1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2001.
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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
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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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 GARFIELD STREET
DENVER, COLORADO 80206
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(303) 361-6000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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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 - 14,035,101 shares as of May 1, 2001.
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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, 2000 and March 31, 2001 3
Condensed Consolidated Income Statements -
Three months ended March 31, 2000 and 2001 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2000 and 2001 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 MARCH 31
2000 2001
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 22,543 $ 16,295
Investments 32,413 37,962
Trade accounts receivable, less allowance for
doubtful accounts of $672 and $659, respectively 20,399 13,756
Inventories 1,946 2,257
Deferred tax assets 1,902 2,073
Prepaid expenses and other assets 742 979
------------ ------------
Total current assets 79,945 73,322
Property, plant and equipment, net 29,891 30,407
Investment in Gifts.com, Inc., at cost 2,606 2,606
Notes receivable from Gifts.com, Inc. 9,807 9,807
Other assets 34 34
------------ ------------
Total assets $ 122,283 $ 116,176
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,375 $ 7,674
Accrued liabilities 5,962 5,997
Income taxes payable 3,108 1,961
Line of credit 4,000 --
Current portion of long-term debt 1,992 1,974
Other 362 331
------------ ------------
Total current liabilities 23,799 17,937
Long-term debt, less current portion 5,505 4,839
Deferred income taxes 725 760
Other 290 143
Stockholders' equity:
Common stock 140 140
Additional paid-in capital 47,095 47,121
Cumulative translation adjustment 8 (12)
Unrealized loss on investments available for sale (495) (962)
Retained earnings 45,216 46,210
------------ ------------
Total stockholders' equity 91,964 92,497
------------ ------------
Total liabilities and stockholders' equity $ 122,283 $ 116,176
============ ============
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
MARCH 31
---------------------------
2000 2001
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Revenues $ 49,668 $ 32,432
Cost of services 38,457 23,682
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Gross profit 11,211 8,750
Selling, general and
administrative expenses 5,185 5,802
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Operating profit 6,026 2,948
Net interest income and other 716 1,665
Non-recurring loss on impaired investment -- (3,040)
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Income before income taxes 6,742 1,573
Income tax expense 2,501 580
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Net income(A) $ 4,241 $ 993
============ ============
Weighted average shares of
common stock(B) 13,989,184 14,034,015
Dilutive effect of stock options 302,922 30,793
------------ ------------
Common stock and common stock
equivalents(C) 14,292,106 14,064,808
============ ============
Earnings per share:
Basic (A/B) $ 0.30 $ 0.07
Diluted (A/C) $ 0.30 $ 0.07
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)
THREE MONTHS ENDED
MARCH 31
----------------------------
2000 2001
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OPERATING ACTIVITIES
Net income $ 4,241 $ 993
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,132 1,454
Deferred income taxes 125 151
Changes in operating assets and liabilities:
Purchases of trading securities, net (2,760) (1,047)
Trade accounts receivable, net 2,618 6,643
Inventories (1,196) (311)
Prepaid expenses and other assets 34 (237)
Accounts payable (1,102) (701)
Income taxes payable 1,583 (1,147)
Accrued and other liabilities 1,131 (141)
------------ ------------
Net cash provided by operating activities 5,806 5,657
INVESTING ACTIVITIES
Purchases of investments available for sale (9,878) (7,147)
Proceeds from disposition of investments available for sale 5,629 1,903
Purchases of property, plant and equipment (1,019) (1,896)
------------ ------------
Net cash used in investing activities (5,268) (7,140)
FINANCING ACTIVITIES
Stock options exercised 289 26
Principal payments on borrowings, net (357) (4,685)
Principal payments on capital lease obligations (9) --
------------ ------------
Net cash used in financing activities (77) (4,659)
Effect of exchange rate changes on cash 85 (106)
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Net increase (decrease) in cash and cash equivalents 546 (6,248)
Cash and cash equivalents at beginning of period 11,943 22,543
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Cash and cash equivalents at end of period $ 12,489 $ 16,295
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 86 $ 95
Income taxes paid $ 746 $ 1,531
(Increase) in unrealized loss on investments available
for sale, net of tax $ (138) $ (467)
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. 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 months ended March 31, 2001 are not
necessarily indicative of operating results that may be expected during any
other interim period of 2001.
The condensed consolidated balance sheet as of December 31, 2000 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, 2000.
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 was effective for the Company on January 1,
2001. The adoption of SFAS No. 133 had no material impact on the Company.
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. NON-RECURRING LOSS ON IMPAIRED INVESTMENT
In January 2001, the Company purchased an investment in Six Sigma, LLC
("Six Sigma"). Six Sigma provided its audited financial statements which
included an unqualified independent auditors' opinion. The purpose of Six Sigma
was to provide revolving platform financing to its customer, a national mortgage
company ("Mortgage Company") and all advances were to be secured by first
mortgages or deeds of trust on residential properties located in 47 different
states. Six Sigma was to receive interest from the Lender and a portion of the
loan origination fees. Subsequently, a federal court placed the Mortgage Company
into receivership based on allegations by the Securities and Exchange Commission
that the president of the Mortgage Company had misappropriated large amounts of
funds. The concurrent default on the line of credit extended by Six Sigma to the
Mortgage Company triggered a bankruptcy filing by Six Sigma. Based on the
limited information available to the Company, the Company believes it is
probable its investment in Six Sigma has been impaired, and as of March 31, 2001
has taken a charge for a non-recurring loss on the entire investment balance of
$3,000 and accrued interest and fees of $40. The Company will continue to pursue
recovery of this investment.
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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, 2000, investments available for sale consisted of:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Corporate bonds $ 7,081 $ 139 -- $ 7,220
Foreign government bonds 1,438 178 -- 1,616
Equity securities 9,871 -- $ (1,107) 8,764
---------- ---------- ---------- ----------
Total $ 18,390 $ 317 $ (1,107) $ 17,600
========== ========== ========== ==========
As of March 31, 2001, investments available for sale consisted of:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Corporate bonds $ 8,609 $ 254 $ 8,863
Foreign government bonds 1,438 231 1,669
Equity securities 13,580 $ (2,011) 11,569
---------- ---------- ---------- ----------
Total $ 23,627 $ 485 $ (2,011) $ 22,101
========== ========== ========== ==========
As of March 31, 2001, 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 $ 6,527 $ 6,794
Two to five years 2,082 2,069
Due after five years 1,438 1,669
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10,047 10,532
Equity securities 13,580 11,569
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Total $ 23,627 $ 22,101
========== ==========
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, 2000, the Company was invested in trading
securities, which, in the aggregate, had an original cost and fair market value
of $14,571 and $14,813, respectively. As of March 31, 2001, the Company was
invested in trading securities, which, in the aggregate, had an original cost
and fair market value of $15,560 and $15,860, respectively. Trading securities
consisted primarily of US and international mutual funds and investments in
limited partnerships. 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 March 31, 2001, the Company
had sold call options for a total of 83,000 shares of US equity securities
which, in the aggregate, had a basis and market value of $152 and $42,
respectively, and sold put options for a total of 32,500 shares of US equity
securities which, in the aggregate, had a basis and market value of $44 and $71,
respectively. The foregoing call and put options were reported net as components
of trading securities and expire April 21, 2001.
Risk of loss to the Company regarding its current investments 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
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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)
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 supply chain 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 MARCH 31
2000 2001
------------ ------------
Purchased components and
fabricated assemblies $ 1,524 $ 1,682
Finished goods 422 575
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$ 1,946 $ 2,257
============ ============
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 $12,413 in the
aggregate. The Company's investment in Gifts.com, Inc. is carried at cost.
During the three months ended March 31, 2000, the Company recognized
$605 of revenues related to services performed for Gifts.com, Inc. and $158 of
interest income. During the three months ended March 31, 2001, the Company
recognized $175 of interest income. As of March 31, 2001, regular quarterly
interest of $175 was due and current from Gifts.com, Inc.
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, negative
cash flows, and a deficiency in working capital. The Company could lose its
entire investment in and notes receivable from Gifts.com, Inc. An impairment of
the Company's investment in and notes receivable from Gifts.com, Inc. could have
an adverse effect on the Company's result of operations and financial condition.
The Company does not exercise significant influence over financial or operating
policies of Gifts.com, Inc.
8. PRINCIPAL CLIENTS
Three clients accounted for 41.7%, 36.6%, and 11.6% of the Company's
revenues during the three months ended March 31, 2001. Two clients accounted for
approximately 70.1% and 10.1% of revenues during the three months ended March
31, 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 March 31, 2001.
9. 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 $4,143 and $507 for the three months ended March 31, 2000 and 2001,
respectively.
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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, 2000.
The following table sets forth certain unaudited condensed consolidated
income statement data expressed as a percentage of revenues:
THREE MONTHS ENDED MARCH 31
----------------------------
2000 2001
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Revenues 100.0% 100.0%
Cost of services 77.4 73.0
------------ ------------
Gross profit 22.6 27.0
Selling, general and administrative
expenses 10.4 17.9
------------ ------------
Operating profit 12.2 9.1
Net interest income and other 1.4 5.1
Non-recurring loss on impaired investment -- (9.3)
------------ ------------
Income before income taxes 13.6 4.9
Income tax expense 5.0 1.8
------------ ------------
Net income 8.6% 3.1%
============ ============
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Revenues. Revenues decreased $17.3 million, or 34.7%, from $49.7
million to $32.4 million during the three months ended March 31, 2000 and 2001,
respectively. This decrease was largely due to reduced revenue from the
Company's largest client which provided 70.1% and 41.7% of revenues in the three
months ended March 31, 2000 and 2001, respectively, partially offset by
increased services provided to certain other clients, one of which provided
36.6% of revenues in the three months ended March 31, 2001. The Company believes
its share of business from its largest client has not declined.
Cost of Services. Cost of services decreased $14.8 million, or 38.4%,
from $38.5 million to $23.7 million during the three months ended March 31, 2000
and 2001, respectively. As a percentage of revenues, cost of services was 77.4%
and 73.0% during the three months ended March 31, 2000 and 2001, respectively.
This percentage amount declined mainly as a result of improved processes, better
operating efficiency, and changes in the mix of services provided.
Gross Profit. Due to the foregoing factors, gross profit decreased $2.4
million, or 22.0%, from $11.2 million to $8.8 million during the three months
ended March 31, 2000 and 2001, respectively. As a percentage of revenues, gross
profit was 22.6% and 27.0% during the three months ended March 31, 2000 and
2001, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.6 million, or 11.9%, from $5.2 million to
$5.8 million during the three months ended March 31, 2000 and 2001,
respectively. As a percentage of revenues, selling, general and administrative
expenses were 10.4% and 17.9% during the three months ended March 31, 2000 and
2001, respectively. The increase in selling, general and administrative expenses
as a percentage of revenue was primarily due to the spreading of relatively
fixed costs over a smaller revenue base together with increased costs of
developing systems and infrastructure.
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Operating Profit. As a result of the foregoing factors, operating
profit decreased from $6.0 million to $2.9 million during the three months ended
March 31, 2000 and 2001, respectively. As a percentage of revenues, operating
profit was 12.2% and 9.1% during the three months ended March 31, 2000 and 2001,
respectively.
Net Interest Income and Other. Net interest income and other was
approximately $0.7 million and $1.7 million during the three months ended March
31, 2000 and 2001, 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.
Non-Recurring Loss on Impaired Investment. The Company believes it is
probable that its $3.0 million investment plus accrued interest and fees in Six
Sigma, LLC has been impaired and has taken a charge for a non-recurring loss on
the entire investment balance as of March 31, 2001. See Note 4 to the Financial
Statements.
Income Before Income Taxes. As a result of the foregoing factors,
income before income taxes decreased $5.1 million, or 76.7%, from $6.7 million
to $1.6 million during the three months ended March 31, 2000 and 2001,
respectively. As a percentage of revenues, income before income taxes decreased
from 13.6% to 4.9% during the three months ended March 31, 2000 and 2001,
respectively.
Income Tax Expense. Income tax expense during the three months ended
March 31, 2000 and 2001 reflects a provision for federal, state, and foreign
income taxes at an effective rate of 37.1% and 36.9%, respectively.
Net Income. Based on the factors discussed above, net income decreased
$3.2 million, or 76.6%, from $4.2 million to $1.0 million during the three
months ended March 31, 2000 and 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its 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 had a $5.0 million line of credit with Wells Fargo Bank
West, N.A. (the "Bank") that matured on April 30, 2001. The Company has renewed
this line of credit on an unsecured basis. Borrowings under the new line of
credit bear interest at the Bank's prime rate minus 1% (7.00% as of March 31,
2001). Under this new line of credit, the Company is required to maintain
minimum tangible net worth of $65.0 million and operate at a profit (excluding
any adjustments of carrying value pertaining to Gifts.com, Inc). The Company may
not pay dividends in an amount which would cause a failure to meet these
financial covenants. As of March 31, 2001 and the date of this Form 10-Q the
Company was in compliance with the financial covenants pertaining to the
unsecured line of credit.
Effective September 15, 1999, the Company entered into a contribution
agreement (the "Contribution Agreement") and stockholders agreement with The
Reader's Digest Association, Inc. ("Reader's Digest") and Gifts.com. Inc.
(formerly known as Good Catalog Company), previously a wholly-owned subsidiary
of Reader's Digest. On November 8, 1999, pursuant to the Contribution Agreement,
Domain.com purchased 19.9% of the outstanding common stock of Gifts.com, Inc.
for approximately $2.6 million in cash. Reader's Digest owns the remaining 80.1%
of the outstanding common stock of Gifts.com, Inc. The Contribution Agreement
provides for an assignment from Domain.com to Gifts.com, Inc. of Domain.com's
right, title, and interest in and to the URL www.gifts.com. Domain.com has the
right to designate at least one member of Gifts.com, Inc.'s board of directors,
which consists of at least five directors. Effective November 1, 1999,
Domain.com and Reader's Digest entered into a loan agreement pursuant to which
Domain.com advanced an unsecured loan of $7.8 million and Reader's Digest also
advanced an unsecured loan to Gifts.com, Inc. ( the "Loans"). The Loans mature
November 1, 2002, bear interest at a rate equal to a three month LIBO rate plus
2.0% per annum, and interest is payable quarterly. Gifts.com, Inc. provides two
Internet web sites that sell gifts on-line and operates a gifts catalog
business.
The Company advanced two additional $0.99 million loans to Gifts.com,
Inc.: the first loan was made August 2, 2000 and the second loan was made
December 5, 2000. Both loans are governed by the same terms and conditions as
those set forth in the $7.8 million loan agreement effective November 1, 1999.
In conjunction with the loans made by Domain.com, Inc., and in order to maintain
proportionate ownership interest, Reader's Digest Association, Inc., owning
80.1% of Gifts.com, Inc. made corresponding loans in the amount of $4.0 million
each to Gifts.com, Inc. thereby maintaining an 80.1% ownership interest in
Gifts.com, Inc.
Gifts.com, Inc. is currently experiencing operating losses, negative
cash flows and a deficiency in working capital. The Company could lose its
entire investment in and notes receivable from Gifts.com, Inc. An impairment of
the Company's investment and notes receivable from Gifts.com, Inc. could have an
adverse effect on the Company's results of operations and financial condition.
As of March 31, 2001, the Company had cash, cash equivalents, and
investment balances of $54.3 million, working capital of $55.4 million, and
stockholders' equity of $92.5 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.
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The Company has committed to spend approximately $1.6 million in the
remainder of 2001 related to property, plant, and equipment.
Net cash provided by operating activities was $5.8 million and $5.7
million for the three months ended March 31, 2000 and 2001, respectively. This
decrease was primarily a result of a decrease in net income and income taxes
payable, partially offset by increases in accounts receivable and a decrease in
net purchases of trading securities. Without the effect of net purchases of
trading securities, and the non-recurring loss on impaired investment, operating
cash flows were $8.6 million and $9.7 million for 2000 and 2001, respectively.
Net cash used in investing activities was $5.3 million and $7.1 million
for the three months ended March 31, 2000 and 2001, respectively. This increase
was primarily due to a net increase in investments available for sale together
with an increase in purchases of property, plant, and equipment.
Net cash used in financing activities was $ 0.1 million and $4.7
million for the three months ended March 31, 2000 and 2001, 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.
The effect of currency exchange rate changes on translation of the
Company's United Kingdom and Singapore operations was not substantial during the
three months ended March 31, 2001. 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 $10.0 million line of credit
will be sufficient to support its operations, capital expenditures, and various
repayment obligations under its debt and lease agreements for the foreseeable
future. 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 that 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 70.1% and 41.7% of
the Company's revenues during the three months ended March 31, 2000 and 2001,
respectively. The Company believes its share of business from Microsoft has not
declined. AT&T Corporation accounted for less than 10.0% of the Company's
revenues during the three months ended March 31, 2000 and 36.6% of the Company's
revenues during the three months ended March 31, 2001. America Online accounted
for 10.1% and 11.6% of the Company's revenues during the three months ended
March 31, 2000 and 2001, respectively. Loss of a principal client(s) and/or
changes in timing or termination of a principal client's product launch or
service offering would have a material adverse affect 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 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
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buying season. However, the Company's revenues and operating results for the
three months ended March 31, 2001 are not necessarily indicative of revenues or
operating results that may be experienced in future periods. 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.
RISKS RELATED TO THE COMPANY'S INVESTMENT IN AND NOTES RECEIVABLE FROM
GIFTS.COM, INC.
Through its wholly-owned subsidiary Domain.com, Inc., the Company's
investment in and note receivable from Gifts.com, Inc. of approximately $12.4
million, in the aggregate, involves a high degree of risk. Gifts.com, Inc. is
currently experiencing operating losses and negative cash flows and has a
deficiency in working capital. Accordingly, an investor in the Company's common
stock must consider the challenges, risks, and uncertainties frequently
encountered by early stage companies using new and unproven business models in
new and rapidly evolving markets. These challenges influencing Gifts.com, Inc.'s
ability to substantially increase its revenues and thereby achieve
profitability, include Gifts.com, Inc.'s ability to: (i) execute on its business
model; (ii) increase brand recognition; (iii) manage growth in its operations;
(iv) cost-effectively attract and retain a high volume of catalog and online
customers and build a critical mass of repeat customers at a reasonable cost;
(v) effectively manage, control, and account for inventory; (vi) upgrade and
enhance its web sites, transaction-processing systems, order fulfillment
capabilities, and inventory management systems; (vii) increase awareness of its
online stores; (viii) establish pricing to meet customer expectations; (ix)
compete effectively in its market; (x) adapt to rapid regulatory and
technological changes related to catalog operations, E-commerce and the
Internet; and (xi) protect its trademarks, service marks, and copyrights. These
and other uncertainties generally attributable to businesses engaging in catalog
operations, E-commerce and the Internet must be considered when evaluating the
Company's investment in and notes receivable from Gifts.com, Inc., and the
Company's participation in the business of Gifts.com, Inc. An impairment of the
Company's investment in and notes receivable from Gifts.com, Inc. could have an
adverse effect on the Company's results of operations and financial condition.
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
March 31, 2001. 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, 2000.
Interest Rate Sensitivity and Other General Market Risks
Cash and Cash Equivalents. The Company had $16.3 million in cash and
cash equivalents, which consisted of: (i) $15.7 million invested in various
money market funds, overnight investments, and various commercial paper
securities at a combined weighted average interest rate of approximately 5.85%;
and (ii) $0.6 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
$23.6 million and $22.1 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.
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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 8.30% $6,527 $ -- $ -- $ -- $ 6,527 $ 6,794
Corporate bonds 8.73% $ 2,082 2,082 2,069
Foreign government bonds 9.26% $ 1,438 1,438 1,669
------ ------- ------- ------- ------- ---------- ------- ----------
Total $6,527 $ 2,082 $ -- $ -- $ -- $ 1,438 $10,047 $ 10,532
====== ======= ======= ======= ======= ========== ======= ==========
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 equity securities which, in aggregate, had an original cost and
fair market value of $13.6 million and $11.6 million, respectively.
Outstanding Debt of the Company. The Company had outstanding debt of
$6.8 million, $1.6 million of which bears interest at an annual fixed rate of
7.0%, and $1.6 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, $1.4 million outstanding, whereby the
Company is expected to repay its debt at a variable rate of interest (6.9%)
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 $10.0 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 $10.0 million line of credit bear interest at the lender's
prime rate less 1% (7.0%). The Company had no outstanding line of credit
obligations. In the past, the Company has not hedged against interest rate
changes.
Equity Price Risks, General Market Risks, and Other 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 $13.6 million and $11.6 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 $15.6
million and $15.9 million, respectively. Trading securities consisted primarily
of US and international mutual funds, investments in limited partnerships, and
US equity securities. Trading securities were held to meet short-term investment
objectives. As part of trading securities and as of March 31, 2001, the Company
had sold call options for a total of 83,000 shares of US equity securities
which, in the aggregate, had a basis and market value of $0.2 million and $0.0
million, and sold put options for a total of 32,500 shares of US equity
securities which, in the aggregate, had a basis and market value of $0.0 million
and $0.1 million. The foregoing call and put options were reported net as
components of trading securities and expire April 21, 2001.
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Non-Recurring Loss on Impaired Investment. In January 2001, the Company
purchased an investment in Six Sigma, LLC ("Six Sigma"). Six Sigma provided its
audited financial statements which included an unqualified independent auditors'
opinion. The purpose of Six Sigma was to provide revolving platform financing to
its customer, a national mortgage company ("Mortgage Company") and all advances
were to be secured by first mortgages or deeds of trust on residential
properties located in 47 different states. Six Sigma was to receive interest
from the Lender and a portion of the loan origination fees. Subsequently, a
federal court placed the Mortgage Company into receivership based on allegations
by the Securities and Exchange Commission that the president of the Mortgage
Company had misappropriated large amounts of funds. The concurrent default on
the line of credit extended by Six Sigma to the Mortgage Company triggered a
bankruptcy filing by Six Sigma. Based on the limited information available to
the Company, the Company believes it is probable its investment in Six Sigma has
been impaired, and as of March 31, 2001 has taken a charge for a non-recurring
loss on the entire investment balance of $3,000 and accrued interest and fees of
$40. The Company will continue to pursue recovery of this investment.
Risk of loss regarding its current investments 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.
Foreign Currency Exchange Risks
Of the Company's revenues for the three months ended March 31, 2001,
19.1% 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.
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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 March 31, 2001 except as
follows:
On January 2, 2001, the Company granted options to
purchase 21,600 shares of common stock, in the
aggregate, to 216 employees pursuant to the Company's
employee stock option plan. These options vest at a
rate of 20% per year beginning January 2, 2002,
expire January 2, 2011, and are exercisable at price
of $14.94 per share, which was the market value of
the Company's common stock on the date the options
were granted.
On January 8, 2001, the Company granted options to
purchase 100,000 shares of common stock, in the
aggregate, to the Company's Chief Executive Officer
pursuant to the Company's employee stock option plan.
These options vest at a rate of 20% per year
beginning January 8, 2002, expire January 8, 2011,
and are exercisable at price of $14.94 per share,
which was the market value of the Company's common
stock on the date the options were granted.
On March 9, 2001, the Company granted options to
purchase 51,600 shares of common stock, in the
aggregate, to 16 employees pursuant to the Company's
employee stock option plan. These options vest at a
rate of 20% per year beginning March 9, 2002, expire
March 9, 2011, and are exercisable at price of $14.50
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
10.31 Amendment dated April 23, 2001 to the Startek,
Pacific, Inc. Manufacturing agreement dated January
1, 1998 between StarTek Pacific, Ltd. and Mentor
Media Ltd.
10.32 Assignment and Amendment dated January 1, 2001 to the
Microsoft Corporation Manufacturing Agreement dated
January 1, 1998 between Microsoft Corporation and
StarTek, Inc.
10.33 Credit Agreement and $10,000,000 Revolving Line of
Credit Note dated April 30, 2001 between StarTek,
Inc. and Wells Fargo Bank West, National Association.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the three months ended March 31, 2001.
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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: May 14, 2001 /s/ A. EMMET STEPHENSON, JR.
----------------------------- -----------------------------------------
A. Emmet Stephenson, Jr.
Chairman of the Board
Date: May 14, 2001 /s/ DENNIS M. SWENSON
----------------------------- -----------------------------------------
Dennis M. Swenson
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.31 Amendment dated April 23, 2001 to the Startek,
Pacific, Inc. Manufacturing agreement dated January
1, 1998 between StarTek Pacific, Ltd. and Mentor
Media Ltd.
10.32 Assignment and Amendment dated January 1, 2001 to the
Microsoft Corporation Manufacturing Agreement dated
January 1, 1998 between Microsoft Corporation and
StarTek, Inc.
10.33 Credit Agreement and $10,000,000 Revolving Line of
Credit Note dated April 30, 2001 between StarTek,
Inc. and Wells Fargo Bank West, National Association.