<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. _ )
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
TREMONT CORPORATION
------------------------------------------------------------------------
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[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
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<PAGE> 2
STARTEK, INC.
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS - MAY 17, 2000
----------------------
PROXY STATEMENT
----------------------
SUPPLEMENT TO 2000 ANNUAL REPORT TO
STOCKHOLDERS - MAY 17, 2000:
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 8, 2000.
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 8, 2000.
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 8, 2000.
<PAGE> 3
STARTEK, INC.
100 Garfield Street
Denver, Colorado 80206
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 2000
To the Stockholders:
Notice is hereby given that the 2000 Annual Meeting of Stockholders of
StarTek, Inc., a Delaware corporation (the "Company"), will be held at the
Company's headquarters, 100 Garfield Street, Denver, Colorado 80206, on May 17,
2000, 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 increase
the number of shares of common stock the Company has authority to
issue, from 18,000,000 shares to 32,000,000 shares.
3. To approve the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 2000.
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 March 20,
2000 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
/s/ Dennis M. Swenson
Dennis M. Swenson
Secretary
March 31, 2000
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 2000 ANNUAL MEETING OF STOCKHOLDERS OF
STARTEK, INC.
i
<PAGE> 4
STARTEK, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Notice of Annual Meeting (i)
Proxy Statement:
2000 Annual Meeting of Stockholders 1
Outstanding Stock and Voting Rights 1
Beneficial Ownership of Common Stock by Directors, Executive 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 Graph 8
Proposal 2 -- Amendment to the Company's Certificate of Incorporation to Increase the
Number of Shares of the Common Stock the Company has Authority to Issue, from
18,000,000 Shares to 32,000,000 Shares 9
Proposal 3 -- Approval of Appointment of Auditors 10
Stockholder Proposals 10
Miscellaneous 10
Exhibit A (Form of Certificate of Amendment to the Certificate of Incorporation of StarTek,
Inc.) 11
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 8, 2000 A-1
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 8, 2000 B-1
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 8, 2000:
Report of Independent Auditors C-1
Consolidated Balance Sheets C-2
Consolidated Statements of Operations C-3
Consolidated Statements of Cash Flows C-4
Consolidated Statements of Stockholders' Equity C-5
Notes to Consolidated Financial Statements C-6
</TABLE>
ii
<PAGE> 5
PROXY STATEMENT
STARTEK, INC.
100 GARFIELD STREET
DENVER, COLORADO 80206
(303) 361-6000
2000 ANNUAL MEETING OF STOCKHOLDERS
MAY 17, 2000
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 2000 Annual Meeting of Stockholders (the
"Annual Meeting") to be held at the Company's headquarters at 100 Garfield
Street, Denver, Colorado 80206, on May 17, 2000 at 9:00 a.m. local time, and at
any and all adjournments thereof. The Company's principal address is 100
Garfield Street, Denver, Colorado 80206. The date of mailing of this Proxy
Statement is on or about March 31, 2000. The purpose of the meeting is to (i)
elect four directors of the Company; (ii) amend the Company's Certificate of
Incorporation to increase the number of shares of common stock the Company has
the authority to issue, from 18,000,000 shares to 32,000,000 shares; (iii)
approve the appointment of Ernst & Young LLP as the Company's independent
auditors for the year ending December 31, 2000; and (iv) 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
March 20, 2000 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 as of the Record 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, 13,993,571 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 purposes 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 election 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, EXECUTIVE OFFICERS, AND PRINCIPAL STOCKHOLDERS
As of March 20, 2000, the beneficial ownership of Common Stock by each
director, 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 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 23.9 %
Michael W. Morgan (b), (d) 664,343 4.7
E. Preston Sumner, Jr. (b), (e) 20,000 *
Dennis M. Swenson (b), (f) -- *
Toni E. Stephenson (b), (g) 3,350,882 23.9
FASSET Trust (b) 1,223,662 8.7
MASSET Trust (b) 1,223,662 8.7
Pamela S. Oliver (b), (h) 2,447,324 17.5
Ed Zschau (i) 26,000 *
Jack D. Rehm (j) 10,000 *
All Directors and Executive Officers ----------- ------
as a group (6 persons) 4,071,225 29.0 %
=========== ======
</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,
100 Garfield Street, Denver, Colorado 80206.
(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 60,000 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 42,000 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.
(i) 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. Also, on May 19,
1999, Mr. Zschau received fully vested options to purchase 3,000
shares of Common Stock, which expire on May 19, 2009, and are
exercisable at $18.50 per share. The exercise prices of these
options equaled the market value of the Common Stock on the date
the options were granted. Mr. Zschau's business address is c/o
Karen Cindrich, 1310 Trinity Drive, Menlo Park, California 94025.
2
<PAGE> 7
(j) Mr. Rehm is a Director of the Company. On December 14, 1999, Mr.
Rehm received options to purchase 10,000 shares of Common Stock.
Such options are fully vested, expire on December 14, 2009, and
are exercisable at $38.625 per share, which equaled the market
value of the Common Stock on the date the options were granted.
Mr. Rehm's business address is Meredith Corporation, 1716 Locust
Street, Des Moines, Iowa 50309-3023.
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 direct and indirect ownership of Common Stock and
changes in such ownership. The rules of the Commission require 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 Insiders
have complied with all Section 16(a) filing requirements applicable since
January 1, 1999.
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 Annual Meeting, stockholders will elect four
directors to serve until the 2001 annual meeting of stockholders and until
successors are duly elected and qualified. The Board of Directors has nominated
Messrs. A. Emmet Stephenson, Jr., Michael W. Morgan, Ed Zschau, and Jack D. Rehm
to serve as directors until their terms expire in 2001.
The names of nominees and directors continuing in office, their
principal occupations, years in which they became directors, and 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 54; 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. Effective September 15, 1999, Mr. Stephenson
became a director of Good Catalog Company, 19.9% of the outstanding common stock
of which is owned by Domain.com, Inc., a wholly owned subsidiary of StarTek,
Inc. If re-elected, his Term will expire in 2001.
MICHAEL W. MORGAN; AGE 39; 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. If re-elected,
his Term will expire in 2001.
ED ZSCHAU; AGE 60; 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. He is
also Visiting Professor at Princeton University in the Department of Electrical
Engineering. 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. If
re-elected, his Term will expire in 2001.
JACK D. REHM; AGE 67; DIRECTOR, STARTEK, INC. (a), (b), (c)
On December 14, 1999, Mr. Rehm was elected to the Board of Directors of
StarTek, Inc. Mr. Rehm currently serves on the board of directors of Meredith
Corporation, International Multifoods Corporation, and ING Mutual Funds
Management Co. He is also past chairman of the Drake University Board of
Governors, and former Chairman of the Board, President and CEO of Meredith
Corporation. If re-elected, his Term will expire in 2001.
- ------------------------------------------------------------------------
(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 four regular meetings during 1999. All
directors attended all meetings of the Board of Directors and of the Committees
on which they served during 1999.
The Audit Committee reviews the financial statements of the Company to
confirm 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 twice during 1999.
The Compensation Committee reviews the Company's compensation
philosophy and programs, and exercises authority with respect to payment of
direct salaries and incentive compensation to Company officers. The Compensation
Committee met once during 1999.
The Option Committee is responsible for oversight of the StarTek, Inc.
Stock Option Plan. The Option Committee met seven times in 1999.
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. 54 Chairman of the Board 1987
Michael W. Morgan 39 President, Chief Executive Officer, and Director 1990
E. Preston Sumner, Jr. 48 Executive Vice President and Chief Operating Officer 1997
Dennis M. Swenson 65 Executive Vice President, Chief Financial Officer, Secretary, and Treasurer 1995
</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. Effective September 15, 1999, Mr. Stephenson
became a director of Good Catalog Company, 19.9% of the outstanding common stock
of which is owned by Domain.com, Inc., a wholly owned subsidiary of StarTek,
Inc.
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 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 1997,
1998, and 1999 compensation of the Company's Chief Executive Officer and
executive officers of the Company who, in addition to the Chief Executive
Officer, received the highest compensation during 1997, 1998, and 1999. The
Company did not grant any options to purchase Common Stock to any executive
officer during the year ended December 31, 1999.
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 -- -- --
1999 270,800 -- -- --
A. Emmet Stephenson, Jr.
Chairman of the Board 1997 -- 2,800,000 (b), (c) -- 245,000 (d)
1998 -- -- -- 245,000 (d)
1999 -- -- -- 245,000 (d)
E. Preston Sumner, Jr.
Executive VP and COO 1997 123,461 -- 100,000 1,000 (e)
1998 153,315 -- -- --
1999 155,359 -- -- 758,756 (g)
Dennis M. Swenson
Executive VP, CFO
Secretary, and Treasurer 1997 126,000 -- 70,000 --
1998 128,652 -- -- --
1999 132,614 -- -- 1,012,663 (g)
</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 management fee arrangement was
terminated in June 1997 effective as of the closing of the Company's
initial public offering.
(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 periods prior to the
June 1997 initial public offering while the Company was an S
corporation. 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 exceeded
$50,000 or 10% of such officer's total salary and bonus for 1997, 1998,
and 1999.
(g) Earnings from exercise of stock options and sale of underlying Common
Stock.
6
<PAGE> 11
COMPENSATION OF DIRECTORS
Pursuant to the Company's Director Option Plan and upon reelection on
May 20, 1999 at the Company's 1999 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. Upon initial election on December 14, 1999, the
Company automatically granted an option to purchase 10,000 shares of Common
Stock to one non-employee director. These options fully vest upon grant date,
expire ten years from grant date, and are exercisable at an exercise price equal
to the market value of the Common Stock on the grant date. 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 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 this committee 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, as amended (the
"Securities Act"), or the Exchange Act.
The Compensation Committee has responsibility to: (i) recommend to the
full Board of Directors 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) review and submit
recommendations concerning new executive compensation or stock plans; (iii)
establish and review corporate policies concerning management perquisites; (iv)
assess the Corporation's executive development plan, if any; and (v) 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 1999 salaries and other compensation of the three executive
officers and the Chairman of the Board appear in the Summary Compensation Table.
Effective January 1, 1997, the Company began paying 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 who is President and Chief
Executive Officer, currently receives an annual base salary of $270,800.
E. Preston Sumner, 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 1999 to the three
executive officers or the Chairman of the Board.
By the Compensation Committee:
A. Emmet Stephenson, Jr.
Ed Zschau
Jack D. Rehm
7
<PAGE> 12
STOCK PERFORMANCE GRAPH
The following graph sets forth a stock market index:
PERFORMANCE GRAPH
The graph below 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 $100 investment on June 19, 1997 in each of Common Stock, NYSE,
Russell, and reinvestment of dividends, if any). The Company does not believe
stock price performance shown on the graph below is necessarily indicative of
future price performance.
<TABLE>
<CAPTION>
StarTek, Inc. Common Stock NYSE Return Russell Return
<S> <C> <C> <C>
06/19/97 $ 100 $ 100 $ 100
12/31/97 $ 76 $ 110 $ 111
12/31/98 $ 82 $ 127 $ 106
12/31/99 $ 241 $ 141 $ 127
</TABLE>
The stock performance graph 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 or the Exchange Act.
8
<PAGE> 13
PROPOSAL 2.
AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED SHARES
The Company has a total of 18,000,000 shares of Common Stock currently
authorized. As of March 20, 2000, the Company had 13,993,571 shares of Common
Stock issued and outstanding. As of December 31, 1999, there were 605,710 shares
of Common Stock underlying outstanding options, of which 107,820 were
exercisable. Options for 310,750 shares of Common Stock were available for
future grant as of December 31, 1999. The Board of Directors believes the
Company's number of authorized shares of Common Stock should be increased to
provide additional shares necessary for equity financing contingencies in the
future. The Board of Directors believes increasing the number of authorized
shares from 18,000,000 to 32,000,000 would provide sufficient additional
authorized shares to meet the Company's 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 increase the number of shares of Common Stock
the Company has the authority to issue, from 18,000,000 shares to 32,000,000
shares. The Company would effectuate such 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 of Incorporation 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
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").
If the proposal were 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 32,000,000 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 increase 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 were 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, Executive Officers of the Company,
Toni E. Stephenson, and Pamela S. Oliver own or control approximately 70.2% of
the outstanding Common Stock of the Company as of March 20, 2000, 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.
9
<PAGE> 14
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
the year ending December 31, 2000. Ernst & Young LLP has been the Company's
auditors since the year ended June 30, 1991, and has advised the Company it 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, have an opportunity to make a
statement if he desires to do so, and be available to answer questions from
stockholders.
The Board of Directors unanimously recommends stockholders vote "FOR"
ratification and approval of selection of Ernst & Young LLP as independent
auditors for the Company for the year ending December 31, 2000.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the 2001 annual
meeting of stockholders of the Company must be received by the Company at its
executive offices at 100 Garfield Street, Denver, Colorado 80206, attention to
Director of Investor Relations, no later than December 21, 2000 for inclusion in
the proxy statement and proxy relating to the 2001 annual meeting of
stockholders.
MISCELLANEOUS
The Company's Annual Report to Stockholders for the year ended December
31, 1999 will be furnished with this Proxy Statement to stockholders of record
on March 20, 2000. The Annual Report to Stockholders for the year ended December
31, 1999 does not constitute a part of the proxy soliciting material.
Management of the Company is not aware of any other business that may
come before the Annual Meeting. However, if additional matters properly come
before the Annual Meeting, proxies will be voted at the discretion of the proxy
holders.
By Order of the
Board of Directors
/s/ Dennis M. Swenson
Dennis M. Swenson
Secretary
Dated: March 31, 2000
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER
31, 1999, INCLUDING 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., 100 GARFIELD STREET, DENVER, COLORADO 80206. 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 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 THAT HAS BEEN FILED
ELECTRONICALLY WITH THE COMMISSION.
10
<PAGE> 15
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,
shall hereafter read as follows:
ARTICLE IV
Stock
The total number of shares of stock which the Corporation shall
have authority to issue is 32,000,000 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
______________, 2000.
STARTEK, INC., a Delaware corporation
By:
----------------------------------------
Title:
-------------------------------------
11
<PAGE> 16
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 report 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 a principal client, 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, and risks related to the Company's investment in and note receivable from
Good Catalog Company doing business as gifts.com, 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 March 8, 2000, which was the
filing date of the Company's Form 10-K for the fiscal year ended December 31,
1999, 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 "Factors That May Affect
Future Results" below.
OVERVIEW
StarTek has historically generated revenues through the provision of
process management services, which include E-commerce support and fulfillment,
provisioning management for complex telecommunications systems, high-end inbound
technical support, and a comprehensive offering of supply chain management
services. 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.
An essential element of the Company's ability to grow is availability
of capacity to readily provide for the needs of new clients and increasing needs
of existing clients. StarTek operates from facilities in the United States,
United Kingdom and Singapore. The Company's capacity expanded during 1999
through: (i) lease of a 30,000 square-foot building in Big Spring, Texas; (ii)
expansion of previously existing space in Hartlepool, England from 53,000 to
73,000 square feet; and (iii) purchase of an 88,000 square-foot building in
Greeley, Colorado. These three additions, together with the Company's previously
existing capacity, provided adequate capacity to accommodate revenue and
earnings growth experienced by the Company during 1999. Management believes
StarTek's existing facilities are adequate for the Company's current and near
term operations, but continued capacity expansion will be required to support
continued growth. Management intends to maintain a certain amount of excess
capacity to enable StarTek to readily provide for needs of new clients and
increasing needs of existing clients. The 10,500 square-foot Greeley facility
purchased in 1993 was closed in December 1999, and is currently for sale.
Certain process management services previously provided from the Denver facility
were completely transferred to other facilities by January 31, 2000. Currently,
a relatively small portion of the Denver facility provides for certain
executive, corporate, and information technology functions, while management
evaluates possible operating activities which could be located in this facility.
The Company's cost of services primarily include labor,
telecommunications, materials, and freight expenses 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 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.
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 necessary working capital, with substantially
all of the remaining 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.
Compensation has continued to be payable to certain principal
stockholders as general compensation for services rendered in the form of
salaries 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, in the aggregate, approximate $516,000 annually.
A-1
<PAGE> 17
The Company frequently purchases components of its clients' products as an
integral part of its process 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 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
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of services 80.7 81.6 81.3
---------- ---------- ----------
Gross profit 19.3 18.4 18.7
Selling, general and administrative expenses 9.8 10.4 9.9
Management fee expense 3.5 -- --
---------- ---------- ----------
Operating profit 6.0 8.0 8.8
Net interest income and other 1.0 1.6 1.4
---------- ---------- ----------
Income before income taxes 7.0 9.6 10.2
Income tax expense 2.3 3.5 3.8
---------- ---------- ----------
Net income 4.7% 6.1% 6.4%
========== ========== ==========
</TABLE>
The following table sets forth certain unaudited pro forma consolidated
statement of operations data, expressed in dollars and as a percentage of
revenues for the year ended December 31, 1997 (dollars in thousands, except per
share data) (a):
<TABLE>
<S> <C> <C>
Revenues $ 89,150 100.0%
Cost of services 71,986 80.7
------------
Gross profit 17,164 19.3
Selling, general and administrative expenses 8,703 9.8
------------
Operating profit 8,461 9.5
Net interest income and other 933 1.0
------------
Income before income taxes 9,394 10.5
Income tax expense 3,504 3.9
------------
Pro forma net income $ 5,890 6.6%
============
Earnings per share:
Basic $ 0.47
Diluted $ 0.47
Weighted average shares outstanding:
Basic 12,652,680
Diluted 12,652,680
</TABLE>
- ------------------------------------
(a) The Company was an S corporation for federal and state income tax purposes
from July 1, 1992 through June 17, 1997, and accordingly, was not subject to
federal or state income taxes. The S corporation election was terminated on June
17, 1997 in contemplation of the Company's initial public offering. Since June
18, 1997, the Company has been a C corporation for federal and state income tax
purposes. Pro forma net income: (i) reflects the elimination of management fee
expense; and (ii) includes a provision for federal, state and foreign income
taxes at an effective rate of 37.3% during the applicable S corporation period.
Management fee expense was discontinued in connection with the initial public
offering in June 1997. Pro forma presentation was not applicable for the years
ended December 31, 1998 and 1999.
A-2
<PAGE> 18
1999 Compared to 1998
Revenues. Revenues increased $64.2 million, or 45.6%, from $141.0
million in 1998 to $205.2 million in 1999. This increase was primarily from
existing and new clients, partially offset by decreases in the volume of
services provided to other existing clients. Also, management believes changes
in the timing of the volume of services provided to the Company's clients due to
year 2000 buying patterns contributed to the increase in revenues experienced by
the Company during 1999.
Cost of Services. Cost of services increased $51.8 million, or 45.0%,
from $115.1 million in 1998 to $166.9 million in 1999. As a percentage of
revenues, cost of services was 81.6% and 81.3% in 1998 and 1999, respectively.
This percentage amount remained relatively consistent.
Gross Profit. Due to the foregoing factors, gross profit increased
$12.4 million in 1999, or 48.0%, from $25.9 million in 1998 to $38.3 million in
1999. As a percentage of revenues, gross profit was 18.4% and 18.7% in 1998 and
1999, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.6 million, or 38.2%, from $14.7 million in
1998 to $20.3 million in 1999, 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 10.4%
in 1998 to 9.9% in 1999.
Operating Profit. As a result of the foregoing factors, operating
profit increased from $11.2 million in 1998 to $18.0 million in 1999. As a
percentage of revenues, operating profit increased from 8.0% in 1998 to 8.8% in
1999.
Net Interest Income and Other. Net interest income and other was $2.3
million in 1998 and $2.8 million in 1999. 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 $7.4 million, or 54.9%, from $13.4 million
in 1998 to $20.8 million in 1999. As a percentage of revenues, income before
income taxes increased from 9.6% in 1998 to 10.2% in 1999.
Income Tax Expense. Income tax expense for 1998 and 1999 reflects a
provision for federal, state, and foreign income taxes at an effective rate of
36.5% and 37.5%, respectively.
Net Income. Based on the factors discussed above, net income increased
$4.5 million, or 52.4%, from $8.5 million in 1998 to $13.0 million in 1999.
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.
A-3
<PAGE> 19
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.
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.
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 (8.5% as of December
31, 1999). 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, 1999 and March 8, 2000, which was
the filing date of the Company's Form 10-K for the fiscal year ended December
31, 1999, 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 December 31, 1999 and March 8, 2000,
which was the filing date of the Company's Form 10-K for the fiscal year ended
December 31, 1999, no amount was outstanding under the $5.0 million line of
credit.
On October 26, 1998, the Company, through its wholly owned subsidiary
StarTek USA, Inc., entered into an equipment loan agreement with a finance
company maturing 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 rate of interest of 7.0% and for the Company to pay
forty-eight equal monthly installments, which, in the aggregate, totaled
approximately $4.2 million at inception of the equipment loan. 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' account
receivable.
A-4
<PAGE> 20
On February 16, 1999, the Company entered into a lease agreement for
46,350 square feet of building space in Grand Junction, Colorado. The facility
is used for a call center, general office use, and other services offered by the
Company (the "Grand Junction Facility"). The term of the lease agreement
commenced on May 1, 1999 and unless earlier terminated or extended, continues
until April 30, 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
lease agreement is not terminated after the end of the fifth year, total minimum
rental commitments, in the aggregate, excluding certain taxes and utilities as
defined, are approximately $1.1 million and are payable on a monthly basis from
May 1999 through April 2009.
On July 16, 1999, the Company entered into a lease agreement for an
additional 20,000 square feet of building space in Hartlepool, England, to be
used for the continuing operations of StarTek Europe, Ltd. (a wholly owned
subsidiary of the Company). The term of the lease agreement commenced on May 1,
1998 and unless earlier terminated, extended, or otherwise revised, continues
until April 30, 2013. If the Company and the landlord do not complete a new
lease agreement for additional premises, as defined, the Company was granted the
right to terminate the lease agreement on May 1, 2003 by giving the landlord at
least six months written notice to terminate. Additionally, if a new lease
agreement for additional premises, as defined, is consummated, the Company was
granted the right to terminate the lease agreement on May 1, 2008 by giving the
landlord at least six months written notice to terminate. Pursuant to the terms
of the lease agreement, the Company was granted an option, which commences on
May 1, 2008 and expires on July 31, 2008, to purchase the leased property at
market value as determined at such time. The lease agreement provides for
quarterly lease payments which, in the aggregate for the periods described, are:
106,000 British Pounds from May 1, 1998 through April 30, 1999, all of which the
Company has paid; 584,000 British Pounds from May 1, 1999 through April 30,
2003, a portion of which the Company has paid pursuant to the quarterly lease
payment schedule provided for in the lease agreement; and 1,095,000 British
Pounds from May 1, 2003 through April 30, 2008. Quarterly lease payments from
May 1, 2008 through April 30, 2013 will equal lease payments as agreed to
between the landlord and the Company, or by formula in the absence of such an
agreement.
Effective September 15, 1999, the Company, through its wholly owned
subsidiary Domain.com, Inc. ("Domain.com"), entered into a contribution
agreement (the "Contribution Agreement") and stockholders agreement with The
Reader's Digest Association, Inc. ("Reader's Digest") and Good Catalog Company,
previously a wholly owned subsidiary of Reader's Digest. On November 8, 1999,
pursuant to the Contribution Agreement, Domain.com purchased 19.9% of the
outstanding common stock of Good Catalog Company for approximately $2.6 million
in cash. Reader's Digest owns the remaining 80.1% of the outstanding common
stock of Good Catalog Company. The Contribution Agreement provides for: (i) an
assignment from Domain.com to Good Catalog Company of Domain.com's right, title,
and interest in and to the URL www.gifts.com; and (ii) an undertaking by Good
Catalog Company to effect a change in its name to Gifts.com, Inc. Domain.com has
the right to designate at least one member of Good Catalog Company's board of
directors, which will consist of at least five directors. Effective November 1,
1999, Domain.com, Reader's Digest, and Good Catalog Company entered into a loan
agreement pursuant to which Domain.com advanced an unsecured loan of $7.8
million and Reader's Digest advanced an unsecured loan of $18.4 million to Good
Catalog Company ( the "Loans"). The Loans mature November 1, 2002, bear interest
at a rate equal to a three month LIBO rate plus 2.0% per annum, and interest is
payable quarterly. Currently, Good Catalog Company, doing business as gifts.com,
provides an Internet web site accessed through the URL www.gifts.com that sells
gifts on-line. The Company agreed to perform certain fulfillment services for
Good Catalog Company in connection with certain products and services to be sold
in connection with gifts.com.
On October 14, 1999, the Company purchased an 88,000 square-foot
building in Greeley, Colorado for $4.2 million in cash. The building is used for
certain executive and other offices, E-commerce support operations, and
telecommunications provisioning management business.
On October 22, 1999, the Company, through its wholly owned subsidiary
StarTek USA, Inc., completed an equipment loan arrangement with a finance
company maturing October 22, 2003. In connection with the equipment loan, the
Company received cash of $2.0 million in exchange for providing, among other
things, certain collateral which generally consisted of computer hardware and
software, various forms of telecommunications equipment, and furniture and
fixtures whose estimated cost was equal to the principal amount of the equipment
loan. The equipment loan arrangement provides for interest at the prime rate
minus 1.60% (6.9% as of December 31, 1999), and forty-eight consecutive monthly
payments. StarTek USA, Inc. is required, from time to time, to maintain certain
operating ratios. As of December 31, 1999 and March 8, 2000, which was the
filing date of the Company's Form 10-K for the fiscal year ended December 31,
1999, StarTek USA, Inc. was in compliance with these financial covenants.
A-5
<PAGE> 21
On November 1, 1999, the Company entered into a lease agreement for
30,000 square feet of building space in Big Spring, Texas. The facility is
principally used for a call center supporting Internet and telecommunications
clients, and for general office use and other services offered by the Company.
The term of the lease agreement commenced on November 1, 1999 and unless earlier
terminated or extended, continues until November 1, 2014. Pursuant to the terms
of the lease agreement, the Company was granted, among other things: (i) a right
to terminate the lease agreement in the fifth or tenth year. Assuming the lease
agreement is not terminated after the end of the fifth or tenth year, total
minimum rental commitments, in the aggregate, excluding certain taxes and
utilities as defined, are approximately $0.9 million, and are payable on a
monthly basis from November 1999 through November 2014. Pursuant to an incentive
agreement and through the tenth year of the lease agreement, the Company shall
be reimbursed for the actual amount of its lease payments.
In November 1999, the Company received $2.3 million in cash in
connection with its Big Spring, Texas operations through a non-interest bearing
fifteen-year promissory note. The principal balance of the promissory note
declines without payment over fifteen years based on the level of employment at
the Company's Big Spring, Texas facility during the term of the promissory note.
As of December 31, 1999, the Company had cash, cash equivalents, and
investment balances of $35.9 million, working capital of $40.2, and
stockholders' equity of $71.0 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 in "Appendix B" for further discussions regarding the
Company's cash, cash equivalents, investments available for sale, and trading
securities.
Net cash provided by operating activities increased from $13.1 million
in 1998 to $15.8 million in 1999. This increase was primarily a result of
increases in net income, accrued and other liabilities, depreciation and
amortization expense, and income taxes payable. The positive effects of the
foregoing were partially offset by increases in net deferred tax assets, net
purchases of trading securities, net trade accounts receivable, inventories, and
prepaid expenses and other assets; and decreases in accounts payable. Microsoft
Corporation ("Microsoft") accounted for approximately 77.5% of the Company's
revenues in 1999. Correspondingly, the Company's cash flows from operating
activities were in the past and presently continue to be substantially dependent
upon its Microsoft related process management services operations. 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 the Company's "Reliance on Principal Client Relationship"
and "Risks Associated with the Company's Contracts".
Net cash used in investing activities was $24.2 million in 1998 and
$28.9 million in 1999. This increase was primarily due to $2.6 million and $7.8
million paid to Good Catalog Company in exchange for a 19.9% equity interest in
and a note receivable from Good Catalog Company, respectively. The effects of
the foregoing were partially offset by decreases, in the aggregate of $5.7
million, related to net purchases of property, plant, and equipment and net
purchases of investments available for sale.
Net cash provided by financing activities was $3.6 million in 1998,
which 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. Net cash provided by financing
activities was $5.6 million in 1999, which primarily consisted of $2.4 million
of proceeds received from exercises of employee stock options and $4.3 million
of proceeds received from borrowing arrangements entered into during 1999,
partially offset by $1.1 million of principal payments on borrowings and capital
lease obligations.
The effect of currency exchange rate changes on the translation of the
Company's United Kingdom and Singapore operations was not substantial during
1999. 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 in "Appendix B" for a
further discussion of the Company's exposure to foreign currency exchange risks
in connection with certain of its investments.
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<PAGE> 22
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 client 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 that additional financing will be available, or that if available, it will
be available on terms favorable to the Company.
QUARTERLY RESULTS
Note 17 to the consolidated financial statements set forth in "Appendix
C" reflects certain unaudited statement of operations data for the quarters in
1998 and 1999. Unaudited quarterly information has been prepared on the same
basis as annual information and, in management's opinion, includes all
adjustments necessary to present fairly information for 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.
For quarterly periods in 1998 and 1999, 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 the Company's principal client, 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 1998 to the first quarter of 1999 declined principally due to
the seasonal pattern of certain businesses served by the Company. Also,
management believes changes in the timing of the volume of services provided to
the Company's clients due to year 2000 buying patterns contributed to the
increase in revenues experienced by the Company in the third quarter of 1999 by
accelerating significant revenues into the third quarter of 1999 revenues that
may have otherwise occurred in the fourth quarter of 1999 and potentially the
first quarter of 2000.
The following table sets forth certain unaudited statement of
operations data, expressed as a percentage of revenues:
<TABLE>
<CAPTION>
1998 QUARTERS ENDED 1999 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>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit 18.8 19.0 18.4 18.0 18.8 18.6 18.5 18.8
Selling, general and administrative
expenses 11.2 13.3 11.0 8.6 10.8 11.4 10.7 7.7
Operating profit 7.6 5.7 7.4 9.4 8.0 7.2 7.8 11.1
Net income 6.2% 5.4% 5.7% 6.5% 6.0% 5.5% 5.8% 7.6%
</TABLE>
Gross profit as a percentage of revenues, remained relatively constant
from the fourth quarter of 1998 to the first quarter of 1999, and for each of
the comparative quarters between 1998 and 1999 as a substantial portion of the
Company's revenues continued to be derived from the Company's principal client
and the terms of the Company's arrangements with its principal client have also,
in large part, remained constant.
For the quarterly periods in 1998 and 1999, selling, general and
administrative expenses fluctuated principally due to personnel and related
expansion costs incurred to service increasing business. Additionally, for the
quarterly periods in 1998 and 1999, selling, general and administrative expenses
fluctuated partially due to the spreading of fixed and semi-variable costs over
a revenue base that fluctuates from quarter to quarter.
Operating profit fluctuated within the quarterly periods of 1998 and
1999 based primarily on the factors noted above.
Net income also fluctuated within the quarterly periods in 1998 and
1999 based primarily on the factors noted above, and based on an increase in net
interest income and other derived from the Company's cash equivalents and
investments in 1999 partially offset by a provision for income taxes in 1999 of
37.5%.
A-7
<PAGE> 23
INFLUENCE OF YEAR 2000
In 1999, management discussed the nature and progress of StarTek's plans to
become Year 2000 ready. In late 1999, management believed the Company completed
its remediation and testing of certain systems. Because of those planning and
implementation efforts, management believes: (i) the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems; and (ii) those systems successfully
responded to the Year 2000 date change. The Company expensed approximately
$150,000 related to remediating its systems. Management is not aware of any
substantial problems, resulting from Year 2000 issues, with StarTek's services,
internal systems, or products and services of third parties. Management plans to
continue to monitor StarTek's mission critical computer applications and those
of its important suppliers throughout 2000 in an effort to insure StarTek
addresses any latent Year 2000 problems responsively. Management does not
anticipate incurring any material costs related to its ongoing monitoring of
Year 2000 issues.
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 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 Relationship
Microsoft Corporation ("Microsoft") accounted for approximately 77.5% of
the Company's revenues in 1999. Loss of Microsoft as a 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 Microsoft as a client or, if it were to lose Microsoft as a client, it
would be able to timely replace Microsoft with clients which generate a
comparable amount of revenues. Additionally, the amount and growth rate of
revenues derived from the Microsoft relationship in the past is not necessarily
indicative of revenues that may be expected from Microsoft 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.
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 client.
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; (ii) expand its sales and marketing organization; (iii)
recruit, motivate, and retain qualified management, customer support, and other
personnel; (iv) rapidly expand 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 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.
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<PAGE> 24
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 the Company will be able to timely and successfully develop and
market any new services, such services will be commercially successful, or
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, would 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
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 the Company will be able to successfully recruit, hire, train, and
retain sufficient qualified personnel to adequately staff for existing business
or future growth. Additionally, since 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.
Risks Associated with International Operations and Expansion
StarTek currently conducts business in Europe and Asia, in addition to
its North America operations. Such international operations accounted for
approximately 24.0% of the Company's revenues for the year ended December 31,
1999. A component of the Company's growth strategy continues to be expansion of
its international operations. There can be no assurance the Company will be able
to continue or expand its capacity to market, sell, and deliver its services in
international markets, or 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 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 1, 2000, A. Emmet Stephenson, Jr., Chairman of the Board
and co-founder of the Company, and his family beneficially own approximately
65.5% 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 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. In connection with Domain.com, Inc.'s 19.9% equity interest
in Good Catalog Company, Mr. Stephenson is also a director of Good Catalog
Company. Previously, Good Catalog Company was a wholly owned subsidiary of The
Reader's Digest Association, Inc. Domain.com, Inc. is a wholly owned subsidiary
of StarTek, Inc. Currently, Good Catalog Company, doing business as gifts.com,
sells gifts on-line through an Internet web site accessed through the URL
www.gifts.com.
A-9
<PAGE> 25
Dependence on Key Personnel
The Company's success to date has depended in part on the skills and
efforts of Mr. Stephenson and Michael W. Morgan, President, Chief Executive
Officer, Director, and co-founder of the Company. As of March 1, 2000, Mr.
Stephenson and his family and Mr. Morgan beneficially own approximately 65.5%
and 4.7% 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 the Company can retain the services of these
individuals. The loss of either Mr. Stephenson, Mr. Morgan, or the Company's
inability to hire and 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 generally 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 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.
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 client, the Company typically generates revenues based
on the number and duration of customer inquiries, and volume, complexity, and
type of components involved in its clients' products. Consequently, the amount
of revenues generated from any particular client is generally dependent upon
customers' purchase and use of StarTek's 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 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 services. Substantially all 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 Markets
The markets in which StarTek operates are highly competitive.
Management 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,
in-house operations of StarTek'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 additional competitors with
greater name recognition and resources than the Company will not enter the
markets in which the Company operates. In-house operations of the Company's
existing and potential clients are significant competitors of the Company. As a
result, StarTek's performance and growth could be materially and adversely
affected if its clients decide to provide in-house services currently
outsourced, or if potential clients retain or increase their in-house
capabilities. Moreover, a decision by its principal client to consolidate its
outsourced services with a company other than StarTek would materially and
adversely affect the Company's business. 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.
A-10
<PAGE> 26
Risks of Business Interruptions
StarTek's operations depend on 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,
other emergencies, and ability of its suppliers to deliver component parts
quickly. While the Company maintains certain procedures and contingency plans to
minimize the detrimental impact of such events, there can be no assurance 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 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.
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. Additionally, since approximately 29.8% of StarTek's outstanding common
stock is currently available to the public for trading, any change in demand for
such shares can be expected to substantially influence market prices of
StarTek's outstanding common stock.
Risks related to Investment in and Note Receivable from Good Catalog Company,
doing business as gifts.com
Through its wholly owned subsidiary Domain.com, Inc., the Company's
investment in and note receivable from Good Catalog Company, doing business as
gifts.com, of approximately $10.4 million, in the aggregate, involves a high
degree of risk. The business of gifts.com is difficult to evaluate because it
has a limited operating history under its current business model. Good Catalog
Company was a wholly owned subsidiary of The Reader's Digest Association, Inc.
Gifts.com's current management team and its current web site were both formed in
late 1999. Accordingly, an investor in the Company's common stock must consider
the challenges, risks, and uncertainties frequently encountered by early stage
companies using new and unproven business models in new and rapidly evolving
markets. These challenges influencing gifts.com's ability to substantially
increase its revenues and thereby achieve profitability, include gifts.com's
ability to: (i) execute on its business model; (ii) increase brand recognition;
(iii) manage growth in its operations; (iv) cost-effectively attract and retain
a high volume of online customers and build a critical mass of repeat customers
at a reasonable cost; (v) effectively manage, control, and account for
inventory; (vi) upgrade and enhance its web site, transaction-processing
systems, order fulfillment capabilities, and inventory management systems; (vii)
increase awareness of its online store; (viii) establish pricing to meet
customer expectations; (ix) compete effectively in its market; (x) adapt to
rapid regulatory and technological changes related to E-commerce and the
Internet; and (xi) protect its trademarks, service marks, and copyrights. These
and other uncertainties generally attributable to businesses engaging in
E-commerce and the Internet must be considered when evaluating the Company's
investment in and note receivable from Good Catalog Company, and the Company's
participation in the business of gifts.com. An impairment of the Company's
investment in and note receivable from Good Catalog Company could have an
adverse effect on the Company's results of operations and financial condition.
A-11
<PAGE> 27
Risks related to the Company's Internet web site operations
Through its wholly owned subsidiary Domain.com, Inc., the Company's
Internet web site operations involve a high degree of risk. The businesses of
airlines.com and wedding.com, for example, are difficult to evaluate because
each are early stage and have a limited operating history. Accordingly, an
investor in the Company's common stock must consider the challenges, risks, and
uncertainties frequently encountered by early stage companies using new and
unproven business models in new and rapidly evolving markets. These challenges
influencing, for example, airlines.com's and wedding.com's ability to
substantially increase revenues and thereby achieve profitability, include the
ability to: (i) execute on business models; (ii) increase brand recognition;
(iii) manage growth in operations; (iv) cost-effectively attract and retain a
high volume of online customers and build a critical mass of repeat customers at
a reasonable cost; (v) upgrade and enhance web sites, transaction-processing
systems, and order fulfillment capabilities; (vi) increase awareness of online
offerings; (vii) establish pricing to meet customer expectations; (viii) compete
effectively; (ix) adapt to rapid regulatory and technological changes related to
E-commerce and the Internet; and (x) protect trademarks, service marks, and
copyrights. These and other uncertainties generally attributable to businesses
engaging in E-commerce and the Internet must be considered when evaluating
prospects of the Company's Internet web site operations.
Risks related to the Company's portfolio of Internet domain names
Through its wholly owned subsidiary Domain.com, Inc., the Company owns
a portfolio of Internet domain names. The estimated fair market value of domain
names owned by the Company is difficult to assess because the Company, to date,
has had limited activity related to its Internet domain name portfolio. An
investor in the Company's common stock must consider the challenges, risks, and
uncertainties frequently encountered by early stage companies using new and
unproven business models in new and rapidly evolving markets. These challenges
influencing the Company's ability to benefit from its portfolio of Internet
domain names include the Company's ability to: (i) execute on its business
model; (ii) increase brand recognition of the Internet domain names within the
Company's portfolio; and (iii) protect trademarks, service marks, and copyrights
related to the domain names. These and other uncertainties generally
attributable to businesses engaging in E-commerce and the Internet must be
considered when evaluating the Company's portfolio of Internet domain names, and
prospects of the Company's Internet web site operations anticipated to be
developed from these domain names.
A-12
<PAGE> 28
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 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 "Appendix A" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations"--"Factors That May Affect Future
Results". Also, see Note 1 and 3 to the consolidated financial statements set
forth in "Appendix C" for a further discussion of the Company's cash, cash
equivalents, and investments.
Interest Rate Sensitivity and Other General Market Risks
Cash and Cash Equivalents. As of December 31, 1999, the Company had
$11.9 million in cash and cash equivalents, which was not restricted, and
consisted of: (i) approximately $11.6 million invested in various money market
funds, overnight investments, and various commercial paper securities at a
combined weighted average interest rate of approximately 5.0%; and (ii)
approximately $0.3 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 December 31, 1999, the Company
had investments available for sale, which, in the aggregate, had an original
cost and fair market value of $23.7 million and $22.8 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.
B-1
<PAGE> 29
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) the 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 December 31, 1999:
<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 6.12% $ 5,944 $ -- $ -- $ -- $ -- $ -- $ 5,944 $ 6,059
Foreign government bonds 6.25% 1,980 -- -- -- -- -- 1,980 1,991
Corporate bonds 8.54% -- 3,987 -- -- -- -- 3,987 3,975
Corporate bonds 7.26% -- -- 2,711 -- -- -- 2,711 2,518
Corporate bonds 5.08% -- -- -- -- 1,830 -- 1,830 1,484
Foreign government bonds 8.88% -- -- -- -- -- 1,438 1,438 1,582
------- ------- ------- ------- ------- ------- ------- -------
Total 6.96% $ 7,924 $ 3,987 $ 2,711 $ -- $ 1,830 $ 1,438 $17,890 $17,609
======= ======= ======= ======= ======= ======= ======= =======
</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, 1999 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 an original cost and fair market value of
approximately $2.0 million and $1.9 million, respectively; and (ii) equity
securities which, in the aggregate, had an original cost and fair market value
of approximately $3.8 million and $3.3 million, respectively.
Debt securities within bond mutual funds as of December 31, 1999: (i)
had a weighted average yield of approximately 11.8%, and a weighted average
maturity of approximately 3.4 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) the
potential for political and economic instability. The 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 of the 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 December 31, 1999, the Company
had outstanding debt of approximately $7.4 million, approximately $2.7 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 a
$2.0 million equipment loan arrangement whereby the Company is expected to repay
its debt at a variable rate of interest 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 $2.0 million 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. As of December 31, 1999, the
Company had no outstanding line of credit obligations. The Company has not
hedged against interest rate changes.
B-2
<PAGE> 30
Equity Price Risk and Other General Market Risks
Equity Securities. As of December 31, 1999, the Company held in its
investments available for sale portfolio certain equity securities with original
cost and fair market value, in the aggregate, of $3.8 million and $3.3 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 the value of equity securities
and equity prices in general would have a material adverse affect on the
Company's equity investments. Also, the price of common stock 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 December 31, 1999, the Company was invested
in trading securities which, in the aggregate, had an original cost and fair
market value of approximately $1.4 million and $1.2 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 December 31, 1999, the Company was invested in
securities sold short related to a total of 24,421 shares of U.S. equity
securities which, in the aggregate, had a basis and estimated fair market value
of approximately $1.8 million and $2.2 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.
Management believes the risk of loss to the Company in the event of
nonperformance by any party under these agreements 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 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 Risk
Approximately 17.3% of the Company's revenues in 1999 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.
B-3
<PAGE> 31
APPENDIX C
----------
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
StarTek, Inc.
We have audited the accompanying consolidated balance sheets of
StarTek, Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Denver, Colorado
February 11, 2000
C-1
<PAGE> 32
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,593 $ 11,943
Investments 16,829 23,907
Trade accounts receivable, less allowance for
doubtful accounts of $441 and $775, respectively 20,476 21,792
Inventories 2,772 3,740
Deferred tax assets 1,135 2,363
Prepaid expenses and other assets 165 448
------------ ------------
Total current assets 60,970 64,193
Property, plant and equipment, net 19,171 26,758
Investment in Good Catalog Company, at cost -- 2,606
Note receivable from Good Catalog Company -- 7,818
Other assets 60 60
------------ ------------
Total assets $ 80,201 $ 101,435
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,433 $ 16,148
Accrued liabilities 2,092 4,443
Income taxes payable 1,944 1,384
Current portion of capital lease obligations 46 32
Current portion of long-term debt 906 1,428
Other 213 544
------------ ------------
Total current liabilities 22,634 23,979
Capital lease obligations, less current portion 77 42
Long-term debt, less current portion 3,196 5,922
Deferred income taxes 144 446
Other 17 --
Commitments and contingencies -- --
Stockholders' equity:
Common stock 138 140
Additional paid-in capital 41,661 45,681
Cumulative translation adjustment 167 25
Unrealized loss on investments available for sale (606) (596)
Retained earnings 12,773 25,796
------------ ------------
Total stockholders' equity 54,133 71,046
------------ ------------
Total liabilities and stockholders' equity $ 80,201 $ 101,435
============ ============
</TABLE>
See notes to consolidated financial statements.
C-2
<PAGE> 33
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 89,150 $ 140,984 $ 205,227
Cost of services 71,986 115,079 166,880
---------- ---------- ----------
Gross profit 17,164 25,905 38,347
Selling, general and administrative
expenses 8,703 14,714 20,338
Management fee expense 3,126 -- --
---------- ---------- ----------
Operating profit 5,335 11,191 18,009
Net interest income and other 933 2,254 2,814
---------- ---------- ----------
Income before income taxes 6,268 13,445 20,823
Income tax expense 2,110 4,901 7,800
---------- ---------- ----------
Net income $ 4,158 $ 8,544 $ 13,023
========== ========== ==========
Earnings per share:
Basic $ 0.62 $ 0.94
Diluted $ 0.62 $ 0.92
</TABLE>
See notes to consolidated financial statements.
C-3
<PAGE> 34
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,158 $ 8,544 $ 13,023
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,829 2,852 4,715
Deferred income taxes (153) (577) (884)
(Gain) loss on sale of assets -- (106) 3
Changes in operating assets and liabilities:
Purchases of trading securities, net -- -- (1,146)
Trade accounts receivable, net (1,487) (7,958) (1,316)
Inventories (4) (233) (968)
Prepaid expenses and other assets (65) (17) (283)
Accounts payable 2,425 8,046 (1,285)
Income taxes payable 106 1,838 1,094
Accrued and other liabilities (661) 679 2,874
---------- ---------- ----------
Net cash provided by operating activities 6,148 13,068 15,827
INVESTING ACTIVITIES
Purchases of investments available for sale (7,504) (18,684) (19,123)
Proceeds from disposition of investments available for sale -- 8,397 13,197
Purchases of property, plant and equipment (3,191) (14,108) (12,593)
Proceeds from disposition of property, plant and equipment -- 181 2
Investment in Good Catalog Company, at cost -- -- (2,606)
Note receivable from Good Catalog Company -- -- (7,818)
Collections on notes receivable-stockholders 213 -- --
---------- ---------- ----------
Net cash used in investing activities (10,482) (24,214) (28,941)
FINANCING ACTIVITIES
Stock options exercised -- -- 2,368
Principal payments on line of credit borrowings, net (3,500) -- --
Principal payments on borrowings (1,854) (62) (1,057)
Proceeds from borrowings and capital lease obligations 1,500 3,729 4,331
Principal payments on capital lease obligations (2,218) (80) (14)
Dividend to S corporation principal stockholders (8,000) -- --
Net proceeds from initial public offering of common stock 41,042 -- --
Contributed capital 1,641 -- --
---------- ---------- ----------
Net cash provided by financing activities 28,611 3,587 5,628
Effect of exchange rate changes on cash (59) 192 (164)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 24,218 (7,367) (7,650)
Cash and cash equivalents at beginning of year 2,742 26,960 19,593
---------- ---------- ----------
Cash and cash equivalents at end of year $ 26,960 $ 19,593 $ 11,943
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 368 $ 58 $ 332
Income taxes paid $ 2,263 $ 3,640 $ 7,484
Property, plant and equipment acquired or refinanced under
long-term debt $ 261 $ 3,629 $ 2,031
Change in unrealized loss on investments available for sale,
net of tax $ 92 $ 514 $ (10)
</TABLE>
See notes to consolidated financial statements.
C-4
<PAGE> 35
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, 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
Cumulative 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
Cumulative 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
Stock options exercised 158,540 2 2,366 -- -- -- 2,368
Income tax benefit from stock
options exercised -- -- 1,654 -- -- -- 1,654
Net income -- -- -- -- 13,023 -- 13,023
Cumulative translation adjustment -- -- -- -- -- (142) (142)
Unrealized gain on investments
available for sale -- -- -- -- -- 10 10
-----------
Comprehensive income -- -- -- -- -- -- 12,891
-----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 13,987,111 $ 140 $ 45,681 $ -- $ 25,796 $ (571) $ 71,046
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
C-5
<PAGE> 36
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.'s business was founded in 1987 and, through its wholly
owned subsidiaries, has provided outsourced process management services since
inception. On December 30, 1996, StarTek, Inc. (the "Company" or "StarTek") was
incorporated in Delaware, and in June 1997 StarTek completed an initial public
offering of its common stock. Prior to December 30, 1996, StarTek USA, Inc. and
StarTek Europe, Ltd. conducted business as affiliates under common control. In
1998, the Company formed StarTek Pacific, Ltd., a Colorado corporation and
Domain.com, Inc., a Delaware corporation, both of which are also wholly owned
subsidiaries of the Company. StarTek, Inc. is a holding company for the
businesses conducted by its wholly owned subsidiaries. The consolidated
financial statements include accounts of all wholly owned subsidiaries after
elimination of significant intercompany accounts and transactions.
Business Operations
StarTek has an established position as a global provider of process
management services and owns and operates branded vertical market Internet web
sites. The Company's process management services include E-commerce support and
fulfillment, provisioning management for complex telecommunications systems,
high-end inbound technical support, and a comprehensive offering of supply chain
management services. As an outsourcer of process management services as its core
business, StarTek allows its clients to focus on their primary business, reduce
overhead, replace fixed costs with variable costs, and reduce working capital
needs. The Company has continuously expanded its process management business and
facilities to offer additional outsourcing services in response to growing needs
of its clients and to capitalize on market opportunities, both domestically and
internationally. The Company has process management operations in North America,
Europe, and Asia.
StarTek owns a portfolio of branded vertical market Internet web sites
and operates certain sites, including airlines.com and wedding.com. In September
1999, StarTek and The Reader's Digest Association, Inc. entered into certain
arrangements whereby StarTek obtained a 19.9% ownership interest in Good Catalog
Company, doing business as gifts.com. Gifts.com provides an Internet web site
accessed through the URL www.gifts.com that sells gifts on-line. StarTek expects
to combine its process management service platforms with certain Internet web
site businesses arising from a portfolio of Internet domain names to establish a
solid position in the Internet connected world. The Company's investment in Good
Catalog Company is carried at cost because the Company does not exercise
significant influence over financial or operating policies of such company
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 information have been restated to reflect
the split.
Foreign Currency Translation
Assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at current exchange rates. Revenues and expenses
are translated at average monthly exchange rates. Resulting translation
adjustments, net of applicable deferred income taxes (1997 tax benefit of $42,
1998 tax of $53, and 1999 tax of $15), are reported as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
in determining net income. Such gains and losses were not material for any
period presented.
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 $4,007, $8,127, and $12,891 for 1997, 1998, and 1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 1997 and 1998 consolidated financial
statements and related notes have been made to conform to the 1999 presentation.
C-6
<PAGE> 37
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)
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, accounts receivable, accounts payable, notes receivable, debt, and
capital lease obligations. Carrying values of cash and cash equivalents,
accounts receivable, and accounts payable approximate fair value. Investments
are reported at fair value. Management believes differences between fair values
and carrying values of notes receivable, 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 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.
Investments
Investments available for sale consist of debt and equity securities
reported at fair value, with unrealized gains and losses, net of tax (tax
benefits of $56, $356, and $360 for 1997, 1998, and 1999, respectively) reported
as 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. Original cost of investments available for sale,
which are sold, is based on the specific identification method. Interest income
from investments available for sale is included in net interest income and
other. Trading securities are carried at fair market values. Fair market values
are determined by the most recently traded price of the security as of the
balance sheet date. Gross unrealized gains and losses from trading securities
are reflected in income currently and as part of net interest income and other.
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.
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.
Investment in Good Catalog Company, at cost
Equity investments of less than 20% in non-publicly traded companies
are carried at cost. Changes in value of these investments are not recognized
unless impairment in value is deemed to be other than temporary.
C-7
<PAGE> 38
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)
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 is
computed using the straight-line method based on:
Estimated Useful Lives
----------------------------
Buildings and improvements 7 to 30.5 years
Equipment 3 to 5 years
Furniture and fixtures 7 years
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 tax returns of
stockholders and no provision was made for federal, state, and foreign income
taxes.
Subsequent to 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 Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". Deferred income taxes reflect
net effects of temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for income tax
purposes. The Company is subject to foreign income taxes on its foreign
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. These 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. These advisory fees
and salaries were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Selling, general and administrative expenses $ 512 $ 516 $ 516
Management fee expense $ 3,126 -- --
</TABLE>
2. 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>
DECEMBER 31
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net income (A) $ 4,158 $ 8,544 $ 13,023
------------ ------------ ------------
Weighted average shares of common stock (B) 12,652,680 13,828,571 13,874,556
Dilutive effect of stock options -- -- 264,593
------------ ------------ ------------
Common stock and common stock equivalents (C) 12,652,680 13,828,571 14,139,149
============ ============ ============
Earnings per share:
Basic (A/B) $ 0.33 $ 0.62 $ 0.94
Diluted (A/C) $ 0.33 $ 0.62 $ 0.92
</TABLE>
C-8
<PAGE> 39
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. INVESTMENTS
As of December 31, 1998, 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 $ 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>
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 December 31, 1999, 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 $ 7,924 $ 8,050
Two to five years 8,528 7,977
Due after five years 1,438 1,582
------------ ------------
17,890 17,609
Bond mutual funds 1,992 1,850
Equity securities 3,835 3,302
------------ ------------
Total $ 23,717 $ 22,761
============ ============
</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.
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. 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
December 31, 1999, the Company was invested in securities sold short related to
a total of 24,421 shares of U.S. equity securities which, in the aggregate, had
a basis and estimated fair market value of approximately $1,845 and $2,160,
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.
C-9
<PAGE> 40
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. INVESTMENTS (CONTINUED)
Risk of loss to the Company in the event of nonperformance by any party
under these agreements 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 risk in excess of the amounts recognized in the accompanying 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.
4. 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
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Purchased components and
fabricated assemblies $ 2,313 $ 1,986
Finished goods 459 1,754
------------ ------------
$ 2,772 $ 3,740
============ ============
</TABLE>
5. INVESTMENT IN AND NOTE RECEIVABLE FROM GOOD CATALOG COMPANY
Effective September 15, 1999, the Company, through its wholly owned
subsidiary Domain.com, Inc. ("Domain.com"), entered into a contribution
agreement (the "Contribution Agreement") and stockholders agreement with The
Reader's Digest Association, Inc. ("Reader's Digest") and Good Catalog Company,
previously a wholly owned subsidiary of Reader's Digest. On November 8, 1999,
pursuant to the Contribution Agreement, Domain.com purchased 19.9% of the
outstanding common stock of Good Catalog Company for approximately $2,606 in
cash. Reader's Digest owns the remaining 80.1% of the outstanding common stock
of Good Catalog Company. The Contribution Agreement provides for: (i) an
assignment from Domain.com to Good Catalog Company of Domain.com's right, title,
and interest in and to the URL www.gifts.com; and (ii) an undertaking by Good
Catalog Company to effect a change in its name to Gifts.com, Inc. Domain.com has
the right to designate at least one member of Good Catalog Company's board of
directors, which will consist of at least five directors. Effective November 1,
1999, Domain.com, Reader's Digest, and Good Catalog Company entered into a loan
agreement pursuant to which Domain.com advanced an unsecured loan of $7,818 and
Reader's Digest advanced an unsecured loan of $18,433 to Good Catalog Company (
the "Loans"). The Loans mature November 1, 2002, bear interest at a rate equal
to a three month LIBO rate plus 2.0% per annum (approximately 8.0% as of
December 31, 1999), and interest is payable quarterly. Currently, Good Catalog
Company, doing business as gifts.com, provides an Internet web site accessed
through the URL www.gifts.com that sells gifts on-line. The Company agreed to
perform certain fulfillment services for Good Catalog Company in connection with
certain products and services to be sold in connection with gifts.com. During
1999 and included in the accompanying 1999 consolidated statement of operations,
the Company recognized approximately $1,100 of revenues related to fulfillment
services performed by the Company for Good Catalog Company, and approximately
$89 of interest income related to Good Catalog Company's $7,818 debt to
Domain.com. Included in trade accounts receivable in the accompanying
consolidated balance sheet as of December 31, 1999, was approximately $622 due
from Good Catalog Company to the Company in connection with the Company's
provision of fulfillment services to Good Catalog Company during 1999.
Management has evaluated its investment in and note receivable from
Good Catalog Company for recoverability. Management reviewed certain financial
data and held discussions with Good Catalog Company management. As of December
31, 1999, management believes its investment in and note receivable from Good
Catalog are recoverable and no impairment loss provision is necessary. Should
available information in the future indicate a material impairment in carrying
values of the Company's investment in and note receivable from Good Catalog
Company, an adjustment would be recorded.
C-10
<PAGE> 41
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Land $ 1,129 $ 2,179
Buildings and improvements 9,656 14,079
Equipment 14,785 20,333
Furniture and fixtures 1,445 2,219
------------ ------------
27,015 38,810
Less accumulated depreciation and amortization (7,844) (12,052)
------------ ------------
Property, plant and equipment, net $ 19,171 $ 26,758
============ ============
</TABLE>
Management decided to dispose of a 10,500 square-foot facility and
related land in Greeley, Colorado, and is actively searching for a buyer.
Process management service operations at this facility ceased in December 1999.
As of December 31, 1999, management believes carrying values of this facility
and related land, which, in the aggregate, total approximately $198, are
recoverable and no impairment loss provision is necessary. Should available
information in the future indicate a material impairment in carrying values of
this facility and related land, an adjustment would be recorded.
Certain process management services previously provided from the
Company's Denver facility were completely transferred to other facilities by
January 31, 2000. Currently, a relatively small portion of the Denver facility
provides for certain executive, corporate, and information technology functions,
while management evaluates possible operating activities which could be located
in this facility. As of December 31, 1999, management believes carrying values
of this facility and related land are recoverable and no impairment loss
provision is necessary. Should available information in the future indicate a
material impairment in carrying values of this facility and related land, an
adjustment would be recorded.
7. LINE OF CREDIT
As of December 31, 1998 and 1999, 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,
1998 and 1999. Interest is payable monthly and accrues at the prime rate of the
bank (8.5% as of December 31, 1999). This revolving line of credit matures on
April 30, 2001.
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. The Company may not pay dividends in an amount which would cause a
failure to meet these financial covenants. As of and for the year ended December
31, 1999, the Company was in compliance with the various financial and other
covenants provided for under the line of credit.
8. LEASES
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 was the following
equipment held under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1999
-------- --------
<S> <C> <C>
Equipment $ 261 $ 162
Less accumulated amortization (233) (100)
-------- --------
$ 28 $ 62
======== ========
</TABLE>
C-11
<PAGE> 42
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. LEASES (CONTINUED)
The Company also leases equipment under various non-cancelable
operating leases. As of December 31, 1999, future minimum rental commitments for
capital and operating leases were:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
2000 $ 42 $ 541
2001 41 448
2002 -- 449
2003 -- 292
2004 -- 136
Thereafter -- 12
---------- ----------
Total minimum lease payments $ 83 $ 1,878
==========
Less amount representing interest (9)
----------
Present value of minimum lease payments 74
Less current portion of obligations under capital leases (32)
----------
Obligations under capital leases, less current portion $ 42
==========
</TABLE>
Rent expense, including equipment rentals, for 1997, 1998, and 1999 was
$271, $410, and $1,054, respectively.
On November 1, 1999, the Company entered into a lease agreement for
30,000 square feet of building space in Big Spring, Texas. The facility is
principally used for a call center supporting Internet and telecommunications
clients, and for general office use and other services offered by the Company.
The term of the lease agreement commenced on November 1, 1999 and unless earlier
terminated or extended, continues until November 1, 2014. Pursuant to the terms
of the lease agreement, the Company was granted, among other things: (i) a right
to terminate the lease agreement in the fifth or tenth year. Assuming the lease
agreement is not terminated after the end of the fifth or tenth year, total
minimum rental commitments, in the aggregate, excluding certain taxes and
utilities as defined, are approximately $903, and are payable on a monthly basis
from November 1999 through November 2014. Pursuant to an incentive agreement and
through the tenth year of the lease agreement, the Company shall be reimbursed
for the actual amount of its lease payments.
9. 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 bears interest at 9% per annum, 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,
1999, the Company had used approximately $4,012 and $1,745 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> 43
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Equipment loan 3,564 2,744
Equipment loan -- 1,957
Promissory note with incentive provisions -- 2,300
Other debt obligations 538 349
------------ ------------
4,102 7,350
Less current portion of long-term debt (906) (1,428)
------------ ------------
Long-term debt, less current portion $ 3,196 $ 5,922
============ ============
</TABLE>
On October 26, 1998, the Company, through its wholly owned subsidiary
StarTek USA, Inc., entered into an equipment loan agreement with a finance
company maturing 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 7.0% and for the Company to pay
forty-eight equal monthly installments, which, in the aggregate, totaled
approximately $4,176 at inception of the equipment loan. 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 years ended December 31, 1998 and 1999, interest
expense incurred on the equipment loan was $21 and $224, respectively.
On October 22, 1999, the Company, through its wholly owned subsidiary
StarTek USA, Inc., completed an equipment loan arrangement with a finance
company maturing October 22, 2003. In connection with the equipment loan, the
Company received cash of $2,031 in exchange for providing, among other things,
certain collateral which generally consisted of computer hardware and software,
various forms of telecommunications equipment, and furniture and fixtures whose
estimated cost was equal to the principal amount of the equipment loan. The
equipment loan arrangement provides for interest at the prime rate minus 1.60%
(6.9% on December 31, 1999), and forty-eight consecutive monthly payments.
StarTek USA, Inc. is required, from time to time, to maintain certain operating
ratios. During the year ended December 31, 1999, interest expense incurred on
the equipment loan was $22. As of December 31, 1999, StarTek USA, Inc. was in
compliance with these financial covenants.
In November 1999, the Company received $2,300 in cash in connection
with its Big Spring, Texas operations through a non-interest bearing
fifteen-year promissory note with incentive provisions. The principal balance of
the promissory note declines without payment over fifteen years based on the
level of employment at the Company's Big Spring, Texas facility during the term
of the promissory note.
The Company has other debt obligations totaling $349 as of December 31,
1999 with interest up to 6.0% annually and maturing through 2007.
Future scheduled annual principal payments on long-term debt, including
amounts related to the promissory note with waiver provisions and the promissory
note with incentive provisions, as of December 31, 1999 were:
<TABLE>
<S> <C>
2000 $ 1,428
2001 1,708
2002 1,643
2003 659
2004 190
Thereafter 1,722
--------
$ 7,350
========
</TABLE>
C-13
<PAGE> 44
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. 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. Significant
components of the provision for income taxes for the years ended December 31,
1997, 1998, and 1999 were:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 2,211 $ 5,311 $ 7,054
Foreign 9 123 864
State 99 249 762
---------- ---------- ----------
Total current 2,319 5,683 8,680
Deferred:
Federal (181) (678) (765)
State (28) (104) (115)
---------- ---------- ----------
Total deferred (209) (782) (880)
---------- ---------- ----------
Income tax expense $ 2,110 $ 4,901 $ 7,800
========== ========== ==========
</TABLE>
Income tax benefits associated with disqualifying dispositions of
incentive stock options during 1999 reduced income taxes payable as of December
31, 1999 by $1,654. Such benefits were recorded as an increase to additional
paid-in capital.
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 were:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Bad debt allowance $ 161 $ 347
Vacation accrual 233 433
Deferred revenue 88 311
Accrued expenses 192 668
Unrealized loss on investments
available for sale 356 360
Other 105 244
---------- ----------
Total deferred tax assets 1,135 2,363
Long-term deferred tax liabilities:
Tax depreciation in excess of book (49) (422)
Other (95) (24)
---------- ----------
Total long-term deferred tax liabilities (144) (446)
---------- ----------
Net deferred tax assets $ 991 $ 1,917
========== ==========
</TABLE>
Differences between U.S. federal statutory income tax rates and the
Company's effective tax rates for the years ended December 31, 1997, 1998, and
1999 were:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Tax at U.S. statutory rates 34.0% 35.0% 35.0%
State income taxes, net of federal tax
benefit 3.3 3.2 3.1
One-time credit to record deferred
tax asset upon termination of
S corporation status (4.4) -- --
Other, net (2.0) (1.7) (0.6)
---------- ---------- ----------
30.9% 36.5% 37.5%
========== ========== ==========
</TABLE>
12. NET INTEREST INCOME AND OTHER
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Interest income $ 1,229 $ 2,122 $ 2,741
Interest expense (373) (58) (332)
Other income and expense 77 190 405
---------- ---------- ----------
Net interest income and other $ 933 $ 2,254 $ 2,814
========== ========== ==========
</TABLE>
C-14
<PAGE> 45
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. STOCKHOLDERS' EQUITY
Immediately prior to 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 notes to consolidated financial
statements to shares and related prices in per share calculations, per share
amounts, and stock option plan information have been restated to reflect the
split.
Immediately prior to closing the initial public offering, the Company
also declared an $8,000 dividend approximating additional paid-in capital and
retained earning of the Company as of the closing date, payable to principal
stockholders pursuant to certain promissory notes. Promissory notes payable to
principal stockholders were paid from net proceeds of the Company's initial
public offering. As of December 31, 1998, common stock and additional paid-in
capital consisted of:
<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>
At the Company's May 19, 1999 annual meeting of stockholders, a
proposal to amend the Company's Certificate of Incorporation to reduce the
number of shares of common stock the Company has the authority to issue from
95,000,000 shares to 18,000,000 shares and eliminate the authorization of
preferred stock was approved by an affirmative vote of holders of a majority of
the shares of common stock outstanding. As of December 31, 1999, common stock
and additional paid-in capital consisted of:
<TABLE>
<S> <C>
Common stock; 18,000,000 shares, $.01 par value, authorized;
13,987,111 shares outstanding $ 140
Additional paid-in capital 45,681
--------
$ 45,821
========
</TABLE>
14. 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.
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."
Options granted under the Plan could be exercised for a period of not
more than 10 years and one month from 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 date of grant, or 110% of fair market value per share in case of a 10%
or greater stockholder. Options generally vested ratably over a five-year period
from date of grant. Unexercised, vested options remained exercisable for three
calendar months from 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 holders to exercise
any granted options. Subsequently, all outstanding options were exercised. In
the aggregate, 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 were
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> 46
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. 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 "Options") to key
employees, directors (other than non-employee directors), consultants, and other
independent contractors. The Option Plan provides for Options to be granted for
a maximum of 985,000 shares of common stock, which are to be awarded by
determination of committee of non-employee directors. Unless otherwise
determined by the committee, all Options granted under the Option Plan vest 20%
annually beginning on the first anniversary of the 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 termination of employment; (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 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) date of Participant's membership on the
Company's board of directors is terminated for cause; (ii) ten years from option
grant date; or (iii) one year after Participant's death. Stock option activity
during 1997, 1998, and 1999 consisted of:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Outstanding as of beginning of
year -- 611,500 613,800
Granted 618,500 36,200 194,550
Exercised -- -- (158,540)
Canceled (7,000) (33,900) (44,100)
---------- ---------- ----------
Outstanding as of end of year 611,500 613,800 605,710
========== ========== ==========
Exercisable as of end of year 20,000 140,200 107,820
========== ========== ==========
</TABLE>
As of December 31, 1997, 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, except for 8,000 options exercisable at
$13.06 per share. As of December 31, 1998, the exercise price per share for
options outstanding 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, 1999, the exercise price for options outstanding was
$50.06 for 300 options, $42.75 for 89,650 options, $38.63 for 10,000 options,
$32.81 for 22,700 options, $31.00 for 6,600 options, $18.50 for 47,200 options,
$15.00 for 406,300 options, $13.06 for 2,000 options, $12.69 for 6,000 options,
$12.25 for 7,600 options, and $10.38 for 7,360 options. As of December 31, 1999,
there were 10,000 fully vested options exercisable at $38.63 per share, 6,000
fully vested options exercisable at $18.50 per share, 83,500 fully vested
options exercisable at $15.00 per share, 800 fully vested options exercisable at
$13.06 per share, 6,000 fully vested options exercisable at $12.69 per share,
and 1,520 fully vested options exercisable at $12.25 per share. Options for
262,750 and 48,000 shares of the Company's common stock were available for
future grant as of December 31, 1999 under the Option Plan and Director Option
Plan, respectively.
The Company elected to follow Accounting Principles Board Opinion No.
25, ("APB 25") "Accounting for Stock Issued to Employees" 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 date of grant, no compensation expense has been recognized.
Pro forma information regarding net income and net income per share is required
by Statement of Financial Accounting Standards No. 123, (SFAS 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
SFAS 123.
C-16
<PAGE> 47
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. STOCK OPTIONS (CONTINUED)
Fair value of options granted during 1997 was estimated as of date of
grant using a Black-Scholes option pricing model and assuming a 6.0% risk free
rate, a seven year life, a 30.0% expected volatility, and no dividends. Fair
value of options granted during 1998 was estimated as of date of grant using a
Black-Scholes option pricing model and assuming a 5.5% risk-free interest rate,
a seven year life, a 55.1% expected volatility, and no dividends. Fair value of
options granted during 1999 was estimated as of date of grant using a
Black-Scholes option pricing model assuming a range of 6.0% to 6.3% for the
risk-free rate, a seven year life, a 72.1% expected volatility, and no
dividends. Weighted average grant date fair market value of options granted
during 1997, 1998, and 1999 was approximately $7.00 per share, $7.00 per share,
and $24.24 per share, respectively. 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 earnings per share would have
decreased by $0.03. Had this method been used in the determination of net income
for 1998, net income would have decreased by $559 and basic and diluted earnings
per share would have decreased by $0.04. Similarly, had this method been used in
the determination of net income for 1999, net income would have decreased by
$848 and basic and diluted earnings per share would have decreased by $0.06.
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in subjective input
assumptions can materially affect fair value estimates, in management's opinion,
the existing models do not necessarily provide a reliable single measure of fair
value of the Company's stock options.
15. 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 year ended December 31, 1997, the Company's operations in Asia
were not material and are included with North America in the following table. As
of December 31, 1997, 1998 and 1999 the Company's long-lived assets located in
Europe and Asia were not material and are included 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 major
geographic areas in which the Company operates were:
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE ASIA ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
YEAR ENDED DECEMBER 31, 1999
Revenues $ 156,008 $ 23,330 $ 25,889 $ -- $ 205,227
Operating profit 14,877 1,818 1,314 -- 18,009
Identifiable assets $ 92,402 $ 7,478 $ 3,819 $ (2,264) $ 101,435
</TABLE>
16. PRINCIPAL CLIENTS
Two clients accounted for 56.3% and 25.4% of revenues for the year
ended December 31, 1997. One client accounted for 72.5% and 77.5% of revenues
for the year ended December 31, 1998 and 1999, respectively. The loss of its
principal client for the year ended December 31, 1999 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 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, 1999.
C-17
<PAGE> 48
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. QUARTERLY DATA (UNAUDITED)
<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
Earnings per share:
Basic $ 0.11 $ 0.10 $ 0.13 $ 0.28
Diluted $ 0.11 $ 0.10 $ 0.13 $ 0.28
Weighted average shares outstanding:
Basic 13,828,571 13,828,571 13,828,571 13,828,571
Diluted 13,828,571 13,828,571 13,828,571 13,828,571
</TABLE>
<TABLE>
<CAPTION>
1999 QUARTERS ENDED
---------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 40,850 $ 45,723 $ 52,279 $ 66,375
Gross profit 7,686 8,507 9,690 12,464
Selling, general and administrative expenses 4,429 5,202 5,576 5,131
Operating profit 3,257 3,305 4,114 7,333
Net income $ 2,427 $ 2,490 $ 3,036 $ 5,070
Earnings per share:
Basic $ 0.18 $ 0.18 $ 0.22 $ 0.36
Diluted $ 0.18 $ 0.18 $ 0.21 $ 0.35
Weighted average shares outstanding:
Basic 13,828,571 13,832,246 13,856,554 13,979,393
Diluted 13,828,571 13,832,246 14,191,360 14,283,613
</TABLE>
C-18
<PAGE> 49
STARTEK, INC.
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS - MAY 17, 2000
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 2000 Annual
Meeting of Stockholders. The undersigned stockholder of StarTek, Inc., a
Delaware corporation (the "Company"), hereby constitutes and appoints A. Emmet
Stephenson, Jr. or 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 May 17, 2000, 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)
<TABLE>
<S> <C> <C> <C>
A. Emmet Stephenson, Jr. Michael W. Morgan Ed Zschau Jack D. Rehm
WITHHOLD AUTHORITY to vote for all nominees listed below
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S), PRINT SUCH NOMINEE'S(S') NAME(S) IN
THE SPACE PROVIDED BELOW:
(To be signed on reverse side)
2. TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK THE COMPANY HAS THE
AUTHORITY TO ISSUE, FROM 18,000,000 SHARES TO 32,000,000 SHARES:
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)
</TABLE>
<PAGE> 50
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: , 2000
------------------------------------
