency, arbitrator or governmental body
which will, if determined adversely to Lessee, materially adversely affect
its ability to perform its obligations under the Lease or any related
agreement to which it is a party; (vii) that aside from the Master Agreement
and the Lease there are no additional agreements between Lessee and Lessor
relating to the Equipment, and (viii) that any and all financial statements
and other information with respect to Lessee supplied to Lessor at the time
of execution of the Lease and any amendment, are true and complete. The
foregoing representations and warranties shall survive the execution delivery
of the Lease and any amendments hereto and shall upon the written request of
Lessor, be made to Lessor's Assignee(s).
(b) Prior to and during the term of the Lease, Lessee will furnish Lessor
with Lessee's audited or unaudited financial statements. If
<PAGE>
Lessee is a subsidiary of another company, Lessee shall supply such company's
financial statements and guarantees as are reasonably acceptable to Lessor.
Lessor's obligations to perform under any Lease is subject to the condition
that the financial statements furnished to Lessor by Lessee present the
financial condition and results of operations of Lessee and its affiliated
corporations, if any, and any guarantor of Lessee's obligations under any
Lease, as of the date of such financial statements, and that since the date
of such statements there have been no material adverse changes in the assets
or liabilities, the financial condition or other condition which in Lessor's
or Assignee(s) sole discretion are deemed to be materially adverse. Lessee
shall also provide Lessor with such other statements concerning the Lease and
the condition of the Equipment as Lessor may from time to time request.
(c) Upon Lessor's request, Lessee shall, with respect to each Lease, deliver
to Lessor (i) a certificate of a secretarial officer of Lessee certifying the
bylaw, resolution (specific or general) or corporate action authorizing the
transactions contemplated in the Lease; (ii) an incumbency certificate
certifying that the person signing this Mater Agreement and the Lease holds
the office the person purports to hold and has authority to sign on behalf of
Lessee; (iii) an opinion of Lessee's counsel with respect to the
representations in Section 15(a); (iv) an agreement with Lessor's Assignee
with regard to any assignment as referred to in Section 10; (v) the purchase
documents if Lessee has sold or assigned its interest in the Equipment to
Lessor; (vi) an insurance certificate evidencing the insurance provided by
Lessee pursuant to Section 14; and (vii) an Installation Certificate duly
executed by Lessee. Failure by Lessee to deliver any of these documents when
due shall operate, at Lessor's option, to continue the Installation Term for
the Lease thus delaying the Base Term Commencement Date, or to increase the
Base Monthly Rental to recover costs incurred by Lessor consequent to the
delay or the termination of the Lease as provided in Section 16.
16. DEFAULT, REMEDIES
(a) The following shall be deemed "Events of Default" under the Lease:
(1) Lessee fails to pay any installment of rent or other charge or
amount due under the Lease within ten (10) days after notice that such
payment is overdue; or
(2) Except as expressly permitted in the Lease, Lessee attempts to
remove, sell, encumber, assign or sublease or fails to insure any of the
Equipment, or fails to deliver any documents required of Lessee under the
Lease; or
(3) Any representation or warranty made by Lessee or Lessee's guarantor
in the Lease or any document supplied in connection with the Lease or any
financial statement is misleading or materially inaccurate; or
<PAGE>
(4) Lessee fails to observe or perform any of the other obligations
required to be observed by Lessee under the Lease within thirty (30) days of
Lessee's first knowledge of such failure; or
(5) Lessee or Lessee's guarantor ceases doing business as a going
concern; makes an assignment for the benefit of creditors; admits in writing
its inability to pay its debts as they become due; files a voluntary petition
in bankruptcy; is adjudicated a bankrupt or an insolvent; files a petition
seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar arrangement under any
present or future statute, law or regulation or files an answer admitting or
fails to deny the material allegations of a petition filed against it in any
such proceeding; consents to or acquiesces in the appointment of a trustee,
receiver, or liquidator for it or of all or any substantial part of its
assets or properties, or if it or its trustee, receiver, liquidator or
shareholders shall take any action to effect its dissolution or liquidation;
or
(6) If within thirty (30) days after the commencement of any proceedings
against Lessee or Lessee's guarantor seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under
any present or future statute, law or regulation, such proceedings shall not
have been dismissed, or if within thirty (30) days after the appointment
(with or without Lessee's or Lessee's guarantor's consent) of any trustee,
receiver or liquidator of it or all of or any substantial part of its
respective assets and properties, such appointment shall not be vacated.
(b) Upon the happening of any Event of Default, Lessor may declare the
Lessee to be in default. Lessee authorizes Lessor at any time thereafter,
with or without terminating the Lease, to enter any premises where the
Equipment may be and take possession of the Equipment. Lessee shall, upon
such declaration of default, without further demand, immediately pay Lessor
an amount which is equal to (i) any unpaid amount due on or before Lessor
declared the Lease to be in default, plus (ii) as liquidated damages for loss
of a bargain and not as a penalty, an amount equal to the Stipulated Loss
Value for the Equipment computed as of the date the last Base Monthly Rental
payment was due prior to the date Lessor declared the Lease to be in default,
together with interest, as provided herein, plus (iii) all attorney and court
costs incurred by Lessor relating to the enforcement of its rights under the
Lease. After an Event of Default, at the request of Lessor and to the extent
requested by Lessor, Lessee shall immediately comply with the provisions of
Section 6(d) and Lessor may sell the Equipment at private or public sale, in
bulk or in parcels, with or without notice, without having the Equipment
present at the place of sale; or Lessor may lease, otherwise dispose of or
keep idle all or part of the Equipment, subject, however, to its obligation
to mitigate damages. The proceeds of sale, lease or other disposition, if
any, of the Equipment shall be applied: (1) to all Lessor's costs,
<PAGE>
charges and expenses incurred in taking, removing, holding, repairing and
selling, leasing or otherwise disposing of the Equipment including attorney
fees; then (2) to the extent not previously paid by Lessee, to pay Lessor the
Stipulated Loss Value for the Equipment and all other sums owed by Lessee
under the Lease, including any unpaid rent which accrued to the date Lessor
declared the Lease to be in default and indemnities then remaining unpaid
under the Lease; then (3) reimburse to Lessee Stipulated Loss Value previously
paid by Lessee as liquidated damages; and (4) any surplus shall be retained by
Lessor. Lessee shall pay any deficiency in (1) and (2) immediately. The
exercise of any of the foregoing remedies by Lessor shall not constitute a
termination of the Lease unless Lessor so notifies Lessee in writing. Lessor
may also proceed by appropriate court action, either at law or in equity to
enforce performance by Lessee of the applicable covenants of the Lease or to
recover damages for the breach of the Lease.
(c) The waiver by Lessor of any breach of any obligation of Lessee shall not
be deemed a waiver of any future breach of the same or any other obligation.
The subsequent acceptance of rental payments under the Lease by Lessor shall
not be deemed a waiver of any such prior existing breach at the time of
acceptance of such rental payments. The rights afforded Lessor under Section
16 shall be cumulative and concurrent and shall be in addition to every other
right or remedy provided for the Lease or now or later existing in law
(including as appropriate all the rights of a secured party or lessor under
the Uniform Commercial Code) or in equity and Lessor's exercise or attempted
exercise of such rights or remedies shall not preclude the simultaneous or
later exercise of any or all other rights or remedies.
(d) In the event Lessee shall fail to perform any of its obligations under
the Lease, then Lessor may perform the same, but shall not be obligated to do
so, at the cost and expense of Lessee. In any such event, Lessee shall
promptly reimburse Lessor for any such costs and expenses incurred by Lessor.
17. LESSOR'S TAX BENEFITS
Lessee acknowledges that Lessor shall be entitled to claim all tax benefits,
credits and deductions related to the Equipment for federal income tax
purposes including, without limitation: (i) deductions on Lessor's cost of
the Equipment for each of its tax years during the term of the Lease under
any method of depreciation or other cost recovery formula permitted by the
Internal Revenue Code of 1986, as amended (hereinafter called the "Code"),
and (ii) interest deductions as permitted by the Code on the aggregate
interest paid to any Assignee (hereinafter collectively "Lessor's Tax
Benefits"). Lessee agrees to take no action inconsistent (including the
voluntary substitution of Equipment) with the foregoing or which would result
in the loss, disallowance, recapture or unavailability to Lessor of Lessor's
Tax Benefits. Lessee hereby indemnifies Lessor and its Assignee(s) from and
against (a) any loss, disallowance, unavailability or
<PAGE>
recapture of Lessor's Tax Benefits resulting from any action or failure to
act of Lessee, including replacement of the Equipment, plus (b) all interest,
penalties, costs (including attorney fees), or additions to tax resulting
from such loss, disallowance, unavailability or recapture.
18. GENERAL
(a) The Lease shall be deemed to have been made and delivered in the State
of Michigan and shall be governed in all respects by the laws of such state.
THE PARTIES HERETO AGREE THAT IN THE EVENT OF AN ALLEGED BREACH OF THIS
AGREEMENT OR ANY DOCUMENTS RELATING THERETO BY EITHER PARTY, OR ANY
CONTROVERSIES ARISE BETWEEN THE PARTIES RELATING TO THIS AGREEMENT OR ANY
DOCUMENTS RELATING THERETO, AND SUCH BREACHES OR CONTROVERSIES ARE BROUGHT
BEFORE ANY COURT, SUCH CONTROVERSIES SHALL BE TRIED BY A JUDGE ALONE. THE
PARTIES, HAVING HAD THE OPPORTUNITY TO CONSULT WITH INDEPENDENT COUNSEL OF
THEIR OWN CHOOSING, HEREBY KNOWINGLY AND VOLUNTARILY WAIVE THEIR RIGHTS TO A
TRIAL BY JURY IN ANY MATTER RELATING TO THIS AGREEMENT OR ANY DOCUMENTS
RELATED THERETO.
(b) The Master Agreement and the Lease constitute the entire and only
agreement between Lessee and Lessor with respect to the lease of the
Equipment, and the parties have only those rights and have incurred only
those obligations as specifically set forth herein. The covenants,
conditions, terms and provisions may not be waived or modified orally and
shall supersede all previous proposals, both oral and written, negotiations,
representations, commitments or agreements between the parties. The Lease
may not be amended or discharged except by subsequent written agreement
entered into by duly authorized representatives of Lessor and Lessee.
(c) All notices, consents or requests desired or required to be given under
the Lease shall be in writing and shall be delivered in person or sent by
certified mail, return, receipt requested, or by courier service to the
address of the other party set forth in the introduction of the Master
Agreement or to such other address as such party shall have designated by
proper notice.
(d) Each Schedule shall be executed in three counterparts, consecutively
numbered. To the extent, if any, that a Schedule constitutes chattel paper
(as such term is defined in the Uniform Commercial Code) no security interest
in the Schedule may be created through the transfer or possession of any
counterpart other than Counterpart No. 1. The Master Agreement, in the form
of a photocopy, is Exhibit A to the Schedule and is not chattel paper by
itself.
(e) Section headings are for convenience only and shall not be construed as
part of the Lease.
(f) It is expressly understood that all of the Equipment shall be and remain
personal property, notwithstanding the manner in which
<PAGE>
the same may be attached or affixed to realty, and, upon Lessor's request,
Lessee shall secure from its mortgagee, landlord or owner of the premises a
waiver in form and substance reasonably satisfactory to Lessor.
(g) Lessor may upon written notice to Lessee advise Lessee that certain
Items supplied to Lessee are leased to Lessor and supplied to Lessee under
the Lease as a sublease. Lessee agrees to execute and deliver such
acknowledgements and assignments in connection with such a Lease as are
reasonably required. If, at any time during the term of the Lease, Lessor's
right to lease the Equipment expires, Lessor may remove the Equipment from
Lessee's premises and shall promptly provide identical substitute Equipment.
All expenses of such substitution, including de-installation, installation
and transportation expenses, shall be borne by Lessor.
(h) Prior to the delivery of an Item, the obligations of Lessor hereunder
shall be suspended to the extent that it is hindered or prevented from
complying therewith because of labor disturbances, including strikes and
lockouts, acts of God, fires, storms, accidents, failure to deliver any Item,
governmental regulations or interferences or any cause whatsoever not within
the sole control of Lessor.
(i) Any provision of the Master Agreement or any Schedule prohibited by or
unlawful or unenforceable under any applicable law or any jurisdiction shall
be ineffective as to such jurisdiction without invalidating the remaining
provisions of the Master Agreement and such Schedule.
(j) Although this Lease is the standard form used by Lessor to lease
hardware equipment to Lessee, both Lessor and Lessee acknowledge that, with
respect to any software which may be included as Equipment ("Software"), this
Lease is a financing agreement whereby that portion of Lessee's Base Month
Rental payment obligation applicable to any Software represents license fees
which are being paid by Lessee in consideration for payment by Lessor to the
software vendor ("Vendor") of the total license fee relating to any such
Software. Neither Lessor nor Lessee have or were granted any ownership or
other proprietary rights in the Software, and neither party purports to
transfer any such rights to the other hereunder. Lessee has only those
rights in the Software which were granted to Lessee pursuant to the software
license agreement entered into directly between Vendor and Lessee ("License").
(k) The parties agree that this is a "Finance Lease" as defined by section
2A-103(g) of the Uniform Commercial Code ("UCC"). Lessee acknowledges either
(a) that Lessee has reviewed and approved any written Supply Contract (as
defined by UCC 2-A-103(y)) covering the Equipment purchased from the Supplier
(as defined by UCC 2A-103(x) thereof for lease to Lessee or (b) that Lessor
has informed or advised Lessee, in writing, either previously or by this
Lease of the following: (i) identity of the Supplier, (ii) that the Lessee
<PAGE>
may have rights under the Supply Contract; and (iii) that the Lessee may
contact the Supplier for a description of any such rights Lessee may have
under the Supply Contract.
The terms of this Lease are applicable only as between Lessor (and any
Assignee) and Lessee. The terms of the License are applicable only as
between Lessee and Vendor, and Lessor does not assume and is not liable for
any obligations under any of the provisions of the License.
Lessee's Base Monthly Rental payment obligation is absolute and
unconditional in all respects regardless of any problem Lessee may have with
the Software, any dispute Lessee may have with the Vendor, any inability of
Lessee to use the Software or exercise by Vendor of any remedies it may have
pursuant to the License.
The parties have executed this Master Lease Agreement as of the date written
above.
LESSOR: LESSEE:
VARILEASE CORPORATION STARPAK, INC.
By: /s/ GARY F. MILLER By: /s/ DENNIS M. SWENSON
------------------------------- ------------------------------------
Name: Gary F. Miller Name: Dennis M. Swenson
By: Senior Vice President Title: Vice President
If there are no Additional Provisions to this Master Lease Agreement, check
here X . If there are Additional Provisions describe here:
<PAGE>
ATTACHMENT A
to MASTER LEASE AGREEMENT
dated March 6 [sic], 1997
between VARILEASE CORPORATION ("LESSOR")
and STARPAK, INC. ("LESSEE")
To calculate Stipulated Loss Value, multiply the applicable percentage,
below, by the value of the applicable Item(s) set forth on the Schedule.
RENT RENT RENT
PAYMENT STIP LOSS PAYMENT STIP LOSS PAYMENT S T I P
LOSS
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
1 110.50% 21 85.31% 41 60.13%
2 109.24% 22 84.05% 42 58.87%
3 107.98% 23 82.80% 43 57.61%
4 106.62% 24 81.54% 44 56.35%
5 105.46% 25 80.28% 45 55.09%
6 104.20% 26 79.02% 46 53.83%
7 102.94% 27 77.76% 47 52.57%
8 101.68% 28 76.50% 48 51.31%
9 100.43% 29 75.24% 49 50.05%
10 99.17% 30 73.98% 50 48.79%
11 97.91% 31 72.72% 51 47.53%
12 96.65% 32 71.46% 52 46.28%
13 95.39% 33 70.20% 53 45.02%
14 94.13% 34 68.94% 54 43.76%
15 92.87% 35 67.68% 55 42.50%
16 91.61% 36 66.42% 56 41.24%
17 90.35% 37 65.17% 57 39.98%
18 89.09% 38 63.91% 58 38.72%
19 87.83% 39 62.65% 59 37.46%
20 86.57% 40 61.39% 60 36.10%
AND THEREAFTER
<PAGE>
SCHEDULE NO. 02
dated April 15, 1997
incorporating by reference
Master Agreement dated March 7, 1997
between VARILEASE CORPORATION, as Lessor,
and STARPAK, INC., as Lessee.
LESSEE AGREES TO LEASE THE DESCRIBED EQUIPMENT FROM LESSOR, AND LESSOR BY
ACCEPTANCE OF THIS LEASE, AGREES TO LEASE THE EQUIPMENT TO LESSEE ON THE
TERMS AND CONDITIONS SET FORTH IN THIS SCHEDULE AND THE MASTER AGREEMENT,
WHICH IS INCORPORATED HEREIN BY REFERENCE.
1. Equipment Description:
Value for
Calculation
Model/ of Stip.
Qty Mfgr Feature Description Loss Value
2 Aspect 3273 Voice Storage Expansion Module $ 7,694.50
250 Aspect 3190 Teleset, Standard 109,312.50
66 Aspect 3197 Standard Handset and Cradle 871.20
12 Aspect 4061 Teleset Int. Card 79,173.60
Parts Installation 5,850.00
SUB TOTAL $202,901.80
Contract Deletions/Customer Credit:
1 Aspect 3060 Telecaster {$ 2,747.25}
1 Aspect 4310 Agent Monitoring Card { 5,720.00}
Installation Credit { 550.00}
TOTAL $193,884.05
2. Base Monthly Rental: $5,190.56
3. Equipment Location: 111 Havana Street
Denver, CO 80114
4. Equipment Return Location: To Be Advised
5. Expected Delivery Date: June 1997
6. Base Term: 36 months
7. Riders: If there are no Riders, please check here:___.
If there are Riders, attach and describe here:
FMV Renewal Option
FMV Purchase Option
<PAGE>
8. Special Terms:
A) The thirty-sixth (36th) Base Monthly Rental is due and payable on
the Rent Commencement Date.
9. Lessee Address for Notices (if different than Master Agreement):
Notwithstanding anything herein or in the Master Agreement to the contrary,
Lessee acknowledges and agrees, that Lessor shall be entitled to claim for
federal income tax purposes, without limitation, all benefits, credits and
deductions related to the Equipment.
The undersigned Lessee acknowledges that this Schedule authorizes the Lessor
or its agents or assignee(s) to sign and execute on its behalf any and all
necessary documents to make public this lease transaction. The parties
intend this transaction to be a true lease, but if any court or tribunal,
having power to bind the parties, should conclude that all or part of this
Schedule is not a true lease but is in the nature of a sale, consignment, or
other transaction, the parties intend and the Lessee hereby grants a
continuing security interest in the Equipment from the date of this Schedule
to secure the payment of all Lessee's indebtedness to Lessor.
THIS SCHEDULE TOGETHER WITH EXHIBIT A AND ANY ADDITIONAL PROVISION(S)
REFERRED TO IN ITEM 7 CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE LESSOR AND
LESSEE AS TO THE LEASE AND THE EQUIPMENT. LESSEE ACKNOWLEDGES THAT ON OR
BEFORE LESSEE'S SIGNING OF THIS SCHEDULE IT RECEIVED A COPY OF THE CONTRACT
EVIDENCING LESSOR'S ACQUISITION OF THE EQUIPMENT.
LESSOR: LESSEE:
VARILEASE CORPORATION STARPAK, INC.
By: /s/ Gary F. Miller By: /s/ Dennis M. Swenson
Name: Gary F. Miller Name: Dennis M. Swenson
Title: Senior Vice President Title: Vice President
<PAGE>
Rider No. 01
RENEWAL OPTION
To Schedule No. 02 dated April 15, 1997
Master Agreement dated March 7, 1997
Lessor: Varilease Corporation
Lessee: Starpak, Inc.
Provided no Event of Default or event which with the giving of notice or
lapse of time, or both, would constitute an Event of Default has occurred and
is continuing, Lessee shall have the option to extent the term of the Lease
as to all, but not less than all, of the Equipment at the end of the Base
Term or any prior renewal term subject to the following terms and conditions:
1. Lessee must notify Lessor of its exercise of the option at least 180
days prior to the expiration of the Base Term or renewal term, if
applicable.
2. All of the terms and conditions of the Lease, other than the Base
Monthly Rental, which shall be the then Fair Rental Value of the
Equipment at the commencement of such renewal term, shall remain the
same. For purposes of this Renewal Option, the "Fair Rental Value"
is defined as the value upon which a willing lessor and a willing
lessee would agree, for the term involved, each respectively under
no compulsion to lease. Fair Rental Value shall be determined by
agreement of Lessor and Lessee, or, if they are unable to agree, Fair
Rental Value shall be determined by an independent appraiser selected
by Lessor and satisfactory to Lessee. The cost of such appraisal
shall be borne equally by Lessor and Lessee.
<PAGE>
Rider No. 02
PURCHASE OPTION
To Schedule No. 02 dated April 15, 1997
Master Agreement dated March 7, 1997
Lessor: Varilease Corporation
Lessee: Starpak, Inc.
Provided no Event of Default or event which with the giving of notice or
lapse of time, or both, would constitute an Event of Default has occurred and
is continuing, and provided Lessee has given Lessor at least 180 days written
notice prior to the expiration of the Base Term of any extension, Lessee
shall have the option at the end of such Base Term or any extension to
purchase all, but not less than all, of the Equipment for an amount equal to
the then Fair Market Value of the Equipment.
For purposes of this Purchase Option, "Fair Market Value" shall be defined as
the purchase price of the Equipment (delivered and installed at Lessee's
location) that would be obtained in an arm's length transaction between a
willing seller and a willing purchaser, neither under a compulsion to buy or
sell. In the event Lessor and Lessee cannot agree upon the Fair Market
Value, then such amount shall be determined by an independent appraiser
selected by Lessor but satisfactory to Lessee. The cost of such appraisal
shall be borne equally by Lessor and Lessee.
Upon receipt of the Fair Market Value, plus any taxes, Lessor shall execute
and deliver to Lessee a bill of sale without representation or warranty
except that the Equipment is free and clear of any liens, claims or
encumbrances created by Lessor.
<PAGE>
EXHIBIT A
MASTER LEASE AGREEMENT
MASTER LEASE AGREEMENT ("Master Agreement") made as of March 7, 1997, between
VARILEASE CORPORATION, a Michigan corporation, having its chief executive
offices at 28525 Orchard Lake Road, Farmington Hills, MI 48334 ("Lessor") and
STARPAK, INC., a Colorado corporation having its chief executive offices at
237 22nd Street, Greeley, CO 80631 ("Lessee").
1. LEASE
On the terms and conditions of this Master Agreement, Lessor shall lease to
Lessee, and Lessee shall hire from Lessor, the items of personal property
described in the Schedule(s) (collectively the "Equipment," and individually
an "Item") which shall incorporate this Master Agreement. Each Schedule
shall constitute a separate and independent lease and contractual obligation
of Lessee. The term "Lease" shall refer to an individual Schedule which
incorporates this Master Agreement. In the event of a conflict between this
Master Agreement and any Schedule, the language of the Schedule shall prevail.
The Lease shall be effective upon execution by Lessor at its offices.
2. TERM
(a) The term of the Lease shall be comprised of a Delivery Term,
Installation Term and Base Term. The Delivery Term for each Item shall
commence on the date the Item is delivered to Lessee and shall end on the
Installation Date. The Installation Term shall commence on the Installation
Date and terminate on the first day of the month following the Installation
Date for the last Item to be installed (the "Base Term Commencement Date").
The Base Term of the Lease shall begin on the Base Term Commencement Date,
and may, subject to Subsection 2(b), terminate on the last day of the last
month of the Base Term. The date of installation (the "Installation Date")
for any Item shall be the earlier of either (i) the date on which the entity
responsible for installing such Item certifies that the Item is installed and
placed in good working order, or (ii) if Lessee has caused a delay in the
installation of an Item, seven days from the date the Item is delivered to
the equipment location specified in the Schedule, or (iii) if Lessee is to
install the Item, the third day after delivery. In the event the Equipment
is already installed at the equipment location of Lessee and has been
previously paid for by Lessee, the Installation Date shall be the date on
which the Lessor pays Lessee for the Equipment.
(b) A Lease may be terminated as of the last day of the last month of the
Base Term by written notice given by either Lessor or Lessee not less than
six (6) months prior to the date of termination of the Base Term. If the
Lease is not so terminated at the end of the Base Term, the Base Term shall
be automatically extended for
<PAGE>
successive six (6) month periods until such six (6) month notice is given.
The Base Monthly Rental, as hereinafter defined, shall continue to be due and
payable by Lessee until the Equipment redelivered to Lessor upon the
termination of the Base Term or any extension term, and throughout any such
extension term(s). No notice of termination may be revoked without the
written consent of the other party. Lessor will notify Lessee in writing
seven (7) months prior to lease termination of the date of the completion of
lease term.
3. RENTAL
(a) The rental amount payable to Lessor by Lessee for the Equipment will be
as set forth on the Schedule ("Base Monthly Rental"). As rent for Equipment,
Lessee shall pay Lessor in immediately available funds and in advance on the
Base Term Commencement Date and on the first day of each month during the
Base Term of the Lease the Base Monthly Rental, per month, and (ii) on the
Installation Date an amount equal to 1/30th of the Base Monthly Rental for
each Item times the number of days which will elapse from the Installation
Date of such Item to the Base Term Commencement Date of the Lease. Each
remittance from Lessee to Lessor shall contain information as to the Lease
for which payment is made.
(b) For any payment of rent or other amount due under a Lease which is past
due for more than five (5) days, interest shall accrue at the rate of 2% per
month, from the date such payment was due until payment is received by
Lessor, or if such rate shall exceed the maximum rate of interest allowed by
law, then at such maximum rate.
4. TAXES
The term "Taxes" shall mean all taxes, fees and assessments due, assessed or
levied by any foreign, federal, state or local government or taxing
authority, and/or any penalties, fines or interest, which are imposed against
or on the Equipment, its use, operation, or ownership, or the rentals or
receipts due under the Lease, or penalties arising from the failure to file a
return with respect to the Taxes, but shall not include any federal or state
taxes based upon or measured by the net income of Lessor. As of the
commencement of the term of the Lease, Lessee shall promptly report, file,
pay and indemnify, and hold Lessor harmless with respect to any and all
Taxes. Lessee will, upon request by Lessor, submit to Lessor written
evidence of Lessee's payment of all Taxes.
5. NET LEASE
The Lease is a net lease, it being the intention of the parties that all
costs, expenses and liabilities associated with the Equipment or its lease
shall be borne by Lessee. Lessee's agreement to pay all obligations under
the Lease, including but not limited to Base Monthly Rental, is absolute and
unconditional and
<PAGE>
such agreement is for the benefit of Lessor and its Assignee(s). Lessee's
obligations shall not be subject to any abatement, deferment, reduction,
setoff, defense, counterclaim or recoupment for any reason whatsoever.
Except as may be otherwise expressly provided in the Lease, it shall not
terminate, nor shall the obligations of Lessee be affected by reason of any
defect in or damage to, or any loss or destruction of, no obsolescence of,
the Equipment or any Item from any cause whatsoever, or the interference with
its use by any private person, corporation or governmental authority, or as a
result of any war, riot, insurrection or an Act of God. It is the express
intention of Lessor and Lessee that all rent and other sums payable by Lessee
under the Lease shall be, and continue to be, payable in all events
throughout the term of the Lease. The Lease shall be binding upon the
Lessee, its successors and permitted assigns and shall inure to the benefit
of Lessor and its Assignee(s).
6. INSTALLATION, RETURN AND USE OF EQUIPMENT
(a) Upon delivery of the Equipment to Lessee, Lessee shall pay all
transportation, installation, rigging, packing and insurance charges with
respect to the Equipment. In the case of a sale and leaseback transaction,
Lessee shall, upon the request of Lessor, certify the date the Equipment was
first put into use. Lessee will provide the required electric current and a
suitable place of installation for the Equipment with all appropriate
facilities as specified by the manufacturer. No cards, tapes, disks, data
cells or other input/output and storage media may be used by Lessee to
operate any Item unless it meets the specifications of the manufacturer.
Lessee agrees that it will not install, or permit the installation of, the
Equipment without Lessor's consent.
(b) Lessee shall, at all times during the term of the Lease, be entitled to
unlimited use of the Equipment. Lessee will at all times keep the Equipment
in its sole possession and control. The Equipment shall not be moved from
the location stated in the Schedule without the prior written consent of
Lessor and in no event shall the Equipment be moved outside the continental,
contiguous United States. Lessee will comply with all laws, regulations, and
ordinances, and all applicable requirements of the manufacturer of the
Equipment which apply to the physical possession, use, operation, condition,
and maintenance of the Equipment. Lessee agrees to obtain all permits and
licenses necessary for the operation of the Equipment.
(c) Lessee shall not without the prior written consent of Lessor, affix or
install any accessory, feature, equipment or device to the Equipment or make
any improvement, upgrade, modification, alteration or addition to the
Equipment (any such accessory, feature, equipment, device or improvement,
upgrade, modification, alteration or addition affixed or installed is an
"Improvement"). Title to all Improvements shall, without further act, upon
the making, affixing or installation of such Improvement, vest solely in
Lessor, except such Improvements as may be readily removed
<PAGE>
without causing material damage to the Equipment and without in any way
affecting or impairing the originally intended function, value or use of the
Equipment. Removal of the Improvement shall be performed by the manufacturer,
at the sole expense of Lessee. Provided the Equipment is returned to Lessor
in the condition required by the Lease, including, but not limited to
coverage under the manufacturer's standard maintenance contract, title to the
Improvement shall vest in the Lessee upon removal. Any Improvement not
removed from the Equipment prior to return shall at Lessor's option remain
the property of Lessor and shall be certified for maintenance by the
manufacturer, at Lessee's expense.
Lessee shall notify Lessor in writing no less than 60 days prior to the
desired installation date of the type of Improvement Lessee desires to
obtain. Lessor may, at any time within 10 days after receipt of the notice
offer to provide the Improvement to Lessee upon terms and conditions to be
mutually agreed upon. Lessee shall notify Lessor of any third party offers
and shall lease the Improvement from Lessor if Lessor meets the terms of the
third party offer.
If Lessee leases an Improvement from Lessor, such lease shall be under a
separate Schedule, the Improvement shall not be placed in service by Lessee
prior to acquisition by Lessor, and Lessee shall execute and deliver any
document necessary to vest title to such Improvement in Lessor.
During the term of the Lease term and any renewal term, Lessee shall
cause all Improvements to be maintained, at Lessee's expense, in accordance
with the requirements of Section 7. Unless otherwise agreed to by Lessor,
upon the expiration or earlier termination of the term of the Lease, any
Improvement shall be de-installed and removed from the Equipment by the
manufacturer, at Lessee's expense. If the Improvement is removed, the
Equipment shall be restored to its unmodified condition and shall be
certified for maintenance by the manufacturer, at Lessee's expense.
In the event an Improvement is provided to Lessee by a party other than
Lessor, Lessee shall cause such party to execute and deliver to Lessor such
documents as shall be required by Lessor to protect the interests of Lessor
and any Assignee in the Equipment, this Master Agreement and any Schedule.
(d) Lessee shall, at the termination of the Lease, at its expense,
de-install, pack and return the Equipment to Lessor at such location within
the continental United States as shall be designated by Lessor in the same
operating order, repair, condition and appearance as of the Installation
Date, reasonable wear and tear excepted, with all current engineering changes
prescribed by the manufacturer of the Equipment or a maintenance contractor
approved by Lessor (the "Maintenance Organization") incorporated in the
Equipment. Until the return of the Equipment to Lessor, Lessee shall be
obligated to pay the Base Monthly Rental and all other sums due under the
Lease. Upon redelivery to Lessor, Lessee shall
<PAGE>
arrange and pay for such repairs (if any) as are necessary for the
manufacturer of the Equipment to accept the Equipment under a maintenance
contract at its then standard rates.
7. MAINTENANCE AND REPAIRS
Lessee shall, during the term of the Lease, maintain in full force and effect
a contract with the manufacturer of the Equipment or Maintenance Organization
covering at least prime shift maintenance of the Equipment. Lessee upon
request shall furnish Lessor with a copy of such maintenance contract as
amended or supplemented. During the term of the Lease, Lessee shall, at its
expense, keep the Equipment in good working order, repair, appearance and
condition and make all necessary adjustments, repairs and replacements, all
of which shall become the property of Lessor. Lessee shall not use or permit
the use of the Equipment for any purpose for which, in the opinion of the
manufacturer of the Equipment or Maintenance Organization, the Equipment is
not designed or intended.
8. OWNERSHIP, LIENS AND INSPECTIONS
(a) Lessee shall keep the Equipment free from any marking or labeling which
might be interpreted as a claim of ownership by Lessee or any party other
than Lessor and its Assignee(s), and shall affix and maintain tags, decals or
plates furnished by Lessor on the Equipment indicating ownership and title to
the Equipment in Lessor or its Assignee(s). Upon reasonable notice to
Lessee, Lessor or its agents shall have access to the Equipment and Lessee's
books and records with respect to the Lease and the Equipment at reasonable
times for the purpose of inspection and for any other purposes contemplated
by the Lease, subject to the reasonable security requirements of Lessee.
(b) Lessee shall execute and deliver such instruments, including Uniform
Commercial Code financing statements, as are required to be filed to evidence
the interest of Lessor and its Assignee(s) in the Equipment or the Lease.
Lessee has no interest in the Equipment except as expressly set forth in the
Lease, and that interest is a lease-hold interest. Lessor and Lessee agree,
and Lessee represents for the benefit of Lessor and its Assignee(s) that the
Lease is intended to be a "finance lease" and not a "lease intended as
security" as those terms are used in the Uniform Commercial Code, and that
the Lease is intended to be a "true lease" as the term is commonly used under
the Internal Revenue Code of 1986, as amended.
(c) LESSEE SHALL KEEP THE LEASE, THE EQUIPMENT AND ANY IMPROVEMENTS FREE AND
CLEAR OF ALL LIENS AND ENCUMBRANCES OF WHATSOEVER KIND (EXCEPT THOSE CREATED
BY LESSOR) AND LESSEE SHALL NOT ASSIGN THE LEASE OR ANY OF ITS RIGHTS UNDER
THE LEASE OR SUBLEASE ANY OF THE EQUIPMENT OR GRANT ANY RIGHTS TO THE
EQUIPMENT WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR. No permitted
assignment or sublease shall relieve Lessee of any of its
<PAGE>
obligations under the Lease and Lessee agrees to pay all costs and expenses
Lessor may incur in connection with such sublease or assignment. Lessee
grants to Lessor the right of first refusal on any sublease or other grant of
Lessee's rights to the Equipment.
9. DISCLAIMER OF WARRANTIES
(a) LESSOR LEASES THE EQUIPMENT "AS IS," AND BEING NEITHER THE MANUFACTURER
OF THE EQUIPMENT NOR THE AGENT OF EITHER THE MANUFACTURER OR SELLER, LESSOR
DISCLAIMS ANY REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED,
WITH RESPECT TO THE CONDITION OR PERFORMANCE OF THE EQUIPMENT, ITS
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WITH RESPECT TO PATENT
INFRINGEMENTS OR THE LIKE, LESSOR SHALL HAVE NO LIABILITY TO LESSEE FOR ANY
CLAIM, LOSS OR DAMAGE OF ANY KIND OR NATURE WHATSOEVER, NOR SHALL THERE BE
ANY ABATEMENT OF RENTAL FOR ANY REASON INCLUDING CLAIMS ARISING OUT OF OR IN
CONNECTION WITH (i) THE DEFICIENCY OR INADEQUACY OF THE EQUIPMENT FOR ANY
PURPOSE, WHETHER OR NOT KNOWN OR DISCLOSED TO LESSOR, (ii) ANY DEFICIENCY OR
DEFECT IN THE EQUIPMENT, (iii) THE USE OR PERFORMANCE OF THE EQUIPMENT, OR
(iv) ANY LOSS OF BUSINESS OR OTHER CONSEQUENTIAL LOSS OR DAMAGE, WHETHER OR
NOT RESULTING FROM ANY OF THE FOREGOING.
(b) For the term of the Lease, Lessor assigns to Lessee (to the extent
possible), and Lessee may have the benefit of, any and all manufacturer's
warranties, service agreements and patent indemnities, if any, with respect
to the Equipment; provided, however, that Lessee's sole remedy for the breach
of any such warranty, indemnification or service agreement shall be against
the manufacturer of the Equipment and not against Lessor, nor shall any such
breach have any effect whatsoever on the rights and obligations of Lessor or
Lessee with respect to the Lease.
(c) NO REPRESENTATIONS OR WARRANTIES OF THE MANUFACTURER OR DISTRIBUTOR OF
THE EQUIPMENT, OR ANY OTHER THIRD PARTY, CAN BIND LESSOR, AND LESSEE
ACKNOWLEDGES AND AGREES THAT LESSOR SHALL HAVE NO OBLIGATIONS WITH RESPECT TO
THE EQUIPMENT EXCEPT AS SPECIFICALLY SET FORTH HEREIN OR OTHER DOCUMENT
EXECUTED BY LESSOR.
10. ASSIGNMENT
(a) Lessee acknowledges and understands that Lessor may assign to a
successor, financing lender and/or purchaser (the "Assignee"), all or any
part of the Lessor's right, title and interest in and to the Lease and the
Equipment and Lessee hereby consents to such assignment(s). In the event
Lessor transfers or assigns, or retransfers or reassigns, to an Assignee all
or part of Lessor's interest in the Lease, the Equipment or any sums payable
under the Lease, whether as collateral security for loans or advances made or
to be made to Lessor by such Assignee or otherwise, Lessee covenants that,
upon receipt of notice of any such transfer or assignment and instructions
from Lessor,
<PAGE>
(i) Lessee shall, if so instructed, pay and perform its obligations under
the Lease to the Assignee (or to any other party designated by Assignee), and
shall not assign the Lease or any of its rights under the Lease or permit the
Lease to be amended, modified, or terminated without the prior written consent
of Assignee; and
(ii) Lessee's obligations under the Lease with respect to Assignee shall be
absolute and unconditional and not be subject to any abatement, reduction,
recoupment, defense, offset or counterclaim for any reason, alleged or proven,
including, but not limited to, defect in the Equipment, the condition, design,
operation or fitness for use of the Equipment or any loss or destruction or
obsolescence of the Equipment or any part, the prohibition of or other
restrictions against Lessee's use of the Equipment, the interference with such
use by any person or entity, any failure by Lessor to perform any of its
obligations contained in the Lease, any insolvency or bankruptcy of Lessor, or
for any other cause; and
(iii) Lessee shall, upon request of Lessor, submit documents and
certificates as may be reasonably required by Assignee to secure and complete
such transfer or assignment, including but not limited to the documents set
forth in Section 15(c) of this Master Agreement.
(iv) Lessee shall deliver to Assignee copies of any notices which are
required under the Lease to be sent to Lessor; and
(v) Lessee shall, if requested, restate to Assignee the representations,
warranties and covenants contained in the Lease (upon which Lessee
acknowledges Assignee may rely) and shall make such other representations,
warranties and covenants to Assignee as may be reasonably required to give
effect to the assignment.
(b) Lessor shall not make an assignment or transfer to any Assignee who
shall not agree that, so long as Lessee is not in default under the Lease,
such Assignee shall take no action to interfere with Lessee's quiet enjoyment
and use of the Equipment in accordance with the terms of the Lease. No such
assignment or conveyance shall relieve Lessor of its obligations under the
Lease and Lessee agrees it shall not look to any Assignee to perform any of
Lessor's obligations under the Lease. No such assignment shall increase
Lessee's obligations nor decrease Lessee's rights hereunder.
11. QUIET ENJOYMENT
Lessor covenants that so long as Lessee is not in default under a Lease,
Lessor shall take no action to interfere with Lessee's possession and use of
the Equipment subject to and in accordance with the provisions of the Lease.
12. INDEMNIFICATION
<PAGE>
Except for the sole and gross negligence or willful misconduct of Lessor or
Assignee, Lessee shall and does agree to indemnify, protect, defend, save and
keep harmless Lessor and its Assignee(s) from and against any and all
liabilities, obligations, losses, damages, penalties, claims, actions, suits,
costs, or expenses of any kind and nature whatsoever, including but not
limited to attorneys fees, including without limitation attorneys fees in
connection with the enforcement of this indemnification, which may be imposed
upon, incurred by or asserted against Lessor or its Assignee(s) in any way
relating to or arising out of the Lease, the manufacture, ownership, lease,
possession, use condition, operation, or accident in connection with the
Equipment (including, without limitation, those claims based on latent and
other defects, whether or not discoverable, or claims based on strict
liability, or any claim for patent, trademark or copyright infringement).
Lessor's rights arising from this Section shall survive the expiration or
other termination of the Lease. Nothing in this Section shall limit or waive
any right of Lessee to proceed against the manufacturer of the Equipment.
13. RISK OF LOSS
(a) Lessee assumes and shall bear the entire risk of loss and damage,
whether or not insured against, of the Equipment from any and every cause
whatsoever as of the date the Equipment is delivered to Lessee.
(b) In the event of loss or damage of any kind to any Item, Lessee shall use
all reasonable efforts to place the Item in good repair, condition and
working order to the reasonable satisfaction of Lessor within sixty (60) days
of such loss or damage, unless the manufacturer of the Equipment determines
that such Item has been irreparably damaged, in which case Lessee shall,
within ten (10) days of the manufacturer's determination of irreparable loss,
make its election to either pay Lessor the Stipulated Loss Value (as set
forth in Attachment A to this Master Agreement) for the irreparably damaged
Item or replace the irreparably damaged Item, all as provided in this
Section. To the extent that the Item is damaged but not irreparably damaged
and if Lessee is entitled, pursuant to the insurance coverage, to obtain
proceeds from such insurance for the repair of the Item, Lessee (provided no
Event of Default has occurred under the Lease) may arrange for the
disbursement of such proceeds to the manufacturer or other entity approved by
Lessor to perform the repairs to pay the cost of repair. However, Lessee's
obligation to timely repair the damaged Item is not contingent upon receipt
of such insurance proceeds.
(c) In the event that Lessee elects to pay Lessor the Stipulated Loss Value
for the irreparably damaged Item, Lessee shall (i) pay such amount (computed
as of the first day of the month following the determination of the
irreparable damage by the manufacturer) to Lessor on the first day of the
month following the election by Lessee as provided in (b) above, (ii) pay all
Base Monthly Rental for the Item up to the date that the Stipulated Loss
Value is paid
<PAGE>
to Lessor; and (iii) arrange with the applicable insurance company (with the
consent of Lessor) for the disposition of the irreparably damaged Item. If
not all the Equipment is irreparably damaged, the Value for Calculation of
Stipulated Loss Value ("Value") as set forth on the Schedule for the
irreparably damaged Item shall be multiplied by the applicable percentage set
forth in Attachment A to compute the Stipulated Loss Value for such
irreparably damaged Item, and the Base Monthly Rental for the undamaged
Equipment remaining due (after payment of the Stipulated Loss Value for the
irreparably damaged Item) shall be that amount resulting from multiplying the
original Base Monthly Rental by the ratio of the Value of the undamaged
Equipment divided by the Value for all the Equipment prior to the damage.
(d) If Lessee elects to replace the irreparably damaged Item, Lessee shall
continue all payments under the Lease without interruption, as if no such
damage, loss or destruction had occurred, and shall replace such irreparably
damaged Item, paying all such costs, associated with the replacement, and
Lessee shall be entitled to insurance proceeds up to the amount expended by
Lessee in effecting the replacement. Lessee shall within twenty (20) days
following the date of determination of irreparable damage by the
manufacturer, effect the replacement by replacing the irreparably damaged
Item with a "Replacement Item" so that Lessor has good, marketable and
unencumbered title to such Replacement Item. The Replacement Item shall have
a fair market value equal to or greater than the Item replaced, and
anticipated to have a fair market value at the expiration of the Base Term
equal to the fair market value that the replaced Item would have had at the
end of the Base Term, and be the same manufacture, model and type and of at
least equal capacity to the Item for which the replacement is being made.
Upon delivery, such Replacement Item shall become subject to all of the terms
and conditions of the Lease. Lessee shall execute all instruments or
documents necessary to effect the foregoing.
(e) For purposes of this Lease, the term "fair market value" shall mean the
price of the Equipment delivered and installed at Lessee's location that
would be obtained in an arm's-length transaction between an informed and
willing buyer-lessee under no compulsion to buy or lease and an informed and
willing seller-lessor under no compulsion to sell or lease. If Lessor and
Lessee are unable to agree upon fair market value, such value shall be
determined, at Lessee's expense, in accordance with the foregoing definition,
by three independent appraisers, one to be appointed by Lessee, one to be
appointed by Lessor and the third to be appointed by the first two.
14. INSURANCE
During the term of the Lease, Lessee, at its own expense, shall maintain in
regard to the Equipment all risk insurance (in an amount not less than the
Stipulated Loss Value as identified on Attachment A) and comprehensive public
liability insurance in
<PAGE>
amounts and with carriers reasonably satisfactory to Lessor. Any such
insurance shall name Lessor and the Assignee(s) as additional insured and, as
for the all risk insurance, loss payees as their interests may appear. All
such insurance shall provide that it may not be terminated, canceled or
altered without at least thirty (30) days' prior written notice to Lessor and
its Assignee(s). Coverage afforded to Lessor shall not be rescinded,
impaired, or invalidated by any act or neglect of Lessee. Lessee agrees to
supply to Lessor, upon request, evidence of such insurance.
15. REPRESENTATIONS AND WARRANTIES OF LESSEE; FINANCIAL STATEMENTS
(a) Lessee represents and warrants to Lessor and its Assignee(s) (i) that
the execution, delivery and performance of this Master Agreement and the
Lease was duly authorized and that upon execution of this Master Agreement
and the Lease by Lessee and Lessor, the Master Agreement and the Lease will
be in full force and effect and constitute a valid legal and binding
obligation of Lessee, and enforceable against Lessee in accordance with their
respective terms; (ii) the Equipment is accurately described in the Lease and
all documents of Lessee relating to the Lease; (iii) that Lessee is in good
standing in the jurisdiction of its incorporation and in any jurisdiction in
which any of the Equipment is located; (iv) that no consent or approval of,
giving of notice to, registration with, or taking of any other action in
respect of, any state, federal or other government authority or agency is
required with respect to the execution, delivery and performance by the
Lessee of this Master Agreement or the Lease or, if any such approval,
notice, registration or action is required, it has been obtained; (v) that
the entering into and performance of this Master Agreement and the Lease will
not violate any judgment, order, law or regulation applicable to Lessee or
any provision of Lessee's Articles of Incorporation or Bylaws or result in
any breach of, or constitute a default under, or result in the creation of
any lien, charge, security interest or other encumbrance upon any assets of
Lessee or upon the Equipment pursuant to any instrument to which Lessee is a
party or by which it or its property may be bound; (vi) there are no actions,
suits or proceedings pending, or to the knowledge of Lessee, threatened,
before any court or administrative agency, arbitrator or governmental body
which will, if determined adversely to Lessee, materially adversely affect
its ability to perform its obligations under the Lease or any related
agreement to which it is a party; (vii) that aside from the Master Agreement
and the Lease there are no additional agreements between Lessee and Lessor
relating to the Equipment, and (viii) that any and all financial statements
and other information with respect to Lessee supplied to Lessor at the time
of execution of the Lease and any amendment, are true and complete. The
foregoing representations and warranties shall survive the execution delivery
of the Lease and any amendments hereto and shall upon the written request of
Lessor, be made to Lessor's Assignee(s).
(b) Prior to and during the term of the Lease, Lessee will furnish Lessor
with Lessee's audited or unaudited financial statements. If
<PAGE>
Lessee is a subsidiary of another company, Lessee shall supply such company's
financial statements and guarantees as are reasonably acceptable to Lessor.
Lessor's obligations to perform under any Lease is subject to the condition
that the financial statements furnished to Lessor by Lessee present the
financial condition and results of operations of Lessee and its affiliated
corporations, if any, and any guarantor of Lessee's obligations under any
Lease, as of the date of such financial statements, and that since the date
of such statements there have been no material adverse changes in the assets
or liabilities, the financial condition or other condition which in Lessor's
or Assignee(s) sole discretion are deemed to be materially adverse. Lessee
shall also provide Lessor with such other statements concerning the Lease and
the condition of the Equipment as Lessor may from time to time request.
(c) Upon Lessor's request, Lessee shall, with respect to each Lease, deliver
to Lessor (i) a certificate of a secretarial officer of Lessee certifying the
bylaw, resolution (specific or general) or corporate action authorizing the
transactions contemplated in the Lease; (ii) an incumbency certificate
certifying that the person signing this Mater Agreement and the Lease holds
the office the person purports to hold and has authority to sign on behalf of
Lessee; (iii) an opinion of Lessee's counsel with respect to the
representations in Section 15(a); (iv) an agreement with Lessor's Assignee
with regard to any assignment as referred to in Section 10; (v) the purchase
documents if Lessee has sold or assigned its interest in the Equipment to
Lessor; (vi) an insurance certificate evidencing the insurance provided by
Lessee pursuant to Section 14; and (vii) an Installation Certificate duly
executed by Lessee. Failure by Lessee to deliver any of these documents when
due shall operate, at Lessor's option, to continue the Installation Term for
the Lease thus delaying the Base Term Commencement Date, or to increase the
Base Monthly Rental to recover costs incurred by Lessor consequent to the
delay or the termination of the Lease as provided in Section 16.
16. DEFAULT, REMEDIES
(a) The following shall be deemed "Events of Default" under the Lease:
(1) Lessee fails to pay any installment of rent or other charge or
amount due under the Lease within ten (10) days after notice that such
payment is overdue; or
(2) Except as expressly permitted in the Lease, Lessee attempts to
remove, sell, encumber, assign or sublease or fails to insure any of the
Equipment, or fails to deliver any documents required of Lessee under the
Lease; or
(3) Any representation or warranty made by Lessee or Lessee's guarantor
in the Lease or any document supplied in connection with the Lease or any
financial statement is misleading or materially inaccurate; or
<PAGE>
(4) Lessee fails to observe or perform any of the other obligations
required to be observed by Lessee under the Lease within thirty (30) days of
Lessee's first knowledge of such failure; or
(5) Lessee or Lessee's guarantor ceases doing business as a going
concern; makes an assignment for the benefit of creditors; admits in writing
its inability to pay its debts as they become due; files a voluntary petition
in bankruptcy; is adjudicated a bankrupt or an insolvent; files a petition
seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar arrangement under any
present or future statute, law or regulation or files an answer admitting or
fails to deny the material allegations of a petition filed against it in any
such proceeding; consents to or acquiesces in the appointment of a trustee,
receiver, or liquidator for it or of all or any substantial part of its
assets or properties, or if it or its trustee, receiver, liquidator or
shareholders shall take any action to effect its dissolution or liquidation;
or
(6) If within thirty (30) days after the commencement of any proceedings
against Lessee or Lessee's guarantor seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under
any present or future statute, law or regulation, such proceedings shall not
have been dismissed, or if within thirty (30) days after the appointment
(with or without Lessee's or Lessee's guarantor's consent) of any trustee,
receiver or liquidator of it or all of or any substantial part of its
respective assets and properties, such appointment shall not be vacated.
(b) Upon the happening of any Event of Default, Lessor may declare the
Lessee to be in default. Lessee authorizes Lessor at any time thereafter,
with or without terminating the Lease, to enter any premises where the
Equipment may be and take possession of the Equipment. Lessee shall, upon
such declaration of default, without further demand, immediately pay Lessor
an amount which is equal to (i) any unpaid amount due on or before Lessor
declared the Lease to be in default, plus (ii) as liquidated damages for loss
of a bargain and not as a penalty, an amount equal to the Stipulated Loss
Value for the Equipment computed as of the date the last Base Monthly Rental
payment was due prior to the date Lessor declared the Lease to be in default,
together with interest, as provided herein, plus (iii) all attorney and court
costs incurred by Lessor relating to the enforcement of its rights under the
Lease. After an Event of Default, at the request of Lessor and to the extent
requested by Lessor, Lessee shall immediately comply with the provisions of
Section 6(d) and Lessor may sell the Equipment at private or public sale, in
bulk or in parcels, with or without notice, without having the Equipment
present at the place of sale; or Lessor may lease, otherwise dispose of or
keep idle all or part of the Equipment, subject, however, to its obligation
to mitigate damages. The proceeds of sale, lease or other disposition, if
any, of the Equipment shall be applied: (1) to all Lessor's costs,
<PAGE>
charges and expenses incurred in taking, removing, holding, repairing and
selling, leasing or otherwise disposing of the Equipment including attorney
fees; then (2) to the extent not previously paid by Lessee, to pay Lessor the
Stipulated Loss Value for the Equipment and all other sums owed by Lessee
under the Lease, including any unpaid rent which accrued to the date Lessor
declared the Lease to be in default and indemnities then remaining unpaid
under the Lease; then (3) reimburse to Lessee Stipulated Loss Value previously
paid by Lessee as liquidated damages; and (4) any surplus shall be retained by
Lessor. Lessee shall pay any deficiency in (1) and (2) immediately. The
exercise of any of the foregoing remedies by Lessor shall not constitute a
termination of the Lease unless Lessor so notifies Lessee in writing. Lessor
may also proceed by appropriate court action, either at law or in equity to
enforce performance by Lessee of the applicable covenants of the Lease or to
recover damages for the breach of the Lease.
(c) The waiver by Lessor of any breach of any obligation of Lessee shall not
be deemed a waiver of any future breach of the same or any other obligation.
The subsequent acceptance of rental payments under the Lease by Lessor shall
not be deemed a waiver of any such prior existing breach at the time of
acceptance of such rental payments. The rights afforded Lessor under Section
16 shall be cumulative and concurrent and shall be in addition to every other
right or remedy provided for the Lease or now or later existing in law
(including as appropriate all the rights of a secured party or lessor under
the Uniform Commercial Code) or in equity and Lessor's exercise or attempted
exercise of such rights or remedies shall not preclude the simultaneous or
later exercise of any or all other rights or remedies.
(d) In the event Lessee shall fail to perform any of its obligations under
the Lease, then Lessor may perform the same, but shall not be obligated to do
so, at the cost and expense of Lessee. In any such event, Lessee shall
promptly reimburse Lessor for any such costs and expenses incurred by Lessor.
17. LESSOR'S TAX BENEFITS
Lessee acknowledges that Lessor shall be entitled to claim all tax benefits,
credits and deductions related to the Equipment for federal income tax
purposes including, without limitation: (i) deductions on Lessor's cost of
the Equipment for each of its tax years during the term of the Lease under
any method of depreciation or other cost recovery formula permitted by the
Internal Revenue Code of 1986, as amended (hereinafter called the "Code"),
and (ii) interest deductions as permitted by the Code on the aggregate
interest paid to any Assignee (hereinafter collectively "Lessor's Tax
Benefits"). Lessee agrees to take no action inconsistent (including the
voluntary substitution of Equipment) with the foregoing or which would result
in the loss, disallowance, recapture or unavailability to Lessor of Lessor's
Tax Benefits. Lessee hereby indemnifies Lessor and its Assignee(s) from and
against (a) any loss, disallowance, unavailability or
<PAGE>
recapture of Lessor's Tax Benefits resulting from any action or failure to
act of Lessee, including replacement of the Equipment, plus (b) all interest,
penalties, costs (including attorney fees), or additions to tax resulting
from such loss, disallowance, unavailability or recapture.
18. GENERAL
(a) The Lease shall be deemed to have been made and delivered in the State
of Michigan and shall be governed in all respects by the laws of such state.
THE PARTIES HERETO AGREE THAT IN THE EVENT OF AN ALLEGED BREACH OF THIS
AGREEMENT OR ANY DOCUMENTS RELATING THERETO BY EITHER PARTY, OR ANY
CONTROVERSIES ARISE BETWEEN THE PARTIES RELATING TO THIS AGREEMENT OR ANY
DOCUMENTS RELATING THERETO, AND SUCH BREACHES OR CONTROVERSIES ARE BROUGHT
BEFORE ANY COURT, SUCH CONTROVERSIES SHALL BE TRIED BY A JUDGE ALONE. THE
PARTIES, HAVING HAD THE OPPORTUNITY TO CONSULT WITH INDEPENDENT COUNSEL OF
THEIR OWN CHOOSING, HEREBY KNOWINGLY AND VOLUNTARILY WAIVE THEIR RIGHTS TO A
TRIAL BY JURY IN ANY MATTER RELATING TO THIS AGREEMENT OR ANY DOCUMENTS
RELATED THERETO.
(b) The Master Agreement and the Lease constitute the entire and only
agreement between Lessee and Lessor with respect to the lease of the
Equipment, and the parties have only those rights and have incurred only
those obligations as specifically set forth herein. The covenants,
conditions, terms and provisions may not be waived or modified orally and
shall supersede all previous proposals, both oral and written, negotiations,
representations, commitments or agreements between the parties. The Lease
may not be amended or discharged except by subsequent written agreement
entered into by duly authorized representatives of Lessor and Lessee.
(c) All notices, consents or requests desired or required to be given under
the Lease shall be in writing and shall be delivered in person or sent by
certified mail, return, receipt requested, or by courier service to the
address of the other party set forth in the introduction of the Master
Agreement or to such other address as such party shall have designated by
proper notice.
(d) Each Schedule shall be executed in three counterparts, consecutively
numbered. To the extent, if any, that a Schedule constitutes chattel paper
(as such term is defined in the Uniform Commercial Code) no security interest
in the Schedule may be created through the transfer or possession of any
counterpart other than Counterpart No. 1. The Master Agreement, in the form
of a photocopy, is Exhibit A to the Schedule and is not chattel paper by
itself.
(e) Section headings are for convenience only and shall not be construed as
part of the Lease.
(f) It is expressly understood that all of the Equipment shall be and remain
personal property, notwithstanding the manner in which
<PAGE>
the same may be attached or affixed to realty, and, upon Lessor's request,
Lessee shall secure from its mortgagee, landlord or owner of the premises a
waiver in form and substance reasonably satisfactory to Lessor.
(g) Lessor may upon written notice to Lessee advise Lessee that certain
Items supplied to Lessee are leased to Lessor and supplied to Lessee under
the Lease as a sublease. Lessee agrees to execute and deliver such
acknowledgements and assignments in connection with such a Lease as are
reasonably required. If, at any time during the term of the Lease, Lessor's
right to lease the Equipment expires, Lessor may remove the Equipment from
Lessee's premises and shall promptly provide identical substitute Equipment.
All expenses of such substitution, including de-installation, installation
and transportation expenses, shall be borne by Lessor.
(h) Prior to the delivery of an Item, the obligations of Lessor hereunder
shall be suspended to the extent that it is hindered or prevented from
complying therewith because of labor disturbances, including strikes and
lockouts, acts of God, fires, storms, accidents, failure to deliver any Item,
governmental regulations or interferences or any cause whatsoever not within
the sole control of Lessor.
(i) Any provision of the Master Agreement or any Schedule prohibited by or
unlawful or unenforceable under any applicable law or any jurisdiction shall
be ineffective as to such jurisdiction without invalidating the remaining
provisions of the Master Agreement and such Schedule.
(j) Although this Lease is the standard form used by Lessor to lease
hardware equipment to Lessee, both Lessor and Lessee acknowledge that, with
respect to any software which may be included as Equipment ("Software"), this
Lease is a financing agreement whereby that portion of Lessee's Base Month
Rental payment obligation applicable to any Software represents license fees
which are being paid by Lessee in consideration for payment by Lessor to the
software vendor ("Vendor") of the total license fee relating to any such
Software. Neither Lessor nor Lessee have or were granted any ownership or
other proprietary rights in the Software, and neither party purports to
transfer any such rights to the other hereunder. Lessee has only those
rights in the Software which were granted to Lessee pursuant to the software
license agreement entered into directly between Vendor and Lessee ("License").
(k) The parties agree that this is a "Finance Lease" as defined by section
2A-103(g) of the Uniform Commercial Code ("UCC"). Lessee acknowledges either
(a) that Lessee has reviewed and approved any written Supply Contract (as
defined by UCC 2-A-103(y)) covering the Equipment purchased from the Supplier
(as defined by UCC 2A-103(x) thereof for lease to Lessee or (b) that Lessor
has informed or advised Lessee, in writing, either previously or by this
Lease of the following: (i) identity of the Supplier, (ii) that the Lessee
<PAGE>
may have rights under the Supply Contract; and (iii) that the Lessee may
contact the Supplier for a description of any such rights Lessee may have
under the Supply Contract.
The terms of this Lease are applicable only as between Lessor (and any
Assignee) and Lessee. The terms of the License are applicable only as
between Lessee and Vendor, and Lessor does not assume and is not liable for
any obligations under any of the provisions of the License.
Lessee's Base Monthly Rental payment obligation is absolute and
unconditional in all respects regardless of any problem Lessee may have with
the Software, any dispute Lessee may have with the Vendor, any inability of
Lessee to use the Software or exercise by Vendor of any remedies it may have
pursuant to the License.
The parties have executed this Master Lease Agreement as of the date written
above.
LESSOR: LESSEE:
VARILEASE CORPORATION STARPAK, INC.
By: /s/ GARY F. MILLER By: /s/ DENNIS M. SWENSON
------------------------------- ------------------------------------
Name: Gary F. Miller Name: Dennis M. Swenson
By: Senior Vice President Title: Vice President
If there are no Additional Provisions to this Master Lease Agreement, check
here X . If there are Additional Provisions describe here:
<PAGE>
ATTACHMENT A
to MASTER LEASE AGREEMENT
dated March 6 [sic], 1997
between VARILEASE CORPORATION ("LESSOR")
and STARPAK, INC. ("LESSEE")
To calculate Stipulated Loss Value, multiply the applicable percentage,
below, by the value of the applicable Item(s) set forth on the Schedule.
RENT RENT RENT
PAYMENT STIP LOSS PAYMENT STIP LOSS PAYMENT S T I P
LOSS
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
1 110.50% 21 85.31% 41 60.13%
2 109.24% 22 84.05% 42 58.87%
3 107.98% 23 82.80% 43 57.61%
4 106.62% 24 81.54% 44 56.35%
5 105.46% 25 80.28% 45 55.09%
6 104.20% 26 79.02% 46 53.83%
7 102.94% 27 77.76% 47 52.57%
8 101.68% 28 76.50% 48 51.31%
9 100.43% 29 75.24% 49 50.05%
10 99.17% 30 73.98% 50 48.79%
11 97.91% 31 72.72% 51 47.53%
12 96.65% 32 71.46% 52 46.28%
13 95.39% 33 70.20% 53 45.02%
14 94.13% 34 68.94% 54 43.76%
15 92.87% 35 67.68% 55 42.50%
16 91.61% 36 66.42% 56 41.24%
17 90.35% 37 65.17% 57 39.98%
18 89.09% 38 63.91% 58 38.72%
19 87.83% 39 62.65% 59 37.46%
20 86.57% 40 61.39% 60 36.10%
AND THEREAFTER
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated February 18,
1997, in Amendment No. 4 to the Registration Statement (Form S-1 No.
333-20633) and related Prospectus of StarTek, Inc. for the registration of
4,216,667 shares of its common stock.
ERNST & YOUNG LLP
Denver, Colorado
May 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND FOR THE YEAR THEN
ENDED AND THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AT MARCH 31, 1997 AND
FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 2,742,313 5,684,058
<SECURITIES> 0 0
<RECEIVABLES> 11,342,120 8,722,907
<ALLOWANCES> 311,172 373,609
<INVENTORY> 2,535,091 2,640,031
<CURRENT-ASSETS> 16,448,484 17,179,586
<PP&E> 10,194,649 10,429,101
<DEPRECIATION> (3,667,411) (4,152,500)
<TOTAL-ASSETS> 22,978,722 23,459,187
<CURRENT-LIABILITIES> 13,552,752 12,305,342
<BONDS> 0 0
0 0
0 0
<COMMON> 432 336
<OTHER-SE> 7,102,356 8,157,533
<TOTAL-LIABILITY-AND-EQUITY> 22,978,722 23,459,187
<SALES> 0 0
<TOTAL-REVENUES> 71,583,861 16,666,614
<CGS> 0 0
<TOTAL-COSTS> 64,704,445 14,803,108
<OTHER-EXPENSES> 6,100,505 735,743
<LOSS-PROVISION> 297,716 92,245
<INTEREST-EXPENSE> 443,764 141,469
<INCOME-PRETAX> 37,431 894,049
<INCOME-TAX> 111,890 0
<INCOME-CONTINUING> (74,459) 894,049
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (74,459) 894,049
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
