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 September 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 .
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Commission File Number 1-12793
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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
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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 - 14,033,221 shares as of October 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 September 30, 2000 3
Condensed Consolidated Income Statements -
Three months ended September 30, 1999 and 2000
Nine months ended September 30, 1999 and 2000 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 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 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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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 SEPTEMBER 30
1999 2000
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,943 $ 18,436
Investments 23,907 37,223
Trade accounts receivable, less allowance for
doubtful accounts of $775 and $738, respectively 21,792 13,320
Inventories 3,740 2,288
Deferred tax assets 2,363 1,214
Prepaid expenses and other assets 448 563
--------- ---------
Total current assets 64,193 73,044
Property, plant and equipment, net 26,758 27,749
Investment in Gifts.com, Inc., at cost 2,606 2,606
Notes receivable from Gifts.com, Inc. 7,818 8,813
Other assets 60 37
--------- ---------
Total assets $ 101,435 $ 112,249
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,148 $ 11,555
Accrued liabilities 4,443 5,620
Income taxes payable 1,384 1,300
Current portion of capital lease obligations 32 --
Current portion of long-term debt 1,428 1,683
Other 544 501
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Total current liabilities 23,979 20,659
Capital lease obligations, less current portion 42 --
Long-term debt, less current portion 5,922 4,415
Deferred income taxes 446 472
Other -- 475
Stockholders' equity:
Common stock 140 140
Additional paid-in capital 45,681 47,095
Cumulative translation adjustment 25 13
Unrealized loss on investments available for sale (596) (162)
Retained earnings 25,796 39,142
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Total stockholders' equity 71,046 86,228
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Total liabilities and stockholders' equity $ 101,435 $ 112,249
========= =========
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ -------------------------
1999 2000 1999 2000
---------- ----------- ----------- -----------
Revenues $ 52,279 $ 51,510 $ 138,852 $ 142,767
Cost of services 42,589 39,677 112,969 109,359
----------- ----------- ----------- -----------
Gross profit 9,690 11,833 25,883 33,408
Selling, general and
administrative expenses 5,576 5,284 15,207 15,325
----------- ----------- ----------- -----------
Operating profit 4,114 6,549 10,676 18,083
Net interest income and other 752 1,316 2,022 3,134
----------- ----------- ----------- -----------
Income before income taxes 4,866 7,865 12,698 21,217
Income tax expense 1,830 2,918 4,745 7,871
----------- ----------- ----------- -----------
Net income(A) $ 3,036 $ 4,947 $ 7,953 $ 13,346
=========== =========== =========== ===========
Weighted average shares of
common stock(B) 13,856,554 14,031,771 13,839,226 14,011,355
Dilutive effect of stock options 334,806 260,373 172,354 312,102
----------- ----------- ----------- -----------
Common stock and common stock
equivalents(C) 14,191,360 14,292,144 14,011,580 14,323,457
=========== =========== =========== ===========
Earnings per share:
Basic(A/B) $ 0.22 $ 0.35 $ 0.57 $ 0.95
Diluted(A/C) $ 0.21 $ 0.35 $ 0.57 $ 0.93
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)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
1999 2000
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OPERATING ACTIVITIES
Net income $ 7,953 $ 13,346
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,399 3,663
Deferred income taxes (205) 776
Loss (gain) on sale of assets 3 (84)
Changes in operating assets and liabilities:
Purchases of trading securities, net (3,341) (12,797)
Trade accounts receivable, net 2,241 8,352
Inventories 180 1,338
Prepaid expenses and other assets (163) 14
Prepaid income taxes (30) --
Accounts payable 41 (4,470)
Income taxes payable (1,944) 689
Accrued and other liabilities 2,793 1,640
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Net cash provided by operating activities 10,927 12,467
INVESTING ACTIVITIES
Purchases of investments available for sale (19,206) (11,905)
Proceeds from disposition of investments available for sale 13,532 12,085
Purchases of property, plant and equipment (5,980) (4,962)
Proceeds from disposition of property, plant and equipment 2 284
Notes receivable from Gifts.com, Inc. -- (995)
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Net cash used in investing activities (11,652) (5,493)
FINANCING ACTIVITIES
Stock options exercised 2,607 704
Principal payments on borrowings, net (664) (1,252)
Principal payments on capital lease obligations (13) (74)
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Net cash provided by (used in) financing activities 1,930 (622)
Effect of exchange rate changes on cash (53) 141
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Net increase in cash and cash equivalents 1,152 6,493
Cash and cash equivalents at beginning of period 19,593 11,943
-------- --------
Cash and cash equivalents at end of period $ 20,745 $ 18,436
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 214 $ 255
Income taxes paid $ 5,808 $ 6,291
Change in unrealized loss on investments available for sale,
net of tax $ 60 $ 434
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 management's opinion, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results during the three and nine months ended
September 30, 2000 are not necessarily indicative of operating results that may
be expected during the year or three months ending December 31, 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.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, as modified ("SAB 101") "Revenue Recognition in
Financial Statements". SAB 101 is effective for the Company on October 1, 2000.
Management believes the Company's adoption of SAB 101 will not have a material
adverse effect on the Company's revenue recognition policies nor on the
Company's consolidated financial statements.
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 on January 1,
2001. Management has not yet quantified impacts of adopting SFAS No. 133 on the
Company's 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.
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 $2,815 and $5,128 for the three months ended September 30, 1999 and
2000, respectively. Comprehensive income was $7,955 and $13,768 for the nine
months ended September 30, 1999 and 2000, respectively.
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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
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
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Total $23,717 $ 480 $(1,436) $22,761
======= ======= ======= =======
As of September 30, 2000, investments available for sale consisted of:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
Corporate bonds $11,546 $ 245 $ (182) $11,609
Foreign government bonds 1,438 129 -- 1,567
Bond mutual funds 1,935 43 (50) 1,928
Equity securities 8,620 965 (1,408) 8,177
------- ------- ------- -------
Total $23,539 $ 1,382 $(1,640) $23,281
======= ======= ======= =======
As of September 30, 2000, amortized costs and estimated fair values of
investments available for sale by contractual maturity were:
ESTIMATED
COST FAIR VALUE
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Corporate bonds and foreign government bonds
maturing within:
One year $ 8,453 $ 8,676
Two to five years 3,093 2,933
Due after five years 1,438 1,567
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12,984 13,176
Bond mutual funds 1,935 1,928
Equity securities 8,620 8,177
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Total $23,539 $23,281
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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 publicly traded common stock
of US based companies, equity mutual funds, and real estate investment trusts.
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 $1,429 and $1,146, respectively. As of September 30, 2000, the Company was
invested in trading securities, which, in the aggregate, had an original cost
and fair market value of $14,132 and $13,942, respectively. Trading securities
consisted primarily of US and international mutual funds ($8,083 fair market
value), and investments in limited partnerships ($6,039 fair market value).
Certain investments include hedging and derivative securities. Trading
securities were held to meet short-term investment objectives. As part of
trading securities and as of September 30, 2000, the Company had sold call
options for a total of 53,000 shares of US equity securities which, in the
aggregate, had a basis and market value of $112 and $127, respectively, and sold
put options for a total of 25,000 shares of US equity securities which, in the
aggregate, had a basis and market value of $51 and $53, respectively. The
foregoing call and put options were reported net as components of trading
securities and expire between October 2000 and April 2001.
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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)
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. The foregoing call and
put options 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, investment limited partnerships, and/or call
and put options could have a material adverse effect on the Company's portfolio
of trading securities. Also, trading securities could be materially and
adversely affected by increasing interest and/or inflation rates or market
expectations thereon, 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 valued in the Company's balance sheet.
Inventories consisted of:
DECEMBER 31 SEPTEMBER 30
1999 2000
----------- ------------
Purchased components and
fabricated assemblies $1,986 $1,799
Finished goods 1,754 489
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$3,740 $2,288
====== ======
7. GIFTS.COM, INC.
Through its wholly-owned subsidiary Domain.com, Inc., the Company has a
19.9% investment in and notes receivable from Gifts.com, Inc. of $11.4 million
in the aggregate. The Company's investment in Gifts.com, Inc. is carried at
cost.
During the three months ended September 30, 2000, the Company recognized
$139 of revenues related to services performed for Gifts.com, Inc. and $180 of
interest income. During the nine months ended September 30, 2000, the Company
recognized $1,014 of revenues related to services performed for Gifts.com, Inc.
and $511 of interest income. As of September 30, 2000, accounts receivable of
$68 plus regular quarterly interest of $180 were due from Gifts.com, Inc., all
of which was current.
Management believes the Company's investment in and notes receivable from
Gifts.com, Inc. are recoverable and no impairment loss provision is necessary.
Gifts.com, Inc. is currently experiencing operating losses and negative cash
flows. The Company could lose its entire investment in and notes receivable from
Gifts.com, Inc.
8. PRINCIPAL CLIENTS
One client accounted for 80.3% of the Company's revenues during the three
months ended September 30, 1999. Two clients accounted for 73.2%, and 15.4% of
revenues during the three months ended September 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 September 30, 2000.
9. COMMITMENTS
In September 2000, the Company, through its wholly-owned subsidiary Startek
USA, Inc., entered into a lease agreement for additional space in Grand
Junction, Colorado. The term of the lease agreement commenced on October 1, 2000
and continues for a minimum of eight years. The lease provides for annual lease
payments of $191 during the first four years of the lease, and annual lease
payments of $218 during the last four years of the lease. The lease also
provides for the Company to pay its pro rata share of common area maintenance
charges and other expenses in addition to the foregoing annual lease payments.
In October 2000, the Company committed to spend $2,400 for construction
related to its Enid, Oklahoma facility.
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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
which are not statements of historical facts are forward-looking statements that
involve substantial risks and uncertainties. Forward-looking statements are
preceded by terms such as "may", "will", "should", "anticipates", "expects",
"believes", "plans", "future", "estimate", "continue", and similar expressions.
The following are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements;
these include, but are not limited to, inflation and general economic conditions
in the Company's and its clients' markets, risks associated with the Company's
reliance on principal clients, loss or delayed implementation of a large project
or service offering for a principal client, which could cause substantial
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, risks related to the Company's
portfolio of Internet domain names, and risks related to changes in valuation of
the Company's investments. 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. Similarly, it is impossible for management to foresee or identify
all such factors. As such, investors should not consider the foregoing list to
be an exhaustive statement of all risks, uncertainties, or potentially
inaccurate assumptions. 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 SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1999 2000 1999 2000
------ ------ ------ ------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of services 81.5 77.0 81.4 76.6
----- ----- ----- -----
Gross profit 18.5 23.0 18.6 23.4
Selling, general and
administrative expenses 10.7 10.3 10.9 10.7
----- ----- ----- -----
Operating profit 7.8 12.7 7.7 12.7
Net interest income and other 1.5 2.6 1.5 2.2
----- ----- ----- -----
Income before income taxes 9.3 15.3 9.2 14.9
Income tax expense 3.5 5.7 3.4 5.5
----- ----- ----- -----
Net income 5.8% 9.6% 5.8% 9.4%
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues. Revenues decreased $0.8 million, or 1.47%, from $52.3 million to
$51.5 million during the three months ended September 30, 1999 and 2000,
respectively. This decrease was largely due to reduced revenue from the
Company's largest client and culling of less profitable business, partially
offset by increased services provided to certain other clients.
Cost of Services. Cost of services decreased $2.9 million, or 6.8%, from
$42.6 million to $39.7 million during the three months ended September 30, 1999
and 2000, respectively. As a percentage of revenues, cost of services was 81.5%
and 77.0% during the three months ended September 30, 1999 and 2000,
respectively. This percentage decreased primarily due to an improving mix of
business, cost controls, and culling of less profitable business.
Gross Profit. Due to the foregoing factors, gross profit increased $2.1
million, or 22.1%, from $9.7 million to $11.8 million during the three months
ended September 30, 1999 and 2000, respectively. As a percentage of revenues,
gross profit was 18.5% and 23.0% during the three months ended September 30,
1999 and 2000, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.3 million, or 5.2%, from $5.6 million to
$5.3 million during the three months ended September 30, 1999 and 2000,
respectively. As a percentage of revenues, selling, general and administrative
expenses were 10.7% and 10.3% during the three months ended September 30, 1999
and 2000, respectively.
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Operating Profit. As a result of the foregoing factors, operating profit
increased from $4.1 million to $6.5 million during the three months ended
September 30, 1999 and 2000, respectively. As a percentage of revenues,
operating profit was 7.8% and 12.7% during the three months ended September 30,
1999 and 2000, respectively.
Net Interest Income and Other. Net interest income and other was
approximately $0.8 million and $1.3 million during the three months ended
September 30, 1999 and 2000, respectively. Substantially all 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 $3.0 million, or 61.6%, from $4.9 million to $7.9
million during the three months ended September 30, 1999 and 2000, respectively.
As a percentage of revenues, income before income taxes increased from 9.3% to
15.3% during the three months ended September 30, 1999 and 2000, respectively.
Income Tax Expense. Income tax expense during the three months ended
September 30, 1999 and 2000 reflects a provision for federal, state, and foreign
income taxes at an effective rate of 37.6% and 37.1%, respectively.
Net Income. Based on the factors discussed above, net income increased $1.9
million, or 62.9%, from $3.0 million to $4.9 million during the three months
ended September 30, 1999 and 2000, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues. Revenues increased $3.9 million, or 2.8%, from $138.9 million to
$142.8 million during the nine months ended September 30, 1999 and 2000,
respectively. This increase was primarily from increased services to existing
and new clients, partially offset by reduced revenue from the Company's largest
client and culling of less profitable business.
Cost of Services. Cost of services decreased $3.6 million, or 3.2%, from
$113.0 million to $109.4 million during the nine months ended September 30, 1999
and 2000, respectively. As a percentage of revenues, cost of services was 81.4%
and 76.6% during the nine months ended September 30, 1999 and 2000,
respectively. This percentage decreased primarily due to an improving mix of
business, cost controls, and culling of less profitable business.
Gross Profit. Due to the foregoing factors, gross profit increased $7.5
million, or 29.1%, from $25.9 million to $33.4 million during the nine months
ended September 30, 1999 and 2000, respectively. As a percentage of revenues,
gross profit was 18.6% and 23.4% during the nine months ended September 30, 1999
and 2000, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.1 million, or 0.8%, from $15.2 million to
$15.3 million during the nine months ended September 30, 1999 and 2000,
respectively. As a percentage of revenues, selling, general and administrative
expenses decreased from 10.9% to 10.7% during the nine months ended September
30, 1999 and 2000, respectively.
Operating Profit. As a result of the foregoing factors, operating profit
increased from $10.7 million to $18.1 million during the nine months ended
September 30, 1999 and 2000, respectively. As a percentage of revenues,
operating profit was 7.7% and 12.7% during the nine months ended September 30,
1999 and 2000, respectively.
Net Interest Income and Other. Net interest income and other was $2.0
million and $3.1 million during the nine months ended September 30, 1999 and
2000, respectively. Substantially all 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 $8.5 million, or 67.1%, from $12.7 million to
$21.2 million during the nine months ended September 30, 1999 and 2000,
respectively. As a percentage of revenues, income before income taxes increased
from 9.2% to 14.9% during the nine months ended September 30, 1999 and 2000,
respectively.
Income Tax Expense. Income tax expense during the nine months ended
September 30, 1999 and 2000 reflects a provision for federal, state, and foreign
income taxes at an effective rate of 37.4% and 37.1%, respectively.
Net Income. Based on the factors discussed above, net income increased $5.3
million, or 67.8%, from $8.0 million to $13.3 million during the nine months
ended September 30, 1999 and 2000, respectively.
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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 $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 and leasing arrangements.
The Company maintains a $5.0 million line of credit with Wells Fargo Bank
West, 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 September 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 September 30, 2000 and the date of this Form 10-Q, the Company
was in compliance with these financial covenants and no amount was outstanding
under the line of credit. Collateral for the line of credit is trade accounts
receivable of certain of the Company's wholly-owned subsidiaries.
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.
As of September 30, 2000, the Company had cash, cash equivalents, and
investment balances of $55.7 million, working capital of $52.4 million, and
stockholders' equity of $86.2 million. Cash and cash equivalents are not
restricted. See "Quantitative and Qualitative Disclosure About Market Risk" set
forth herein for further discussions regarding the Company's cash, cash
equivalents, investments available for sale, and trading securities.
Net cash provided by operating activities was $10.9 million and $12.5
million during the nine months ended September 30, 1999 and 2000, respectively.
This increase was primarily a result of increases in 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 $11.7 million and $5.5 million
during the nine months ended September 30, 1999 and 2000, respectively. This
decrease was primarily due to a decrease in net purchases of investments
available for sale together with a decrease in purchases of property, plant, and
equipment, partially offset by an increase in notes receivable from Gifts.com,
Inc.
Net cash provided by financing activities was $1.9 million and net cash
used in financing activities was $0.6 million during the nine months ended
September 30, 1999 and 2000, respectively. Financing activities, during both
periods, consisted of principal payments on borrowings and capital lease
obligations, offset by proceeds from exercises of employee stock options.
In September 2000, the Company, through its wholly-owned subsidiary Startek
USA, Inc., entered into a lease agreement for additional space in Grand
Junction, Colorado. The term of the lease agreement commenced on October 1, 2000
and continues for a minimum of eight years. The lease provides for annual lease
payments of $0.2 million, and for the Company to pay its pro rata share of
common area maintenance charges and other expenses in addition to the foregoing
annual lease payments.
In October 2000, the Company committed to spend $2.4 million for
construction related to its Enid, Oklahoma facility.
The effect of currency exchange rate changes on translation of the
Company's United Kingdom and Singapore operations was not substantial during the
nine months ended September 30, 2000. Terms of the Company's agreements with
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, which increases 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 its investments.
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.
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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 80.3% and 73.2% of the
Company's revenues during the three months ended September 30, 1999 and 2000,
respectively. AT&T Corporation accounted for less than 10.0% and 15.4% of the
Company's revenues during the three months ended September 30, 1999 and 2000,
respectively. 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 nine months
ended September 30, 2000 are not necessarily indicative of revenues or operating
results that may be expected during the year or three months ending December 31,
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.
RECOVERABILITY OF THE COMPANY'S INVESTMENT IN AND NOTES RECEIVABLE FROM
GIFTS.COM, INC. (FORMERLY NAMED GOOD CATALOG COMPANY)
Through its wholly-owned subsidiary Domain.com, Inc., the Company has a
19.9% investment in and notes receivable from Gifts.com, Inc. of $11.4 million
in the aggregate. The Company's investment is carried at cost. Management
believes the Company's investment in and notes receivable from Gifts.com, Inc.
are recoverable and no impairment loss provision is necessary. Gifts.com, Inc.
is currently experiencing operating losses and negative cash flows. The Company
could lose its entire investment in and notes receivable from Gifts.com, Inc.
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 as of
September 30, 2000. All of the Company's investment decisions are supervised or
managed by its Chairman of the Board. The Company's investment portfolio policy,
approved by the Board of Directors during 1999, provides for investment
objectives and 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 and inflation rates or market expectations
thereon, equity market prices, 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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13
Interest Rate Sensitivity and Other General Market Risks
Cash and Cash Equivalents. The Company had $18.4 million in cash and cash
equivalents, which consisted of: (i) $18.0 million invested in various money
market funds, overnight investments, and various commercial paper securities at
a combined weighted average interest rate of approximately 6.4%; and (ii) $0.4
million in various non-interest bearing accounts. Cash and cash equivalents are
not restricted. 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 estimated fair value of its cash and cash equivalents approximates original
cost.
Investments Available for Sale. The Company had investments available for
sale, which, in the aggregate, had an original cost and fair market value of
$23.5 million and $23.3 million, respectively. 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 and inflation rate risks
and will fall in value if interest and/or inflation rates or market expectations
thereon 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 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:
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 8.1% $ 8,453 $ -- $ -- $ 8,453 $ 8,676
Foreign government bonds 8.7% $ 2,082 2,082 2,010
Corporate bonds 5.7% $ 1,011 1,011 923
Foreign government bonds 9.3% $ 1,438 1,438 1,567
------- ------- ---- ------- ---- ------- ------- -------
Total $ 8,453 $ 2,082 $ -- $ 1,011 $ -- $ 1,438 $12,984 $13,176
======= ======= ==== ======= ==== ======= ======= =======
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 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 $1.9 million; and (ii) equity
securities which, in the aggregate, had an original cost and fair market value
of $8.6 million and $8.2 million, respectively.
13
14
Debt securities within bond mutual funds: (i) had a weighted average
yield of 9.5%, and a weighted average maturity of 9.3 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 intended to reduce fair market value
fluctuations; (iv) are subject to interest and inflation rate risk and will fall
in value if market rates or market expectations thereon, 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. The Company had outstanding debt of $6.1
million, $2.1 million of which bears interest at an annual fixed rate of 7.0%,
and $2.1 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, $1.6 million outstanding, whereby the Company is expected to
repay its debt at a variable rate of interest (7.9 %) 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 would, 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%). The Company had no
outstanding line of credit obligations. In the past, the Company has not hedged
against interest rate changes.
Equity Price Risks and Other General Market Risks
Equity Securities. The Company held in its investments available for
sale portfolio certain equity securities with original cost and fair market
value, in the aggregate, of $8.6 million and $8.2 million, respectively. Equity
securities primarily consisted of publicly traded common stock of US based
companies, equity mutual funds, and real estate investment trusts. 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
increasing inflation and/or interest rates or market expectations thereon, 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. The Company was invested in trading securities, which,
in the aggregate, had an original cost and fair market value of $14.1 million
and $13.9 million, respectively. Trading securities consisted primarily of US
and international mutual funds ($8.1 million fair market value), and investments
in limited partnerships ($6.0 million fair market value). Certain investments
include hedging and derivative securities. Trading securities were held to meet
short-term investment objectives. As part of trading securities and as of
September 30, 2000, the Company had sold call options for a total of 53,000
shares of US equity securities which, in the aggregate, had a basis and market
value of $0.1 million, and sold put options for a total of 25,000 shares of US
equity securities which, in the aggregate, had a basis and market value of $0.1
million. The foregoing call and put options were reported net as components of
trading securities and expire between October 2000 and April 2001.
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. The foregoing call and
put options, 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, investments in limited partnerships, and/or
call and put options could have a material adverse effect on the Company's
portfolio of trading securities. Also, trading securities could be materially
and adversely affected by increasing interest and/or inflation rates or market
expectations thereon, 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
24.8% of the Company's revenues during the three months ended September 30,
2000 were derived from arrangements whereby the Company received payments from
clients in currencies other than US dollars. Terms of the Company's agreements
with 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, which increases 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 September 30, 2000 except as
follows:
On July 3, 2000, the Company granted options to purchase
20,900 shares of common stock, in the aggregate, to 209
employees pursuant to the Company's employee stock option
plan. These options vest at a rate of 20% per year beginning
July 3, 2001, expire July 3, 2010, and are exercisable at
price of $50.50 per share, which was the market value of the
Company's common stock on the date the options were granted.
On September 27, 2000, the Company granted options to
purchase 13,500 shares of common stock, in the aggregate, to
12 employees pursuant to the Company's employee stock option
plan. These options vest at a rate of 20% per year beginning
September 27, 2001, expire September 27, 2010, and are
exercisable at a price of $30.94 per share, which was the
market value of the Company's common stock on the date the
options were granted.
The foregoing stock option grants were made in reliance upon
exemptions from registration provided by Sections 4(2) and 3(b)
of the Securities Act of 1933, as amended, and regulations
promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
three months ended September 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: November 14, 2000 /s/ MICHAEL W. MORGAN
-------------------- ----------------------------------------------
Michael W. Morgan
President and Chief Executive Officer
Date: November 14, 2000 /s/ DENNIS M. SWENSON
-------------------- ----------------------------------------------
Dennis M. Swenson
Executive Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
16
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule