<PAGE> 1
SCHEDULE 14a INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
STARTEK, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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<PAGE> 2
STARTEK, INC.
111 Havana Street
Denver, CO 80010
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 19, 1999
To the Stockholders:
Notice is hereby given that the 1999 Annual Meeting of Stockholders of
StarTek, Inc., a Delaware corporation (the "Company"), will be held at the
Company's headquarters, 111 Havana Street, Denver, CO 80010, on May 19, 1999, at
9:00 a.m., local time, for the following purposes:
1. To elect four Directors to hold office for a term of one year and
until their successors are elected and qualified.
2. To amend the Company's Certificate of Incorporation to reduce the
number of shares of common stock that the Company has the
authority to issue, from 95,000,000 shares to 18,000,000 shares,
and eliminate the authorization of the preferred stock.
3. To approve the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1999.
4. To consider and act upon such other business as may properly come
before the meeting.
The Board of Directors has fixed the close of business on April 2, 1999
as the record date for determination of stockholders entitled to notice of and
to vote at the meeting and any adjournment thereof.
Whether or not you expect to be present, please sign, date and return
the enclosed proxy card as promptly as possible in the enclosed stamped
envelope, the postage on which will be valid if mailed in the United States.
By Order of the Board of Directors
Dennis M. Swenson
Secretary
April 12, 1999
EVERY STOCKHOLDER'S VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND MAIL THE
ENCLOSED PROXY CARD AT YOUR EARLIEST CONVENIENCE, WHETHER OR NOT YOU PLAN TO
ATTEND THE STARTEK, INC. ANNUAL MEETING.
<PAGE> 3
STARTEK, INC.
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS - MAY 19, 1999
----------------------
PROXY STATEMENT
----------------------
SUPPLEMENT TO 1999 ANNUAL REPORT
TO STOCKHOLDERS - MAY 19, 1999:
APPENDIX A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS PORTION
OF STARTEK, INC.'S FORM 10-K AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1999.
APPENDIX B - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK PORTION OF STARTEK, INC.'S FORM 10-K AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
MARCH 31, 1999.
APPENDIX C - CONSOLIDATED FINANCIAL STATEMENTS OF STARTEK,
INC. AND SUBSIDIARIES PORTION OF STARTEK, INC.'S FORM
10-K AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON MARCH 31, 1999.
<PAGE> 4
STARTEK, INC.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Notice of Annual Meeting (i)
Proxy Statement:
1999 Annual Meeting of Stockholders 1
Outstanding Stock and Voting Rights 1
Beneficial Ownership of Common Stock by Directors, Officers and Principal Stockholders 2
Proposal 1 - Election of Directors of the Company 4
The Board of Directors and Committees of the Board 5
Executive Officers of the Company 5
Compensation of Directors and Executive Officers 6
Summary Compensation Table 6
Compensation of Directors 7
Compensation Committee Interlocks and Insider Participation 7
Employment Contracts and Termination of Employment 7
Report of the Compensation Committee of the Board of Directors on Executive Compensation 7
Stock Performance Chart 8
Proposal 2 - Amendment to the Company's Certificate of Incorporation to Reduce the Number of
Shares of the Common Stock that the Company has the Authority to Issue, from 95,000,000
Shares to 18,000,000 Shares, and Eliminate the Authorization of the Preferred Stock 9
Proposal 3 - Approval of Appointment of Auditors 11
Stockholder Proposals 11
Miscellaneous 11
Exhibit A (Form of Certificate of Amendment to the Certificate of Incorporation of StarTek, Inc.) 12
Supplement to Proxy Statement:
Appendix A:
Management's Discussion and Analysis of Financial Condition and Results
of Operations portion of StarTek, Inc.'s Form 10-K as filed with the
Securities and Exchange Commission on March 31, 1999. A1
Appendix B:
Quantitative and Qualitative Disclosure About Market Risk portion of StarTek, Inc.'s Form 10-K
as filed with the Securities and Exchange Commission on March 31, 1999. B1
Appendix C:
Consolidated Financial Statements of StarTek, Inc. and Subsidiaries portion of StarTek, Inc.'s
Form 10-K as filed with the Securities and Exchange Commission on March 31, 1999:
Report of Independent Auditors C1
Consolidated Balance Sheets C2
Consolidated Statements of Operations C3
Consolidated Statements of Cash Flow C4
Consolidated Statements of Stockholders' Equity C5
Notes to Consolidated Financial Statements C6
</TABLE>
<PAGE> 5
PROXY STATEMENT
STARTEK, INC.
111 HAVANA STREET
DENVER, CO 80010
(303) 361-6000
1999 ANNUAL MEETING OF STOCKHOLDERS
MAY 19, 1999
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of StarTek, Inc., a Delaware corporation (the
"Company"), of proxies for use at the 1999 Annual Meeting of Stockholders (the
"Annual Meeting") to be held at the Company's headquarters at 111 Havana Street,
Denver, Colorado 80010, on May 19, 1999, at 9:00 a.m. local time, and at any and
all adjournments thereof. The Company's principal address is 111 Havana Street,
Denver, Colorado 80010. The date of mailing of this Proxy Statement is on or
about April 12, 1999. The purpose of the meeting is to elect four directors of
the Company; to amend the Company's Certificate of Incorporation to reduce the
number of shares of common stock that the Company has the authority to issue,
from 95,000,000 shares to 18,000,000 shares, and eliminate the authorization of
the preferred stock; to approve the appointment of Ernst & Young LLP as the
Company's independent auditors for the year ending December 31, 1999; and to
consider and act upon such other business as may properly come before the
meeting.
OUTSTANDING STOCK AND VOTING RIGHTS
In accordance with the By-laws of the Company, the Board of Directors
of the Company (the "Board of Directors") has fixed the close of business on
April 2, 1999 as the record date for determining the stockholders entitled to
notice of, and to vote at, the Annual Meeting (the "Record Date"). Only
stockholders of record on that date will be entitled to vote. A stockholder who
submits a proxy on the accompanying form has the power to revoke it by notice of
revocation to the Company at any time before it is voted. A subsequently dated
proxy, when filed with the Company, will constitute revocation. Proxies will be
voted as specified on the proxy card. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS,
PROXIES WILL BE VOTED (I) FOR THE PROPOSALS DESCRIBED IN THIS PROXY STATEMENT
AND (II) IN THE DISCRETION OF THE PROXY HOLDERS ON ANY OTHER MATTER WHICH
PROPERLY COMES BEFORE THE MEETING. A stockholder who has given a proxy may
nevertheless attend the meeting, revoke the proxy and vote in person. The Board
of Directors has selected A. Emmet Stephenson, Jr. and Michael W. Morgan, and
each of them, to act as proxies with full power of substitution.
Solicitation of proxies may be made by mail, personal interview,
telephone and facsimile transmission by officers and other management employees
of the Company, who will receive no additional compensation for their services.
The total expense of any solicitation will be borne by the Company and may
include reimbursement paid to brokerage firms and others for their expenses in
forwarding material regarding the Annual Meeting to beneficial owners.
The only outstanding securities of the Company entitled to vote at the
Annual Meeting are shares of common stock, $.01 par value, of the Company
("Common Stock"). As of the Record Date, 13,828,571 shares of Common Stock were
issued and outstanding. Each outstanding share of Common Stock entitles the
holder, as of the Record Date, to one vote on all matters brought before the
Annual Meeting. The quorum necessary to conduct business at the Annual Meeting
consists of a majority of the outstanding shares of Common Stock as of the
Record Date.
The election of the directors nominated will require a plurality (i.e.,
the highest number) of the votes cast in person or by proxy at the Annual
Meeting by holders of shares of Common Stock. In the election of directors, each
stockholder is entitled to cast one vote per share for each director to be
elected. Cumulative voting is not permitted. Approval of the amendment to the
Company's Certificate of Incorporation will require the affirmative vote of the
holders of the majority of the shares of the Common Stock outstanding. Approval
of the appointment of the Company's auditors will require the affirmative vote
of the holders of a majority of the shares of Common Stock present, whether in
person or by proxy, at the Annual Meeting.
Votes withheld from nominees for directors, abstentions, and broker
non-votes (i.e., when a broker does not have authority to vote on a specific
issue) are counted as present in determining whether the quorum requirement is
satisfied. For purpose of the election of directors, abstentions, and broker
non-votes are not considered to be votes cast and do not affect the plurality
vote required for elections of directors. For the purposes of the amendment to
the Company's Certificate of Incorporation, broker non-votes and abstentions
have the effect of a "no" vote. For purposes of the appointment of the Company's
auditors and other matters properly brought before the Annual Meeting, broker
non-votes will not be considered present and do not affect the vote taken;
however, abstentions are considered as being present and have the effect of a
"no" vote.
1
<PAGE> 6
BENEFICIAL OWNERSHIP OF COMMON STOCK BY
DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS
As of April 2, 1999, the beneficial ownership of Common Stock by each
director and nominee for director, executive officer named in the Summary
Compensation Table, persons known by the Company to beneficially own more than
five percent of Common Stock and by all present executive officers and directors
of the Company as a group, was as follows:
<TABLE>
<CAPTION>
Number of Shares Percent
Name Beneficially Owned (a) of Class
---------------------------------------------------- ----------------------- ----------
<S> <C> <C>
A. Emmet Stephenson, Jr. (b), (c) 3,350,882 24.2 %
Michael W. Morgan (b), (d) 965,843 7.0
E. Preston Sumner, Jr. (b), (e) 20,000 *
Dennis M. Swenson (b), (f) 14,000 *
Toni E. Stephenson (b), (g) 3,350,882 24.2
FASSET Trust (b) 1,223,662 8.8
MASSET Trust (b) 1,223,662 8.8
Pamela S. Oliver (b), (h) 2,447,324 17.7
Thomas O. Ryder (i), (k) 53,000 *
Ed Zschau (j), (l) 23,000 *
Capital Guardian Trust Co. (m) 695,000 5.0
Awad Asset Management, Inc. (n) 911,150 6.6
All Directors and Executive Officers
as a group (6 persons) 4,426,725 31.9
</TABLE>
- ----------
* Less than one percent
(a) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934, as amended. Unless otherwise stated below, each such person has sole
voting and investment power with respect to all shares. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned
by such person, but are not deemed outstanding for the purpose of
calculating the percentage owned by each other person listed.
(b) The address of such 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. 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.
(e) Mr. Sumner is Executive Vice President and Chief Operating Officer of the
Company. On June 18, 1997, Mr. Sumner received options to purchase 100,000
shares of Common Stock. Such options vest at a rate of 20% per year
beginning June 18, 1998, expire on June 18, 2007 and are exercisable at
$15.00 per share, which was the market value of the Common Stock on the
date the options were granted. Excludes 80,000 shares of Common Stock
underlying unvested options held by Mr. Sumner.
(f) Mr. Swenson is Executive Vice President, Chief Financial Officer, Secretary
and Treasurer of the Company. On June 18, 1997, Mr. Swenson received
options to purchase 70,000 shares of Common Stock. Such options vest at a
rate of 20% per year beginning June 18, 1998, expire on June 18, 2007 and
are exercisable at $15.00 per share, which was the market value of the
Common Stock on the date the options were granted. Excludes 56,000 shares
of Common Stock underlying unvested options held by Mr. Swenson.
(g) Mrs. Stephenson is the wife of A. Emmet Stephenson, Jr. Mr. Stephenson
disclaims beneficial ownership of shares owned by Mrs. Stephenson.
(h) Represents shares owned by the FASSET 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.
2
<PAGE> 7
(i) Mr. Ryder is a Director of the Company. Mr. Ryder owns 40,000
shares of Common Stock. Additionally, on June 18, 1997, Mr. Ryder
received options to purchase 10,000 shares of Common Stock. Such
options are fully vested, expire on June 18, 2007 and are
exercisable at $15.00 per share. On May 20, 1998, Mr. Ryder
received additional options to purchase 3,000 shares of Common
Stock. Such options are fully vested, expire on May 20, 2008 and
are exercisable at $12.69 per share. The exercise prices of these
options equaled the market value of the Common Stock on the date
the options were granted.
(j) Mr. Zschau is a Director of the Company. The Zschau Living Trust
owns 10,000 shares of Common Stock. Additionally, on June 18,
1997, Mr. Zschau received options to purchase 10,000 shares of
Common Stock. Such options are fully vested, expire on June 18,
2007 and are exercisable at $15.00 per share. On May 20, 1998, Mr.
Zschau received additional options to purchase 3,000 shares of
Common Stock. Such options are fully vested, expire on May 20,
2008 and are exercisable at $12.69 per share. The exercise prices
of these options equaled the market value of the Common Stock on
the date the options were granted.
(k) Mr. Ryder's business address is The Readers' Digest Association,
Inc., Readers Digest Road, Pleasantville, New York 10570.
(l) Mr. Zschau's business address is c/o Karen Cindrich, 1310 Trinity
Drive, Menlo Park, California 94025.
(m) Capital Guardian Trust Co.'s address is 11100 Santa Monica
Boulevard, Los Angeles, California 90025. The information
regarding Capital Guardian Trust Co. is as of February 8, 1999
(for the period ended December 31, 1998), as reported by Capital
Guardian Trust Co. to the Securities and Exchange Commission on
Form 13G.
(n) Awad Asset Management, Inc.'s address is 250 Park Avenue, 2nd
Floor, New York, New York 10177. The information regarding Awad
Asset Management, Inc. is as of February 12, 1999, as reported by
Awad Asset Management, Inc. to the Securities and Exchange
Commission on Form 13G.
Except as set forth in the table above, the Company knows of no other
person that beneficially owns 5% or more of the outstanding Common Stock.
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors, executive officers, and beneficial
owners of more than 10% of the outstanding Common Stock (collectively,
"insiders"), to file reports with the Securities and Exchange Commission (the
"Commission") disclosing their direct and indirect ownership of Common Stock and
changes in such ownership. The rules of the Commission require the insiders to
provide the Company with copies of all Section 16(a) reports filed with the
Commission. Based solely upon a review of copies of Section 16(a) reports
received by the Company, and written representations that no additional reports
were required to be filed with the Commission, the Company believes that its
insiders have complied with all Section 16(a) filing requirements applicable to
them since January 1, 1998, except that during 1998 (i) Thomas O. Ryder
inadvertently failed to file timely three Statements of Changes of Beneficial
Ownership of Securities as to 3,000 stock options granted May 20, 1998, 10,000
shares of Common Stock purchased in August 1998, and 10,000 shares of Common
Stock purchased in September 1998, and (ii) Ed Zschau inadvertently failed to
file timely one Statement of Changes of Beneficial Ownership of Securities as to
3,000 stock options granted May 20, 1998.
3
<PAGE> 8
PROPOSAL 1.
ELECTION OF DIRECTORS OF THE COMPANY
The Company's By-laws provide that the Board of Directors shall consist
of at least one director and no more than nine. Each director will serve an
annual term ("Term"). The Board of Directors has fixed the number of directors
of the Company at four. At the 1999 Annual Meeting, stockholders will elect four
directors to serve until the 2000 Annual Meeting of Stockholders and until his
successor is duly elected and qualified. The Board of Directors has nominated
Messrs. A. Emmet Stephenson, Jr., Michael W. Morgan, Thomas O. Ryder, and Ed
Zschau to serve as directors until their terms expire in 2000.
The names of the nominees and the directors continuing in office, their
principal occupations, the years in which they became directors and the years in
which their terms expire are set forth below. In the event the nominee shall
decline or be unable to serve, it is intended that the proxies will be voted in
the discretion of the proxy holders. The Company knows of no reason to
anticipate that this will occur.
A. EMMET STEPHENSON, JR.; AGE 53; PRESIDENT, STEPHENSON AND COMPANY (a), (c)
Mr. Stephenson 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. His Term will expire in 2000.
MICHAEL W. MORGAN; AGE 38; PRESIDENT AND CHIEF EXECUTIVE OFFICER, STARTEK, INC.
Mr. 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. His Term will
expire in 2000.
THOMAS O. RYDER; AGE 54; CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR, THE
READER'S DIGEST ASSOCIATION, INC. (a), (b), (c)
Mr. Ryder has served as a Director of the Company since January 1997.
He has been Chairman, Chief Executive Officer and Director of The Reader's
Digest Association, Inc. since April 1998. Mr. Ryder served as President of
Travel Related Services International for American Express TRS Company, Inc.
between October 1995 and April 1998. Mr. Ryder was Chairman of the Board of
American Express Publishing Corporation from December 1991 through April 1998.
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. His Term will expire in 2000.
ED ZSCHAU; AGE 59; PROFESSOR OF MANAGEMENT, HARVARD BUSINESS SCHOOL; VISITING
PROFESSOR AT PRINCETON UNIVERSITY (a), (b), (c)
Mr. Zschau has served as a Director of the Company since January 1997.
He is a Professor of Management at the Graduate School of Business
Administration at Harvard University, where he joined the faculty in 1996.
During the 1998-99 academic year, he is a visiting Professor at Princeton
University. From April 1993 to July 1995, Mr. Zschau was General Manager, IBM
Corporation Storage Systems Division. From July 1988 to April 1993, he was
Chairman and Chief Executive Officer of Censtor Corp., a company that researched
and developed magnetic recording components for disk drives. Mr. Zschau is a
director of The Reader's Digest Association, Inc. and GenRad, Inc. His Term will
expire in 2000.
- ----------
(a) Member of the Compensation Committee of the Board of Directors.
(b) Member of the Audit Committee of the Board of Directors.
(c) Member of the Option Committee of the Board of Directors.
4
<PAGE> 9
THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors had a total of three meetings during 1998. All
directors attended all of the meetings of the Board of Directors and of the
Committees on which they served during 1998.
The Audit Committee reviews the financial statements of the Company to
confirm that they reflect fairly the financial condition of the Company and to
appraise the soundness, adequacy and application of accounting and operating
controls. The Audit Committee recommends independent auditors to the Board of
Directors, reviews the scope of the audit function of the independent auditors
and reviews audit reports rendered by the independent auditors. The Audit
Committee met two times during 1998.
The Compensation Committee reviews the Company's compensation philosophy
and programs, and exercises authority with respect to the payment of direct
salaries and incentive compensation to Company officers. The Compensation
Committee met once in 1998.
The Option Committee is responsible for the oversight of the StarTek, Inc.
Stock Option Plan. The Option Committee met twice in 1998.
The Company has no nominating committee of its Board of Directors.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Officer
Name Age Position Since
---- --- -------- -----
<S> <C> <C> <C>
A. Emmet Stephenson, Jr. 53 Chairman of the Board 1987
Michael W. Morgan 38 President, Chief Executive Officer and Director 1990
E. Preston Sumner, Jr. 47 Executive Vice President and Chief Operating Officer 1997
Dennis M. Swenson 64 Executive Vice President, Chief Financial Officer, 1995
Secretary and Treasurer
</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. has served as the Company's Chief Operating Officer
since February 1997. Mr. Sumner 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 continues to serve as a director and
Vice Chairman of the Board of such company.
Dennis M. Swenson has served as the Company's Chief Financial Officer since
October 1995. He has served 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.
5
<PAGE> 10
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the 1997
and 1998 compensation of the Company's Chief Executive Officer and the executive
officers of the Company who, in addition to the Chief Executive Officer,
received the highest compensation during 1997 and 1998. The Company did not
grant any options to purchase Common Stock to any executive officer during the
year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term All Other
Compensation Compensation
Annual Compensation (f) Awards ($)
- ------------------------------------------------------------------------------------ ------------------ ----------------
Management Securities
Name and Principal Salary Fees and Bonus Underlying
Position Year ($) ($) Option (#)
- ---------------------------- ---------- ------------- ---------------------- ------------------
<S> <C> <C> <C> <C> <C>
Michael W. Morgan
President, CEO and Director 1997 270,821 326,396 (a),(c)
1998 270,800 -- -- --
A. Emmet Stephenson, Jr.
Chairman of the Board 1997 2,800,000 (b),(c) -- 245,000 (d)
1998 -- -- -- 245,000 (d)
E. Preston Sumner, Jr.
Executive VP and COO 1997 123,461 -- 100,000 1,000 (e)
1998 153,315 -- -- --
Dennis M. Swenson
Executive VP, CFO
Secretary and Treasurer 1997 126,000 -- 70,000 --
1998 128,652 -- -- --
</TABLE>
- ----------
(a) Of the 1997 bonus, Mr. Morgan recontributed $171,358 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. The bonus
arrangement was terminated in June 1997 effective as of the closing of the
Company's initial public offering.
(b) Management fees were paid to A. Emmet Stephenson, Jr., Inc., which is
wholly owned by A. Emmet Stephenson, Jr. Of the 1997 management fees,
$1,470,000 was recontributed to the Company as additional capital. These
recontributions were made by Mr. Stephenson and Toni E. Stephenson, his
spouse and a principal stockholder. The remainder of the management fees
were used to pay applicable federal and state income taxes on such fees.
The Company terminated this management fee arrangement effective as of the
closing of the Company's initial public offering in June 1997.
(c) See Note 1 to the Consolidated Financial Statements included in Appendix C
hereto for a description of management fees and bonuses paid. Such
management fees and bonuses pertain to the period prior to the June 1997
initial public offering while the Company was an S corporation. The
management fee and bonus arrangements were terminated effective as of the
closing of the Company's initial public offering.
(d) Effective January 1, 1997, the Company began paying an annual advisory fee
of $245,000 to A. Emmet Stephenson, Jr., Inc.
(e) Consulting fees prior to rejoining the Company in February 1997.
(f) The Company did not provide perquisites or other personal benefits,
securities, or property to the named executive officers which exceed
$50,000 or 10% of such officer's total salary and bonus for 1997 and 1998.
6
<PAGE> 11
COMPENSATION OF DIRECTORS
Pursuant to the Company's Director Option Plan and upon reelection on
May 20, 1998 at the Company's 1998 Annual Meeting of Stockholders, the Company
automatically granted an option to purchase 3,000 shares of Common Stock to each
of two non-employee directors. These options were fully vested upon the date of
grant, expire in May 2008 and are exercisable at $12.69 per share. Pursuant to
the Director Option Plan, each non-employee director will be automatically
granted options to acquire 3,000 shares of Common Stock at an exercise price
equal to market value of the Common Stock on the date of each annual meeting of
stockholders at which such director is reelected. The Director's Option Plan is
administered by the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
A. Emmet Stephenson, Jr. serves as a director, Chairman of the Board,
and a member of the Company's Compensation Committee. Except for Mr. Stephenson,
no officers or employees of the Company participate in the deliberations of the
Compensation Committee. The Compensation Committee makes salary decisions with
input from the Chief Executive Officer; however, the Chief Executive Officer
does not participate in deliberations regarding his own compensation. See
Summary Compensation Table for management fees and advisory fees paid to A.
Emmet Stephenson, Jr., Inc.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
The Company has not entered into any employment contracts, change of
control arrangements, or termination of employment arrangements with any named
executive officer.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD
OF DIRECTORS ON EXECUTIVE COMPENSATION
This committee report is not deemed to be "soliciting material" or to
be "filed" with the Commission or subject to the Commission's proxy rules or to
the liabilities of Section 18 of the Exchange Act, and the report shall not be
deemed to be incorporated by reference into any prior or subsequent filing by
the Company under the Securities Act of 1933 or the Exchange Act.
The Compensation Committee has responsibility for the following
functions: (i) to recommend to the full Board of Directors the salary, bonus and
other benefits, direct and indirect, of the Chairman, President and Chief
Executive Officer, Executive Vice Presidents, members of the Board of Directors
who are also involved in management of the Company, and such other officers of
the Company as are designated from time to time by the Board of Directors; (ii)
to review and submit recommendations concerning new executive compensation or
stock plans; (iii) to establish and review corporate policies concerning
management perquisites; (iv) to assess the Corporation's executive development
plan, if any; and (v) to recommend director compensation.
Total executive officer compensation is comprised of salary and grants
of options to purchase Common Stock. Executives and other key employees who, in
the opinion of the Committee, contribute to the growth, development and
financial success of the Company are eligible to be awarded options to purchase
Common Stock. These grants are normally made at or above the fair market value
on the date of grant with vesting over a five-year period. The amount of options
granted is impacted both by the level of the employee within the Company's
management and the amount of options previously granted to the employee. The
Committee considers the value of each executive officer's contribution to the
performance of the Company (including the Chief Executive Officer) in
determining salary levels and grants of options.
The 1998 salaries and other compensation of the three executive
officers and the Chairman of the Board appear on the summary compensation table.
From and after January 1, 1997, the Company pays an annual advisory fee of
$245,000 to A. Emmet Stephenson, Jr., Inc. (wholly-owned by A. Emmet Stephenson,
Jr., Chairman of the Board). Michael W. Morgan, President and Chief Executive
Officer, receives a base salary of $270,800. E. Preston Summer, Jr., Executive
Vice President and Chief Operating Officer, currently receives an annual base
salary of $155,000. Dennis M. Swenson, Executive Vice President and Chief
Financial Officer, currently receives an annual base salary of $130,000. No
options were granted in 1998 to the three executive officers or the Chairman of
the Board.
By the Compensation Committee:
A. Emmet Stephenson, Jr.
Thomas O. Ryder
Ed Zschau
7
<PAGE> 12
STOCK PERFORMANCE CHART
The following graph sets forth a stock market index, which compares the
cumulative total stockholder return on the Common Stock since consummation of
the Company's initial public offering in June 1997 with the cumulative total
return of the New York Stock Exchange Composite Index ("NYSE") and of the
Russell 2000 Index ("Russell") over the same period (assuming the investment on
June 19, 1997 of $100 in each of Common Stock, NYSE and Russell and the
reinvestment of dividends, if any). The Company does not believe that the stock
price performance shown on the graph below is necessarily indicative of future
price performance.
<TABLE>
StarTek, Inc. Common Stock NYSE Return Russell Return
<S> <C> <C> <C>
6/19/97 $100 $100 $100
12/31/97 76 110 111
12/31/98 82 127 106
</TABLE>
[CHART]
The stock performance chart assumes $100 was invested on June 19, 1997.
The information set forth under the heading "Stock Performance Graph" is not
deemed to be "soliciting material" or to be "filed" with the Commission or
subject to the Commission's proxy rules or to the liabilities of Section 18 of
the Exchange Act, and the graph shall not be deemed to be incorporated by
reference into any prior or subsequent filing by the Company under the
Securities Act of 1933 or the Exchange Act.
8
<PAGE> 13
PROPOSAL 2.
TO AMEND THE COMPANY'S
CERTIFICATE OF INCORPORATION TO REDUCE AUTHORIZED SHARES
Delaware law currently imposes a franchise tax on the Company based in
part on the number of authorized shares of the Company's capital stock.
Currently, the Company has a total of 110,000,000 shares of authorized stock,
95,000,000 shares of which have been designated as Common Stock and 15,000,000
of which have been designated as preferred stock ("Preferred Stock"). As of
April 2, 1999, the Company had 13,828,571 shares of Common Stock issued and
outstanding and no shares of Preferred Stock issued and outstanding. At December
31, 1998, there were 613,800 options to purchase Common Stock outstanding, of
which 140,200 were exercisable. Options for 461,200 shares of Common Stock were
available for future grant as of December 31, 1998. The Board of Directors
believes the Company's number of authorized shares of stock greatly exceeds that
necessary for equity financing contingencies for the foreseeable future, and as
a result the Company's present franchise tax obligations are inordinately high
relative to the Company's capitalization and foreseeable equity needs. The Board
of Directors believes that reducing the number of authorized shares would allow
the Company to reduce its franchise tax obligations without impairing the
Company's ability to meet its foreseeable equity financing needs.
Based on the foregoing, the Board of Directors has approved and
unanimously recommends to the stockholders a proposal to amend the Company's
Certificate of Incorporation to reduce the number of shares of Common Stock that
the Company has the authority to issue, from 95,000,000 shares to 18,000,000
shares, and eliminate the authorization of the Preferred Stock. The Company
would effectuate the amendment by filing a Certificate of Amendment to the
Certificate of Incorporation of the Company substantially in the form attached
as Exhibit A with the Delaware Secretary of State. Approval of this amendment to
the Certificate requires the affirmative vote of holders of a majority of the
outstanding shares of Common Stock.
Article IV of the Company's Certificate of Incorporation currently
provides as follows:
ARTICLE IV
Stock
A. Authorized Stock. The total number of shares of stock which the
Corporation shall have authority to issue is 110,000,000, of
which 95,000,000 shares with $.01 per share par value are
designated as common stock ("Common Stock") and 15,000,000 shares
with $.01 per share par value are designated as preferred stock
("Preferred Stock").
B. Right to Designate Preferred Stock. The Board of Directors of the
Corporation is authorized, subject to limitations prescribed by
law, to provide by resolution or resolutions for the issuance of
the shares of Preferred Stock as a class or in series and, by
filing a certificate of designations pursuant to the Delaware Act
setting forth a copy of such resolution or resolutions, to
establish from time to time the number of shares to be included
in each such class or series, and to fix the designations,
powers, preferences and rights of the shares of the class or of
each such series and the qualifications, limitations and
restrictions thereof. The authority of the Board of Directors
with respect to the class or each series shall include, but not
be limited to, determination of the following:
(1) the number of shares constituting any series and the
distinctive designation of that series;
(2) the dividend rate on the shares of the class or of any
series, whether dividends shall be cumulative, and, if
so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares
of the class or of that series;
(3) whether the class or any series shall have voting
rights, in addition to the voting rights provided by
law, and, if so, the terms of such voting rights;
9
<PAGE> 14
(4) whether the class or any series shall have conversion
privileges, and, if so, the terms and conditions of
conversion, including provision for adjustment of the
conversion rate in such events as the Board of
Directors shall determine;
(5) whether or not the shares of the class or of any series
shall be redeemable, and, if so, the terms and
conditions of redemption, including the date or dates
upon or after which they shall be redeemable, and the
amount per share payable in case of redemption, which
amount may vary under different conditions and at
different redemption dates;
(6) whether the class or any series shall have a sinking
fund for the redemption or purchase of shares of that
class or of that series, and, if so, the terms and
amount of such sinking fund;
(7) the rights of the shares of the class or of any series
in the event of voluntary or involuntary dissolution or
winding up of the Corporation, and the relative rights
of priority, if any, of payment of shares of that class
or of that series; and
(8) any other powers, preferences, rights, qualifications,
limitations and restrictions of the class or of any
series.
Except as otherwise expressly provided by law or expressly
stated in the resolution or resolutions providing for the
establishment of a class or series of Preferred Stock, any
shares of Preferred Stock which may be redeemed, purchased
or acquired by the Corporation may be reissued. Except as
otherwise expressly provided in the resolution or
resolutions providing for the establishment of any class or
series of Preferred Stock, no vote of the holders of shares
of Preferred Stock or Common Stock shall be a prerequisite
to the issuance of any shares of any class or series of the
Preferred Stock authorized by and complying with the
conditions of this Restated Certificate of Incorporation.
If the proposal is adopted, Article IV of the Company's Certificate of
Incorporation will be amended to read as follows:
ARTICLE IV
Stock
The total number of shares of stock which the Corporation shall
have authority to issue is 18,000,000 shares with $.01 per share
par value, all of which are designated as common stock ("Common
Stock").
The effect of filing the proposed amendment would be to reduce the
number of authorized shares of the Company's capital stock to the level
management believes is appropriate. The proposed amendment would not affect the
proportionate equity interest in the Company of any stockholder nor would it
affect the rights of any stockholder.
If the proposal is approved, the amendment would become effective upon
the filing of the certificate of amendment with the Delaware Secretary of State.
Members of the Board of Directors and Executive Officers of the
Company, Toni E. Stephenson and Pamela S. Oliver own or control approximately
73.4% of the outstanding Common Stock of the Company, and have expressed their
intention to cast their votes in favor of the proposed amendment.
The Board of Directors recommends voting "FOR" the adoption of the
proposed amendment to the Company's Certificate of Incorporation.
10
<PAGE> 15
PROPOSAL 3.
APPROVAL OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed Ernst & Young LLP, an
international firm of independent certified public accountants, to act as
independent accountants for the Company and its consolidated subsidiaries for
1999. Ernst & Young LLP has been the Company's auditors since the year ended
June 30, 1991, and has advised the Company that the firm does not have any
direct or indirect financial interest in the Company or any of its subsidiaries,
nor has such firm had any such interest in connection with the Company during
the past five years other than its capacity as the Company's independent
certified public accountants. A representative of Ernst & Young LLP is expected
to be present at the Annual Meeting and will have an opportunity to make a
statement if he desires to do so and to be available to answer questions from
stockholders.
The Board of Directors unanimously recommends that stockholders vote
"FOR" ratification and approval of the selection of Ernst & Young LLP as
independent auditors for the Company for the year ending December 31, 1999.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the 2000 Annual
Meeting of Stockholders of the Company must be received by the Company at its
executive offices at 111 Havana Street, Denver, Colorado 80010, attention to
Director of Investor Relations, no later than December 21, 1999 for inclusion in
the Proxy Statement and proxy relating to the 2000 Annual Meeting of
Stockholders.
MISCELLANEOUS
The Company's Annual Report to Stockholders for the year ended December
31, 1998 will be furnished with this Proxy Statement to stockholders of record
on April 2, 1999. The Annual Report to Stockholders for the year ended December
31, 1998 does not constitute a part of the proxy soliciting material.
The management of the Company is not aware of any other business that
may come before the 1999 Annual Meeting. However, if additional matters properly
come before the 1999 Annual Meeting, proxies will be voted at the discretion of
the proxy holders.
By Order of the Board of Directors
Dennis M. Swenson
Secretary
Dated: April 12, 1999
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER
31, 1998, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS, REQUIRED TO BE FILED
WITH THE COMMISSION PURSUANT TO RULE 13A-1 OF THE EXCHANGE ACT WILL BE
FURNISHED, EXCLUDING EXHIBITS, WITHOUT CHARGE, TO ANY STOCKHOLDER UPON WRITTEN
REQUEST. A COPY MAY BE REQUESTED BY WRITING TO THE DIRECTOR OF PUBLIC RELATIONS,
STARTEK, INC., 111 HAVANA STREET, DENVER, COLORADO 80010. THE COMPANY'S ANNUAL
REPORT ON FORM 10-K CAN BE OBTAINED OVER THE INTERNET THROUGH THE COMPANY'S WEB
SITE. THE COMPANY'S INTERNET ADDRESS IS HTTP://WWW.STARTEK.COM. ADDITIONALLY,
THE ANNUAL REPORT ON FORM 10-K AND OTHER INFORMATION FILED WITH THE COMMISSION
BY THE COMPANY 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 THE
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, PROXIES,
INFORMATION STATEMENTS, AND OTHER INFORMATION REGARDING THE COMPANY FILED
ELECTRONICALLY WITH THE COMMISSION.
11
<PAGE> 16
EXHIBIT A
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
STARTEK, INC.
StarTek, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Act"), hereby certifies as
follows:
1. The name of the corporation is StarTek, Inc. (the
"Corporation").
2. The amendment to the Certificate of Incorporation of
the Corporation set forth below was duly adopted in
accordance with the provisions of Section 242 of the Act.
3. The Certificate of Incorporation of the Corporation is
hereby amended by deleting Article IV thereof in its
entirety and by substituting in lieu thereof the following,
so that Article IV, Section A shall hereafter read as
follows:
ARTICLE IV
Stock
The total number of shares of stock which the Corporation
shall have authority to issue is 18,000,000 shares with $.01
per share par value, all of which are designated as common
stock ("Common Stock").
IN WITNESS WHEREOF, this Certificate of Amendment to the Certificate
of Incorporation of StarTek, Inc. is executed _________, 1999.
STARTEK, INC., a Delaware corporation
By:
Title:
12
<PAGE> 17
APPENDIX A
STARTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this Definitive
Proxy Statement that are not statements of historical facts are forward-looking
statements (as defined in the Private Securities Litigation Reform Act of 1995)
that involve substantial risks and uncertainties. Forward-looking statements are
preceded by terms such as "may", "will", "should", "anticipates", "expects",
"believes", "plans", "future", "estimate", "continue", and similar expressions.
The following are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements;
these include, but are not limited to, general economic conditions in the
Company's markets, the loss of the Company's principal client(s), the loss or
delayed implementation of a large project which could cause quarterly variation
in the Company's revenues and earnings, difficulties of managing rapid growth,
dependence on key personnel, dependence on key industries and the trend toward
outsourcing, risks associated with the Company's contracts, risks associated
with rapidly changing technology, risks of business interruption, risks
associated with international operations and expansion, dependence on labor
force, the year 2000 issue, and highly competitive markets. These factors
include risks and uncertainties beyond the Company's ability to control; and, in
many cases, the Company and its management cannot predict the risks and
uncertainties that could cause actual results to differ materially from those
indicated by use of forward-looking statements. All forward-looking statements
herein are qualified in their entirety by the information set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"--"Factors That May Affect Future Results" appearing elsewhere in
this Definitive Proxy Statement.
OVERVIEW
StarTek generates its revenues by providing process management services,
which encompass a wide spectrum of service platforms, including logistics
management (selection and management of suppliers), management of product
assembly and packaging, E-commerce order processing and fulfillment, Internet
support, product distribution, direct store distribution, warehouse services and
inventory management, inbound technical support and customer care teleservices,
telecommunications process management, and product order processing. The Company
recognizes revenues as process management services are completed. Substantially
all of the Company's significant arrangements with its clients for its services
generate revenues based, in large part, on the number and duration of customer
inquiries, and the volume, complexity and type of components involved in the
handling of clients' products. Changes in the complexity or type of components
in the product units assembled by the Company may have an effect on the
Company's revenues, independent of the number of product units assembled.
A key element of the Company's ability to grow is the availability of
capacity to readily provide for the needs of new clients and the increased needs
of existing clients. StarTek's capacity substantially expanded during 1998
through the opening of a 305,000 square-foot building in Clarksville, Tennessee,
a 35,000 square-foot building in Greeley, Colorado and a 22,000 square-foot
building in Laramie, Wyoming. These three facilities, all of which became
operational during 1998, together with the Company's previously existing
capacity, provided adequate capacity to accommodate the revenue and earnings
growth experienced by the Company during 1998. StarTek leases 46,350 square-feet
of building space in Grand Junction, Colorado, which is currently expected to
become operational during the second quarter of 1999. The Company also operates
from facilities in the United Kingdom and Singapore. Additionally, the Company
has announced plans to search for an additional facility, which is currently
expected to be operational during the second half of 1999. Management believes
StarTek's existing facilities are adequate for the Company's current operations,
but continued capacity expansion will be required to support continued growth.
Management intends to maintain a certain amount of excess capacity to enable it
to readily provide for the needs of new clients and the increased needs of
existing clients.
The Company's cost of services primarily includes labor,
telecommunications, materials, and freight charges that are variable in nature
and certain facility expenses. All other operating expenses, including expenses
attributed to technology support, sales and marketing, human resource management
and other administrative functions that are not allocable to specific client
services, are included in selling, general and administrative expenses, which
generally tend to be either semi-variable or fixed in nature.
A-1
<PAGE> 18
From July 1992, through June 17, 1997, the Company operated as an S
corporation and, accordingly, was not subject to federal or state income taxes.
As an S corporation, in addition to general compensation for services rendered,
the Company historically paid certain management fees, bonuses and other fees to
the principal stockholders and/or their affiliates in amounts on an annual basis
which were approximately equal to the annual earnings of the Company, and all
such amounts were reflected as management fee expense in the consolidated
statement of operations. Upon receipt of such management fees and bonuses, the
principal stockholders historically contributed approximately 53% of such
amounts to the Company to provide the Company with necessary working capital,
with substantially all of the balance used to pay applicable federal and state
income taxes. The amounts so contributed are reflected in additional
paid-in-capital on the Company's consolidated balance sheets. Effective with the
closing of the Company's initial public offering, these management fees and
bonus arrangements were discontinued. See Note 1 to the consolidated financial
statements set forth in Appendix C.
Compensation has continued to be payable to certain principal
stockholders as general compensation for services rendered in the form of
salaries, bonuses, or advisory fees and all such payments are included in
selling, general and administrative expenses in the consolidated statement of
operations. At current rates, such payments aggregate approximately $516,000
annually. See Note 1 to the consolidated financial statements set forth in
Appendix C.
The Company frequently purchases components of its clients' products as
an integral part of its supplier management services and in advance of providing
its product assembly and packaging services. These components are packaged,
assembled and held by StarTek pending shipment. The Company generally has the
right to be reimbursed from clients for unused inventories. Client-owned
inventories are not reflected in the Company's consolidated balance sheets. See
Note 1 and Note 4 to the consolidated financial statements set forth in Appendix
C for a further description of the Company's inventories.
RESULTS OF OPERATIONS
The following tables should be read in conjunction with the consolidated
financial statements and notes thereto set forth in Appendix C.
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data expressed as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of services 80.0 80.7 81.6
------------ ------------ ------------
Gross profit 20.0 19.3 18.4
Selling, general and administrative
expenses 10.8 9.8 10.4
Management fee expense 8.6 3.5 --
------------ ------------ ------------
Operating profit 0.6 6.0 8.0
Net interest income ( expense) and other (0.5) 1.0 1.6
------------ ------------ ------------
Income before income taxes 0.1 7.0 9.6
Income tax expense 0.2 2.3 3.5
------------ ------------ ------------
Net income (loss) (0.1)% 4.7% 6.1%
============ ============ ============
</TABLE>
A-2
<PAGE> 19
The following table sets forth certain unaudited pro forma consolidated
statement of operations data expressed in dollars and as a percentage of
revenues (dollars in thousands, except per share data) (b):
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------
1996 1997
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues $ 71,584 100.0% $ 89,150 100.0%
Cost of services 57,238 80.0 71,986 80.7
-------------- --------------
Gross profit 14,346 20.0 17,164 19.3
Selling, general and administrative expenses 7,764 10.8 8,703 9.8
-------------- --------------
Operating profit 6,582 9.2 8,461 9.5
Net interest income ( expense) and other (372) (0.5) 933 1.0
-------------- --------------
Income before income taxes 6,210 8.7 9,394 10.5
Income tax expense 2,316 3.3 3,504 3.9
-------------- --------------
Net income $ 3,894 5.4% $ 5,890 6.6%
============== ==============
Basic and diluted net income per share $ 0.34 $ 0.47
Weighted average shares outstanding 11,361,904 12,652,680
</TABLE>
- -------------------------------
(b) See Note 2 to the consolidated financial statements set forth in
Appendix C for a further description of pro forma adjustments. Pro
forma presentation was not applicable for the year ended December 31,
1998.
1998 Compared to 1997
Revenues. Revenues increased $51.8 million, or 58.1%, from $89.2 million
for 1997 to $141.0 million for 1998. This increase was primarily due to an
increase in the volume of services provided to one of the Company's principal
clients, together with certain existing and new clients, partially offset by
decreases in the volume of services provided to other existing clients.
Cost of Services. Cost of services increased $43.2 million, or 59.9%, from
$71.9 million for 1997 to $115.1 million for 1998. As a percentage of revenues,
costs of services increased from 80.7% for 1997 to 81.6% for 1998. This
percentage increase was primarily due to higher overall costs of certain
business for a principal client at lower relative margins, mix of services
performed and training and start-up expenses related to the new Greeley,
Colorado, Laramie, Wyoming and Clarksville, Tennessee facilities, all of which
became operational during 1998.
Gross Profit. Due to the foregoing factors, gross profit increased $8.7
million, or 50.9%, from $17.2 million for 1997 to $25.9 million for 1998. As a
percentage of revenues, gross profit decreased from 19.3% for 1997 to 18.4% for
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.0 million, or 69.1%, from $8.7 million for
1997 to $14.7 million for 1998, primarily as a result of increased personnel
costs incurred to service increasing business and costs associated with capacity
expansion. As a percentage of revenues, selling, general and administrative
expenses increased from 9.8% for 1997 to 10.4% for 1998.
Management Fee Expense. Management fee expense was $3.1 million for 1997
and zero for 1998. Effective with the closing of the Company's initial public
offering in June 1997, management fees were discontinued.
Operating Profit. As a result of the foregoing factors, operating profit
increased from $5.3 million for 1997 to $11.2 million for 1998. As a percentage
of revenues, operating profit increased from 6.0% for 1997 to 8.0% for 1998.
Net Interest Income and Other. Net interest income and other was $0.9
million for 1997 and $2.3 million for 1998. This increase was primarily a result
of an increase in interest income derived from cash equivalents and investments
available for sale balances during 1998, whereas there were line of credit and
substantially more capital lease borrowings outstanding during the first half of
1997, substantially all of which were repaid from the net proceeds received by
the Company from its June 1997 initial public offering.
Income Before Income Taxes. As a result of the foregoing factors, income
before income taxes increased $7.1 million, or 114.5%, from $6.3 million for
1997 to $13.4 million for 1998. As a percentage of revenues, income before
income taxes increased from 7.0% for 1997 to 9.6% for 1998.
A-3
<PAGE> 20
Income Tax Expense. The Company was taxed as an S corporation for federal
and state income tax purposes from July 1, 1992 through June 17, 1997, when S
corporation status was terminated in contemplation of the Company's initial
public offering. Accordingly, the Company was not subject to federal or state
income taxes prior to June 17, 1997. During 1997, a provision for income taxes
as a C corporation was made for the period June 18, 1997 through December 31,
1997 as adjusted for a foreign tax benefit item, less a one-time credit to
record a net deferred tax asset of $0.3 million upon termination of S
corporation status. Income tax expense for 1998 reflects a provision for
federal, state and foreign income taxes at an effective rate of 36.5%.
Net Income. Based on the factors discussed above, net income increased $4.3
million, or 105.5%, from $4.2 million for 1997 to $8.5 million for 1998. As a
percentage of revenues, net income increased from 4.7% for 1997 to 6.1% for
1998.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Tax Expense and Pro Forma Net
Income for 1997 compared to actual results for 1998. Pro forma amounts for 1997
reflect the elimination of management fees and bonuses to stockholders and their
affiliates as these fees and bonuses were discontinued upon the closing of the
Company's June 1997 initial public offering, and provide for related income
taxes at 37.3% of pre-tax income as if the Company were taxed as a C corporation
for the entire year of 1997. Pro forma presentation was not applicable to 1998.
As a result of the foregoing factors: (i) pro forma management fee expense is
zero for 1997 and actual management fee expense is zero for 1998; (ii) pro forma
operating profit was $8.5 million for 1997 compared to actual operating profit
of $11.2 million for 1998, while such operating profit represented 9.5% and 8.0%
of revenues, respectively; (iii) income before income taxes increased $4.0
million, or 43.1%, from a pro forma amount of $9.4 million for 1997 to an actual
amount of $13.4 million for 1998; (iv) income tax expense increased $1.4
million, or 39.9%, from a pro forma amount of $3.5 million for 1997 to an actual
amount of $4.9 million for 1998; and (v) net income increased $2.6 million, or
45.1%, from a pro forma amount of $5.9 million for 1997 to an actual amount of
$8.5 million for 1998.
1997 Compared to 1996
Revenues. Revenues increased $17.6 million, or 24.5%, from $71.6 million
for 1996 to $89.2 million for 1997. This increase was primarily from existing
clients. A portion of the revenues for 1996 were attributable to two large
projects, which generated unusually high revenues.
Cost of Services. Cost of services increased $14.7 million, or 25.8%, from
$57.2 million for 1996 to $71.9 million for 1997. As a percent of revenues, cost
of services increased 0.7%. Factors pertaining to this increase were decreased
labor utilization, primarily from Greeley capacity restraints in latter 1997,
increased training costs and a greater penetration of business with a large
client at lower relative margins. These increased cost factors were partially
offset by the absence of start-up costs in Denver and product rework cost as
compared to 1996.
Gross Profit. As a result of the foregoing factors, gross profit increased
$2.8 million, or 19.6%, from $14.3 million for 1996 to $17.2 million for 1997.
As a percentage of revenues, gross profit decreased from 20.0% for 1996 to 19.3%
for 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.9 million, or 12.0%, from $7.8 million for
1996 to $8.7 million for 1997, primarily as a result of increased personnel
costs incurred to service increasing business. As a percentage of revenues,
selling, general and administrative expenses decreased from 10.8% for 1996 to
9.8% for 1997, reflecting the spreading of fixed and semi-variable costs over a
larger revenue base.
Management Fee Expense. Management fee expense decreased $3.1 million, or
49.3%, from $6.2 million for 1996 to $3.1 million for 1997. As a percentage of
revenues, management fee expense decreased from 8.6% for 1996 to 3.5% for 1997.
Management fee expense was determined by the Board of Directors and related
primarily to changes in operating profit of the Company for 1996. The Company
paid management fees and bonuses of $3.1 million in the period from January 1,
1997 through the closing of the Company's initial public offering in June 1997,
at which time these management fees and bonus arrangements were discontinued.
These management fee and bonus payments gave consideration to operating profits
and the effects of certain expense timing differences for book and tax purposes.
Operating Profit. As a result of the foregoing factors, operating profit
increased $4.9 million, or 1200%, from $0.4 million for 1996 to $5.3 million for
1997. As a percentage of revenues, operating profit increased from 0.6% for 1996
to 6.0% for 1997.
A-4
<PAGE> 21
Net Interest Income (Expense) and Other. Net interest income (expense) and
other was $0.4 million expense in 1996, while it was $0.9 million income for
1997. This increase in net interest earnings was primarily due to interest
earnings from the net proceeds of the Company's initial public offering in June
1997 and the substantial absence of line-of-credit borrowing during the third
and fourth quarters of 1997.
Income Before Income Taxes. As a result of the foregoing factors, income
before income taxes increased $6.3 million from zero for 1996 to $6.3 million
for 1997. As a percentage of revenues, income before income taxes increased from
0.1% for 1996 to 7.0% for 1997.
Income Tax Expense. The Company operated as an S corporation for federal
and state income tax purposes until termination of S corporation status in
connection with the Company's initial public offering. Accordingly, the Company
was not subject to federal or state income taxes through June 17, 1997. A
provision for foreign income taxes of $0.1 million was made in 1996. During
1997, a provision for income taxes as a C corporation was made for the period
June 18, 1997 through December 31, 1997, as adjusted for a foreign tax benefit
item, less a one-time credit to record a net deferred tax asset of $0.3 million
upon termination of S corporation status.
Net Income (Loss). Based on the factors discussed above, net income
increased $4.3 million, from $(0.1) million for 1996 to $4.2 million for 1997.
As a percentage of revenues, net income increased from (0.1)% for 1996 to 4.7%
for the year ended December 31, 1997.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Taxes and Pro Forma Net Income. Pro
forma amounts reflect the elimination of management fees and bonuses paid to
stockholders and their affiliates as these fees and bonuses were discontinued
upon closing of the Company's initial public offering, and provide for related
income taxes at 37.3% of pre-tax income as if the Company were taxed as a C
corporation. As a result of the foregoing factors: (1) pro forma management fee
expense is zero for 1996 and 1997; (2) pro forma operating profit increased $1.9
million, or 28.5% from $6.6 million for 1996 to $8.5 million for 1997; (3) pro
forma income before income taxes increased $3.2 million, or 51.3%, from $6.2
million in 1996 to $9.4 million for 1997; (4) pro forma income taxes increased
$1.2 million, or 51.4%, from $2.3 million 1996 to $3.5 million for 1997; and (5)
pro forma net income increased $2.0 million, or 51.3% from $3.9 million for 1996
to $5.9 million for 1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in June 1997, the Company funded its
operations and capital expenditures primarily through cash flow from operations,
borrowings under various lines of credit, capital lease arrangements, short-term
borrowings from its stockholders and their affiliates and additional capital
contributions by its stockholders. In November 1997, the Company replaced its
previous $3.5 million line of credit with Norwest Business Credit, Inc. with a
$5.0 million revolving line of credit with Norwest Bank Colorado, N.A. (the
"Bank"), which matures on April 30, 1999. Borrowings under the line of credit
bear interest at the Bank's prime rate (7.75% as of December 31, 1998). Under
this line of credit, the Company is required to maintain working capital of
$17.5 million and tangible net worth of $25.0 million. The Company may not pay
dividends in an amount which would cause a failure to meet these financial
covenants. As of December 31, 1998, and the date of this Definitive Proxy
Statement, the Company was in compliance with these financial covenants.
Collateral for the line of credit is the accounts receivable of certain of the
Company's wholly-owned subsidiaries. As of December 31, 1998, no amount was
outstanding under the $5.0 million line of credit. The Company currently expects
to renew this line of credit with the Bank under the same general terms and
conditions provided for in the arrangement described above.
The Company closed an initial public offering of common stock on June 24,
1997. The net proceeds, after deducting underwriting discounts and commissions
and offering expenses, were approximately $41.0 million. From the net proceeds,
the Company repaid substantially all of its outstanding indebtedness, which
included approximately $4.9 million of bank and mortgage indebtedness, $1.8
million of capital lease obligations and $8.0 million of notes payable to
principal stockholders arising from an S corporation dividend in an amount
approximating the additional paid-in capital and retained earnings of the
Company as of the closing date. The balance of the net proceeds (approximately
$26.3 million) was primarily used for working capital and other general
corporate purposes, including approximately $8.0 million for capital
expenditures to expand into new facilities and build-out of the Company's
existing facilities.
A-5
<PAGE> 22
During the first half of 1998, the Company completed construction of and
began operating from a new 35,000 square-foot call center facility in Greeley,
Colorado (the "Greeley Facility"). The Company purchased the Greeley Facility in
order to expand its call center capacity. The total construction cost of the
Greeley Facility and related equipment was approximately $3.5 million (excluding
the cost of the land). The Company financed the land for the Greeley Facility
through a $0.3 million non-interest bearing ten year promissory note. The
principal balance of the ten year promissory note declines on an equal basis,
without payment, over ten years so long as the Company does not sell or transfer
the land or fail to continuously operate a customer service center thereon.
During 1998, the Company purchased a total of approximately $1.8 million in
equipment, leasehold improvements and other fixed assets in order to operate a
22,000 square-foot call center facility in Laramie, Wyoming in a leased
building. The Laramie call center became operational during the three months
ended June 30, 1998. An option to purchase the Laramie land and building for
$365,000 was exercised on October 30, 1998.
On July 8, 1998, the Company entered into certain financing agreements with
the Industrial Development Board of the County of Montgomery, Tennessee, (the
"Board") in connection with the Board's issuance to StarTek USA, Inc. of an
Industrial Development Revenue Note, Series A not to exceed $4.5 million (the
"Facility Note") and an Industrial Development Revenue Note, Series B not to
exceed $3.5 million (the "Equipment Loan"). The Facility Note bears interest at
9% per annum commencing on October 1, 1998, payable quarterly, and maturing on
July 8, 2008. Concurrently, the Company advanced $3.6 million in exchange for
the Facility Note and entered into a lease agreement, maturing July 8, 2008,
with the Board for the use and acquisition of a 305,000 square-foot process
management and distribution facility in Clarksville, Tennessee (the "Facility
Lease"). The Facility Lease provides for the Company to pay to the Board lease
payments sufficient to pay, when and as due, the principal of and interest on
the Facility Note due to the Company from the Board. Pursuant to the provisions
of the Facility Lease and upon the Company's payment of the Facility Lease in
full, the Company shall have the option to purchase the 305,000 square-foot,
Clarksville, Tennessee facility for a lump sum payment of one hundred dollars.
The Equipment Loan generally contains the same provisions as the Facility Note
and provides for an equipment lease, except the Equipment Loan and equipment
lease mature on January 1, 2004. As of December 31, 1998, the Company had used
approximately $3.9 million and $1.2 million of the Facility Note and Equipment
Loan, respectively, and correspondingly entered into further lease arrangements
with the Board.
All transactions related to the purchase of the notes by the Company from
the Board and the lease arrangements from the Board to the Company have been
offset against each other in the consolidated financial statements set forth
herein, and accordingly have no impact on the consolidated balance sheets. The
assets acquired are included in property, plant and equipment. Similarly, the
interest income and interest expense related to the notes and lease
arrangements, respectively, have also been offset. The lease payments are equal
to the amount of principal and interest payments on the notes, and accordingly
have no impact on the consolidated statements of operations.
On October 26, 1998, the Company entered into an equipment loan
agreement with a finance company, which matures on November 2, 2002. In
connection with the equipment loan, the Company received cash of $3.6 million in
exchange for providing, among other things, certain collateral which generally
consisted of equipment, furniture and fixtures used in the Company's business.
The equipment loan provides for interest at a fixed annual interest rate of 7.0%
and for the Company to pay forty-eight equal monthly installments, which in
aggregate total approximately $4.2 million. In addition to the collateral
described above, the Company granted to the finance company a secondary security
interest in certain of its wholly-owned subsidiaries' accounts receivable.
On February 16, 1999, the Company entered into an operating lease agreement
whereby the Company acquired use of 46,350 square-feet of building space in
Grand Junction, Colorado to be used by the Company for call center, general
office use and other services as appropriate for the general purposes of the
Company (the "Grand Junction Facility"). The term of the lease agreement
commences on April 1, 1999 and unless earlier terminated or extended, continues
until March 31, 2009. Pursuant to the terms of the lease agreement, the Company
was granted, among other things, (i) a right of first refusal to purchase the
property, of which the leased space is a part, during the lease term and (ii) a
right to terminate the lease agreement anytime after the end of the fifth year
by giving the landlord 180 day prior written notice to terminate. Assuming the
operating lease agreement is not terminated, future minimum rental commitments
in aggregate, excluding certain taxes and utilities as defined, total
approximately $1.1 million and are payable on a monthly basis from April 1999
through March 2009.
On February 18, 1999 and in connection with the Grand Junction Facility,
the Company ordered certain call center computer hardware and software with an
aggregate purchase price of approximately $0.8 million. Completion of
installation of this call center equipment is currently scheduled to occur
during the second quarter of 1999, when, it is currently expected, the Grand
Junction Facility will also become operational.
A-6
<PAGE> 23
As of December 31, 1998, the Company had cash, cash equivalents, and
investments available for sale of $36.4 million, working capital of $38.3
million and net worth of $54.1 million. The Company's investments available for
sale generally consisted of corporate bonds, foreign government bonds
denominated in U.S. dollars, bond related mutual funds, other debt securities,
and various real estate investment trusts and equity related mutual funds. Such
investments held by the Company could be materially and adversely affected by
(i) various domestic and foreign economic conditions, such as recessions,
increasing interest rates, adverse foreign currency exchange fluctuations,
foreign and domestic inflation, and other factors and (ii) the inability of
certain corporations to repay their debts, including interest amounts, to the
Company. See "Quantitative and Qualitative Disclosures About Market Risk", and
Note 1 and Note 3 to the consolidated financial statements set forth in Appendix
B and Appendix C, respectively, for further discussions regarding the Company's
cash and cash equivalents, and investments available for sale.
Net cash provided by operating activities increased from $6.1 million for
1997 to $13.1 million for 1998. This increase was primarily a result of
increases in net income, depreciation and amortization expense, various tax
related items, accounts payable, and accrued and other liabilities, partially
offset by increases in accounts receivable, inventories, and gain on sale of
assets.
Net cash used in investing activities was $10.5 million for 1997 and $24.2
million for 1998. This increase was primarily due to increased purchases of (i)
property, plant and equipment, and (ii) investments available for sale,
partially offset by proceeds received from dispositions of certain fixed assets
and investments.
Net cash provided by financing activities during 1997 of approximately
$28.6 million was primarily the result of $41.0 million of net proceeds received
from the June 1997 initial public offering, $1.6 million in contributed capital
from certain S corporation stockholders prior to the June 1997 initial public
offering, and $1.5 million proceeds received from borrowings and capital lease
arrangements, partially offset by approximately $7.5 million of net repayments
of various debt obligations, and $8.0 million of cash dividends paid to certain
S corporation principal stockholders. Net cash provided by financing activities
during 1998 of $3.6 million primarily consisted of $3.7 million of net proceeds
received from an October 1998 equipment loan and other borrowings, partially
offset by approximately $0.1 million of principal payments for the October 1998
equipment loan and various capital lease obligations.
The effect of currency exchange rate changes on the translation of the
Company's United Kingdom operations was not substantial during 1997 and 1998.
The terms of the Company's agreements with its clients and its foreign
subcontracts are typically in U.S. dollars except for certain of its agreements
related to its United Kingdom operations. In the past, the Company's exposure to
foreign currency exchange risks has been minimal in connection with its day to
day operations in the United Kingdom. However, as the international portion of
the Company's business grows, more revenues and expenses may be denominated in
foreign currency, and this will increase the Company's exposure to fluctuations
in currency exchange rates. See "Quantitative and Qualitative Disclosures About
Market Risk" set forth in Appendix B for a further discussion of the Company's
exposure to foreign currency exchange risks in connection with certain of its
investments available for sale.
The Company believes its current cash, cash equivalents and investments
available for sale balances, anticipated cash flows from future operations and
the $5.0 million of currently available financing under its $5.0 million line of
credit, will be sufficient to support its operations, capital expenditures and
various repayment obligations under its debt and lease agreements for the
foreseeable future. However, liquidity and capital requirements depend on many
factors including, but not limited to, the Company's ability to retain or
successfully and timely replace its principal clients and the rate at which the
Company expands its business, whether internally or through acquisitions and
strategic alliances. To the extent the funds generated from the sources
described above are insufficient to fund the Company's activities in the short
or long-term, the Company will be required to raise additional funds through
public or private financing. No assurance can be given that additional financing
will be available or that, if available, it will be available on terms favorable
to the Company.
QUARTERLY RESULTS
Note 16 to the consolidated financial statements set forth in Appendix C
reflects certain unaudited statement of operations data for the quarters in 1997
and 1998 on a historical and pro forma basis. The unaudited historical quarterly
information has been prepared on the same basis as the annual information and,
in management's opinion, includes all adjustments necessary to present fairly
the information for the quarters presented. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"-- "Factors That May
Affect Future Results"--"Variability of Quarterly Operating Results" set forth
herein for a further discussion of the Company's quarterly results.
A-7
<PAGE> 24
For the quarterly periods in 1997 and 1998, revenues, cost of services and
gross profits fluctuated principally due to the seasonal pattern of certain of
the businesses served by the Company and an increase in the volume of services
provided to one of the Company's principal clients, together with certain
existing and new clients, partially offset by decreases in the volume of
services provided to other existing clients. Revenues, cost of services and
gross profit from the fourth quarter of 1997 to the first quarter of 1998
declined principally due to the seasonal pattern of certain businesses served by
the Company.
The following table sets forth certain unaudited historical and pro forma
statement of operations data, expressed as a percentage of revenues:
<TABLE>
<CAPTION>
1997 QUARTERS ENDED 1998 QUARTERS ENDED
---------------------------------- ---------------------------------
MAR 31 JUN 30 SEPT 30 DEC 31 MAR 31 JUN 30 SEPT 30 DEC 31
----- ----- ------- ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Historical:
Revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 23.6 21.9 19.4 16.0 18.8 19.0 18.4 18.0
Selling, general and
administrative expenses 13.0 12.1 10.6 6.8 11.2 13.3 11.0 8.6
Management fee expense 4.7 14.5 -- -- -- -- -- --
Operating profit (loss) 5.9 (4.7) 8.8 9.2 7.6 5.7 7.4 9.4
Net income (loss) 5.4 (4.0) 7.2 6.8 6.2 5.4 5.7 6.5
Pro forma:
Revenues 100.0 % 100.0 % -- -- -- -- -- --
Gross profit 23.6 21.9 -- -- -- -- -- --
Selling, general and
administrative expenses 13.0 12.1 -- -- -- -- -- --
Management fee expense -- -- -- -- -- -- -- --
Operating profit (loss) 10.6 9.8 -- -- -- -- -- --
Net income (loss) 6.3 5.8 -- -- -- -- -- --
</TABLE>
Gross profit, as a percentage of revenues, increased 2.8% from the fourth
quarter of 1997 to the first quarter of 1998 as a result of the mix of services
performed and the absence of lower labor utilization and capacity constraints
related to the 100,000 square-foot Greeley facility, partially offset by
training and start-up expenses related to the 35,000 square-foot Greeley
facility.
Gross profit, as a percentage of revenues, decreased 4.8% from the first
quarter of 1997 to the first quarter of 1998 primarily as a result of higher
overall cost of services from greater penetration of business with certain
principal clients at lower relative margins, training and start-up expenses
related to the 35,000 square-foot Greeley facility and the mix of services
performed.
Gross profit, as a percentage of revenues, decreased 2.9% from the second
quarter of 1997 to the second quarter of 1998 primarily as a result of higher
overall cost of services of certain business at lower relative margins, mix of
services performed, and training and start-up expenses related to the 35,000
square-foot Greeley facility and the 22,000 square-foot Laramie facility, both
of which became operational in the second quarter of 1998.
Gross profit, as a percentage of revenues, decreased 1.0% from the third
quarter of 1997 to the third quarter of 1998 primarily as a result of higher
overall costs of certain business at lower relative margins, mix of services
performed and training and start-up expenses related to the 305,000 square-foot
Clarksville, Tennessee facility, which became operational during the third
quarter of 1998.
Gross profit, as a percentage of revenues, increased 2.0% from the fourth
quarter of 1997 to the fourth quarter of 1998 primarily as a result of the
absence of lower labor utilization and capacity constraints related to the
100,000 square-foot Greeley facility. Operating from the 305,000 square-foot
facility in Clarksville, Tennessee substantially contributed to the relief of
the capacity constraints experienced by the Company during the fourth quarter of
1997. Gross profit, as a percentage of revenues, remained relatively consistent
for the quarterly periods in 1998.
For the quarterly periods in 1997, selling, general and administrative
expenses as a percentage of revenues, fluctuated principally due to the
spreading of fixed and semi-variable costs over a revenue base that fluctuates
from quarter to quarter. For the quarterly periods in 1998, selling, general and
administrative expenses as a percentage of revenues, fluctuated principally due
to increased personnel costs incurred to service increasing business and costs
associated with capacity expansion.
A-8
<PAGE> 25
The Company paid management fees and bonuses of $3.1 million in the period
January 1, 1997 through the closing of the Company's initial public offering in
June 1997, at which time these management fees and bonus arrangements were
discontinued. These 1997 management fees and bonus arrangements gave
consideration to operating profits and the effects of certain expense timing
differences for book and tax purposes.
Operating profit fluctuated within the quarterly periods of 1997 and 1998
based primarily on the factors noted above. Net income fluctuated within the
quarterly periods of 1997 (pro forma quarterly results for the first two
quarters of 1997 and actual quarterly results for the last two quarters of 1997)
and 1998 (actual quarterly results for all quarters in 1998) based primarily on
the factors noted above, and based on an increase in interest earnings in 1998
derived from the Company's cash equivalents and investments available for sale,
partially offset by a provision for income tax expense in 1998 of 36.5%.
The unaudited pro forma quarterly information for the first two quarters of
1997 presents the effects on operating profit of the elimination of management
fee expense paid to stockholders and their affiliates as these fees were
discontinued effective with closing of the Company's initial public offering.
See Note 2 to the consolidated financial statements set forth in Appendix C for
a further description of the 1997 pro forma information and related pro forma
adjustments. Pro forma presentation was not applicable for the quarterly periods
beginning after June 30, 1997.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Some of the
Company's older computer programs and technologies fall into this category. As a
result, those programs have time-sensitive applications that recognize a date
using "00" as the year 1900 rather than the year 2000. This could cause system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in other normal business activities.
The Company formally created a year 2000 project team (the "Y2K Team")
during the first quarter of 1998. The Y2K Team reports directly to the Company's
executive committee and periodically provides the executive committee status
updates of its year 2000 compliance efforts. To date, the Y2K Team has, among
other things, completed its initial assessment of the Company's year 2000
compliance issues, identified non year 2000 compliant computer equipment and
software, communicated with applicable third party vendors of the Company in
order to gather information on year 2000 matters beyond the Company's internal
information technologies, scheduled and partially completed year 2000 testing of
the Company's applicable information systems, and planned to develop and test a
year 2000 contingency plan. The total cost of the Company's year 2000 compliance
efforts is currently estimated to be approximately $100,000.
The Company currently anticipates that the Y2K Team will complete its year
2000 compliance efforts during the third quarter of 1999, which is prior to any
currently anticipated material adverse effect the year 2000 issue may have on
the Company's business, financial condition and results of operations.
Additionally, StarTek uses certain of its clients' software applications in
performing its outsourced services. Such client-owned software used by StarTek,
if not year 2000 compliant, could cause significant interruptions and delays in
the Company's services, revenues and cash receipts. Currently, management is
unaware of any specific year 2000 issues related to client-owned software used
in StarTek's day to day operations. The Company currently believes, based on its
current year 2000 compliance planning, the year 2000 issue will not pose
material adverse problems to its business. However, if the Company's, its third
party vendors', subcontractors' and clients' year 2000 compliance efforts are
not successful, or not completed in a timely manner, the year 2000 issue could
have a material adverse effect on the operations of the Company.
The anticipated cost and timing to complete the year 2000 compliance
efforts mentioned above are based on estimates which have been derived using
numerous assumptions of future events, including the continued availability of
certain resources and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to completely identify and correct all relevant
information systems, the ability to coordinate successfully with its third party
vendors, subcontractors and clients in order to attempt to insure year 2000
issues beyond the Company's internal information systems are also successfully
and timely addressed, and other uncertainties. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"-- "Factors That May
Affect Future Results" set forth herein for a further discussion of factors
relating to the Company's "Year 2000 Compliance".
A-9
<PAGE> 26
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of domestic
and foreign inflation on its operations, the Company does not believe that
inflation has had, or is likely in the foreseeable future to have, a material
adverse effect on its results of operations or financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Reliance on Principal Client Relationships
A substantial portion of the Company's revenue is generated from its
principal client(s) and the loss of its principal client(s) could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company's two largest clients during the twelve and
three months ended December 31, 1997 were Microsoft Corporation ("Microsoft")
and Hewlett-Packard Company ("Hewlett-Packard"). Microsoft, which began its
outsourcing relationship with StarTek in April 1996, accounted for approximately
56.3% of the Company's revenues during the year ended December 31, 1997. The
Company provides various outsourced services to various divisions of
Hewlett-Packard, each of which the Company considers separate clients since each
division acts through a relatively autonomous decision maker. Hewlett-Packard's
various divisions accounted for approximately 25.4% of the Company's revenues
during the year ended December 31, 1997. The Company began its outsourcing
relationship with Hewlett-Packard in 1987. The Company's largest client during
the year ended December 31, 1998 was Microsoft. Microsoft accounted for
approximately 72.5% of the Company's revenues during the year ended December 31,
1998. There can be no assurance the Company will be able to retain its principal
client(s) or, if it were to lose its principal client(s), it would be able to
timely replace its principal client(s) with clients which generate a comparable
amount of revenues.
Variability of Quarterly Operating Results
The Company's business is highly seasonal and is, at times, conducted in
support of product launches for new and existing clients. Historically, the
Company's revenues have been substantially lower in the first and second
quarters due to the timing of its clients' marketing programs and product
launches, which are typically geared toward the holiday buying season.
Additionally, the Company has experienced, and expects to continue to
experience, quarterly variations in operating results as a result of a variety
of factors, many of which are outside the Company's control, including: (i) the
timing of existing and future client product launches; (ii) the expiration or
termination of existing client projects; (iii) the timing and amount of costs
incurred to expand capacity in order to provide for further revenue growth from
current and future clients; (iv) the seasonal nature of certain clients'
businesses; (v) the cyclical nature of certain high technology clients'
businesses; and (vi) changes in the Company's principal client base.
Year 2000 Compliance
As the year 2000 approaches, an issue impacting all companies, including
StarTek, has emerged regarding how existing application software programs,
computer operating systems and other operating equipment which use embedded
computer chips can accommodate this date value. Software programs, computer
operating systems and other operating equipment that have date-sensitive
programming or embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of StarTek's operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. Similarly, disruptions in the
operations of StarTek's clients, third party vendors and/or subcontractors due
to the year 2000 issue could materially and adversely affect StarTek's
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations"--"Year 2000 Compliance" set forth herein for a further
discussion of the Company's year 2000 compliance efforts.
A-10
<PAGE> 27
Difficulties in Managing Business Undergoing Rapid Growth
StarTek has experienced rapid growth over the past several years and
anticipates continued future growth. Continued growth depends on a number of
factors, including the Company's ability to (i) initiate, develop and maintain
new and existing client relationships, particularly relationships with its
principal client(s); (ii) expand its sales and marketing organization; (iii)
recruit, motivate and retain qualified management, customer support and other
personnel; (iv) rapidly expand the capacity of its existing facilities or
identify, acquire or lease suitable additional facilities on acceptable terms
and complete build-outs of such facilities in a timely and economic fashion; (v)
provide high quality services to its clients; and (vi) maintain relationships
with high-quality and reliable suppliers. Continued rapid growth can be expected
to place significant strain upon the Company's management, employees,
operations, operating and financial systems, and other resources. To accommodate
such growth and to compete effectively, the Company must continue to implement
and improve its information systems, procedures, and controls and expand, train,
motivate, and manage its workforce. There can be no assurance that the Company's
personnel, systems, procedures, and controls will be adequate to support the
Company's future operations. Further, there can be no assurance the Company will
be able to maintain or accelerate its current growth, effectively manage its
expanding operations or achieve planned growth on a timely and profitable basis.
If the Company is unable to manage growth effectively or if growth does not
occur, its business, results of operations and financial condition could be
materially and adversely affected.
Risks Associated with Rapidly Changing Technology
Continued and substantial world-wide use and development of the Internet as
a delivery system for computer software, hardware, computer games, other
computer related products, and products in general could significantly and
adversely affect demand for the Company's services. Additionally, the Company's
success is significantly dependent on its computer equipment, telecommunications
equipment, software systems, operating systems, and financial systems. There can
be no assurance that the Company will be able to timely and successfully develop
and market any new services, that such services will be commercially successful
or that clients' and competitors' technologies or services will not render the
Company's services obsolete. Furthermore, the Company's failure to successfully
and timely implement sophisticated technology or to respond effectively to
technological changes in general, could have a material adverse effect on the
Company's success, growth prospects, results of operations and financial
condition.
Dependence on Labor Force
StarTek's success is largely dependent on its ability to recruit, hire,
train, and retain qualified employees. The Company's business is labor intensive
and continues to experience relatively high personnel turnover. The Company's
operations, especially its technical support teleservices, generally require
specially trained employees. Increases in the Company's employee turnover rate
could increase the Company's recruiting and training costs and decrease its
operating efficiency and productivity. Also, the addition of new clients or the
implementation of new projects for existing clients may require the Company to
recruit, hire, and train personnel at accelerated rates. There can be no
assurance that the Company will be able to successfully recruit, hire, train,
and retain sufficient qualified personnel to adequately staff for existing
business or future growth. In addition, because a substantial portion of the
Company's operating expenses consist of labor related costs, continued labor
shortages together with increases in wages (including minimum wages as mandated
by the U.S. federal government, employee benefit costs, employment tax rates,
and other labor related expenses) could have a material adverse effect on
StarTek's business, operating profit and financial condition. Furthermore,
certain of StarTek's facilities are located in areas with relatively low
unemployment rates and/or relatively high labor costs, thus potentially making
it more difficult and costly to hire qualified personnel.
A-11
<PAGE> 28
Risks Associated with International Operations and Expansion
StarTek currently conducts business in Europe and Asia, in addition to its
North American operations. Such international operations accounted for
approximately 13.9% of the Company's total revenues for the year ended December
31, 1998. A component of the Company's growth strategy continues to be expansion
of its international operations. There can be no assurance that the Company will
be able to continue or expand its capacity to market, sell, and deliver its
services in international markets or that it will be able to develop
relationships with other businesses to expand its international operations.
Additionally, there are certain risks inherent in conducting international
business, including: (i) exposure to foreign currency fluctuations against the
U.S. dollar; (ii) potentially longer working capital cycles; (iii) greater
difficulties in collecting accounts receivable; (iv) difficulties in complying
with a variety of foreign laws and foreign tax regulations; (v) unexpected
changes in foreign government programs, policies, regulatory requirements and
labor laws; (vi) difficulties in staffing and effectively managing foreign
operations; and (vii) political instability and adverse tax consequences. There
can be no assurance that one or more of such factors will not have a material
adverse effect on the Company's international operations and, consequently, on
the Company's business, results of operations, growth prospects and financial
condition.
Control by Principal Stockholders
As of March 24, 1999, A. Emmet Stephenson, Jr., Chairman of the Board and
co-founder of the Company, and his family, beneficially own approximately 66.2%
of the Company's outstanding common stock. As a result, Mr. Stephenson and his
family will be able to elect the entire Board of Directors of the Company and to
control substantially all other matters requiring action by the Company's
stockholders. Additionally, substantially all of the Company's revenues,
operating expenses and operating results in general are derived from the
Company's wholly-owned subsidiaries. Mr. Stephenson is also the sole Director
for each of the Company's wholly-owned subsidiaries. Such voting concentration
may discourage, delay or prevent a change in control of the Company and its
wholly-owned subsidiaries.
Dependence on Key Personnel
The Company's success to date has depended in large part on the skills and
efforts of Mr. Stephenson and of Michael W. Morgan, President, Chief Executive
Officer, Director and co-founder of the Company. As of March 24, 1999, Mr.
Stephenson and his family and Mr. Morgan beneficially own approximately 66.2%
and 7.0% of the Company's outstanding common stock, respectively. Mr. Stephenson
and Mr. Morgan have not entered into employment agreements with the Company and
there can be no assurance that the Company can retain the services of these
individuals. The loss of either Mr. Stephenson or Mr. Morgan, or the Company's
inability to hire or retain other qualified officers, directors and key
employees, could have a material adverse effect on the Company's success, growth
prospects, results of operations and financial condition.
Dependence on Key Industries and Trends Toward Outsourcing
StarTek's current client base primarily consists of companies engaged
primarily in the computer software, computer hardware, Internet, E-commerce,
technology and telecommunications industries. The Company's business and growth
is largely dependent on the continued demand for its services from clients in
these industries and industries targeted by the Company, and current trends in
such industries to outsource various non-core functions which are offered on an
outsourced basis by the Company. A general economic downturn in the computer
industry or in other industries targeted by the Company or a slowdown or
reversal of the trend in these industries to outsource services provided by the
Company could materially and adversely affect the Company's business, results of
operations, growth prospects and financial condition.
A-12
<PAGE> 29
Risks Associated with the Company's Contracts
The Company typically enters into written agreements with each client for
outsourced services or performs services on a purchase order basis. Under
substantially all of the Company's significant arrangements with its clients,
including its principal clients, the Company typically generates revenues based
in large part, on the number and duration of customer inquiries, and the volume,
complexity, and type of components involved in its clients' products.
Consequently, the amount of StarTek's revenues generated from any particular
client is generally dependent upon customers' purchase and use of its clients'
products. There can be no assurance as to the number of customers who will be
attracted to the products of the Company's clients or that the Company's clients
will continue to develop new products that will require the Company's services.
Although the Company currently seeks to sign multi-year contracts with its
clients, the Company's contracts generally (i) permit termination upon
relatively short notice by its clients, (ii) do not designate the Company as its
clients' exclusive outsourcing service provider, (iii) do not penalize its
clients for early termination, and (iv) generally hold the Company responsible
for work performed which does not meet certain pre-defined specifications. To
the extent the Company works on a purchase order basis, agreements with its
clients frequently do not provide for minimum purchase requirements, except in
connection with certain of its technical support and customer care services.
Several of the Company's contracts require the Company, through its wholly-owned
subsidiaries and for certain of its facilities and services, to maintain ISO
9002 certification.
Highly Competitive Market
The markets in which the Company operates are highly competitive. The
Company expects competition to persist and intensify in the future. The
Company's competitors include small firms offering specific applications,
divisions of large companies, large independent firms and, most significantly,
the in-house operations of the Company's existing and potential clients. A
number of competitors have or may develop financial and other resources greater
than those of the Company. Similarly, there can be no assurance that additional
competitors with greater name recognition and resources than the Company will
not enter the markets in which the Company operates. Because the in-house
operations of the Company's existing and potential clients are significant
competitors of the Company, the Company's performance and growth could be
materially and adversely affected if its clients decide to provide in-house
services that currently are outsourced or if potential clients retain or
increase their in-house capabilities. Further, a decision by its principal
client(s) to consolidate its outsourced services with a company other than
StarTek could materially and adversely affect the Company's business,
particularly due to the fact that the Company is not the largest supplier of any
of the services it currently provides to its principal client(s). Additionally,
competitive pressures from current or future competitors could result in
substantial price erosion, which could materially and adversely affect the
Company's business, results of operations and financial condition.
Risks of Business Interruptions
StarTek's operations are dependent upon its ability to protect its
facilities, clients' products, confidential client information, computer
equipment, telecommunications equipment, and software systems against damage
from Internet interruption, fire, power loss, telecommunications interruption,
E-commerce interruption, natural disaster, theft, unauthorized intrusion,
computer viruses, and other emergencies and the ability of its suppliers, to
deliver component parts on an expedited basis. While the Company maintains
certain procedures and contingency plans to minimize the detrimental impact of
such events, there can be no assurance that such procedures and plans will be
successful. In the event the Company experiences temporary or permanent
interruptions or other emergencies at one or more of its facilities, the
Company's business could be materially and adversely affected and the Company
may be required to pay contractual damages to its clients or allow its clients
to terminate or renegotiate their arrangements with the Company. While the
Company maintains property and business interruption insurance, such insurance
may not adequately and/or timely compensate the Company for all losses that it
may incur. Further, some of the Company's operations, including
telecommunication systems and telecommunication networks, and the Company's
ability to timely and consistently access and use 24 hours per day, seven days
per week, telephone, Internet, E-commerce, E-mail, facsimile connections, and
other forms of communication, are substantially dependent upon telephone
companies, Internet service providers, T1 lines, etc. If such communications are
interrupted on a short or long-term basis, the Company's services would be
similarly interrupted and delayed.
A-13
<PAGE> 30
Volatility of Stock Price
The market price of StarTek's common stock may be highly volatile and could
be subject to wide fluctuations in response to quarterly variations in operating
results, the success of the Company in implementing its business and growth
strategies, announcements of new contracts or contract cancellations,
announcements of technological innovations or new products and services by the
Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors. Additionally, the stock market has
experienced substantial price and volume fluctuations that have particularly
affected the market prices of equity securities of many companies, and that have
often been unrelated to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of StarTek's common
stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. Any such litigation initiated against the
Company could result in substantial costs and diversion of management's
attention and resources, which could materially and adversely affect the
Company's business, results of operations and financial condition.
A-14
<PAGE> 31
APPENDIX B
STARTEK, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses the Company's exposure to market risk related to
changes in interest rates and other general market risks, equity market prices,
and foreign currency exchange rates. Primarily all of the Company's investment
decisions are directed by its Chairman of the Board. This discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual
results could vary materially as a result of a number of factors, including but
not limited to, changes in interest rates and other general market risks, equity
market prices, foreign currency exchange rates, and those set forth in Appendix
A under "Management's Discussion and Analysis of Financial Condition and Results
of Operations"--"Factors That May Affect Future Results". See also Note 1 and
Note 3 to the consolidated financial statements set forth in Appendix C for a
further discussion of the Company's cash and cash equivalents and investments
available for sale.
Interest Rate Sensitivity and Other General Market Risks
Cash and cash equivalents. As of December 31, 1998, the Company had cash
and cash equivalents of approximately $19.6 million, which consisted of (i)
approximately $1.4 million invested in various money market funds and overnight
investments at a weighted average interest rate of approximately 5.5%, (ii)
approximately $17.9 million invested in various commercial paper securities at a
weighted average interest rate of approximately 6.1%, and (iii) approximately
$0.3 million in various non-interest bearing operating accounts. StarTek
considers cash equivalents to be short-term, highly liquid investments that are
readily convertible to known amounts of cash and so near their maturity that
they present insignificant risk of changes in value because of changes in
interest rates. The Company does not expect any material loss with respect to
its cash and cash equivalents as a result of interest rate changes, and the
estimated fair value of its cash and cash equivalents approximates original
cost.
Investments Available for Sale. As of December 31, 1998, the Company had
investments available for sale of $16.8 million. These investments available for
sale generally consisted of corporate bonds, foreign government bonds
denominated in U.S. dollars, bond related mutual funds, other debt securities,
and various equity related mutual funds. Corporate bonds , foreign government
bonds denominated in U.S. dollars, bond related mutual funds, and other debt
securities held in the Company's investment portfolio are subject to interest
rate risk and will fall in value if market interest rates increase.
The fair market value of, and the estimated cash flows from, the Company's
investments in corporate bonds are substantially dependent upon the
creditworthiness of certain corporations that are expected to repay their debts,
including interest, as they become due, to the Company. If such corporations'
financial condition and liquidity adversely changes, the Company's investments
in their debts can be expected to be materially and adversely affected.
The Company's investments in foreign government bonds denominated in U.S.
dollars entail special risks of global investing; these include, but are not
limited to, (i) currency exchange fluctuations which could adversely affect the
ability of foreign governments to repay their debts in U.S. dollars, (ii)
foreign government regulations, and (iii) the potential for political and
economic instability. The fair market value of such investments in foreign
government bonds (denominated in U.S. dollars) can be expected to be more
volatile than that of U.S. government bonds. These risks are intensified for the
Company's investments in debt of foreign governments located in countries
generally considered to be emerging markets.
B-1
<PAGE> 32
The table below provides information about maturity dates and corresponding
weighted average interest rates with regard to certain of StarTek's investments
available for sale as of December 31, 1998.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
WEIGHTED AVERAGE --COST--
INTEREST RATES (DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------------- ----------
1999 2000 2001 2002 2003 Thereafter Total FAIR VALUE
-------- -------- -------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate bonds 8.3% $ 1,063 -- -- -- -- -- $ 1,063 $ 1,079
Corporate bonds 7.4% -- $ 3,590 -- -- -- -- $ 3,590 $ 3,602
Corporate bonds 7.3% -- -- $ 1,888 -- -- -- $ 1,888 $ 1,791
Corporate bonds 6.3% -- -- -- -- -- $ 2,445 $ 2,445 $ 2,354
Foreign government bonds
and other 8.9% -- -- -- -- -- $ 3,202 $ 3,202 $ 2,907
-------- -------- -------- -------- -------- -------- -------- --------
Total 7.6% $ 1,063 $ 3,590 $ 1,888 -- -- $ 5,647 $ 12,188 $ 11,733
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Management believes the Company currently has the ability to hold these
investments until maturity, and therefore, if held to maturity, the Company
would not expect the future proceeds from these investments to be affected, to
any significant degree, by the effect of a sudden change in market interest
rates. Declines in interest rates over time will, however, reduce the Company's
interest income derived from future investments.
As of December 31, 1998 and as part of its investments available for sale
portfolio, the Company also was invested in (i) various bond related mutual
funds which, in the aggregate, had an original cost and fair market value of
approximately $4.0 million and $3.9 million, respectively and (ii) various real
estate investment trusts and equity related mutual funds which, in the
aggregate, had an original cost and fair market value of approximately $1.6
million and $1.2 million, respectively.
Such bond related mutual funds, as of December 31, 1998 (i) had a weighted
average interest rate of approximately 6.0%, and a weighted average maturity of
approximately three years; (ii) are primarily invested in investment grade bonds
of U.S. and foreign issuers denominated in U.S. and foreign currencies, and
interests in floating or variable rate senior collateralized loans to
corporations, partnerships, and other entities in a variety of industries and
geographic regions; (iii) include certain foreign currency risk hedging
instruments which are intended to reduce fair market value fluctuations; (iv)
are subject to interest rate risk and will fall in value if market interest
rates increase; and (v) are subject to the quality of the underlying securities
within the mutual funds. The Company's investments in such bond related mutual
funds entail special risks of global investing, including, but not limited to,
(i) currency exchange fluctuations, (ii) government regulations, and (iii) the
potential for political and economic instability. The fair market value of the
Company's investments in such bond related mutual funds can be expected to be
more volatile than that of a U.S.-only fund. These risks are intensified for
certain investments in debt of foreign governments (included in bond related
mutual funds) which are located in countries generally considered to be emerging
markets. Additionally, certain of the bond related mutual fund investments are
also subject to the effect of leverage, which in a declining market, can be
expected to result in a greater decrease in fair market value than if such
investments were not leveraged.
Outstanding Debt of the Company. As of December 31, 1998, the Company had
outstanding debt of approximately $4.2 million, approximately $3.6 million of
which bears interest at an annual fixed rate of 7.0%. Since substantially all of
the interest on the Company's debt is fixed, a hypothetical 10.0% decrease in
interest rates would not have a material impact on the Company. Increases in
interest rates could, however, increase interest expense associated with future
borrowings by the Company, if any. For example, the Company may from time to
time effect borrowings under its $5.0 million line of credit for general
corporate purposes, including working capital requirements, capital expenditures
and other purposes related to expansion of the Company's capacity. Borrowings
under the $5.0 million line of credit bear interest at the lender's prime rate,
which was 7.75% as of December 31, 1998. As of December 31, 1998, the Company
had no outstanding line of credit obligations.
The Company has not hedged against interest rate changes.
B-2
<PAGE> 33
Equity Price Risk
As of December 31, 1998, the Company held in its investments available for
sale portfolio, certain equity securities with original costs and fair market
values, in aggregate, of $1.6 million and $1.2 million, respectively. The
Company's investments in equity securities generally consist of various real
investment trusts and equity related mutual funds. A substantial decline in the
values of real estate investment trusts and equity related mutual funds, and
equity prices in general could have a material adverse effect on the Company's
equity investments.
The Company has not hedged against equity price changes.
Foreign Currency Exchange Risk
Approximately 5.9% of the Company's total revenues for 1998 were derived
from arrangements whereby the Company received payments from its clients in
currencies other than U.S. dollars. The terms of the Company's agreements with
its clients and its foreign subcontracts are typically in U.S. dollars except
for certain of its agreements related to its United Kingdom operations. If an
arrangement provides for the Company to receive payments in a foreign currency,
the ultimate revenues realized from such an arrangement may be less if the value
of such foreign currency declines. Similarly, if an arrangement provides for the
Company to make payments in a foreign currency, the ultimate cost of services
and operating expenses for such an arrangement may be more if the value of such
foreign currency increases. For example, a 10% change in the relative value of
such foreign currency could cause a related 10% change in the Company's
previously expected revenues, cost of services and operating expenses. In the
past, the Company's exposure to currency exchange risks has been minimal in
connection with its day to day operations in the United Kingdom. However, as the
international portion of the Company's business grows, more revenues and
expenses may be denominated in foreign currency, and this will increase the
Company's exposure to fluctuations in currency exchange rates.
The Company has not hedged against foreign currency exchange rate changes
related to its day to day operations in the United Kingdom. However, certain of
its investments classified as bond related mutual funds (discussed in further
detail above as part of "Interest Rate Sensitivity and Other General Market
Risks") include investments in various forms of currency risk hedging
instruments which are intended to reduce fair market value fluctuations of such
mutual funds.
B-3
<PAGE> 34
APPENDIX C
----------
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
Board of Directors
StarTek, Inc.
We have audited the accompanying consolidated balance sheets of
StarTek, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
StarTek, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
February 20, 1999
C-1
<PAGE> 35
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,960 $ 19,593
Investments available for sale 7,356 16,829
Trade accounts receivable, less
allowance for doubtful accounts of $383 and $441
as of December 31, 1997 and 1998, respectively 12,518 20,476
Inventories 2,539 2,772
Deferred tax assets 440 1,135
Prepaid expenses and other 205 165
-------- --------
Total current assets 50,018 60,970
Property, plant and equipment, net 8,151 19,171
Other assets 3 60
-------- --------
Total assets $ 58,172 $ 80,201
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,387 $ 17,433
Accrued liabilities 1,292 2,092
Income taxes payable 106 1,944
Current portion of capital lease obligations 82 46
Current portion of long-term debt 26 906
Other 421 213
-------- --------
Total current liabilities 11,314 22,634
Capital lease obligations, less current portion 121 77
Long-term debt, less current portion 435 3,196
Deferred income taxes 231 144
Other 65 17
Commitments -- --
Stockholders' equity:
Common stock 138 138
Additional paid-in capital 41,661 41,661
Cumulative currency translation adjustment 70 167
Unrealized loss on investments available for sale (92) (606)
Retained earnings 4,229 12,773
-------- --------
Total stockholders' equity 46,006 54,133
-------- --------
Total liabilities and stockholders' equity $ 58,172 $ 80,201
======== ========
</TABLE>
See notes to consolidated financial statements.
C-2
<PAGE> 36
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 71,584 $ 89,150 $ 140,984
Cost of services 57,238 71,986 115,079
----------- ----------- -----------
Gross profit 14,346 17,164 25,905
Selling, general and administrative
expenses 7,764 8,703 14,714
Management fee expense 6,172 3,126 --
----------- ----------- -----------
Operating profit 410 5,335 11,191
Net interest income (expense) and
other (372) 933 2,254
----------- ----------- -----------
Income before income taxes 38 6,268 13,445
Income tax expense 112 2,110 4,901
----------- ----------- -----------
Net income (loss) $ (74) $ 4,158 $ 8,544
=========== =========== ===========
Basic and diluted net income per share $ 0.62
Weighted average shares outstanding 13,828,571
</TABLE>
See notes to consolidated financial statements.
C-3
<PAGE> 37
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (74) $ 4,158 $ 8,544
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,438 1,829 2,852
Deferred income taxes -- (153) (577)
Gain on sale of assets -- -- (106)
Changes in operating assets and liabilities :
Accounts receivable 2,231 (1,487) (7,958)
Inventories (1,177) (4) (233)
Prepaid expenses and other assets 87 (65) (17)
Accounts payable (2,744) 2,425 8,046
Income taxes payable -- 106 1,838
Accrued and other liabilities 1,657 (661) 679
-------- -------- --------
Net cash provided by operating activities 1,418 6,148 13,068
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,333) (3,191) (14,108)
Proceeds from disposition of property, plant and equipment -- -- 181
Purchases of investments available for sale -- (7,504) (18,684)
Proceeds from disposition of investments available for sale -- -- 8,397
Collections on notes receivable-stockholders 663 213 --
-------- -------- --------
Net cash used in investing activities (670) (10,482) (24,214)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (principal payments on) line of credit
borrowings 49 (3,500) --
Principal payments on borrowings (7) (1,854) (62)
Proceeds from borrowings and capital lease obligations 819 1,500 3,729
Principal payments on capital lease obligations (847) (2,218) (80)
Principal payments on notes payable-stockholders (738) -- --
Dividend to S corporation principal stockholders -- (8,000) --
Principal payments on note payable-affiliate (1,112) -- --
Net proceeds from initial public offering of common stock -- 41,042 --
Contributed capital 3,240 1,641 --
-------- -------- --------
Net cash provided by financing activities 1,404 28,611 3,587
Effect of exchange rate changes on cash 139 (59) 192
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,291 24,218 (7,367)
Cash and cash equivalents at beginning of year 451 2,742 26,960
-------- -------- --------
Cash and cash equivalents at end of year $ 2,742 $ 26,960 $ 19,593
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 535 $ 368 $ 58
Income taxes paid $ 112 $ 2,263 $ 3,640
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Equipment acquired or refinanced under capital leases $ 1,017 $ -- $ --
Property, plant and equipment acquired or refinanced under
long-term debt $ -- $ 261 $ 3,629
Net unrealized loss on investments available for sale $ -- $ 92 $ 514
</TABLE>
See notes to consolidated financial statements.
C-4
<PAGE> 38
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL NOTE OTHER TOTAL
------------------ PAID-IN RECEIVABLE RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDER EARNINGS INCOME EQUITY
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 43,200 $ 1 $ 2,908 $ (213) $ 1,112 $ (10) $ 3,798
Contributed capital -- -- 3,240 -- -- -- 3,240
Net loss -- -- -- -- (74) -- (74)
Currency translation
adjustment -- -- -- -- -- 139 139
---------------
Comprehensive income -- -- -- -- -- -- 65
---------------
--------------------------------------------------------------------------------------
Balance, December 31, 1996 43,200 1 6,148 (213) 1,038 129 7,103
Payment of note receivable-
stockholder -- -- -- 213 -- -- 213
Contribution of StarTek
Europe, Ltd. (9,582) -- -- -- -- -- --
Contributed capital -- -- 1,641 -- -- -- 1,641
322.1064-for-one common stock
split effected by stock
dividend, immediately
prior to closing
of initial public
offering 10,794,953 107 (107) -- -- -- --
Dividend to principal
stockholders -- -- (7,033) -- (967) -- (8,000)
Issuance of common stock
pursuant to initial public
offering, net of stock
issuance costs of $3,958 3,000,000 30 41,012 -- -- -- 41,042
Net income -- -- -- -- 4,158 -- 4,158
Currency translation
adjustment -- -- -- -- -- (59) (59)
Unrealized loss on investments
available for sale -- -- -- -- -- (92) (92)
---------------
Comprehensive income -- -- -- -- -- -- 4,007
---------------
--------------------------------------------------------------------------------------
Balance, December 31, 1997 13,828,571 138 41,661 -- 4,229 (22) 46,006
Net income -- -- -- -- 8,544 -- 8,544
Currency translation
adjustment -- -- -- -- -- 97 97
Unrealized loss on investments
available for sale -- -- -- -- -- (514) (514)
---------------
Comprehensive income -- -- -- -- -- -- 8,127
---------------
======================================================================================
Balance, December 31, 1998 13,828,571 $ 138 $ 41,661 $ -- $ 12,773 $ (439) $ 54,133
======================================================================================
</TABLE>
See notes to consolidated financial statements.
C-5
<PAGE> 39
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
StarTek, Inc. (the "Company" or "StarTek") was incorporated in Delaware on
December 30, 1996. Prior to the formation of the Company, StarTek USA, Inc. and
StarTek Europe, Ltd. (previously named StarPak, Inc. and StarPak International,
Ltd., respectively, and whose stockholder groups were substantially identical)
conducted business as affiliates under common control. Effective January 1,
1997, the stockholders of StarTek USA, Inc. exchanged all of the outstanding
shares of capital stock of StarTek USA, Inc. for shares of common stock of the
Company, and StarTek USA, Inc. became a wholly-owned subsidiary of the Company.
Effective January 24, 1997, the stockholders of StarTek Europe, Ltd. contributed
all of its outstanding shares of capital stock to the Company and StarTek
Europe, Ltd. became a wholly-owned subsidiary of the Company. Because the
shareholder groups of StarTek USA, Inc. and StarTek Europe Ltd. were
substantially identical and the relative holdings of the individual stockholders
in StarTek were not altered as a result of the contributions, the formation of
StarTek has been treated as a combination of entities under common control and
accounted for as if it were a pooling of interests. References to the Company
and StarTek include these combined entities. Financial statements for periods
prior to January 1, 1997 reflect the combined accounts of StarTek USA, Inc. and
StarTek Europe, Ltd. After January 1, 1997, the accompanying consolidated
financial statements include the accounts of StarTek Inc. and its wholly-owned
subsidiaries, StarTek USA, Inc., StarTek Europe, Ltd.. During 1998, the Company
formed two other wholly-owned subsidiaries, StarTek Pacific, Ltd. and
Domain.com, Inc. and the accompanying 1998 consolidated financial statements
also include the accounts of these two subsidiaries. All significant
intercompany transactions have been eliminated.
Business Operations
StarTek is a leading international provider of integrated, value-added,
outsourced process management services primarily for Fortune 500 companies. The
Company's process management services encompass a wide spectrum of service
platforms, including logistics management (selection and management of
suppliers), management of product assembly and packaging, E-commerce order
processing and fulfillment, Internet support, product distribution, direct store
distribution, warehouse services and inventory management, inbound technical
support and customer care teleservices, telecommunications process management,
and product order processing. The Company has operations in North America,
Europe and Asia.
Capital Stock
Immediately prior to the closing of the Company's initial public
offering in June 1997, the Company declared a 322.1064-for-one stock split of
the Company's common stock. All references in the notes to the consolidated
financial statements to shares, related prices in per share calculations, per
share amounts and stock option plan data have been restated to reflect the
split.
Foreign Currency Translation
The assets and liabilities of the Company's European operations are
translated into U.S dollars at current exchange rates and revenues and expenses
are translated at average monthly exchange rates. The resulting translation
adjustments, net of applicable deferred income taxes (1997 tax benefit of $42
and 1998 tax of $53), are recorded in a separate component of stockholders'
equity.
The Company's Singapore operations, and related assets and liabilities
are primarily denominated in U.S. dollars. Foreign currency transaction gains
and losses related are included in determining net income (loss).
Such gains and losses were not material for any period presented.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income, which was effective in 1998 for the
Company. The statement establishes new rules for the reporting and display of
comprehensive income. Comprehensive income is defined essentially as all changes
in stockholders' equity, exclusive of transactions with owners. Comprehensive
income was $65, $4,007 and $8,127 for the years ended December 31, 1996, 1997
and 1998, respectively.
Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, Disclosures About Segments of an Enterprise and Related Information,
which was effective for 1998 for the Company. The statement changes the way
companies report segment information in annual financial statements by requiring
the "management approach" for reporting financial and descriptive information
about operating segments. The adoption of Statement No. 131 did not change the
Company's segment information disclosure and, as such, no restatement of prior
years' segment information was necessary.
C-6
<PAGE> 40
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Earnings Per Share
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128), which supersedes
Accounting Principles Board Opinion No. 15. Under FAS 128, basic earnings per
common share is computed by dividing net income by the weighted average number
of shares of common stock outstanding during the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock. For the periods presented, the
additional shares assuming dilution has no impact on earnings per share because
the average price per share of common stock during the period was less than the
exercise price of the options.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect amounts reported in the Company's
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Reclassifications
Certain reclassifications of the 1996 and 1997 consolidated financial
statements and related notes have been made to conform with the 1998
presentation.
Revenue Recognition
Revenues are recognized as services are completed.
Training
Training costs pertaining to start-up and ongoing projects are expensed
during the year incurred.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, investments
available for sale, accounts receivable and payable, notes receivable, debt and
capital lease obligations. The carrying values of cash and cash equivalents, and
accounts receivable and payable approximate fair value. Investments available
for sale are reported at fair value. Management believes the difference between
the fair values and carrying values of debt and capital lease obligations would
not be materially different because interest rates approximate market rates for
material items.
Cash and Cash Equivalents
The Company considers cash equivalents to be short-term, highly liquid
investments that are readily convertible to known amounts of cash and so near
their maturity that they present insignificant risk of changes in value because
of changes in interest rates.
Investments Available for Sale
Investments available for sale consist of debt and equity securities
which are reported at fair value, with the unrealized gains and losses, net of
tax (1997 tax benefit of $56 and 1998 tax benefit of $295) reported in a
separate component of stockholders' equity. There have been no unrealized gains
and losses or declines in value judged to be other than temporary on investments
available for sale. The original cost of investments available for sale which
are sold is based on the specific identification method. Interest on investments
available for sale is included in interest income.
C-7
<PAGE> 41
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Inventories
Inventories are valued at average costs that approximate actual costs
computed on a first-in, first-out basis, not in excess of market value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions,
improvements and major renewals are capitalized. Maintenance, repairs and minor
renewals are expensed as incurred.
Depreciation and amortization of equipment is computed using the
straight-line method based on the following estimated useful lives:
<TABLE>
<CAPTION>
Estimated Useful Lives
----------------------
<S> <C>
Buildings and improvements 7 to 30.5 years
Equipment, and equipment acquired under capital leases 3 to 5 years
Furniture and fixtures 7 years
</TABLE>
Income Taxes
Effective July 1, 1992, StarTek USA, Inc. elected Subchapter S status
for income tax purposes, and StarTek Europe, Ltd. elected Subchapter S status at
inception. On June 17, 1997, Subchapter S status was terminated and the Company
has thereafter been taxable as a C corporation. During the Subchapter S status
period, income and expenses of the Company were reportable on the tax returns of
the stockholders and no provision was made for federal and state income taxes.
Subsequent to the termination of the Company's Subchapter S status,
the Company began accounting for income taxes using the liability method of
accounting for income taxes as prescribed by FASB Statement No. 109,
"Accounting for Income Taxes". Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The Company is subject to foreign income taxes on certain of its operations.
Management Fee Expense
Prior to the Company's June 24, 1997 initial public offering and in
addition to general compensation for services rendered, certain S corporation
stockholders and an affiliate were paid certain management fees, bonuses and
other fees in connection with services rendered to the Company, which were not
included in selling, general and administrative expenses. Such management fees
have been reflected as management fee expense as set forth below. Effective with
the closing of the Company's June 24, 1997 initial public offering, these
management fees, bonuses and other fees were discontinued.
After the closing of the June 24, 1997 initial public offering, all
compensation payable to persons who are now stockholders of the Company (or an
affiliate of such stockholder) are in the form of advisory fees, salaries and
bonuses (which at current rates aggregate approximately $516 annually) and are
included in selling, general and administrative expenses. Prior to 1997, the
Company also had an operating lease for office space with a partnership in which
major stockholders of the Company were the general partner and limited partner.
Payments under the lease for the year ended December 31, 1996 were $70. Such
advisory fees and salaries and operating lease payments are also set forth
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
------- ------- -----
<S> <C> <C> <C>
Selling, general and administrative expenses $ 564 $ 512 $ 516
Management fee expense $ 6,172 $ 3,126 --
</TABLE>
C-8
<PAGE> 42
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Consolidated Statement of Operations
The following unaudited pro forma consolidated statement of operations
present the effect on the historical 1997 consolidated statement of operations
of the elimination of management fee expense paid to stockholders and their
affiliates as these fees were discontinued upon the completion of the initial
public offering in June 1997 and a provision for income taxes of 37.3% as if the
Company were taxed as a C corporation for the entire year of 1997. In connection
with the closing of the initial public offering in June 1997, the Company's S
corporation status terminated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
(UNAUDITED)
-----------
<S> <C>
Revenues $ 89,150
Cost of services 71,986
--------
Gross profit 17,164
Selling, general and administrative expenses 8,703
--------
Operating profit 8,461
Net interest income ( expense) and other 933
--------
Income before income taxes 9,394
Income tax expense 3,504
--------
Net income $ 5,890
========
Basic and diluted net income per share $ 0.47
Weighted average shares outstanding 12,652,680
</TABLE>
Pro Forma Basic and Diluted Net Income Per Common Share
Pro forma basic and diluted net income per share for the year ended
December 31, 1997 is based on the following number of shares of common stock:
<TABLE>
<CAPTION>
<S> <C>
Shares outstanding after giving effect to 322.1064-for-one stock split effected
by a stock dividend 10,828,571
Shares deemed outstanding prior to closing of initial public offering, representing
the number of shares (at an initial public offering price of $15.00 per share)
sufficient to fund payment of $8,000 note payable to principal stockholders 254,246
3,000,000 shares issued in connection with initial public offering completed
June 24, 1997, for days outstanding in 1997 1,569,863
-------------
Weighted average shares outstanding 12,652,680
=============
</TABLE>
C-9
<PAGE> 43
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. INVESTMENTS AVAILABLE FOR SALE
The following is a summary of investments available for sale as of
December 31, 1997:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $ 2,205 $ 5 $ (45) $ 2,165
Bond mutual funds 5,196 -- (108) 5,088
Other debt securities 103 -- -- 103
-----------------------------------------------------------
Total $ 7,504 $ 5 $ (153) $ 7,356
===========================================================
</TABLE>
The following is a summary of investments available for sale as of
December 31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $ 8,987 $ 80 $ (239) $ 8,828
Foreign government bonds 2,915 150 (308) 2,757
Bond mutual funds 4,005 1 (132) 3,874
Other debt securities 286 -- (138) 148
Equity securities 1,598 -- (376) 1,222
-----------------------------------------------------------
Total $ 17,791 $ 231 $ (1,193) $ 16,829
===========================================================
</TABLE>
The amortized cost and estimated fair value of investments available
for sale as of December 31, 1998, by contractual maturity, are:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
---------------- ------------------
<S> <C> <C>
Corporate bonds, foreign government bonds
and certain other debt securities
maturing within:
One year $1,063 $ 1,079
Two to five years 5,478 5,393
Due after five years 5,647 5,261
---------------- ------------------
12,188 11,733
Bond mutual funds 4,005 3,874
Equity securities 1,598 1,222
---------------- ------------------
Total $ 17,791 $ 16,829
================ ==================
</TABLE>
Bond mutual funds are primarily invested in investment grade bonds of
U.S. and foreign issuers denominated in U.S. and foreign currencies, and
interests in floating or variable rate senior collateralized loans to
corporations, partnerships, and other entities in a variety of industries
and geographic regions.
4. Inventories
The Company frequently purchases components of its clients'
products as an integral part of its supplier management services and in advance
of providing its product assembly and packaging services. At the close of an
accounting period, packaged and assembled products (together with other
associated costs) are reflected as finished goods inventories pending shipment.
The Company generally has the right to be reimbursed from its clients for unused
inventories. Client-owned inventories are not reflected in the Company's balance
sheet. Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1998
----------------------
<S> <C> <C>
Purchased components and
fabricated assemblies $ 2,171 $ 2,313
Finished goods 368 459
----------------------
$ 2,539 $ 2,772
======================
</TABLE>
C-10
<PAGE> 44
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1997 1998
------------------------------
<S> <C> <C>
Land $ 636 $ 1,129
Buildings and improvements 3,392 9,656
Equipment 8,641 14,785
Furniture and fixtures 978 1,445
------------------------------
13,647 27,015
Less accumulated depreciation and amortization (5,496) (7,844)
------------------------------
Property, plant and equipment, net $ 8,151 $ 19,171
==============================
</TABLE>
On February 18, 1999, the Company ordered certain call center computer
hardware and software with an aggregate purchase price of approximately $800.
Completion of installation of this call center equipment is currently scheduled
to occur during the second quarter of 1999.
6. LINE OF CREDIT
As of December 31, 1997 and 1998, the Company had a revolving line of
credit agreement with a bank whereby the bank agreed to loan the Company up to
$5,000. No amount was outstanding under the line of credit as of December 31,
1997 and 1998. Interest is payable monthly and accrues at the bank's prime rate
(8.5% as of December 31, 1997 and 7.75% as of December 31, 1998). This revolving
line of credit matures on April 30, 1999.
The Company has pledged as security certain of its wholly-owned
subsidiaries' accounts receivable under the revolving line of credit agreement.
The Company must maintain working capital of $17,500 and tangible net worth of
$25,000 and maintain not less than $250 in non-interest bearing accounts with
the bank. The Company may not pay dividends in an amount which would cause a
failure to meet these financial covenants. As of and for the years ended
December 31, 1997 and 1998, the Company was in compliance with all of the
various financial and other covenants provided for under the line of credit.
7. LEASES
During 1997, the Company paid the majority of its capital lease obligations
from the proceeds of its initial public offering.
Amortization of equipment held under capital lease obligations is included
in depreciation and amortization expense. Included in property, plant and
equipment in the accompanying consolidated balance sheets is the following
equipment held under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1997 1998
--------------------------
<S> <C> <C>
Equipment $ 261 $ 261
Less accumulated amortization (165) (233)
--------------------------
$ 96 $ 28
==========================
</TABLE>
The Company also leases equipment under various non-cancelable operating
leases. As of December 31, 1998, future minimum rental commitments for capital
and operating leases are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -------------
<S> <C> <C>
1999 $ 57 $ 406
2000 44 171
2001 40 50
2002 -- 47
2003 -- 27
Thereafter -- --
-------------------------
Total minimum lease payments 141 $ 701
=============
Less amount representing interest (18)
-----------
Present value of minimum lease payments 123
Less current portion of obligations under capital
leases (46)
-----------
Obligations under capital leases, less current
portion $ 77
===========
</TABLE>
Rent expense, including equipment rentals, for 1996, 1997 and 1998 was
$382, $271 and $410, respectively.
C-11
<PAGE> 45
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. LEASES (CONTINUED)
On February 16, 1999, the Company entered into an operating lease agreement
whereby the Company acquired use of 46,350 square-feet of building space in
Grand Junction, Colorado to be used by the Company for call center, general
office use and other services as appropriate for the general purposes of the
Company. The term of the lease agreement commences on April 1, 1999 and unless
earlier terminated or extended, continues until March 31, 2009. Pursuant to the
terms of the lease agreement, the Company was granted, among other things, (i) a
right of first refusal to purchase the property, of which the leased space is a
part, during the lease term and (ii) a right to terminate the lease agreement
anytime after the end of the fifth year by giving the landlord 180 day prior
written notice to terminate. Assuming the operating lease agreement is not
terminated, future minimum rental commitments, excluding certain taxes and
utilities as defined, are:
<TABLE>
<S> <C>
1999 $ 73
2000 97
2001 97
2002 101
2003 105
Thereafter 607
------------
$ 1,080
============
</TABLE>
8. TENNESSEE FINANCING AGREEMENT
On July 8, 1998, the Company entered into certain financing agreements with
the Industrial Development Board of the County of Montgomery, Tennessee, (the
"Board") in connection with the Board's issuance to StarTek USA, Inc. of an
Industrial Development Revenue Note, Series A not to exceed $4,500 (the
"Facility Note") and an Industrial Development Revenue Note, Series B not to
exceed $3,500 (the "Equipment Loan"). The Facility Note bears interest at 9% per
annum commencing on October 1, 1998, payable quarterly and maturing on July 8,
2008. Concurrently, the Company advanced $3,575 in exchange for the Facility
Note and entered into a lease agreement, maturing July 8, 2008, with the Board
for the use and acquisition of a 305,000 square-foot process management and
distribution facility in Clarksville, Tennessee (the "Facility Lease"). The
Facility Lease provides for the Company to pay to the Board lease payments
sufficient to pay, when and as due, the principal of and interest on the
Facility Note due to the Company from the Board. Pursuant to the provisions of
the Facility Lease and upon the Company's payment of the Facility Lease in full,
the Company shall have the option to purchase the 305,000 square-foot,
Clarksville, Tennessee facility for a lump sum payment of one hundred dollars.
The Equipment Loan generally contains the same provisions as the Facility Note
and provides for an equipment lease, except the Equipment Loan and equipment
lease mature on January 1, 2004. As of December 31, 1998, the Company had used
approximately $3,900 and $1,174 of the Facility Note and Equipment Loan,
respectively, and correspondingly entered into further lease arrangements with
the Board.
All transactions related to the purchase of the notes by the Company from
the Board and the lease arrangements from the Board to the Company have been
offset against each other, and accordingly have no impact on the consolidated
balance sheets. The assets acquired are included in property, plant and
equipment. Similarly, the interest income and interest expense related to the
notes and lease arrangements, respectively, have also been offset. The lease
payments are equal to the amount of principal and interest payments on the
notes, and accordingly have no impact on the consolidated statements of
operations.
C-12
<PAGE> 46
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1997 1998
------------- -----------------
<S> <C> <C>
Economic development loan $ 200 $ 200
Promissory note with waiver provisions 261 238
Unsecured loan -- 100
Equipment loan -- 3,564
------------- -----------------
461 4,102
Less current portion of long-term debt (26) (906)
------------- -----------------
Long-term debt, less current portion $ 435 $ 3,196
============= =================
</TABLE>
In December 1996, the Company received a $200 economic development loan
which bears interest at 6% per annum and is collateralized by certain equipment.
Interest payments are due quarterly on the remaining unpaid principal balance
and, beginning January 1, 1999 continuing through January 1, 2001, principal
payments of $30 are due semi-annually. A final principal payment of $50 is due
on July 1, 2001.
In December 1997, the Company acquired land for $261 and financed the
purchase through a non-interest bearing ten-year promissory note. The principal
balance of the note declines on an equal basis, without payment, over ten years
so long as the Company does not sell or transfer the parcel or fail to
continuously operate a customer support service center thereon.
On August 15, 1998, the Company received a $100 unsecured loan maturing on
January 2, 2000, which provides for interest at a fixed annual rate of 6.5%. The
$100 loan balance, including all accrued interest, is due and payable on January
2, 2000.
On October 26, 1998, the Company entered into an equipment loan
agreement with a finance company, which matures on November 2, 2002. In
connection with the equipment loan, the Company received cash of $3,629 in
exchange for providing, among other things, certain collateral which generally
consisted of equipment, furniture and fixtures used in the Company's business.
The equipment loan provides for interest at a fixed annual interest rate of
7.00% and for the Company to pay forty-eight equal monthly installments of $87,
the first of which was due and paid in December 1998. In addition to the
collateral described above, the Company granted to the finance company a
secondary security interest in certain of its wholly-owned subsidiaries'
accounts receivable. During the year ended December 31, 1998, interest expense
incurred on the equipment loan was $21.
Future scheduled annual principal payments of long-term debt, including
amounts related to the $261 promissory note with waiver provisions, as of
December 31, 1998 are:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 906
2000 1,068
2001 1,048
2002 950
2003 26
Thereafter 104
---------
$ 4,102
=========
</TABLE>
C-13
<PAGE> 47
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCOME TAXES
The Company was taxed as an S corporation for federal and state income tax
purposes from July 1, 1992 through June 17, 1997, when S corporation status
was terminated in contemplation of the Company's initial public offering.
Since June 18, 1997, the Company has been taxable as a C corporation and
income taxes have been accrued since that date. The Company is subject to
foreign income taxes on certain of its operations. Pretax income from the
taxable period June 18, 1997, through December 31, 1997 was $6,818, of
which $6,143 and $675 were attributable to domestic and foreign operations,
respectively.
The significant components of the provision for income taxes for the
period June 18, 1997 through December 31, 1997 and for the year ended December
31, 1998 are:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Current:
Federal $ 2,211 $ 5,311
Foreign 9 123
State 99 249
----------- -----------
Total current 2,319 5,683
Deferred:
Federal (181) (678)
State (28) (104)
----------- -----------
Total deferred (209) (782)
----------- -----------
Total income tax
expense $ 2,110 $ 4,901
=========== ===========
</TABLE>
The significant components of deferred tax assets, which required no
valuation allowance, and deferred tax liabilities included in the accompanying
balance sheets as of December 31 are:
<TABLE>
<CAPTION>
1997 1998
---------- ---------
<S> <C> <C>
Deferred tax assets:
Bad debt allowance $ 143 $ 161
Vacation accrual 92 233
Accrued expenses 108 280
Other 97 461
---------- ---------
Total deferred tax assets 440 1,135
Long-term deferred tax liabilities:
Tax depreciation in excess of book (231) (49)
Other -- (95)
---------- ---------
Total long-term deferred tax liabilities (231) (144)
---------- ---------
Net deferred tax assets $ 209 $ 991
========== =========
</TABLE>
The differences between the U.S. federal statutory income tax rate and
the Company's effective tax rate for the period June 18, 1997 through December
31, 1997 and for the year ended December 31, 1998 are:
<TABLE>
<CAPTION>
1997 1998
------------- -----------
<S> <C> <C>
Tax at U.S. statutory rates 34.0% 35.0%
State income taxes, net of federal tax
benefit 3.3 3.2
One-time credit to record deferred
tax asset upon termination of
S corporation status (4.4) --
Other, net (2.0) (1.7)
------------- -----------
30.9% 36.5%
============= ===========
</TABLE>
11. NET INTEREST INCOME (EXPENSE) AND OTHER
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1997 1998
-------------- ----------- ------------
<S> <C> <C> <C>
Interest income $ 18 $ 1,229 $ 2,122
Interest expense $ (443) $ (373) $ (58)
Other income and expense 53 77 190
============== =========== ============
Net interest income (expense) and
other $ (372) $ 933 $ 2,254
============== =========== ============
</TABLE>
C-14
<PAGE> 48
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. STOCKHOLDERS' EQUITY
Immediately prior to the closing of the Company's initial public offering
in June 1997, the Company declared a 322.1064-for-one
stock split of the Company's common stock. All references in the notes to the
consolidated financial statements to shares and related prices in per share
calculations, per share amounts and stock option plan data have been restated to
reflect the split.
Immediately prior to closing the offering, the Company also declared an
$8,000 dividend approximating the additional paid-in capital and retained
earning of the Company as of the closing date, payable to the principal
stockholders (the "Principal Stockholders") pursuant to certain promissory
notes. The promissory notes payable to the Principal Stockholders were paid from
net proceeds of the Company's initial public offering.
The common stock and additional paid-in capital as of December 31, 1997
and 1998 are:
<TABLE>
<S> <C>
Preferred stock-undesignated; 15,000,000 shares, $.01 par
value, authorized; no shares outstanding $ --
Common stock; 95,000,000 shares, $.01 par value, authorized;
13,828,571 shares outstanding 138
Additional paid-in capital 41,661
----------------
$ 41,799
================
</TABLE>
13. STOCK OPTIONS
1987 Stock Option Plan
Effective July 24, 1987, the stockholders of StarTek USA, Inc. approved
a Stock Option Plan ("Plan"), which provided for the grant of stock options,
stock appreciation rights ("SARs") and supplemental bonuses to key employees.
The stock options were intended to qualify as "incentive stock options" as
defined in Section 422A of the Internal Revenue Code unless specifically
designated as "nonstatutory stock options."
The options granted under the Plan could be exercised for a period of
not more than 10 years and one month from the date of grant, or any shorter
period as determined by StarTek USA, Inc.'s Board of Directors. The option price
of any incentive stock option would be equal to or exceed the fair market value
per share on the date of grant, or 110% of the fair market value per share in
case of a 10% or greater stockholder. Options generally vested ratably over a
five-year period from the date of grant. Unexercised vested options remained
exercisable for three calendar months from the date of termination of
employment.
During 1995, StarTek USA, Inc.'s Board of Directors accelerated the
vesting on all outstanding options under the Plan to allow the holders to
exercise any granted options. Subsequently, all outstanding options were
exercised. In aggregate, the option holders paid $18 in cash and delivered a
note of $213 bearing interest at 4.63% to StarTek USA, Inc. in exchange for
shares of common stock. This note was secured by 288,607 shares of StarTek USA,
Inc. common stock. On January 22, 1997, the note and all accrued interest
thereon was repaid in full. Options for 2,124,936 shares of common stock were
available for grant at the end of 1996.
The Plan was terminated effective January 24, 1997.
C-15
<PAGE> 49
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. STOCK OPTIONS (CONTINUED)
1997 Stock Option Plan
On February 13, 1997, the Company's Board of Directors approved the
StarTek, Inc. Stock Option Plan (the "Option Plan") and, on January 27, 1997,
the Director Stock Option Plan (the "Director Option Plan").
The Option Plan was established to provide stock options, SARs and
incentive stock options (cumulatively referred to as the "Options") to key
employees, directors (other than non-employee directors), consultants, and other
independent contractors. The Option Plan provides for the Options to be granted
for a maximum of 985,000 shares of common stock, which are to be awarded by
determination of committee of non-employee directors. Unless otherwise
determined by the committee, all of the Options granted under the Option Plan
vest 20% annually beginning on the first anniversary of the Options' grant date
and expire at the earlier of (i) ten years (or five years for participants
owning greater than 10% of the voting stock) from the Options' grant date, (ii)
three months after the termination of employment of the participant as outlined
by the Option Plan, (iii) six months after the participant's death, or (iv)
immediately upon termination for "cause".
The Director Option Plan was established to provide stock options to
non-employee directors who are elected to serve on the Company's board of
directors and serve continuously from the commencement of their term (the
"Participants"). The Director Option Plan provides for stock options to be
granted for a maximum of 90,000 shares of common stock. Participants were
automatically granted options to acquire 10,000 shares of common stock upon the
closing of the Company's June 1997 initial public offering. Additionally, each
Participant will be automatically granted options to acquire 3,000 shares of
common stock on the date of each annual meeting of stockholders thereafter at
which such Participant is reelected to serve on the Company's board of
directors. All options granted under the Director Option Plan fully vest upon
grant and expire at the earlier of (i) the date of the Participant's membership
on the Company's board of directors is terminated for cause, (ii) ten years from
the option grant date, or (iii) one year after the Participant's death.
The following is a summary of stock option activity during 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Outstanding as of beginning of year -- 611,500
Granted 618,500 36,200
Exercised -- --
Canceled (7,000) (33,900)
--------- -----------
Outstanding as of end of year 611,500 613,800
========= ===========
Exercisable as of end of year 20,000 140,200
</TABLE>
There was no stock option activity during 1996. As of December 31, 1997,
exercise prices for options issued and outstanding were $15.00, except for 8,000
options, which were priced at $13.06.
As of December 31, 1998, the exercise price for options outstanding, each
of which is exercisable on a basis of one option for one share of the Company's
common stock, was $15.00 for 583,000 options, $13.06 for 8,000 options, $12.69
for 6,000 options, $12.25 for 7,600 options and $10.38 for 9,200 options. As of
December 31, 1998, there were 132,600 fully vested options exercisable at $15.00
per share, 1,600 fully vested options exercisable at $13.06 per share and 6,000
fully vested options exercisable at $12.69 per share. Options for 397,200 and
64,000 shares of the Company's common stock were available for future grant as
of December 31, 1998 under the Option Plan and Director Option Plan,
respectively.
C-16
<PAGE> 50
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. STOCK OPTIONS (CONTINUED)
The Company elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its stock options. Under APB 25, because the exercise price of
the Company's stock options equals the market price of the underlying stock on
the date of grant, no compensation expense has been recognized. Pro forma
information regarding net income and net income per share is required by
Statement 123, Accounting For Stock Based Compensation, and has been determined
as if the Company had accounted for its stock options under the fair value
method as provided for by Statement 123. The fair value for options granted
during 1997 was estimated as of the date of grant using a Black-Scholes option
pricing model assuming a 6% risk-free interest rate, a seven year life for the
options, a 30% expected volatility and no dividends. The fair value for options
granted during 1998 was also estimated as of the date of grant using a
Black-Scholes option pricing model assuming a 5.5% risk-free interest rate, a
seven year life for the options, a 55.1% expected volatility and no dividends.
The weighted average grant date fair market value of options granted during 1997
and 1998 was approximately $7 per share. Had this method been used in the
determination of pro forma net income for 1997, pro forma net income would have
decreased by $367 and pro forma basic and diluted net income per share would
have decreased by $0.03. Similarly, had this method been used in the
determination of net income for 1998, net income would have decreased by $559
and basic and diluted net income per share would have decreased by $0.04.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
14. GEOGRAPHIC AREA INFORMATION
The Company, operating in a single industry segment, provides a variety of
integrated outsourcing services to other businesses throughout the world. As of
and for the years ended December 31, 1996 and 1997, the Company's operations in
Asia, and the Company's long-lived assets located in Europe and Asia as of
December 31, 1996, 1997, and 1998, were not material and have been combined with
North America in the following table. The Company's North America operations are
located in the United States of America. The Company's Europe operations are
located in the United Kingdom. The Company's Asia operations are located in
Singapore. Revenues, operating profit and identifiable assets, classified by the
major geographic areas in which the Company operates, are:
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE ASIA ELIMINATIONS TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Revenues $ 59,563 $ 12,021 $ -- $ -- $ 71,584
Operating profit 377 33 -- -- 410
Identifiable assets $ 21,236 $ 3,459 $ -- $ (1,716) $ 22,979
YEAR ENDED DECEMBER 31, 1997
Revenues $ 79,011 $ 10,139 $ -- $ -- $ 89,150
Operating profit 4,587 748 -- -- 5,335
Identifiable assets $ 55,072 $ 4,123 $ -- $ (1,023) $ 58,172
YEAR ENDED DECEMBER 31, 1998
Revenues $ 121,374 $ 8,317 $ 11,293 $ -- $ 140,984
Operating profit 10,279 330 582 -- 11,191
Identifiable assets $ 76,385 $ 2,861 $ 1,075 $ (120) $ 80,201
</TABLE>
15. PRINCIPAL CLIENTS
Two clients accounted for 38.4% and 33.4% of revenues for the year ended
December 31, 1996. Two clients accounted for 56.3% and 25.4% of revenues for the
year ended December 31, 1997. One client accounted for 72.5% of revenues for the
year ended December 31, 1998.
The loss of its principal client(s) could have a material adverse effect on
the Company's business, operating results or financial condition. To limit the
Company's credit risk, management performs ongoing credit evaluations of its
clients and maintains allowances for potentially uncollectible accounts.
Although the Company is directly impacted by economic conditions in which its
clients operate, management does not believe substantial credit risk exists as
of December 31, 1998.
C-17
<PAGE> 51
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
16. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
---------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Historical:
Revenues $ 16,667 $ 16,067 $ 20,226 $ 36,190
Gross profit 3,935 3,526 3,920 5,783
Selling, general and administrative
expenses 2,164 1,952 2,135 2,452
Management fee expense 793 2,333 -- --
Operating profit (loss) 978 (760) 1,785 3,332
Net income (loss) 894 (642) 1,454 2,452
Net income per share 0.11 0.18
Weighted average shares outstanding 13,828,571 13,828,571
Pro Forma (a):
Revenues $ 16,667 $ 16,067
Gross profit 3,935 3,526
Selling, general and administrative expenses 2,164 1,952
Management fee expense -- --
Operating profit 1,771 1,574
Net income 1,058 925
Basic and diluted net income per share 0.09 0.08
Weighted average shares outstanding 11,361,904 11,551,647
Weighted Average Shares Outstanding :
Shares outstanding after giving effect to
322.1064-for-one stock split effected by
a stock dividend 10,828,571 10,828,571 10,828,571 10,828,571
Shares deemed outstanding prior to closing of
initial public offering, representing the
number of shares (at an initial public
offering price of $15.00 per share)
sufficient to fund payment of $8,000 note
payable to principal stockholders 533,333 492,307 -- --
3,000,000 shares issued in connection with
initial public offering in June 1997, for
days outstanding in the respective
periods -- 230,769 3,000,000 3,000,000
------------- ------------ --------------- --------------
Weighted average shares outstanding 11,361,904 11,551,647 13,828,571 13,828,571
============= ============ =============== ==============
</TABLE>
<TABLE>
<CAPTION>
1998 QUARTERS ENDED
----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 24,321 $ 24,692 $ 31,617 $ 60,354
Gross profit 4,564 4,684 5,821 10,836
Selling, general and administrative expenses 2,732 3,285 3,483 5,214
Operating profit 1,832 1,399 2,338 5,622
Net income 1,512 1,338 1,787 3,907
Basic and diluted net income per share 0.11 0.10 0.13 0.28
Weighted average shares outstanding 13,828,571 13,828,571 13,828,571 13,828,571
</TABLE>
- -----------------------------------
(a) From July 1, 1992 and until the June 1997 initial public offering, the
Company was an S corporation and, accordingly, was not subject to federal
or state income taxes. Subsequent to the initial public offering, the
Company has been subject to income taxation as a C corporation. Pro forma
net income for quarters through June 30, 1997 (i) reflects the elimination
of management fee expense and (ii) includes a provision for federal, state
and foreign income taxes at an effective rate of 37.3%. Management fee
expense was discontinued with the initial public offering in June 1997.
C-18
<PAGE> 52
STARTEK, INC.
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS - MAY 19, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
This proxy is furnished in connection with the solicitation by the
Board of Directors of StarTek, Inc. of proxies for use at the 1999 Annual
Meeting of Stockholders. The undersigned stockholder of StarTek, Inc., a
Delaware corporation (the "Company"), hereby constitutes and appoints A. Emmet
Stephenson, Jr. and Michael W. Morgan, and each of them, his attorneys-in-fact
and proxies (with full power of substitution in each), and authorizes them to
represent the undersigned at the Annual Meeting of Stockholders of the Company
to be held on Wednesday, May 19, 1999, at nine o'clock in the morning, and at
any adjournment thereof, and to vote the Common Stock of the Company held by the
undersigned as designated below on proposals 1, 2, and 3, and in their
discretion on all other matters coming before the meeting.
This proxy when properly executed will be voted in the manner directed
by the stockholder, BUT IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2, AND 3.
Properly executed proxies will be voted in the discretion of the proxy
holder with regard to any other matter that properly comes before the meeting.
1. ELECTION OF DIRECTORS:
[ ] FOR all nominees listed (except as marked below)
A. Emmet Stephenson, Jr. Michael W. Morgan Thomas O. Ryder Ed Zschau
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(s), PRINT
SUCH NOMINEE'(s') NAME(s) IN THE SPACE PROVIDED BELOW:
(To be signed on reverse side)
- -------------------------------------------------------------------------------
2. TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO REDUCE THE NUMBER OF
SHARES OF COMMON STOCK THAT THE COMPANY HAS THE AUTHORITY TO ISSUE, FROM
95,000,000 SHARES TO 18,000,000 SHARES, AND ELIMINATE THE AUTHORIZATION OF
THE PREFERRED STOCK:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(To be signed on reverse side)
- -------------------------------------------------------------------------------
3. TO RATIFY THE SELECTION OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR
THE COMPANY:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(To be signed on reverse side)
<PAGE> 53
PLEASE MARK, SIGN, DATE, AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, trustee
or other representative capacity, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer.
The signer hereby revokes all proxies heretofore given to vote at said meeting
or any adjournment thereof
--------------------------------------
Signature of Stockholder
--------------------------------------
Signature of Stockholder
Dated:___________________________, 1999
