<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
Commission File Number 1-12793
STARTEK, INC.
- - --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1370538
- - ---------------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
111 HAVANA STREET
DENVER, COLORADO 80010
- - ---------------------------------------- ------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 361-6000
- - --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
- - --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at May 11, 1998
Common Stock, par value $.01 per share 13,828,571
<PAGE> 2
STARTEK, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - 2
December 31, 1997 and March 31, 1998
Condensed Consolidated Statements of Operations - 3
Three months ended March 31, 1997 and 1998
Condensed Consolidated Statements of Cash Flow - 4
Three months ended March 31, 1997 and 1998
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................................... $ 26,960 $ 25,125
Short-term investments available for sale ...................................... 7,356 11,667
Trade accounts receivable, less
allowance for doubtful accounts of
$383 and $424, respectively ................................................. 12,518 9,379
Inventories .................................................................... 2,539 2,100
Deferred tax asset ............................................................. 440 353
Prepaid expenses and other ..................................................... 205 248
-------- --------
Total current assets ................................................................ 50,018 48,872
Property, plant and equipment, net .................................................. 8,151 10,508
Other assets ........................................................................ 3 5
-------- --------
Total assets ........................................................................ $ 58,172 $ 59,385
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 9,387 $ 8,733
Accrued liabilities ............................................................ 1,292 1,125
Income taxes payable ........................................................... 106 728
Current portion of capital lease obligations ................................... 82 69
Current portion of long-term debt .............................................. 26 56
Other .......................................................................... 421 334
-------- --------
Total current liabilities ........................................................... 11,314 11,045
Capital lease obligations, less current portion ..................................... 121 105
Long-term debt, less current portion ................................................ 435 405
Deferred income tax ................................................................. 231 213
Other ............................................................................... 65 59
Stockholders' equity:
Common stock ................................................................... 138 138
Additional paid-in capital ..................................................... 41,661 41,661
Cumulative translation adjustment .............................................. 70 75
Unrealized loss on investments ................................................. (92) (58)
Retained earnings .............................................................. 4,229 5,742
-------- --------
Total stockholders' equity .......................................................... 46,006 47,558
-------- --------
Total liabilities and stockholders' equity .......................................... $ 58,172 $ 59,385
======== ========
</TABLE>
See accompanying notes
2
<PAGE> 4
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Revenues .................................... $ 16,667 $ 24,321
Cost of services ............................ 12,732 19,757
------------ ------------
Gross profit ................................ 3,935 4,564
Selling, general and administrative
expenses ............................... 2,164 2,732
Management fee expense ...................... 793 --
------------ ------------
Operating profit ............................ 978 1,832
Net interest income (expense) and other ..... (84) 542
------------ ------------
Income before income taxes .................. 894 2,374
Income tax expense .......................... -- 862
------------ ------------
Net income .................................. $ 894 $ 1,512
============ ============
Basic net income per share .................. $ 0.11
Weighted average shares outstanding ......... 13,828,571
</TABLE>
See accompanying notes.
3
<PAGE> 5
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 894 $ 1,512
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................ 495 550
Gain on sale of assets ....................................... -- (7)
Changes in operating assets and liabilities:
Accounts receivable ....................................... 2,681 3,139
Inventories ............................................... (105) 439
Prepaid expenses and other assets ......................... (366) (46)
Deferred taxes ............................................ -- 69
Accounts payable .......................................... (1,531) (654)
Accrued and other liabilities ............................. (721) (261)
Accrued management fees ................................... 793 --
Income taxes payable ...................................... -- 622
---------- ----------
Net cash provided by operating activities ....................... 2,140 5,363
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment, net ................. (267) (2,899)
Collections on notes receivable-stockholders .................... 213 --
Purchases of investments ........................................ -- (4,277)
---------- ----------
Net cash used in investing activities ........................... (54) (7,176)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on borrowings ................................ (385) --
Proceeds from borrowings and capital lease obligations .......... 1,500 --
Principal payments on capital lease obligations ................. (230) (28)
---------- ----------
Net cash provided by financing activities ....................... 885 (28)
Effect of exchange rate changes on cash ......................... (29) 6
---------- ----------
Net increase in cash and cash equivalents ....................... 2,942 (1,835)
Cash and cash equivalents at beginning of period ................ 2,742 26,960
---------- ----------
Cash and cash equivalents at end of period ...................... $ 5,684 $ 25,125
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest .......................................... $ 113 $ 32
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Unrealized losses, net of deferred taxes ........................ -- $ 33
Contributed common stock ........................................ $ 96 --
</TABLE>
See accompanying notes.
4
<PAGE> 6
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data))
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. The condensed consolidated financial statements
reflect all adjustments (consisting of only normal recurring accruals) which, in
the opinion of management, are necessary for a fair presentation. Operating
results for the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
The balance sheet at December 31, 1997, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For additional information, refer to financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
2. NEW ACCOUNTING STANDARDS
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share (FAS 128), which supersedes
Accounting Principles Board Opinion No. 15. Under FAS 128, basic earnings per
common share is computed by dividing net income by the weighted-average number
of common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock. For the three months ended March 31,
1998, the additional shares assuming dilution has no impact on earnings per
share because the average price per share of common stock during the period was
less than the exercise price of outstanding options.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income, which is effective in 1998 for the Company.
The Statement establishes new rules for the reporting and display of
comprehensive income. Comprehensive income is defined essentially as all changes
in stockholders' equity, exclusive of transactions with owners. Comprehensive
income was $842 and $1,551 for the three months ended March 31, 1997 and 1998,
respectively.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosures About Segments of an Enterprise and Related Information, which
is effective for 1998 for the Company. The Statement changes the way companies
report segment information in annual financial statements by requiring the
"management approach" for reporting financial and descriptive information about
operating segments. The Statement does not provide for application in 1998
interim financial statements, but comparative information for interim periods of
the initial year of application is to be reported for interim periods in the
second year of application.
3. INITIAL PUBLIC OFFERING OF COMMON STOCK
On June 24, 1997 the Company closed an initial public offering of its
common stock. The Company sold 3,000,000 shares of common stock at an offering
price of $15.00 per share. Total proceeds after deducting $3,958 in estimated
costs associated with the offering were $41,042. Immediately prior to the
closing of the offering the Company completed a 322.1064-for-one common stock
split effected by a stock dividend. All common stock amounts, equivalent share
amounts and per share amounts included in the accompanying financial statements
and related notes have been adjusted to give effect to the stock dividend.
Effective immediately prior to the closing of the initial public offering,
the Company declared an $8,000 dividend in an amount approximately equal to the
estimated additional paid-in capital and retained earnings of the Company as of
the closing date of the initial public offering, pursuant to certain promissory
notes. Such notes were paid June 30, 1997 from the net proceeds of the initial
public offering.
4. MANAGEMENT FEE EXPENSE
Historically, certain S corporation stockholders and an affiliate have been
paid certain management fees, bonuses and other fees in connection with services
rendered to the Company which have not been included in selling, general and
administrative expenses, in addition to general compensation for services
rendered. Such management fees are reflected as management fee expenses as set
forth below. Effective with the closing of the Company's initial public offering
in June 1997, these management fees, bonuses and other fees were discontinued.
5
<PAGE> 7
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
(unaudited)
4. MANAGEMENT FEE EXPENSE (CONTINUED)
After the closing of the initial public offering, all compensation payable
to persons who had been S corporation stockholders of the Company (or an
affiliate of such stockholder) is in the form of advisory fees, salaries and
bonuses (which at current rates will aggregate approximately $516 annually) and
are included in selling, general and administrative expenses. Such advisory fees
and salaries are reflected as selling, general and administrative expense as set
forth below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
------- --------
<S> <C> <C>
Selling, general and administrative
expense .......................................... $ 129 $ 129
Management fee expense ................................ $ 793 --
</TABLE>
5. INCOME TAXES
The Company was taxed as an S corporation for federal and state income tax
purposes from July 1, 1992 through June 17, 1997, when S corporation status was
terminated in contemplation of the Company's initial public offering.
Accordingly, the income and expenses of the Company were reportable on tax
returns of the stockholders, and no provision for federal and state income taxes
were made in the three months ended March 31, 1997. Income taxes for the three
months ended March 31, 1998 reflect a provision for federal, state and foreign
income taxes at an effective rate of 36.3%. The Company is subject to foreign
income taxes on certain of its operations.
6. INVENTORIES
Total inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
Raw materials ......................................... $ 2,171 $ 1,269
Finished goods ........................................ 368 831
---------------- ----------------
$ 2,539 $ 2,100
================ ================
</TABLE>
7. COMMON STOCK
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1998
--------------
<S> <C>
Outstanding at beginning of period .................... 611,500
Granted ............................................... --
--------
Outstanding at end of period .......................... 611,500
========
Exercisable at end of period .......................... 20,000
========
</TABLE>
The exercise price for options as of March 31, 1998 was $15.00 per share,
except for 8,000 options which were granted at $13.06.
There were 13,828,571 shares outstanding for the three months ended March
31, 1998.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth certain unaudited pro forma condensed
consolidated statement of operations data expressed in dollars and as a
percentage of revenues for the three month period ended March 31, 1997.
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C>
Revenues ...................................................................... $ 16,667
Cost of services .............................................................. 12,732
---------------
Gross profit .................................................................. 3,935
SG&A expenses ................................................................. 2,164
Management fee expense ........................................................ --
---------------
Operating profit .............................................................. 1,771
Net interest (expense) and other .............................................. (84)
---------------
Income before income taxes .................................................... 1,687
Income tax expense ............................................................ 629
---------------
Net income .................................................................... $ 1,058
===============
Pro forma net income per share ................................................ $ 0.09
Weighted average shares outstanding ........................................... 11,361,904
Computation of weighted shares outstanding:
Shares outstanding after giving effect to 322.1064-for-one
stock split effected by a stock dividend ................................... 10,828,571
Shares deemed outstanding to closing of initial public
offering, representing the number of shares (at an initial public offering
price of $15.00 per share) sufficient to fund payment of $8,000 note payable
to principal stockholders .................................................. 533,333
---------------
Weighted average shares outstanding ........................................ 11,361,904
===============
</TABLE>
This pro forma condensed consolidated statement of operations data presents
the effect on historical consolidated financial statements of the elimination of
management fee expense paid to stockholders and their affiliates, as these fees
were discontinued upon the completion of the Company's initial public offering,
and the provision for related income taxes at an effective rate of 37.3% as if
the Company were taxed as a C corporation.
The following table sets forth, for the periods indicated, certain
unaudited condensed consolidated statement of operations data expressed as a
percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
PRO FORMA
1997 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenues .................................... 100.0% 100.0% 100.0%
Cost of services ............................ 76.4 76.4 81.2
------ ------ ------
Gross profit ................................ 23.6 23.6 18.8
SG&A expenses ............................... 13.0 13.0 11.2
Management fee expense ...................... 4.7 -- --
------ ------ ------
Operating profit ............................ 5.9 10.6 7.6
Net interest income (expense) and other ..... (0.5) (0.5) 2.2
------ ------ ------
Income before income taxes .................. 5.4 10.1 9.8
Income tax expense .......................... -- 3.8 3.6
------ ------ ------
Net income .................................. 5.4% 6.3% 6.2%
====== ====== ======
</TABLE>
7
<PAGE> 9
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998.
Revenues. Revenues increased $7.6 million, or 45.9%, to $24.3 million for
the three months ended March 31, 1998 from $16.7 million for the three months
ended March 31, 1997. This increase was primarily from existing clients.
Cost of Services. Cost of services increased $7.0 million, or 55.2%, to
$19.8 million for the three months ended March 31, 1998 from $12.7 million for
the three months ended March 31, 1998 as compared to the three months ended
March 31, 1997. As a percentage of revenues, costs of services increased 4.8%
for the three months ended March 31, 1998. Factors pertaining to this percentage
increase were primarily: (i) higher overall costs from greater penetration of
business with two large clients at lower relative margins, (ii) training and
start-up expenses related to the new Greeley, Colorado call center which opened
in the second quarter of 1998, and (iii) mix of services performed.
Gross Profit. As a result of the foregoing factors, gross profit increased
$0.6 million, or 16.0%, to $4.6 million for the three months ended March 31,
1998 from $3.9 million for the three months ended March 31, 1997. As a
percentage of revenues, gross profit decreased to 18.8% for the three months
ended March 31, 1998 from 23.6% for the three months ended March 31, 1997.
Selling, General and Administrative Expenses. SG&A expenses increased $0.6
million, or 26.2%, to $2.7 million for the three months ended March 31, 1998
from $2.2 million for the three months ended March 31, 1997, primarily as a
result of increased personnel costs incurred to service increasing business. As
a percentage of revenues, SG&A expenses decreased to 11.2% for the three months
ended March 31, 1998 from 13.0% for the three months ended March 31, 1997,
reflecting a lesser relative increase in SG&A expense as compared to the
increase in revenues.
Management Fee Expense. Management fee expense decreased $0.8 million to
zero for the three months ended March 31, 1998. Effective with the closing of
the Company's initial public offering in June 1997, management fees were
discontinued.
Operating Profit. As a result of the foregoing factors, operating profit
increased to $1.8 million for the three months ended March 31, 1998 from $1.0
million for the three months ended March 31, 1997. As a percentage of revenues,
operating profit increased to 7.6% for the three months ended March 31, 1998
from 5.9% for the three months ended March 31, 1997.
Net Interest Income (Expense) and Other. Net interest income (expense) and
other was $0.5 million income for the three months ended March 31, 1998, while
it was $0.1 million expense for the three months ended March 31, 1997. The
increase in net interest earnings in the three months ended March 31, 1998 was
primarily due to interest earnings from the retained net proceeds of the
Company's initial public offering in June 1997 whereas there were line-of-credit
and significantly more capital lease borrowings in the three months ended March
31, 1997.
Income Before Income Taxes. As a result of the foregoing factors, income
before income taxes increased $1.5 million, or 165.5%, to $2.4 million for the
three months ended March 31, 1998 from $0.9 million for the three months ended
March 31, 1997. As a percentage of revenues, income before income taxes
increased to 9.8% for the three months ended March 31, 1998 from 5.4% for the
three months ended March 31, 1997.
Income Tax Expense (Credit). The Company was taxed as an S corporation for
federal and state income tax purposes from July 1, 1992 through June 17, 1997,
when S corporation status was terminated in contemplation of the Company's
initial public offering. Accordingly, the income and expenses of the Company
were reportable on tax returns of the stockholders, and no provision for federal
and state income taxes were made in the three months ended March 31, 1997.
Income taxes for the three months ended March 31, 1998 reflect a provision for
federal, state and foreign income taxes at an effective rate of 36.3%.
Net Income. Based on the factors discussed above, net income increased $0.6
million, or 69.1%, to $1.5 million for the three months ended March 31, 1998
from $0.9 million for the three months ended March 31, 1997. As a percentage of
revenues, net income increased to 6.2% for the three months ended March 31, 1998
from 5.4% for the three months ended March 31, 1997.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Taxes and Pro Forma Net Income for
the three months ended March 31, 1997 compared to actual results for the three
months ended March 31, 1998. No pro forma presentation was applicable to the
three months ended March 31, 1998. Pro forma amounts for the three months ended
March 31, 1997 reflect the elimination of management fees and bonuses to
stockholders and their affiliates as these fees and bonuses were discontinued
upon the closing of the Company's initial public offering, and provide for
related income taxes at 37.3% of pre-tax income as if the Company were taxed as
a C corporation. As a result of the foregoing factors: (i) management fee
expense is zero for the three months ended March 31, 1998 and pro forma
management fee expense is zero for the three months ended March 31, 1997; (ii)
operating profit remained relatively unchanged at $1.8 million for the three
months ended March 31, 1997 pro forma and the three months ended March 31, 1998
actual while such operating profit represented 10.6% and 7.6% of revenues,
respectively; (iii) income before income taxes increased $0.7 million, or 40.7%,
to $2.4 million for the three months ended March 31, 1998 from $1.7 million pro
forma income before income taxes for the three months ended March 31, 1997; (iv)
8
<PAGE> 10
income taxes increased $0.2 million, or 37.0%, to $0.9 million for the three
months ended March 31, 1998 from $0.6 million pro forma income tax expense for
the three months ended March 31, 1997; and (v) net income increased $0.4
million, or 42.9%, to $1.5 million for the three months ended March 31, 1998
from $1.1 million pro forma net income for the three months ended March 31,
1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in June 1997, the Company funded its
operations and capital expenditures primarily through cash flow from operations,
borrowings under various lines of credit, capital lease arrangements, short-term
borrowings from its stockholders and their affiliates, and additional capital
contributions by its stockholders. In November 1997, the Company replaced its
previous $3.5 million line of credit with Norwest Business Credit, Inc. with a
$5.0 million revolving line of credit with Norwest Bank (the "Bank"), which
matures on April 30, 1999. Borrowings under the line of credit bear interest at
the Bank's prime rate. Under this line of credit, the Company is required to
maintain working capital of $17.5 million and tangible net worth of $25 million.
The Company may not pay dividends in an amount which would cause a failure to
meet these financial covenants. Collateral for the line of credit is the
accounts receivable of the Company and subsidiaries.
The Company closed an initial public offering of common stock on June 24,
1997. The net proceeds, after deducting underwriting discounts and commissions
and offering expenses, were approximately $41.0 million. From the net proceeds,
the Company repaid substantially all of its outstanding indebtedness, which
included approximately $5.0 million of bank and mortgage indebtedness, $1.8
million of capital lease obligations and $8.0 million of notes payable to
principal stockholders arising from an S corporation dividend in an amount
approximating the additional paid-in capital and retained earnings of the
Company as of the closing date. The balance of the net proceeds (approximately
$26.2 million) are for working capital and other general corporate purposes,
including approximately $8.0 million for capital expenditures to expand into new
facilities and build-out its existing facilities, and to potentially make
strategic acquisitions of complementary businesses. The Company has acquired
land and constructed a new facility in Greeley, Colorado which was occupied in
the second quarter of 1998. The estimated cost of the facility is approximately
$3.5 million. In connection with the new Greeley facility, the Company acquired
land for $0.3 million and financed the purchase through a non-interest bearing
ten-year promissory note. The note shall decline on an equal basis, without
payment, over ten years so long as the Company does not sell or transfer the
parcel or fail to continuously operate thereon a customer service center. The
Company has announced plans to open a facility on leased property in Laramie,
Wyoming. This facility was occupied in the second quarter of 1998. The Company
has contracted for $0.8 million of equipment in connection with the Laramie
facility and for $1.0 million of other capital items.
The Company has cash, cash equivalents and short-term investments available
for sale of $36.8 million at March 31, 1998. The Company's working capital was
$37.8 million.
The Company agreed to finance telecommunications computer hardware and
software through a 36 month operating lease which became effective April 1997.
Monthly payments approximate $28,500.
Net cash provided by operating activities increased to $5.4 million for the
three months ended March 31, 1998 from $2.1 million for the same period in the
prior year. The principal causes of this increase were: (i) an increase in net
income, (ii) a reduction in accounts receivable; (iii) a relatively smaller
increase in accounts payable and accrued liabilities; and (iv) a decrease in
inventories.
Net cash used in investing activities increased to $7.2 million in the
three months ended March 31, 1998 from $0.1 million for the same period in the
prior year. The principal cause for this increase was short-term investments of
the net proceeds of the Company's initial public offering and purchases of
property, plant and equipment.
Net cash provided from financing activities decreased to $0.0 million in
the three months ended March 31, 1998 from $0.9 million for the same period in
the prior year. The principal cause of this decrease was the lack of net
borrowings in the three months ended March 31, 1998.
The Company believes that cash flow from operations and net proceeds to the
Company from its initial public offering, together with available funds under
the line of credit, will be sufficient to support its operations and capital
expenditure and liability requirements for the next 12 months and anticipated
operations and cash expenditures for the foreseeable future. However, long-term
capital requirements depend on many factors including, but not limited to, the
rate at which the Company expands its business, whether internally or through
acquisitions and strategic alliances. To the extent that the funds generated
from the sources described above are insufficient to fund the Company's
activities in the short or long term, the Company will be required to raise the
additional funds through public or private financing. No assurance can be given
that additional financing will be available or that, if available, it will be
available on terms acceptable to the Company.
9
<PAGE> 11
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's business is highly seasonal. Historically, the Company's
revenues have been significantly lower in the first and second quarters of each
year due to the timing of its client's marketing programs and the introduction
of new products, which are typically geared toward the Christmas holiday
seasons. Additionally, the Company has experienced, and expects to experience in
the future, quarterly variations in operating results as a result of a variety
of factors, many of which are outside the Company's control, including: (i) the
timing of new projects; (ii) the expiration or termination of existing projects;
(iii) the timing of increased expenses incurred to obtain and support new
business and facilities; (iv) the seasonal pattern of certain of the businesses
served by the Company; and (v) the cyclical nature of certain client's
businesses.
Revenues in the first quarter of 1998 as compared to the fourth quarter of
1997 declined 32.8% principally due to the seasonal pattern of certain
businesses serviced by the Company.
Gross profit as a percentage of revenues was 2.8% higher in the first
quarter of 1998 as compared to the fourth quarter of 1997 primarily due to the
mix of services performed for clients and the absence of lower labor utilization
from Greeley processing facility capacity constraints, partially offset by
training and start up expenses relating to the new Greeley, Colorado call center
which was occupied in the second quarter of 1998.
For the fourth quarter of 1997 and the first quarter of 1998, SG&A expenses
increased principally as a result of increased personnel costs incurred to
service increasing business. As a percentage of revenues, SG&A expenses
increased 4.4% in the first quarter of 1998 as compared to the fourth quarter of
1997 principally from the spreading of fixed and semi-variable costs over a
seasonally fluctuating revenue base.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Some of the Company's
older computer programs fall into this category. As a result, those programs
have time-sensitive software that recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is currently estimated at approximately $100,000.
The project is estimated to be completed not later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The Company
believes, with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed in a timely manner, the Year 2000 Issue could have a
material adverse impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
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.
10
<PAGE> 12
FORWARD-LOOKING STATEMENTS
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this quarterly
report, that are not statements of historical facts are forward-looking
statements that involve substantial risks and uncertainties. Forward-looking
statements include (i) the anticipated level of capital expenditures; (ii) the
Company's belief that existing cash, short-term investments and available
borrowing will be sufficient to finance the Company's operations; and (iii)
statements relating to the Company or its operations that are preceded by terms
such as "may", "will", "should", "anticipates", "expects", "believes", "plans",
"future", "estimate", or "continue", and similar expressions.
In accordance with the Private Securities Litigation Reform Act of 1995,
the following are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements;
these include, but are not limited to, general economic conditions in the
Company's markets, the loss of one or more of its significant clients, the loss
or delayed implementation of a large project which could cause quarterly
variations in the Company's revenues and earnings, difficulties of managing
rapid growth, dependence on key personnel, dependence on key industries and
trend toward outsourcing, risks associated with the Company's contracts, risks
associated with rapidly changing technology, risks of business interruption,
risks associated with international operations and expansion, dependence on
labor force, and highly competitive markets.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Sales of Unregistered Securities
The Company did not issue or sell any unregistered securities
during the quarter ended March 31, 1998.
(d) Use of Proceeds
The Company filed a Registration Statement (Commission file no. 333-20633)
for the public offering of 3,666,667 shares of common stock with the Securities
and Exchange Commission, which became effective June 19, 1997. The managing
underwriters were Donaldson, Lufkin & Jenrette Securities Corporation and Morgan
Stanley Dean Witter. The shares were sold for $15.00 per share for an aggregate
amount of $55,000,005. Of the shares sold, 3,000,000 shares ($45,000,000
aggregate amount) were sold by the Company and 666,667 shares ($10,000,005
aggregate amount) were sold by five selling stockholders, each of whom owned in
excess of ten percent of the outstanding shares prior to the offering.
Expenses incurred for the Company's account in connection with the issuance
and distribution of the common stock registered were as follows:
<TABLE>
<S> <C>
Underwriting discounts and commissions .......................... $ 3,150
Expenses paid to or for underwriters ............................ 22
Other expenses ($41 accrued as of
March 31, 1998) ............................................ 786(1)
----------
Total ........................................................... $ 3,958
==========
</TABLE>
(1) There were no direct or indirect payments to directors, officers, or
persons owning ten percent or more of the Company's securities, or their
associates or affiliates. However, out-of-pocket expenses (i.e. travel,
lodging, and meals) directly in connection with the offering were
reimbursed and are included in other expenses. The Company agreed to pay
the expenses of the selling stockholders, other than underwriting
discounts and commissions. The net offering proceeds to the Company were
$41,042,310.
11
<PAGE> 13
From June 24, 1997 through March 31, 1998, the Company used net offering
proceeds as follows:
<TABLE>
<CAPTION>
Repayment of indebtedness: (IN THOUSANDS)
<S> <C>
Bank and mortgage indebtedness ............................. $ 4,932
Capitalized lease obligations .............................. 1,767
Notes payable to Principal Stockholders .................... 8,000
----------
14,699
Capital expenditures ............................................ 5,061
Working capital ................................................. 21,282
----------
$ 41,042
==========
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following document is filed as an exhibit in this report:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three months ended March 31, 1998.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARTEK, INC.
-------------------------------------
(Registrant)
Date: May 14, 1998 /s/ MICHAEL W. MORGAN
--------------------------- -------------------------------------
Michael W. Morgan
President and Chief Executive Officer
Date: May 14, 1998 /s/ DENNIS M. SWENSON
--------------------------- -------------------------------------
Dennis M. Swenson
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
13
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - -------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 25,125
<SECURITIES> 11,667
<RECEIVABLES> 9,803
<ALLOWANCES> 424
<INVENTORY> 2,100
<CURRENT-ASSETS> 48,872
<PP&E> 16,539
<DEPRECIATION> 6,032
<TOTAL-ASSETS> 59,385
<CURRENT-LIABILITIES> 11,045
<BONDS> 510
0
0
<COMMON> 138
<OTHER-SE> 47,420
<TOTAL-LIABILITY-AND-EQUITY> 59,385
<SALES> 0
<TOTAL-REVENUES> 24,321
<CGS> 0
<TOTAL-COSTS> 19,757
<OTHER-EXPENSES> 2,094
<LOSS-PROVISION> 64
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 2,374
<INCOME-TAX> 862
<INCOME-CONTINUING> 1,512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,512
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
