<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2000.
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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Commission File Number 1-12793
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STARTEK, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1370538
- ------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 GARFIELD STREET
DENVER, COLORADO 80206
----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(303) 361-6000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
111 HAVANA STREET, DENVER, COLORADO 80010
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value -- 14,009,571 shares as of May 1, 2000.
<PAGE> 2
STARTEK, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -
December 31, 1999 and March 31, 2000 3
Condensed Consolidated Statements of Operations -
Three months ended March 31, 1999 and 2000 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1999 2000
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,943 $ 12,489
Investments 23,907 30,705
Trade accounts receivable, less allowance for
doubtful accounts of $775 and $716, respectively 21,792 19,174
Inventories 3,740 4,936
Deferred tax assets 2,363 2,325
Prepaid expenses and other assets 448 414
--------- ---------
Total current assets 64,193 70,043
Property, plant and equipment, net 26,758 26,623
Investment in Gifts.com, Inc., at cost 2,606 2,606
Note receivable from Gifts.com, Inc. 7,818 7,818
Other assets 60 60
--------- ---------
Total assets $ 101,435 $ 107,150
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,148 $ 15,046
Accrued liabilities 4,443 5,570
Income taxes payable 1,384 2,692
Current portion of capital lease obligations 32 32
Current portion of long-term debt 1,428 1,615
Other 544 456
--------- ---------
Total current liabilities 23,979 25,411
Capital lease obligations, less current portion 42 33
Long-term debt, less current portion 5,922 5,378
Deferred income taxes 446 483
Other -- 92
Stockholders' equity:
Common stock 140 140
Additional paid-in capital 45,681 46,245
Cumulative translation adjustment 25 65
Unrealized loss on investments available for sale (596) (734)
Retained earnings 25,796 30,037
--------- ---------
Total stockholders' equity 71,046 75,753
--------- ---------
Total liabilities and stockholders' equity $ 101,435 $ 107,150
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
1999 2000
-------- --------
<S> <C> <C>
Revenues $ 40,850 $ 49,668
Cost of services 33,164 38,457
-------- --------
Gross profit 7,686 11,211
Selling, general and
administrative expenses 4,429 5,185
-------- --------
Operating profit 3,257 6,026
Net interest income and other 602 716
-------- --------
Income before income taxes 3,859 6,742
Income tax expense 1,432 2,501
-------- --------
Net income $ 2,427 $ 4,241
======== ========
Earnings per share:
Basic $ 0.18 $ 0.30
Diluted $ 0.18 $ 0.30
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
1999 2000
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,427 $ 4,241
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 916 1,132
Deferred income taxes 111 125
Loss on sale of assets 3 --
Changes in operating assets and liabilities:
Purchases of trading securities, net -- (2,760)
Trade accounts receivable, net 7,894 2,618
Inventories 1,620 (1,196)
Prepaid expenses and other assets (47) 34
Accounts payable (6,807) (1,102)
Income taxes payable (274) 1,583
Accrued and other liabilities 749 1,131
--------- ---------
Net cash provided by operating activities 6,592 5,806
INVESTING ACTIVITIES
Purchases of investments available for sale (7,878) (9,878)
Proceeds from disposition of investments available for sale 2,985 5,629
Purchases of property, plant and equipment (1,547) (1,019)
Proceeds from disposition of property, plant and equipment 2 --
--------- ---------
Net cash used in investing activities (6,438) (5,268)
FINANCING ACTIVITIES
Stock options exercised -- 289
Principal payments on borrowings, net (228) (357)
Principal payments on capital lease obligations (19) (9)
--------- ---------
Net cash used in financing activities (247) (77)
Effect of exchange rate changes on cash (104) 85
--------- ---------
Net (decrease) increase in cash and cash equivalents (197) 546
Cash and cash equivalents at beginning of period 19,593 11,943
--------- ---------
Cash and cash equivalents at end of period $ 19,396 $ 12,489
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 68 $ 86
Income taxes paid $ 1,550 $ 746
Change in unrealized loss on investments available for sale,
net of tax $ 36 $ (138)
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000, or for any other interim period of 2000.
The condensed consolidated balance sheet as of December 31, 1999 was
derived from audited financial statements at that date, but does not include all
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes
thereto included in StarTek, Inc.'s annual report on Form 10-K for the year
ended December 31, 1999.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS No. 133") "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards requiring every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at fair
value. SFAS No. 133 requires changes in the derivative's fair value be
recognized currently in income unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allow a derivative's gains and
losses to offset related results on the hedged item in the statement of
operations, and requires a company to formally document, designate, and assess
effectiveness of transactions that receive hedge accounting treatment. SFAS No.
133 is effective for the Company's fiscal quarters of fiscal years beginning
after June 15, 2000. The Company has not yet quantified the impacts of adopting
SFAS No. 133 on its consolidated financial statements and has not determined
timing or method of adoption of SFAS No. 133.
3. EARNINGS PER SHARE
Basic earnings per share is computed on the basis of weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of weighted average number of common shares outstanding plus effects
of outstanding stock options using the "treasury stock" method. Components of
basic and diluted earnings per share were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Net income (A) $ 2,427 $ 4,241
----------- -----------
Weighted average shares of common stock (B) 13,828,571 13,989,184
Dilutive effect of stock options -- 302,922
----------- -----------
Common stock and common stock equivalents (C) 13,828,571 14,292,106
=========== ===========
Earnings per share:
Basic (A/B) $ 0.18 $ 0.30
Diluted (A/C) $ 0.18 $ 0.30
</TABLE>
6
<PAGE> 7
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
(unaudited)
4. COMPREHENSIVE INCOME
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income", establishes 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 $2,398, and $4,143 for the three months ended March 31, 1999 and
2000, respectively.
5. INVESTMENTS
As of December 31, 1999, investments available for sale consisted of:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate bonds $ 14,472 $ 141 $ (577) $ 14,036
Foreign government bonds 3,418 155 -- 3,573
Bond mutual funds 1,992 -- (142) 1,850
Equity securities 3,835 184 (717) 3,302
---------- ---------- ---------- ----------
Total $ 23,717 $ 480 $ (1,436) $ 22,761
========== ========== ========== ==========
</TABLE>
As of March 31, 2000, investments available for sale consisted of:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate bonds $ 15,590 $ 299 $ (694) $ 15,195
Foreign government bonds 3,418 124 -- 3,542
Bond mutual funds 2,315 -- (45) 2,270
Equity securities 6,661 236 (1,105) 5,792
---------- ---------- ---------- ----------
Total $ 27,984 $ 659 $ (1,844) $ 26,799
========== ========== ========== ==========
</TABLE>
As of March 31, 2000, amortized costs and estimated fair values of
investments available for sale by contractual maturity were:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Corporate bonds and foreign government bonds
maturing within:
One year $ 9,384 $ 9,657
Two to five years 8,186 7,535
Due after five years 1,438 1,545
---------- ----------
19,008 18,737
Bond mutual funds 2,315 2,270
Equity securities 6,661 5,792
---------- ----------
Total $ 27,984 $ 26,799
========== ==========
</TABLE>
Bond mutual funds were 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. Equity securities consisted of real estate investment trusts, equity
mutual funds, and publicly traded common stock of U.S. based companies.
7
<PAGE> 8
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
(unaudited)
5. INVESTMENTS (CONTINUED)
As of December 31, 1999, the Company was also invested in trading
securities which, in the aggregate, had an original cost and fair market value
of approximately $1,429 and $1,146, respectively. As of March 31, 2000, the
Company was invested in trading securities which, in the aggregate, had an
original cost and fair market value of approximately $4,189 and $3,906,
respectively. Trading securities consisted primarily of publicly traded common
stock of U.S. based companies and international equity mutual funds, together
with certain hedging securities and various forms of derivative securities.
Trading securities were held to meet short-term investment objectives. The
Company entered into hedging and derivative securities in an effort to maximize
its return on investments in trading securities while managing risk. As part of
trading securities and as of March 31, 2000, the Company was invested in
securities sold short related to a total of 18,856 shares of U.S. equity
securities which, in the aggregate, had a basis and estimated fair market value
of approximately $876 and $980 respectively, all of which were reported net as
components of trading securities. Securities sold short were used in conjunction
with and were substantially offset by other trading securities, which taken
together, represented a risk-arbitrage portfolio in U.S. equity securities.
Risk of loss to the Company in the event of nonperformance by any party is
not considered substantial. Because of potential limited liquidity of some of
these instruments, recorded values of these transactions may be different from
values that might be realized if the Company were to sell or close out the
transactions. Such differences are not considered substantial to the Company's
results of operations, financial condition, or liquidity. Hedging and derivative
securities may involve elements of credit and market risks in excess of the
amounts recognized in the accompanying unaudited condensed consolidated
financial statements. A substantial decline and/or change in value of equity
securities, equity prices in general, international equity mutual funds, hedging
securities, and derivative securities could have a material adverse effect on
the Company's trading securities. Also, the price of common stock, hedging
securities, and other derivative securities held by the Company as trading
securities would be materially and adversely affected by poor management,
shrinking product demand, and other risks that may affect single companies, as
well as groups of companies.
6. INVENTORIES
The Company frequently purchases components of its clients' products as an
integral part of its process management 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 consisted of:
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1999 2000
----------- --------
<S> <C> <C>
Purchased components and
fabricated assemblies $ 1,986 $ 3,876
Finished goods 1,754 1,060
-------- --------
$ 3,740 $ 4,936
======== ========
</TABLE>
7. GIFTS.COM, INC.
Good Catalog Company has changed its name to Gifts.com, Inc. During the
three months ended March 31, 2000, the Company recognized approximately $605 of
revenues related to services performed for Gifts.com, Inc., and approximately
$158 of interest income. Included in trade accounts receivable as of March 31,
2000 was approximately $246 due from Gifts.com, Inc.
8. PRINCIPAL CLIENTS
Two clients accounted for approximately 70.1% and 10.1% of revenues during
the three months ended March 31, 2000. One client accounted for approximately
75.7% of revenues during the three months ended March 31, 1999. The loss of
either or both of its principal clients would have a material adverse effect on
the Company's business, operating results, and financial condition. To limit the
Company's credit risk, management performs ongoing credit evaluations of its
clients. Although the Company is directly impacted by economic conditions in
which its clients operate, management does not believe substantial credit risk
existed as of March 31, 2000.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this Form 10-Q
that are not statements of historical facts are forward-looking statements 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, inflation and general economic conditions
in the Company's and its clients' markets, risks associated with the Company's
reliance on principal clients, loss or delayed implementation of a large project
which could cause quarterly variation in the Company's revenues and earnings,
difficulties in managing rapid growth, risks associated with rapidly changing
technology, dependence on labor force, risks associated with international
operations and expansion, control by principal stockholders, dependence on key
personnel, dependence on key industries and trends toward outsourcing, risks
associated with the Company's contracts, highly competitive markets, risks of
business interruptions, volatility of the Company's stock price, risks related
to the Company's investment in and note receivable from Gifts.com, Inc., risks
related to the Company's Internet web site operations, and risks related to the
Company's portfolio of Internet domain names. 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 made as of
the date hereof, and the Company undertakes no obligation to update any such
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" section of StarTek, Inc.'s annual report on Form 10-K for
the year ended December 31, 1999.
The following table sets forth certain unaudited condensed consolidated
statement of operations data expressed as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
1999 2000
------- -------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of services 81.2 77.4
------- -------
Gross profit 18.8 22.6
Selling, general and
administrative expenses 10.8 10.4
------- -------
Operating profit 8.0 12.2
Net interest income and other 1.5 1.4
------- -------
Income before income taxes 9.5 13.6
Income tax expense 3.5 5.0
------- -------
Net income 6.0% 8.6%
======= =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenues. Revenues increased $8.8 million, or 21.6%, from $40.9 million
during the three months ended March 31, 1999 to $49.7 million during the three
months ended March 31, 2000. This increase was primarily from 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 $5.3 million, or 16.0%, from
$33.2 million during the three months ended March 31, 1999 to $38.5 million
during the three months ended March 31, 2000. As a percentage of revenues, cost
of services was 81.2% and 77.4% for the three months ended March 31, 1999 and
March 31, 2000, respectively. This percentage amount declined mainly as a result
of improved processes, better operating efficiency, and changes in the mix of
services performed.
Gross Profit. Due to the foregoing factors, gross profit increased $3.5
million, or 45.9%, from $7.7 million during the three months ended March 31,
1999 to $11.2 million during the three months ended March 31, 2000. As a
percentage of revenues, gross profit was 18.8% and 22.6% for the three months
ended March 31, 1999 and March 31, 2000, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.8 million, or 17.1%, from $4.4 million
during the three months ended March 31, 1999 to $5.2 million during the three
months ended March 31, 2000, primarily as a result of increased personnel and
related expansion costs incurred to service increasing business. As a percentage
of revenues, selling, general and administrative expenses decreased from 10.8%
during the three months ended March 31, 1999 to 10.4% during the three months
ended March 31, 2000.
9
<PAGE> 10
Operating Profit. As a result of the foregoing factors, operating profit
increased from $3.3 million during the three months ended March 31, 1999 to $6.0
million during the three months ended March 31, 2000. As a percentage of
revenues, operating profit increased from 8.0% during the three months ended
March 31, 1999 to 12.2% during the three months ended March 31, 2000.
Net Interest Income and Other. Net interest income and other was $0.6
million during the three months ended March 31, 1999 and $0.7 million during the
three months ended March 31, 2000. The majority of net interest income and other
continues to be derived from cash equivalents and investment balances, partially
offset by interest expense incurred as a result of the Company's various debt
and lease arrangements.
Income Before Income Taxes. As a result of the foregoing factors, income
before income taxes increased $2.8 million, or 74.7%, from $3.9 million during
the three months ended March 31, 1999 to $6.7 million during the three months
ended March 31, 2000. As a percentage of revenues, income before income taxes
increased from 9.5% during the three months ended March 31, 1999 to 13.6% during
the three months ended March 31, 1999.
Income Tax Expense. Income tax expense for both the three months ended
March 31, 1999 and 2000 reflects a provision for federal, state, and foreign
income taxes at an effective rate of 37.1%.
Net Income. Based on the factors discussed above, net income increased $1.8
million, or 74.7%, from $2.4 million during the three months ended March 31,
1999 to $4.2 million during the three months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
In June 1997, the Company completed an initial public offering of its
common stock, which yielded net proceeds to the Company of approximately $41.0
million. The Company applied such proceeds to repay substantially all of its
then outstanding debt and for working capital and other general corporate
purposes, including capital expenditures to expand its operating capacity. Since
fully applying the net proceeds received from its June 1997 initial public
offering, the Company has primarily financed its operations, liquidity
requirements, capital expenditures, and capacity expansion through cash flows
from operations and, to a lesser degree, through various forms of debt financing
and leasing arrangements.
The Company has a $5.0 million line of credit with Norwest Bank Colorado,
N.A. (the "Bank"), which matures on April 30, 2001. Borrowings under the line of
credit bear interest at the Bank's prime rate (9.0% as of March 31, 2000). 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 March 31, 2000 and the date of this Form 10-Q, the Company was
in compliance with these financial covenants. Collateral for the line of credit
is trade accounts receivable of certain of the Company's wholly owned
subsidiaries. As of March 31, 2000 and the date of this Form 10-Q, no amount was
outstanding under the line of credit.
As of March 31, 2000, the Company had cash, cash equivalents, and
investment balances of $43.2 million, working capital of $44.6 million, and
stockholders' equity of $75.8 million. Investments available for sale primarily
consisted of corporate bonds, foreign government bonds denominated in U.S.
dollars, bond mutual funds, real estate investment trusts, equity mutual funds,
and publicly traded common stock of U.S. based companies. Trading securities
generally consisted of publicly traded common stock of U.S. based companies, and
international equity mutual funds, together with certain hedging securities, and
various forms of derivative securities. StarTek's cash and cash equivalents are
not restricted. The Company's investments available for sale and trading
securities could be materially and adversely affected by: (i) various domestic
and foreign economic conditions, such as recession, increasing interest rates,
adverse foreign currency exchange fluctuations, foreign and domestic inflation,
and other factors; (ii) the inability of certain corporations to repay their
debts, including interest amounts, to the Company; and (iii) changes in market
price of common stocks, international equity mutual funds, hedging securities,
and other derivative securities held by the Company due to the level of trading
in such securities, and other risks generally attributable to U.S. based
publicly traded companies. See "Quantitative and Qualitative Disclosure About
Market Risk" set forth herein for further discussions regarding the Company's
cash, cash equivalents, investments available for sale, and trading securities.
Net cash provided by operating activities decreased from $6.6 million
during the three months ended March 31, 1999 to $5.8 million during the three
months ended March 31, 2000. This decrease was primarily a result of net
purchases of trading securities, partially offset by increased net income and
changes in operating assets and liabilities.
Net cash used in investing activities was $6.4 million during the three
months ended March 31, 1999 and $5.3 million during the three months ended March
31, 2000. This decrease was primarily due to a decrease in purchases of
property, plant and equipment and a decrease in purchases of investments
available for sale.
10
<PAGE> 11
Net cash used in financing activities was $0.3 million during the three
months ended March 31, 1999, which consisted of principal payments on borrowings
and capital lease obligations. Net cash used in financing activities was $0.1
million during the three months ended March 31, 2000, which consisted of
principal payments on borrowings and capital lease obligations, partially offset
by proceeds from exercises of employee stock options.
The effect of currency exchange rate changes on the translation of the
Company's United Kingdom and Singapore operations was not substantial during the
three months ended March 31, 2000. The terms of the Company's agreements with
its clients and its subcontracts are typically in U.S. dollars except for
certain of its agreements related to its United Kingdom and Singapore
operations. If the international portion of the Company's business continues to
grow, more revenues and expenses will be denominated in foreign currencies, and
this will increase the Company's exposure to fluctuations in currency exchange
rates. See "Quantitative and Qualitative Disclosure About Market Risk" set forth
herein for a further discussion of the Company's exposure to foreign currency
exchange risks in connection with certain of its investments.
Management believes the Company's current cash, cash equivalents,
investments, anticipated cash flows from future operations, and $5.0 million of
currently available financing under its 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 funds generated from 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 additional financing will be available, or if available, it will be
available on terms favorable to the Company.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate effects of domestic and
foreign inflation on its operations, the Company does not believe inflation has
had, or is likely in the foreseeable future to have, a material adverse effect
on its results of operations or financial condition.
RELIANCE ON PRINCIPAL CLIENT RELATIONSHIPS
Microsoft Corporation ("Microsoft") accounted for approximately 75.7% and
70.1% of the Company's revenues during the three months ended March 31, 1999 and
March 31, 2000, respectively. America Online, Inc. accounted for less than 10.0%
and approximately 10.1% of the Company's revenues during the three months ended
March 31, 1999 and March 31, 2000, respectively. Loss of a principal client
would have a material adverse effect on the Company's business, results of
operations, and financial condition. The Company provides various outsourced
services to various divisions of Microsoft, which began its outsourcing
relationship with the Company in April 1996. 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 such clients with
clients that generate a comparable amount of revenues. Additionally, the amount
and growth rate of revenues derived from its principal clients in the past is
not necessarily indicative of revenues that may be expected from such clients in
the future.
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 quarters preceding the
fourth quarter due to timing of its clients' marketing programs and product
launches, which are typically geared toward the holiday buying season. However,
the Company's revenues and operating results for the first three months of 2000
are not necessarily indicative of the results that may be expected for the
second, third, or fourth quarters of 2000. 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) timing of existing and future client
product launches; (ii) expiration or termination of existing client projects;
(iii) timing and amount of costs incurred to expand capacity in order to provide
for further revenue growth from current and future clients; (iv) seasonal nature
of certain clients' businesses; (v) cyclical nature of certain high technology
clients' businesses; and (vi) changes in the amount and growth rate of revenues
generated from the Company's principal clients.
11
<PAGE> 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses the Company's exposure to market risks related to
changes in interest rates and other general market risks, equity market prices
and other general market risks, and foreign currency exchange rates. All of the
Company's investment decisions are supervised or managed by its Chairman of the
Board. On May 19, 1999 and as amended on August 19, 1999, the Company's Board of
Directors approved the Company's current investment portfolio policy, which
provides for, among other things, investment objectives and investment portfolio
allocation guidelines. 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 and other
general market risks, foreign currency exchange rates, and those set forth in
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations"--"Factors That May Affect Future Results" section of the Company's
annual report on Form 10-K for the year ended December 31, 1999.
Interest Rate Sensitivity and Other General Market Risks
Cash and Cash Equivalents. As of March 31, 2000, the Company had $12.5
million in cash and cash equivalents, which was not restricted, and consisted
of: (i) approximately $11.8 million invested in various money market funds,
overnight investments, and various commercial paper securities at a combined
weighted average interest rate of approximately 5.4%; and (ii) approximately
$0.7 million in various non-interest bearing accounts. Management considers cash
equivalents to be short-term, highly liquid investments readily convertible to
known amounts of cash, and so near their maturity 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 March 31, 2000, the Company had
investments available for sale, which, in the aggregate, had an original cost
and fair market value of $28.0 million and $26.8 million, respectively. These
investments available for sale generally consisted of corporate bonds, foreign
government bonds denominated in U.S. dollars, bond mutual funds, and various
forms of equity securities. The Company's investment portfolio is subject to
interest rate risk and will fall in value if interest rates increase.
Fair market value of and estimated cash flows from the Company's
investments in corporate bonds are substantially dependent upon credit
worthiness of certain corporations 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 risks 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) potential for political and economic
instability. Fair market value of such investments in foreign government bonds
(denominated in U.S. dollars) can be expected to be more volatile than that of
U.S. government bonds. These risks are intensified for the Company's investments
in debt of foreign governments located in countries generally considered to be
emerging markets.
The table below provides information about maturity dates and corresponding
weighted average interest rates related to certain of the Company's investments
available for sale as of March 31, 2000:
<TABLE>
<CAPTION>
WEIGHTED EXPECTED MATURITY DATE
AVERAGE --COST--
INTEREST RATES (DOLLARS IN THOUSANDS)
-------------- ------------------------------------------------------------------------------------
1 year 2 years 3 years 4 years 5 years Thereafter Total FAIR VALUE
------- -------- ------- ------- ------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate bonds 5.54% $ 7,404 $ 7,404 $ 7,660
Foreign government bonds 6.31% 1,980 1,980 1,997
Corporate bonds 9.61% $ 3,647 3,647 3,701
Corporate bonds 8.10% $ 2,711 2,711 2,404
Corporate bonds 5.19% $ 818 818 510
Corporate bonds 5.69% $ 1,010 1,010 920
Foreign government bonds 9.26% $ 1,438 1,438 1,545
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 9,384 $ 3,647 $ 2,711 $ 818 $ 1,010 $ 1,438 $ 19,008 $ 18,737
======== ======== ======== ======== ======== ======== ======== ========
</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.
12
<PAGE> 13
As of March 31, 2000 and as part of its investments available for sale
portfolio, the Company was invested in: (i) various bond mutual funds which, in
the aggregate, had both an original cost and fair market value of approximately
$2.3 million; and (ii) equity securities which, in the aggregate, had an
original cost and fair market value of approximately $6.7 million and $5.8
million, respectively.
Debt securities within bond mutual funds as of March 31, 2000: (i) had a
weighted average yield of approximately 11.7%, and a weighted average maturity
of approximately 6.6 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 bond mutual funds entail
special risks of global investing, including, but not limited to: (i) currency
exchange fluctuations; (ii) foreign government regulations; and (iii) potential
for political and economic instability. Fair market value of the Company's
investments in bond 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 mutual funds) which are located in
countries generally considered to be emerging markets. Additionally, certain
bond 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 March 31, 2000, the Company had
outstanding debt of approximately $7.0 million, approximately $2.5 million of
which bears interest at an annual fixed rate of 7.0%, and approximately $2.3
million of which bears no interest, as long as the Company complies with the
terms of this debt arrangement. On October 22, 1999, the Company completed an
equipment loan, $1.8 million outstanding as of March 31, 2000, whereby the
Company is expected to repay its debt at a variable rate of interest (7.4% as of
March 31, 2000) over a forty-eight month period. Management believes a
hypothetical 10.0% increase in interest rates would not have a material adverse
effect on the Company. Increases in interest rates could, however, increase
interest expense associated with the Company's existing variable rate equipment
loan and 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 (9% as of March 31, 2000). As of March 31, 2000, the Company had no
outstanding line of credit obligations. The Company has not hedged against
interest rate changes.
Equity Price Risks and Other General Market Risks
Equity Securities. As of March 31, 2000, the Company held in its
investments available for sale portfolio certain equity securities with original
cost and fair market value, in the aggregate, of $6.7 million and $5.8 million,
respectively. The Company's investments in equity securities consisted of real
estate investment trusts, equity mutual funds, and publicly traded common stock
of U.S. based companies. A substantial decline in values of equity securities
and equity prices in general would have a material adverse affect on the
Company's equity investments. Also, prices of common stocks held by the Company
would be materially and adversely affected by poor management, shrinking product
demand, and other risks that may affect single companies, as well as groups of
companies. The Company has partially hedged against some equity price changes.
Trading Securities. As of March 31, 2000, the Company was invested in
trading securities which, in the aggregate, had an original cost and fair market
value of approximately $4.2 million and $3.9 million, respectively. Trading
securities consisted primarily of publicly traded common stock of U.S. based
companies and international equity mutual funds, together with certain hedging
securities and various forms of derivative securities. Trading securities were
held to meet short-term investment objectives. The Company entered into hedging
and derivative securities in an effort to maximize its return on investments in
trading securities while managing risk. As part of trading securities and as of
March 31, 2000, the Company was invested in securities sold short related to a
total of 18,856 shares of U.S. equity securities which, in the aggregate, had a
basis and estimated fair market value of approximately $0.9 million and $1.0
million, respectively, all of which were reported net as components of trading
securities. These securities sold short were used in conjunction with and were
substantially offset by other trading securities, which taken together,
represented a risk arbitrage portfolio in U.S. equity securities.
13
<PAGE> 14
Management believes risk of loss to the Company in the event of
nonperformance by any party is not substantial. Because of potential limited
liquidity of some of these instruments, recorded values of these transactions
may be different from values that might be realized if the Company were to sell
or close out the transactions. Management believes such differences are not
substantial to the Company's results of operations, financial condition, or
liquidity. Hedging and derivative securities may involve elements of credit and
market risk in excess of the amounts recognized in the accompanying unaudited
condensed consolidated financial statements. A substantial decline and/or change
in value of equity securities, equity prices in general, international equity
mutual funds, hedging securities, and derivative securities could have a
material adverse effect on the Company's trading securities. Also, the price of
common stock, hedging securities, and other derivative securities held by the
Company as trading securities would be materially and adversely affected by poor
management, shrinking product demand, and other risks that may affect single
companies, as well as groups of companies.
Foreign Currency Exchange Risks
Approximately 28.6% of the Company's revenues during the three months ended
March 31, 2000 were derived from arrangements whereby the Company received
payments from its clients in currencies other than U.S. dollars. Terms of the
Company's agreements with its clients and its subcontracts are typically in U.S.
dollars except for certain of its agreements related to its United Kingdom and
Singapore operations. If an arrangement provides for the Company to receive
payments in a foreign currency, 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,
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. If the international portion of the Company's business continues to
grow, more revenues and expenses will be denominated in foreign currencies, and
this will increase the Company's exposure to fluctuations in currency exchange
rates. In the past, the Company has not hedged against foreign currency exchange
rate changes related to its day to day operations in the United Kingdom and
Singapore.
Certain of the Company's investments classified as bond 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.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities
The Company did not issue or sell any unregistered securities
during the three months ended March 31, 2000, except as
follows:
On January 3, 2000, the Company granted options to
purchase 10,400 shares of common stock, in the
aggregate, to 104 employees pursuant to the Company's
Stock Option Plan. These options vest at a rate of
20% per year beginning January 3, 2001, expire on
January 3, 2010, and are exercisable at $34.00 per
share, which was the market value of the Company's
common stock on the date the options were granted.
On February 16, 2000, the Company granted options to
purchase 2,100 shares of common stock, in the
aggregate, to three employees pursuant to the
Company's Stock Option Plan. These options vest at a
rate of 20% per year beginning February 16, 2001,
expire on February 16, 2010, and are exercisable at
$38.94 per share, which was the market value of the
Company's common stock on the date the options were
granted.
The foregoing stock option grants were made in reliance upon
exemptions from registration provided by Sections 4(2) and
3(b) of the Securities Act of 1933, as amended, and the
regulations promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On January 14, 2000, the Company filed a report on
Form 8-K under Item 5, reporting the election of Jack
D. Rehm to the Board of Directors.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARTEK, INC.
--------------------------------------------
(Registrant)
Date: May 15, 2000 /s/ MICHAEL W. MORGAN
--------------- --------------------------------------------
Michael W. Morgan
President and Chief Executive Officer
Date: May 15, 2000 /s/ DENNIS M. SWENSON
--------------- --------------------------------------------
Dennis M. Swenson
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARTEK,
INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF MARCH 31, 2000 AND
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS
ENDED MARCH 31, 2000 INCLUDED IN STARTEK, INC'S FORM 10-Q FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 12,489
<SECURITIES> 30,705
<RECEIVABLES> 19,890
<ALLOWANCES> 716
<INVENTORY> 4,936
<CURRENT-ASSETS> 70,043
<PP&E> 39,792
<DEPRECIATION> 13,168
<TOTAL-ASSETS> 107,150
<CURRENT-LIABILITIES> 25,411
<BONDS> 5,410
0
0
<COMMON> 140
<OTHER-SE> 46,245
<TOTAL-LIABILITY-AND-EQUITY> 107,150
<SALES> 0
<TOTAL-REVENUES> 49,668
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 38,458
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86
<INCOME-PRETAX> 6,742
<INCOME-TAX> 2,501
<INCOME-CONTINUING> 4,241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,241
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.30
</TABLE>
