1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ________.
Commission File Number 1-12793
STARTEK, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1370538
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
100 GARFIELD STREET
DENVER, COLORADO 80206
----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(303) 361-6000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value-- 14,030,961 shares as of July 31, 2000.
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STARTEK, INC.
FORM 10-Q
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -
December 31, 1999 and June 30, 2000 3
Condensed Consolidated Income Statements -
Three months ended June 30, 1999 and 2000
Six months ended June 30, 1999 and 2000 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
DECEMBER 31 JUNE 30
1999 2000
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,943 $ 16,626
Investments 23,907 31,731
Trade accounts receivable, less allowance for
doubtful accounts of $775 and $743, respectively 21,792 12,143
Inventories 3,740 927
Deferred tax assets 2,363 2,542
Prepaid expenses and other assets 448 547
------------ ------------
Total current assets 64,193 64,516
Property, plant and equipment, net 26,758 26,075
Investment in Gifts.com, Inc., at cost 2,606 2,606
Note receivable from Gifts.com, Inc. 7,818 7,818
Other assets 60 37
------------ ------------
Total assets $ 101,435 $ 101,052
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,148 $ 6,454
Accrued liabilities 4,443 5,146
Income taxes payable 1,384 477
Current portion of capital lease obligations 32 30
Current portion of long-term debt 1,428 1,639
Other 544 497
------------ ------------
Total current liabilities 23,979 14,243
Capital lease obligations, less current portion 42 24
Long-term debt, less current portion 5,922 5,021
Deferred income taxes 446 583
Other -- 152
Stockholders' equity:
Common stock 140 140
Additional paid-in capital 45,681 47,024
Cumulative translation adjustment 25 178
Unrealized loss on investments available for sale (596) (508)
Retained earnings 25,796 34,195
------------ ------------
Total stockholders' equity 71,046 81,029
------------ ------------
Total liabilities and stockholders' equity $ 101,435 $ 101,052
============ ============
See notes to condensed consolidated financial statements.
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STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Income Statements
(dollars in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
----------------------------- -----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
Revenues $ 45,723 $ 41,589 $ 86,573 $ 91,257
Cost of services 37,216 31,224 70,380 69,682
------------ ------------ ------------ ------------
Gross profit 8,507 10,365 16,193 21,575
Selling, general and
administrative expenses 5,202 4,857 9,631 10,041
------------ ------------ ------------ ------------
Operating profit 3,305 5,508 6,562 11,534
Net interest income and other 668 1,102 1,270 1,818
------------ ------------ ------------ ------------
Income before income taxes 3,973 6,610 7,832 13,352
Income tax expense 1,483 2,452 2,915 4,953
------------ ------------ ------------ ------------
Net income $ 2,490 $ 4,158 $ 4,917 $ 8,399
============ ============ ============ ============
Earnings per share:
Basic $ 0.18 $ 0.30 $ 0.36 $ 0.60
Diluted $ 0.18 $ 0.29 $ 0.36 $ 0.59
See notes to condensed consolidated financial statements.
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STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
SIX MONTHS ENDED
JUNE 30
------------------------------
1999 2000
------------ ------------
OPERATING ACTIVITIES
Net income $ 4,917 $ 8,399
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,892 2,370
Deferred income taxes (354) (185)
(Gain) loss on sale of assets 3 (84)
Changes in operating assets and liabilities:
Purchases of trading securities, net (2,150) (5,890)
Trade accounts receivable, net 7,098 9,549
Inventories 1,072 2,702
Prepaid expenses and other assets (81) 29
Accounts payable (6,359) (9,577)
Income taxes payable (1,316) (194)
Accrued and other liabilities 1,875 823
------------ ------------
Net cash provided by operating activities 6,597 7,942
INVESTING ACTIVITIES
Purchases of investments available for sale (13,399) (10,874)
Proceeds from disposition of investments available for sale 5,821 9,089
Purchases of property, plant and equipment (3,812) (1,967)
Proceeds from disposition of property, plant and equipment 2 284
------------ ------------
Net cash used in investing activities (11,388) (3,468)
FINANCING ACTIVITIES
Stock options exercised 187 665
Principal payments on borrowings, net (429) (690)
Principal payments on capital lease obligations (33) (17)
------------ ------------
Net cash used in financing activities (275) (42)
Effect of exchange rate changes on cash (232) 251
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,298) 4,683
Cash and cash equivalents at beginning of period 19,593 11,943
------------ ------------
Cash and cash equivalents at end of period $ 14,295 $ 16,626
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 141 $ 172
Income taxes paid $ 4,550 $ 5,572
Change in unrealized loss on investments available for sale,
net of tax $ 368 $ 88
See notes to condensed consolidated financial statements.
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STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. Certain reclassifications have been made in the 1999 financial
statements to conform to the 2000 presentation. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results during the three
and six months ended June 30, 2000 are not necessarily indicative of the results
that may be expected during the year ending December 31, 2000, or during any
other interim period of 2000.
The condensed consolidated balance sheet as of December 31, 1999 was
derived from audited financial statements, but does not include all information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. For further information,
refer to consolidated financial statements and footnotes thereto included in
StarTek, Inc.'s annual report on Form 10-K for the year ended December 31, 1999.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133") "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards requiring derivative instruments (including
certain derivative instruments embedded in other contracts) to be recorded as
either assets or liabilities measured at fair value. SFAS No. 133 requires
changes in a derivative's fair value to 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 income statement, and requires a company to formally
document, designate, and assess effectiveness of transactions receiving 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 impacts of adopting SFAS No. 133 on its consolidated financial
statements and has not determined timing or method of adoption of SFAS No. 133.
3. EARNINGS PER SHARE
Basic earnings per share is computed based on weighted average number
of common shares outstanding. Diluted earnings per share is computed based on
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:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
----------------------------- -----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
Net income (A) $ 2,490 $ 4,158 $ 4,917 $ 8,399
------------ ------------ ------------ ------------
Weighted average shares of common stock (B) 13,832,246 14,012,885 13,830,419 14,001,034
Dilutive effect of stock options -- 373,010 -- 337,966
------------ ------------ ------------ ------------
Common stock and common stock equivalents (C) 13,832,246 14,385,895 13,830,419 14,339,000
============ ============ ============ ============
Earnings per share:
Basic (A/B) $ 0.18 $ 0.30 $ 0.36 $ 0.60
Diluted (A/C) $ 0.18 $ 0.29 $ 0.36 $ 0.59
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STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
(unaudited)
4. COMPREHENSIVE INCOME
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income. Comprehensive income is defined essentially as all changes
in stockholders' equity, exclusive of transactions with owners. Comprehensive
income was $2,742 and $4,497 for the three months ended June 30, 1999 and 2000,
respectively. Comprehensive income was $5,140 and $8,640 for the six months
ended June 30, 1999 and 2000, respectively.
5. INVESTMENTS
As of December 31, 1999, investments available for sale consisted of:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
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
============ ============ ============ ============
As of June 30, 2000, investments available for sale consisted of:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
Corporate bonds $ 14,461 $ 289 $ (508) $ 14,242
Foreign government bonds 1,438 112 -- 1,550
Bond mutual funds 2,316 -- (56) 2,260
Equity securities 7,306 80 (743) 6,643
------------ ------------ ------------ ------------
Total $ 25,521 $ 481 $ (1,307) $ 24,695
============ ============ ============ ============
As of June 30, 2000, amortized costs and estimated fair values of
investments available for sale by contractual maturity were:
ESTIMATED
COST FAIR VALUE
------------ ------------
Corporate bonds and foreign government bonds maturing within:
One year $ 8,662 $ 8,960
Two to five years 5,799 5,282
Due after five years 1,438 1,550
------------ ------------
15,899 15,792
Bond mutual funds 2,316 2,260
Equity securities 7,306 6,643
------------ ------------
Total $ 25,521 $ 24,695
============ ============
Bond mutual funds were primarily invested in investment grade bonds of
US and foreign issuers denominated in US 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 primarily consisted of real estate investment trusts,
equity mutual funds, and publicly traded common stock of US based companies.
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STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
(unaudited)
5. INVESTMENTS (CONTINUED)
As of December 31, 1999, the Company was also invested in trading
securities which, in the aggregate, had an original cost and fair market value
of approximately $1,429 and $1,146, respectively. As of June 30, 2000, the
Company was invested in trading securities which, in the aggregate, had an
original cost and fair market value of approximately $6,845 and $7,036,
respectively, and primarily consisted of publicly traded common stock of US
based companies and international equity mutual funds. Trading securities were
held to meet short-term investment objectives. From time to time, the Company
enters into hedging and derivative securities in an effort to maximize its
return on investments in trading securities while managing risk. As of June 30,
2000, the Company was not invested in hedging or derivative securities.
Risk of loss to the Company in the event of nonperformance by any party
is not considered substantial. Because of potential limited liquidity of some of
these instruments, recorded values of these transactions may be different from
values that might be realized if the Company were to sell or close out the
transactions. Such differences are not considered substantial to the Company's
results of operations, financial condition, or liquidity. Hedging and derivative
securities may involve elements of credit and market risks in excess of the
amounts recognized in the Company's financial statements. A substantial decline
and/or change in value of equity securities, equity prices in general,
international equity mutual funds, hedging securities, and derivative securities
could have a material adverse effect on the Company's trading securities. Also,
the price of common stock, hedging securities, and other derivative securities
held by the Company as trading securities would be materially and adversely
affected by poor management, shrinking product demand, and other risks that may
affect single companies, as well as groups of companies.
6. INVENTORIES
The Company 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:
DECEMBER 31 JUNE 30
1999 2000
------------ ------------
Purchased components and
fabricated assemblies $ 1,986 $ 594
Finished goods 1,754 333
------------ ------------
$ 3,740 $ 927
============ ============
7. GIFTS.COM, INC.
During the three months ended June 30, 2000, the Company recognized
approximately $270 of revenues related to services performed for Gifts.com,
Inc., and approximately $173 of interest income. During the six months ended
June 30, 2000, the Company recognized approximately $875 of revenues related to
services performed for Gifts.com, Inc., and approximately $331 of interest
income. Accounts receivable of $121 plus regular quarterly interest of $173 were
due from Gifts.com, Inc. as of June 30, 2000. Amounts owed from Gifts.com, Inc.
were current.
8. PRINCIPAL CLIENTS
One client accounted for approximately 77.3% of the Company's revenues
during the three months ended June 30, 1999. Three clients accounted for
approximately 67.2%, 14.3%, and 10.4% of revenues during the three months ended
June 30, 2000. The loss of a principal client and/or changes in timing or
termination of a principal client's product launch or service offering would
have a material adverse effect on the Company's business, revenues, operating
results, and financial condition. To limit the Company's credit risk, management
performs ongoing credit evaluations of its clients. Although the Company is
directly impacted by economic conditions in which its clients operate,
management does not believe substantial credit risk existed as of June 30, 2000.
9. SUBSEQUENT EVENT
On August 2, 2000, as part of the plan for fiscal 2001 for Gifts.com,
Inc., the Company, through its wholly-owned subsidiary Domain.com, Inc., agreed
to advance an additional $995 loan to Gifts.com, Inc. under the same terms and
conditions as those set forth in the $7,818 loan agreement effective November 1,
1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements contained in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" or elsewhere in this Form 10-Q
not statements of historical facts are forward-looking statements that involve
substantial risks and uncertainties. Forward-looking statements are preceded by
terms such as "may", "will", "should", "anticipates", "expects", "believes",
"plans", "future", "estimate", "continue", and similar expressions. The
following are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements;
these include, but are not limited to, inflation and general economic conditions
in the Company's and its clients' markets, risks associated with the Company's
reliance on principal clients, loss or delayed implementation of a large project
or service offering for a principal client, which could cause quarterly
variation in the Company's revenues and earnings, difficulties in managing rapid
growth, risks associated with rapidly changing technology, dependence on labor
force, risks associated with international operations and expansion, control by
principal stockholders, dependence on key personnel, dependence on key
industries and trends toward outsourcing, risks associated with the Company's
contracts, highly competitive markets, risks of business interruptions,
volatility of the Company's stock price, risks related to the Company's
investment in and note receivable from Gifts.com, Inc., risks related to the
Company's Internet web site operations, and risks related to the Company's
portfolio of Internet domain names. These factors include risks and
uncertainties beyond the Company's ability to control; and, in many cases, the
Company and its management cannot predict the risks and uncertainties that could
cause actual results to differ materially from those indicated by use of
forward-looking statements. All forward-looking statements herein are made as of
the date hereof, and the Company undertakes no obligation to update any such
forward-looking statements. All forward-looking statements herein are qualified
in their entirety by information set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations"--"Factors That May
Affect Future Results" section of the Company's annual report on Form 10-K for
the year ended December 31, 1999.
The following table sets forth certain unaudited condensed consolidated
income statement data expressed as a percentage of revenues:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1999 2000 1999 2000
------------ ------------ ------------ ------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of services 81.4 75.1 81.3 76.4
------------ ------------ ------------ ------------
Gross profit 18.6 24.9 18.7 23.6
Selling, general and
administrative expenses 11.4 11.7 11.1 11.0
------------ ------------ ------------ ------------
Operating profit 7.2 13.2 7.6 12.6
Net interest income and other 1.5 2.7 1.5 2.0
------------ ------------ ------------ ------------
Income before income taxes 8.7 15.9 9.1 14.6
Income tax expense 3.2 5.9 3.4 5.4
------------ ------------ ------------ ------------
Net income 5.5% 10.0% 5.7% 9.2%
============ ============ ============ ============
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues. Revenues decreased $4.1 million, or 9.0%, from $45.7 million
during the three months ended June 30, 1999 to $41.6 million during the three
months ended June 30, 2000. This decrease was largely due to a client's
rescheduling of a major product launch from the second quarter to the third
quarter of 2000, and the culling of less profitable accounts.
Cost of Services. Cost of services decreased $6.0 million, or 16.1%,
from $37.2 million during the three months ended June 30, 1999 to $31.2 million
during the three months ended June 30, 2000. As a percentage of revenues, cost
of services was 81.4% and 75.1% during the three months ended June 30, 1999 and
2000, respectively. This percentage decreased primarily due to an improving mix
of business and stringent cost controls.
Gross Profit. Due to the foregoing factors, gross profit increased $1.9
million, or 21.8%, from $8.5 million during the three months ended June 30, 1999
to $10.4 million during the three months ended June 30, 2000. As a percentage of
revenues, gross profit was 18.6% and 24.9% during the three months ended June
30, 1999 and 2000, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.3 million, or 6.6%, from $5.2 million
during the three months ended June 30, 1999 to $4.9 million during the three
months ended June 30, 2000, primarily as a result of decreased personnel and
expansion costs. As a percentage of revenues, selling, general and
administrative expenses were 11.4% and 11.7% during the three months ended June
30, 1999 and 2000, respectively.
Operating Profit. As a result of the foregoing factors, operating
profit increased from $3.3 million during the three months ended June 30, 1999
to $5.5 million during the three months ended June 30, 2000. As a percentage of
revenues, operating profit was 7.2% and 13.2% during the three months ended June
30, 1999 and 2000, respectively.
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Net Interest Income and Other. Net interest income and other was
approximately $0.7 million during the three months ended June 30, 1999 and $1.1
million during the three months ended June 30, 2000. The majority of net
interest income and other continues to be derived from cash equivalents and
investment balances, partially offset by interest expense incurred as a result
of the Company's various debt and lease arrangements.
Income Before Income Taxes. As a result of the foregoing factors,
income before income taxes increased $2.6 million, or 66.4%, from $4.0 million
during the three months ended June 30, 1999 to $6.6 million during the three
months ended June 30, 2000. As a percentage of revenues, income before income
taxes increased from 8.7% during the three months ended June 30, 1999 to 15.9%
during the three months ended June 30, 2000.
Income Tax Expense. Income tax expense during the three months ended
June 30, 1999 and 2000 reflects a provision for federal, state, and foreign
income taxes at an effective rate of 37.3% and 37.1%, respectively.
Net Income. Based on the factors discussed above, net income increased
$1.7 million, or 67.0%, from $2.5 million during the three months ended June 30,
1999 to $4.2 million during the three months ended June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues. Revenues increased $4.7 million, or 5.4%, from $86.6 million
during the six months ended June 30, 1999 to $91.3 million during the six months
ended June 30, 2000. This increase was primarily from existing and new clients,
partially offset by a client's rescheduling of a major product launch from the
second quarter to the third quarter of 2000, and the culling of less profitable
accounts.
Cost of Services. Cost of services decreased $0.7 million, or 1.0%,
from $70.4 million during the six months ended June 30, 1999 to $69.7 million
during the six months ended June 30, 2000. As a percentage of revenues, cost of
services was 81.3% and 76.4% during the six months ended June 30, 1999 and 2000,
respectively. This percentage declined mainly as a result of improved processes,
better operating efficiency, and changes in the mix of services performed.
Gross Profit. Due to the foregoing factors, gross profit increased $5.4
million, or 33.2%, from $16.2 million during the six months ended June 30, 1999
to $21.6 million during the six months ended June 30, 2000. As a percentage of
revenues, gross profit was 18.7% and 23.6% during the six months ended June 30,
1999 and 2000, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.4 million, or 4.3%, from $9.6 million
during the six months ended June 30, 1999 to $10.0 million during the six months
ended June 30, 2000. As a percentage of revenues, selling, general and
administrative expenses decreased from 11.1% during the six months ended June
30, 1999 to 11.0% during the six months ended June 30, 2000.
Operating Profit. As a result of the foregoing factors, operating
profit increased from $6.6 million during the six months ended June 30, 1999 to
$11.5 million during the six months ended June 30, 2000. As a percentage of
revenues, operating profit was 7.6% and 12.6% during the six months ended June
30, 1999 and 2000, respectively.
Net Interest Income and Other. Net interest income and other was $1.3
million during the six months ended June 30, 1999 and $1.8 million during the
six months ended June 30, 2000. The majority of net interest income and other
continues to be derived from cash equivalents and investment balances, partially
offset by interest expense incurred as a result of the Company's various debt
and lease arrangements.
Income Before Income Taxes. As a result of the foregoing factors,
income before income taxes increased $5.6 million, or 70.5%, from $7.8 million
during the six months ended June 30, 1999 to $13.4 million during the six months
ended June 30, 2000. As a percentage of revenues, income before income taxes
increased from 9.1% during the six months ended June 30, 1999 to 14.6% during
the six months ended June 30, 2000.
Income Tax Expense. Income tax expense during the six months ended June
30, 1999 and 2000 reflects a provision for federal, state, and foreign income
taxes at an effective rate of 37.2% and 37.1%, respectively.
Net Income. Based on the factors discussed above, net income increased
$3.5 million, or 70.8%, from $4.9 million during the six months ended June 30,
1999 to $8.4 million during the six months ended June 30, 2000.
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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 operating capacity. Since
fully applying 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 maintains a $5.0 million line of credit with Norwest Bank
Colorado, N.A. (the "Bank") maturing on April 30, 2001. Borrowings under the
line of credit bear interest at the Bank's prime rate (9.5% as of June 30,
2000). Under this line of credit, the Company is required to maintain working
capital of $17.5 million and tangible net worth of $25.0 million. The Company
may not pay dividends in an amount which would cause a failure to meet these
financial covenants. As of June 30, 2000 and the date of this Form 10-Q, the
Company was in compliance with these financial covenants. Collateral for the
line of credit is trade accounts receivable of certain of the Company's
wholly-owned subsidiaries. As of June 30, 2000 and the date of this Form 10-Q,
no amount was outstanding under the line of credit.
As of June 30, 2000, the Company had cash, cash equivalents, and
investment balances of $48.4 million, working capital of $50.3 million, and
stockholders' equity of $81.0 million. The Company's cash and cash equivalents
are not restricted. As of June 30, 2000, investments available for sale
primarily consisted of corporate bonds, foreign government bonds denominated in
US dollars, bond mutual funds, real estate investment trusts, equity mutual
funds, and publicly traded common stock of US based companies. As of June 30,
2000, trading securities generally consisted of publicly traded common stock of
US based companies, and international equity mutual funds. As of June 30, 2000,
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 and international equity mutual funds due to the level of trading
in such securities, and other risks generally attributable to US based publicly
traded companies. See "Quantitative and Qualitative Disclosure About Market
Risk" set forth herein for further discussions regarding the Company's cash,
cash equivalents, investments available for sale, and trading securities.
On August 2, 2000, as part of the plan for fiscal 2001 for Gifts.com,
Inc., the Company, through its wholly-owned subsidiary Domain.com, Inc., agreed
to advance an additional $1.0 million loan to Gifts.com, Inc. under the same
terms and conditions as those set forth in the $7.8 million loan agreement
effective November 1, 1999.
Net cash provided by operating activities increased from $6.6 million
during the six months ended June 30, 1999 to $7.9 million during the six months
ended June 30, 2000. This increase was primarily a result of increased net
income and changes in operating assets and liabilities, partially offset by an
increase in net purchases of trading securities.
Net cash used in investing activities was $11.4 million during the six
months ended June 30, 1999 and $3.5 million during the six months ended June 30,
2000. This decrease was primarily due to a decrease in purchases of property,
plant, and equipment together with a decrease in net purchases of investments
available for sale.
Net cash used in financing activities was $0.3 million and $0.1 million
during the six months ended June 30, 1999 and 2000, respectively. Net cash used
in financing activities during both periods consisted of principal payments on
borrowings and capital lease obligations, partially offset by proceeds from
exercises of employee stock options.
The effect of currency exchange rate changes on the translation of the
Company's United Kingdom and Singapore operations was not substantial during the
six months ended June 30, 2000. The terms of the Company's agreements with its
clients and subcontractors are typically in US dollars except for certain
agreements related to its United Kingdom and Singapore operations. If the
international portion of the Company's business continues to grow, more revenues
and expenses will be denominated in foreign currencies, and this will increase
the Company's exposure to fluctuations in currency exchange rates. See
"Quantitative and Qualitative Disclosure About Market Risk" set forth herein for
a further discussion of the Company's exposure to foreign currency exchange
risks in connection with certain of its investments.
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Management believes the Company's cash, cash equivalents, investments,
anticipated cash flows from future operations, and $5.0 million of currently
available financing under its line of credit will be sufficient to support its
operations, capital expenditures, and various repayment obligations under its
debt and lease agreements for the foreseeable future. However, liquidity and
capital requirements depend on many factors, including, but not limited to, the
Company's ability to retain or successfully and timely replace its principal
clients and the rate at which the Company expands its business, whether
internally or through acquisitions and strategic alliances. To the extent funds
generated from sources described above are insufficient to support the Company's
activities in the short or long-term, the Company will be required to raise
additional funds through public or private financing. No assurance can be given
additional financing will be available, or if available, it will be available on
terms favorable to the Company.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although management cannot accurately anticipate effects of domestic
and foreign inflation on the Company's operations, management does not believe
inflation has had, or is likely in the foreseeable future to have, a material
adverse effect on the Company's results of operations or financial condition.
RELIANCE ON PRINCIPAL CLIENT RELATIONSHIPS
Microsoft Corporation ("Microsoft") accounted for approximately 77.3%
and 67.2 % of the Company's revenues during the three months ended June 30, 1999
and 2000, respectively. AT&T Corporation accounted for less than 10.0% and
approximately 14.3% of the Company's revenues during the three months ended June
30, 1999 and 2000, respectively. America Online, Inc. accounted for less than
10.0% and approximately 10.4% of the Company's revenues during the three months
ended June 30, 1999 and 2000, respectively. The loss of a principal client
and/or changes in timing or termination of a principal client's product launch
or service offering would have a material adverse effect on the Company's
business, revenues, operating results, and financial condition. The Company
provides various outsourced services to various divisions of Microsoft, which
began its outsourcing relationship with the Company in April 1996. There can be
no assurance the Company will be able to retain its principal client(s) or, if
it were to lose its principal client(s), would be able to timely replace such
clients with clients that generate a comparable amount of revenues.
Additionally, the amount and growth rate of revenues derived from its principal
clients in the past is not necessarily indicative of revenues that may be
expected from such clients in the future.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's business is highly seasonal and is at times conducted in
support of product launches for new and existing clients. Historically, the
Company's revenues have been substantially lower in the quarters preceding the
fourth quarter due to timing of its clients' marketing programs and product
launches, which are typically geared toward the holiday buying season. However,
the Company's revenues and operating results during the three and six months
ended June 30, 2000 are not necessarily indicative of the revenues or operating
results that may be expected during the year ending December 31, 2000, or during
any other interim period of 2000. Additionally, the Company has experienced and
expects to continue to experience, quarterly variations in revenues and
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 or service offerings; (ii) expiration or termination of client
projects; (iii) timing and amount of costs incurred to expand capacity in order
to provide for further revenue growth from existing and future clients; (iv)
seasonal nature of certain clients' businesses; (v) cyclical nature of certain
high technology clients' businesses; and (vi) changes in the amount and growth
rate of revenues generated from the Company's principal clients.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses the Company's exposure to market risks related
to changes in interest rates and other general market risks, equity market
prices and other general market risks, and foreign currency exchange rates. All
of the Company's investment decisions are supervised or managed by its Chairman
of the Board. The Company's investment portfolio policy, which was approved by
the Board of Directors during 1999, provides for, among other things, investment
objectives and investment portfolio allocation guidelines. This discussion
contains forward-looking statements subject to risks and uncertainties. Actual
results could vary materially as a result of a number of factors, including but
not limited to, changes in interest rates and other general market risks, equity
market prices and other general market risks, foreign currency exchange rates,
and those set forth in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations"--"Factors That May Affect Future Results"
section of the Company's annual report on Form 10-K for the year ended December
31, 1999.
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Interest Rate Sensitivity and Other General Market Risks
Cash and Cash Equivalents. As of June 30, 2000, the Company had $16.6
million in cash and cash equivalents, which was not restricted, and consisted
of: (i) approximately $15.6 million invested in various money market funds,
overnight investments, and various commercial paper securities at a combined
weighted average interest rate of approximately 6.3%; and (ii) approximately
$1.0 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 substantial 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 June 30, 2000, the Company had
investments available for sale, which, in the aggregate, had an original cost
and fair market value of $25.5 million and $24.7 million, respectively. These
investments available for sale generally consisted of corporate bonds, foreign
government bonds denominated in US dollars, bond mutual funds, and various forms
of equity securities. The Company's investment portfolio is subject to interest
rate risk and will fall in value if interest rates increase.
Fair market value of and estimated cash flows from the Company's
investments in corporate bonds are substantially dependent upon credit
worthiness of certain corporations expected to repay their debts, including
interest, as they become due, to the Company. If such corporations' financial
condition and liquidity adversely changes, the Company's investments in their
debts can be expected to be materially and adversely affected.
The Company's investments in foreign government bonds denominated in US
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 US dollars; (ii)
foreign government regulations; and (iii) potential for political and economic
instability. Fair market value of investments in foreign government bonds
(denominated in US dollars) can be expected to be more volatile than that of US
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 June 30, 2000:
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
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Corporate bonds 6.70% $ 8,662 $ 8,662 $ 8,960
Corporate bonds 8.25% $ 3,971 3,971 3,920
Corporate bonds 5.19% $ 818 818 461
Corporate bonds 5.69% $ 1,010 1,010 901
Foreign government bonds 9.26% $ 1,438 1,438 1,550
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 8,662 $ 3,971 -- $ 818 $ 1,010 $ 1,438 $ 15,899 $ 15,792
========== ========== ========== ========== ========== ========== ========== ==========
Management believes the Company has the ability to hold the foregoing
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 June 30, 2000 and as part of its investments available for sale
portfolio, the Company was invested in: (i) various bond mutual funds which, in
the aggregate, had both an original cost and fair market value of approximately
$2.3 million; and (ii) equity securities which, in the aggregate, had an
original cost and fair market value of approximately $7.3 million and $6.6
million, respectively.
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Debt securities within bond mutual funds as of June 30, 2000: (i) had a
weighted average yield of approximately 7.2%, and a weighted average maturity of
approximately 1.7 years; (ii) are primarily invested in investment grade bonds
of US and foreign issuers denominated in US 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 underlying securities
within the mutual funds. The Company's investments in bond mutual funds entail
special risks of global investing, including, but not limited to: (i) currency
exchange fluctuations; (ii) foreign government regulations; and (iii) potential
for political and economic instability. Fair market value of the Company's
investments in bond mutual funds can be expected to be more volatile than that
of a US-only fund. These risks are intensified for certain investments in debt
of foreign governments (included in bond mutual funds) which are located in
countries generally considered to be emerging markets. Additionally, certain
bond mutual fund investments are also subject to the effect of leverage, which
in a declining market can be expected to result in a greater decrease in fair
market value than if such investments were not leveraged.
Outstanding Debt of the Company. As of June 30, 2000, the Company had
outstanding debt of approximately $6.7 million, approximately $2.3 million of
which bears interest at an annual fixed rate of 7.0%, and approximately $2.3
million of which bears no interest, as long as the Company complies with the
terms of this debt arrangement. On October 22, 1999, the Company completed an
equipment loan, $1.7 million outstanding as of June 30, 2000, whereby the
Company is expected to repay its debt at a variable rate of interest (7.9 % as
of June 30, 2000) over a forty-eight month period. Management believes a
hypothetical 10.0% increase in interest rates would not have a material adverse
effect on the Company. Increases in interest rates could, however, increase
interest expense associated with the Company's existing variable rate equipment
loan and future borrowings by the Company, if any. For example, the Company may
from time to time effect borrowings under its $5.0 million line of credit for
general corporate purposes, including working capital requirements, capital
expenditures and other purposes related to expansion of the Company's capacity.
Borrowings under the $5.0 million line of credit bear interest at the lender's
prime rate (9.5 % as of June 30, 2000). As of June 30, 2000, the Company had no
outstanding line of credit obligations. The Company has not hedged against
interest rate changes.
Equity Price Risks and Other General Market Risks
Equity Securities. As of June 30, 2000, the Company held in its
investments available for sale portfolio certain equity securities with original
cost and fair market value, in the aggregate, of $7.3 million and $6.6 million,
respectively. The Company's investments in equity securities primarily consisted
of real estate investment trusts, equity mutual funds, and publicly traded
common stock of US based companies. A substantial decline in values of equity
securities and equity prices in general would have a material adverse affect on
the Company's equity investments. Also, prices of common stocks held by the
Company would be materially and adversely affected by poor management, shrinking
product demand, and other risks that may affect single companies, as well as
groups of companies. The Company has partially hedged against some equity price
changes.
Trading Securities. As of June 30, 2000, the Company was invested in
trading securities which, in the aggregate, had an original cost and fair market
value of approximately $6.8 million and $7.1 million, respectively, and
primarily consisted of publicly traded common stock of US based companies and
international equity mutual funds. Trading securities were held to meet
short-term investment objectives. From time to time, the Company enters into
hedging and derivative securities in an effort to maximize its return on
investments in trading securities while managing risk. As of June 30, 2000, the
Company was not invested in hedging or derivative securities.
Risk of loss to the Company in the event of nonperformance by any party
is not considered substantial. Because of potential limited liquidity of some of
these instruments, recorded values of these transactions may be different from
values that might be realized if the Company were to sell or close out the
transactions. Such differences are not considered substantial to the Company's
results of operations, financial condition, or liquidity. Hedging and derivative
securities may involve elements of credit and market risks in excess of the
amounts recognized in the Company's 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.
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Foreign Currency Exchange Risks
Approximately 22.0% of the Company's revenues during the three months
ended June 30, 2000 were derived from arrangements whereby the Company received
payments from its clients in currencies other than US dollars. Terms of the
Company's agreements with its clients and subcontractors are typically in US
dollars except for certain 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 United Kingdom and Singapore operations.
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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities
The Company did not issue or sell unregistered securities
during the three months ended June 30, 2000, except as
follows:
On April 3, 2000, the Company granted options to
purchase 14,800 shares of common stock, in the
aggregate, to 148 employees pursuant to the Company's
Stock Option Plan. These options vest at a rate of
20% per year beginning April 3, 2001, expire April 3,
2010, and are exercisable at price of $74.00 per
share, which was the market value of the Company's
common stock on the date the options were granted.
On May 17, 2000, the Company granted options to
purchase 12,000 shares of common stock, in the
aggregate, to 32 employees pursuant to the Company's
Stock Option Plan. These options vest at a rate of
20% per year beginning May 17, 2001, expire May 17,
2010, and are exercisable at a price of $65.00 per
share, which was the market value of the Company's
common stock on the date the options were granted.
On May 17, 2000, the Company granted options to
purchase 6,000 shares of common stock, in the
aggregate, to two non-employee directors pursuant to
the Company's Director Stock Option Plan. These
options immediately and fully vested May 17, 2000,
expire May 17, 2010, and are exercisable at a price
of $65.00 per share, which was the market value of
the Company's common stock on the date the options
were granted.
The foregoing stock option grants were made in reliance upon
exemptions from registration provided by Sections 4(2) and
3(b) of the Securities Act of 1933, as amended, and the
regulations promulgated thereunder.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 17, 2000, the Company held its 2000 annual meeting of
shareholders (the "Annual Meeting").
(b) One matter voted on at the Annual Meeting was the election of all four
directors of the Company. The four nominees who were all existing
directors of the Company, were re-elected at the Annual Meeting as
directors of the Company, receiving the number and percentage of votes
for election as set forth below:
NOMINEES FOR ELECTION WITHHELD
-------- ------------ --------
A. Emmet Stephenson, Jr. 10,154,065 (92.36%) 840,458 (07.64%)
---------- -------
Michael W. Morgan 10,796,100 (98.20%) 198,423 (01.80%)
---------- -------
Ed Zschau 10,796,006 (98.19%) 198,517 (01.81%)
---------- -------
Jack D. Rehm 10,796,006 (98.19%) 198,517 (01.81%)
---------- -------
(c.1) Another matter voted upon at the Annual Meeting was a proposal to amend
the Company's Certificate of Incorporation to increase the number of
shares of common stock that the Company has the authority to issue,
from 18,000,000 shares to 32,000,000 shares. This proposal, which was
approved, received the number and percentage of votes as set forth
below:
VOTES
-----
For 10,712,762 (97.44%)
-----------
Against 278,118 (02.53%)
-----------
Abstain 3,643 (00.03%)
-----------
(c.2) The only other matter voted upon at the Annual Meeting was a proposal
to ratify and approve the selection of Ernst & Young LLP as the
Company's independent auditors for 2000. This proposal, which was
approved, received the number and percentage of votes as set forth
below:
VOTES
-----
For 10,984,920 (99.91%)
-----------
Against 6,290 (00.06%)
-----------
Abstain 3,313 (00.03%)
-----------
(d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.4 Certificate of Amendment to the Certificate of Incorporation
of StarTek, Inc. filed with the Delaware Secretary of State on
May 23, 2000.
*10.27 StarTek Pacific, Ltd. Manufacturing Agreement dated as of
January 1, 1998.
10.28 StarTek Pacific, Ltd. Supplemental Manufacturing Agreement
dated as of January 1, 1998.
27.1 Financial Data Schedule.
- ----------
*Certain portions of the exhibit have been omitted pursuant to a
request for confidential treatment and have been filed separately with
the Securities and Exchange Commission.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
three months ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
STARTEK, INC.
-------------------------------------
(Registrant)
Date: August 14, 2000 /s/ MICHAEL W. MORGAN
-------------------------- -------------------------------------
Michael W. Morgan
President and Chief Executive Officer
Date: August 14, 2000 /s/ DENNIS M. SWENSON
-------------------------- -------------------------------------
Dennis M. Swenson
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.4 Certificate of Amendment to the Certificate of Incorporation
of StarTek, Inc. filed with the Delaware Secretary of State on
May 23, 2000.
*10.27 StarTek Pacific, Ltd. Manufacturing Agreement dated as of
January 1, 1998.
10.28 StarTek Pacific, Ltd. Supplemental Manufacturing Agreement
dated as of January 1, 1998.
27.1 Financial Data Schedule.
- ----------
*Certain portions of the exhibit have been omitted pursuant to a
request for confidential treatment and have been filed separately with
the Securities and Exchange Commission.