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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ________.
Commission File Number 1-12793
STARTEK, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1370538
----------------------------------------------------------- ---------------------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
111 HAVANA STREET
DENVER, COLORADO 80010
- ------------------------------------------------------------ ----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 361-6000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF
CHANGED SINCE LAST REPORT)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, 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 practicable date.
Class of Common Stock Outstanding at November 13, 1998
Common Stock, par value $.01 per share 13,828,571
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STARTEK, INC.
FORM 10-Q
INDEX
Page
PART 1. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - 3
December 31, 1997 and September 30, 1998
Condensed Consolidated Statements of Operations - 4
Three months ended September 30, 1997 and 1998;
Nine months ended September 30, 1997 and 1998
Condensed Consolidated Statements of Cash Flows - 5
Nine months ended September 30, 1997 and 1998
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1997 1998
---------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 26,960 $ 16,184
Investments available for sale 12,645
7,356
Trade accounts receivable, less allowance for
doubtful accounts of $383 and $385, respectively 12,518 12,655
Inventories 2,539 3,381
Deferred tax asset 440 800
Prepaid expenses and other 205 439
-------------- -----------
Total current assets 50,018 46,104
Property, plant and equipment, net 8,151 18,868
Other assets 3 64
-------------- -----------
Total assets $ 58,172 $ 65,036
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,387 $ 11,691
Accrued liabilities 1,292 1,799
Income taxes payable 106 199
Current portion of capital lease obligations 82 43
Current portion of long term debt 26 56
Other 421 251
-------------- -----------
Total current liabilities 11,314 14,039
Capital lease obligations, less current portion 121 97
Long-term debt, less current portion 435 506
Deferred income tax 231 350
Other 65 37
Stockholders' equity:
Common stock 138 138
Additional paid-in capital 41,661 41,661
Cumulative translation adjustment 70 82
Unrealized loss on investments (92) (740)
Retained earnings 4,229 8,866
-------------- -----------
Total stockholders' equity 46,006 50,007
-------------- -----------
Total liabilities and stockholders' equity $ 58,172 $ 65,036
============== ===========
See accompanying notes.
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4
STARTEK, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(dollars in thousands, except share data)
(unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
1997 1998 1997 1998
-------------- -------------- -------------- -------------
Revenues $ 20,226 $ 31,617 $ 52,960 $ 80,630
Cost of services 16,306 25,796 41,579 65,561
-------------- -------------- -------------- -------------
Gross profit 3,920 5,821 11,381 15,069
Selling, general and administrative
expenses 2,135 3,483 6,251 9,500
Management fee expense -- -- 3,126 --
-------------- -------------- -------------- -------------
Operating profit 1,785 2,338 2,004 5,569
Net interest income and other 535 436 353 1,680
-------------- -------------- -------------- -------------
Income before income taxes 2,320 2,774 2,357 7,249
Income tax expense 865 987 650 2,612
-------------- -------------- -------------- -------------
Net income $ 1,455 $ 1,787 $ 1,707 $ 4,637
============== ============== ============== =============
Basic and diluted net income per share $ 0.11 $ 0.13 $ 0.34
Weighted average shares outstanding 13,828,571 13,828,571 13,828,571
See accompanying notes.
4
5
STARTEK, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1997 1998
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,707 $ 4,637
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,226 1,982
Gain on sale of assets, net -- (113)
Changes in operating assets and liabilities:
Accounts receivable 1,677 (137)
Inventories (570) (842)
Prepaid expenses and other assets (255) (295)
Prepaid income taxes (119) --
Deferred taxes (185) (241)
Accounts payable 240 2,304
Accrued and other liabilities (810) 309
Income tax payable -- 93
-------- --------
Net cash provided by operating activities 2,911 7,697
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,647) (12,767)
Proceeds from sale of assets -- 181
Collections on notes receivable-stockholders 213 --
Purchases of investments available for sale (5,360) (5,937)
-------- --------
Net cash used in investing activities (6,794) (18,523)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line of credit borrowings (3,500) --
(Principal payments on) proceeds from borrowings, net (354) 101
Principal payments on capital lease obligations (2,179) (63)
Dividend to S corporation stockholders (8,000) --
Net proceeds from initial public offering of common stock 41,042 --
Contributed capital 1,641 --
-------- --------
Net cash provided by financing activities 28,650 38
Effect of exchange rate changes on cash (70) 12
-------- --------
Net increase (decrease) in cash and cash equivalents 24,697 (10,776)
Cash and cash equivalents at beginning of period 2,742 26,960
-------- --------
Cash and cash equivalents at end of period $ 27,439 $ 16,184
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 349 $ 23
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Unrealized gains (losses), net of deferred taxes $ 11 $ (648)
Common stock split effected by stock dividend $ 107 $ --
See accompanying notes.
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STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. The condensed consolidated financial statements
reflect all adjustments (consisting of only normal recurring accruals) which, in
the opinion of management, are necessary for a fair presentation. Operating
results for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
The balance sheet at December 31, 1997, has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For additional information, refer to
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
2. NEW ACCOUNTING STANDARDS
In the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings Per Share (FAS 128), which
supersedes Accounting Principles Board Opinion No. 15. Under FAS 128, basic
earnings per common share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock. For the three and
nine months ended September 30, 1998, the additional shares assuming dilution
has no impact on earnings per share because the average price per share of
common stock during the period was less than the exercise price of outstanding
options.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income, which is effective in 1998 for the
Company. The Statement establishes new rules for the reporting and display of
comprehensive income. Comprehensive income is defined essentially as all changes
in stockholders' equity, exclusive of transactions with owners. Comprehensive
income was $1,430 and $1,322 for the three months ended September 30, 1997 and
1998, respectively. Comprehensive income was $1,633 and $4,001 for the nine
months ended September 30, 1997 and 1998, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, Disclosures About Segments of an Enterprise and Related Information,
which is effective for 1998 for the Company. The Statement changes the way
companies report segment information in annual financial statements by requiring
the "management approach" for reporting financial and descriptive information
about operating segments. The Statement does not provide for application in 1998
interim financial statements, but comparative information for interim periods of
the initial year of application is to be reported for interim periods in the
second year of application.
3. INITIAL PUBLIC OFFERING OF COMMON STOCK
On June 24, 1997 the Company closed an initial public offering of its
common stock. The Company sold 3,000,000 shares of common stock at an offering
price of $15.00 per share. Total proceeds after deducting $3,958 in costs
associated with the offering were $41,042. Immediately prior to the closing of
the offering the Company completed a 322.1064-for-one common stock split
effected by a stock dividend. All common stock amounts, equivalent share amounts
and per share amounts included in the accompanying financial statements and
related notes have been adjusted to give effect to the stock dividend.
Effective immediately prior to the closing of the initial public
offering, the Company declared an $8,000 dividend in an amount approximately
equal to the estimated additional paid-in capital and retained earnings of the
Company as of the closing date of the initial public offering, pursuant to
certain promissory notes. Such notes were paid on June 30, 1997 from the net
proceeds of the initial public offering.
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STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except share data)
(unaudited)
4. INVESTMENTS AVAILABLE FOR SALE
The following is a summary of investments available for sale as of
December 31, 1997:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- -------- ------------ ------------
Corporate bonds $ 2,205 $ 5 $ (45) $ 2,165
Other debt securities 5,299 - (108) 5,191
-------------- -------- ------------ ------------
Total $ 7,504 $ 5 $ (153) $ 7,356
============== ======== ============ ============
The following is a summary of investments available for sale as of
September 30, 1998:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- -------- ------------ ------------
Corporate bonds $ 5,607 $ 50 $ (140) $ 5,517
Other debt securities 6,365 -- (743) 5,622
Equity securities 1,890 -- (384) 1,506
-------------- -------- ------------ ------------
Total $ 13,862 $ 50 $ (1,267) $ 12,645
============== ======== ============ ============
The amortized cost and estimated fair value of investments available
for sale as of September 30, 1998, by contractual maturity, are shown below:
ESTIMATED
COST FAIR VALUE
-------- ------------
Corporate bonds and certain debt
securities maturing within:
One year $ 805 $ 820
Two to five years 2,147 2,181
Due after five years 5,569 4,833
-------- ----------
8,521 7,834
Other debt securities 3,451 3,305
Equity securities 1,890 1,506
-------- ----------
Total $ 13,862 $ 12,645
======== ==========
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STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except share data)
(unaudited)
5. INVENTORIES
Total inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30,
1997 1998
----------- -----------
Raw materials $ 2,171 $ 2,824
Finished goods 368 557
----------- -----------
$ 2,539 $ 3,381
=========== ===========
6. COMMON STOCK
A summary of the Company's stock option activity is as follows:
NINE MONTHS
ENDED
SEPTEMBER 30, 1998
-------------------
Outstanding as of December 31, 1997 611,500
Granted 20,500
Forfeitures (5,500)
-------------------
Outstanding as of September 30, 1998 626,500
===================
Exercisable as of September 30, 1998 141,600
-------------------
The exercise price for options outstanding as of September 30, 1998 was
$15.00 per share, except for 8,000 options exercisable at $13.06 per share,
14,500 options exercisable at $12.25 per share and 6,000 options exercisable at
$12.69 per share. As of September 30, 1998, there were 135,600 and 6,000 fully
vested options exercisable at $15.00 per share and $12.69 per share,
respectively.
There were 13,828,571 shares of common stock outstanding as of September
30, 1998.
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9
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except share data)
(unaudited)
7. MANAGEMENT FEE EXPENSE
Historically, certain S corporation stockholders and an affiliate have been
paid certain management fees, bonuses and other fees in connection with services
rendered to the Company which have not been included in selling, general and
administrative expenses, in addition to general compensation for services
rendered. Such management fees are reflected as management fee expenses as set
forth below. Effective with the closing of the Company's initial public offering
in June 1997, these management fees, bonuses and other fees were discontinued.
After the closing of the initial public offering, all compensation payable
to persons who had been S corporation stockholders of the Company (or an
affiliate of such stockholder) is in the form of advisory fees, salaries and
bonuses (which at current rates will aggregate approximately $516 annually) and
are included in selling, general and administrative expenses. Such advisory fees
and salaries are reflected as selling, general and administrative expenses as
set forth below.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- --------------------------
1997 1998 1997 1998
----------- ----------- ----------- ----------
Selling, general and administrative
expenses $ 129 $ 129 $ 387 $ 387
Management fee expense -- -- 3,126 --
8. INCOME TAXES
The Company was taxed as an S corporation for federal and state income tax
purposes from July 1, 1992 through June 17, 1997, when S corporation status was
terminated in contemplation of the Company's initial public offering.
Accordingly, the income and expenses of the Company were reportable on tax
returns of the stockholders. Income taxes for the three and nine months ended
September 30, 1998 reflect a provision for federal, state and foreign income
taxes at an effective rate reflecting the expected annual effective tax rate.
The Company is subject to foreign income taxes on certain of its operations.
9. SIGNIFICANT CLIENTS
Two clients accounted for approximately 67% and 15% of revenues for the
nine months ended September 30, 1998. Two clients accounted for approximately
53% and 30% of revenues for the nine months ended September 30, 1997. One client
accounted for approximately 76% of revenues for the three months ended September
30, 1998. Two clients accounted for approximately 63% and 24% of revenues for
the three months ended September 30, 1997. The loss of one or more significant
clients could have a material adverse effect on the Company's business,
operating results and financial condition.
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10
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except share data)
(unaudited)
10. TENNESSEE FINANCING AGREEMENT
On July 8, 1998, the Company, through its wholly-owned subsidiary
StarTek USA, Inc., entered into certain financing agreements with the Industrial
Development Board of the County of Montgomery, Tennessee, (the "Board") in
connection with the Board's issuance to StarTek USA, Inc. of an Industrial
Development Revenue Note, Series A not to exceed $4,500 (the "Facility Note")
and an Industrial Development Revenue Note, Series B not to exceed $3,500 (the
"Equipment Loan"). The Facility Note bears interest at 9% per annum commencing
on September 1, 1998, which is payable quarterly and matures on July 8, 2008.
Concurrently, the Company advanced $3,575 in exchange for the Facility Note and
correspondingly entered into a lease agreement, maturing July 8, 2008, with the
Board for the use and acquisition of a 305,000 square foot process management
and distribution facility in Clarksville, Tennessee (the "Facility Lease"). The
Facility Lease provides for the Company to pay to the Board lease payments
sufficient to pay, when and as due, the principal of and interest on the
Facility Note due to the Company from the Board. Pursuant to the provisions of
the Facility Lease and upon the Company's payment of the Facility Lease in full,
the Company shall have the option to purchase the 305,000 square foot,
Clarksville, Tennessee facility for a lump sum payment of one hundred dollars.
The Equipment Loan generally contains the same provisions as the Facility Note
and provides for an equipment lease, except the Equipment Loan and equipment
lease mature on January 1, 2004.
All transactions related to the purchase of notes by the
Company and the related interest have been eliminated, while the assets acquired
are included in property, plant and equipment. The lease payments are equal to
the amount of principal and interest maturities on the notes.
As of the date of this Form 10-Q, the Company has not advanced monies
to activate the Equipment Loan and equipment lease. Although the Company is not
obligated to do so, the Company expects to activate the Equipment Loan and
equipment lease in the fourth quarter of 1998. When the Equipment Loan and
equipment lease are activated, the Board will acquire equipment for lease to the
Company on terms similar to the Facility Lease and Facility Note but maturing
January 1, 2004.
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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
that are not statements of historical facts are forward-looking statements that
involve substantial risks and uncertainties. Forward-looking statements include
(i) the anticipated level of capital expenditures, (ii) the Company's belief
that existing cash, available for sale investments and available borrowings will
be sufficient to finance the Company's operations; and (iii) statements relating
to the Company or its operations that are preceded by terms such as "may",
"will", "should", "anticipates", "expects", "believes", "plans", "future",
"estimate", or "continue" and similar expressions.
In accordance with the Private Securities Litigation Reform Act of
1995, 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, general economic conditions
in the Company's markets, the loss of one or more of its significant clients,
the loss or delayed implementation of a large project which could cause
quarterly variations in the Company's revenues and earnings, difficulties of
managing rapid growth, dependence on key personnel, dependence on key industries
and trends toward outsourcing, risks associated with the Company's contracts,
risks associated with rapidly changing technology, risks of business
interruptions, risks associated with international operations and expansion,
dependence on labor force and highly competitive markets. All forward-looking
statements herein are qualified in their entirety by the information set forth
in the "Risk Factors" portion of the Company's Prospectus dated June 18, 1997.
RESULTS OF OPERATIONS
The following table sets forth certain unaudited pro forma condensed
consolidated statement of operations data for the nine months ended September
30, 1997 (dollars in thousands, except share data):
NINE MONTHS ENDED
SEPTEMBER 30, 1997
----------------
Revenues $ 52,960
Cost of services 41,579
-----------
Gross profit 11,381
Selling, general and administrative expenses 6,251
Management fee expense --
-----------
Operating profit 5,130
Net interest income and other 353
-----------
Income before income taxes 5,483
Income tax expense 2,045
-----------
Net income $ 3,438
===========
Pro forma net income per share $ 0.28
-----------
Weighted average shares outstanding 12,256,410
-----------
Computation of weighted average shares outstanding:
Shares outstanding after giving effect to 322.1064-for-one
stock split effected by a stock dividend 10,828,571
Shares deemed outstanding prior to closing of June 1997 initial public
offering, representing the number of shares (at an initial public offering
price of $15.00 per share) sufficient to fund payment of the $8 million
notes
payable to principal stockholders 339,927
3 million shares issued in connection with initial public offering
completed June 24, 1997, for days outstanding
during the nine months ended September 30, 1997 1,087,912
-----------
Weighted average shares outstanding 12,256,410
-----------
This pro forma condensed consolidated statement of operations data presents
the effect on historical consolidated financial statements of the elimination of
management fee expense paid to stockholders and their affiliates, as these fees
were discontinued upon the completion of the Company's initial public offering,
and the provision for related income taxes at an effective rate of 37.3% as if
the Company were taxed as a C corporation.
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The following table sets forth, for the periods indicated, certain unaudited
condensed consolidated statement of operations data expressed as a percentage of
revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------------------
PRO
FORMA
1997 1998 1997 1997 1998
---------- ---------- ------- ---------- ----------
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services 80.6 81.6 78.5 78.5 81.3
--------- ---------- ------ --------- ---------
Gross profit 19.4 18.4 21.5 21.5 18.7
Selling, general and
administrative 10.6 11.0 11.8 11.8 11.8
expenses
Management fee expense -- -- 5.9 -- --
--------- ---------- ------- --------- ---------
Operating profit 8.8 7.4 3.8 9.7 6.9
Net interest income and other 2.7 1.4 0.7 0.7 2.1
--------- ---------- ------- --------- ---------
Income before income taxes 11.5 8.8 4.5 10.4 9.0
Income tax expense 4.3 3.1 1.2 3.9 3.2
========= ========== ======= ========= =========
Net income 7.2% 5.7% 3.3% 6.5% 5.8%
========= ========== ======= ========= =========
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues. Revenues increased $11.4 million, or 56.3%, to $31.6 million for
the three months ended September 30, 1998 from $20.2 million for the three
months ended September 30, 1997. This increase was primarily from existing and
new clients, partially offset by changes in the amount of revenues derived from
other existing clients.
Cost of Services. Cost of services increased $9.5 million, or 58.2%, to
$25.8 million for the three months ended September 30, 1998 from $16.3 million
for the three months ended September 30, 1997. As a percentage of revenues,
costs of services increased from 80.6% for the three months ended September 30,
1997 to 81.6% for the three months ended September 30, 1998. This percentage
increase was primarily due to higher overall costs of certain business at lower
relative margins, mix of services performed and training and start-up expenses
related to the new Clarksville, Tennessee facility, which became operational
during the three months ended September 30, 1998.
Gross Profit. As a result of the foregoing factors, gross profit increased
$1.9 million, or 48.5%, to $5.8 million for the three months ended September 30,
1998 from $3.9 million for the three months ended September 30, 1997. As a
percentage of revenues, gross profit decreased to 18.4% for the three months
ended September 30, 1998 from 19.4% for the three months ended September 30,
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 63.1%, to $3.5 million for
the three months ended September 30, 1998 from $2.1 million for the three months
ended September 30, 1997. This increase was primarily due to increased personnel
costs incurred to service increasing business and costs associated with capacity
expansion. As a percentage of revenues, selling, general and administrative
expenses increased to 11.0% for the three months ended September 30, 1998 from
10.6% for the three months ended September 30, 1997.
Management Fee Expense. Management fee expense was zero during the three
months ended September 30, 1997 and 1998. Effective with the closing of the
Company's initial public offering in June 1997, management fees were
discontinued.
Operating Profit. As a result of the foregoing factors, operating profit
increased to $2.3 million for the three months ended September 30, 1998 from
$1.8 million for the three months ended September 30, 1997. As a percentage of
revenues, operating profit decreased to 7.4% for the three months ended
September 30, 1998 from 8.8% for the three months ended September 30, 1997.
Net Interest Income and Other. Net interest income and other was $0.5
million for the three months ended September 30, 1997 and $0.4 million for the
three months ended September 30, 1998.
Income Before Income Taxes. As a result of the foregoing factors, income
before income taxes increased $0.5 million, or 19.6%, to $2.8 million for the
three months ended September 30, 1998 from $2.3 million for the three months
ended September 30, 1997. As
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a percentage of revenues, income before income taxes decreased to 8.8% for the
three months ended September 30, 1998 from 11.5% for the three months ended
September 30, 1997.
Income Tax Expense. A provision for federal, state and foreign income taxes
of $0.9 million and $1.0 million was made in the three months ended September
30, 1997 and 1998, respectively, reflecting expected annual effective tax rates.
Net Income. Based on the factors discussed above, net income increased $0.3
million, or 22.8%, from $1.5 million for the three months ended September 30,
1997 to $1.8 million for the three months ended September 30, 1998. As a
percentage of revenues, net income decreased to 5.7% for the three months ended
September 30, 1998 from 7.2% for the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998.
Revenues. Revenues increased $27.6 million, or 52.3%, to $80.6 million for
the nine months ended September 30, 1998 from $53.0 million for the nine months
ended September 30, 1997. This increase was primarily from existing and new
clients, partially offset by changes in the amount of revenues derived from
other existing clients.
Cost of Services. Cost of services increased $24.0 million, or 57.7%, to
$65.6 million for the nine months ended September 30, 1998 from $41.6 million
for the nine months ended September 30, 1997. As a percentage of revenues, costs
of services increased to 81.3% for the nine months ended September 30, 1998 from
78.5% for the nine months ended September 30, 1997. This percentage increase was
primarily due to higher overall costs of certain business at lower relative
margins, mix of services performed and training and start-up expenses related to
the new Greeley, Colorado, Laramie, Wyoming and Clarksville, Tennessee
facilities, all of which became operational during the nine months ended
September 30, 1998.
Gross Profit. As a result of the foregoing factors, gross profit increased
$3.7 million, or 32.4%, to $15.1 million for the nine months ended September 30,
1998 from $11.4 million for the nine months ended September 30, 1997. As a
percentage of revenues, gross profit decreased to 18.7% for the nine months
ended September 30, 1998 from 21.5% for the nine months ended September 30,
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.2 million, or 52.0%, to $9.5 million for
the nine months ended September 30, 1998 from $6.3 million for the nine months
ended September 30, 1997, primarily as a result of increased personnel costs
incurred to service increasing business and costs associated with capacity
expansion. As a percentage of revenues, selling, general and administrative
expenses was 11.8% for the nine months ended September 30, 1998 and 1997.
Management Fee Expense. Management fee expense was $3.1 million during the
nine months ended September 30, 1997 and zero for the nine months ended
September 30, 1998. Effective with the closing of the Company's initial public
offering in June 1997, management fees were discontinued.
Operating Profit. As a result of the foregoing factors, operating profit
increased to $5.6 million for the nine months ended September 30, 1998 from $2.0
million for the nine months ended September 30, 1997. As a percentage of
revenues, operating profit increased to 6.9% for the nine months ended September
30, 1998 from 3.8% for the nine months ended September 30, 1997.
Net Interest Income and Other. Net interest income and other was $0.4
million for the nine months ended September 30, 1997 and $1.7 million for the
nine months ended September 30, 1998. This increase was primarily a result of
interest earnings from the retained net proceeds of the Company's initial public
offering in June 1997 whereas there were line of credit and substantially more
capital lease borrowings in the nine months ended September 30, 1997.
Income Before Income Taxes. As a result of the foregoing factors, income
before income taxes increased $4.9 million for the nine months ended September
30, 1998 from $2.4 million for the nine months ended September 30, 1997. As a
percentage of revenues, income before income taxes increased to 9.0% for the
nine months ended September 30, 1998 from 4.5% for the nine months ended
September 30, 1997.
Income Tax Expense. The Company was taxed as an S corporation for federal
and state income tax purposes from July 1, 1992 through June 17, 1997, when S
corporation status was terminated in contemplation of the Company's initial
public offering. Accordingly, the Company was not subject to federal or state
income taxes prior to June 17, 1997. During the nine months ended September 30,
1997, a provision for income taxes as a C corporation was made for the period
June 18, 1997 through September 30, 1997 as adjusted for a foreign tax benefit
item, less a one-time credit to record a net deferred tax asset of $0.3 million
upon termination of S corporation status. Income taxes for the nine months ended
September 30, 1998 reflect a provision for federal, state and foreign income
taxes at the expected annual effective tax rate.
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Net Income. Based on the factors discussed above, net income increased $2.9
million to $4.6 million for the nine months ended September 30, 1998 from $1.7
million for the nine months ended September 30, 1997. As a percentage of
revenues, net income increased to 5.8% for the nine months ended September 30,
1998 from 3.3% for the nine months ended September 30, 1997.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Taxes and Pro Forma Net Income for
the nine months ended September 30, 1997 compared to actual results for the nine
months ended September 30, 1998. No pro forma presentation was applicable to the
nine months ended September 30, 1998. Pro forma amounts for the nine months
ended September 30, 1997 reflect the elimination of management fees and bonuses
to stockholders and their affiliates as these fees and bonuses were discontinued
upon the closing of the Company's initial public offering, and provide for
related income taxes at 37.3% of pre-tax income as if the Company were taxed as
a C corporation. As a result of the foregoing factors: (i) management fee
expense is zero for the nine months ended September 30, 1998 and pro forma
management fee expense is zero for the nine months ended September 30, 1997;
(ii) pro forma operating profit was $5.1 million for the nine months ended
September 30, 1997 compared to $5.6 million of actual operating profit for the
nine months ended September 30, 1998, while such operating profit represented
9.7% and 6.9% of revenues, respectively; (iii) income before income taxes
increased $1.8 million, or 32.2%, to $7.3 million for the nine months ended
September 30, 1998 from $5.5 million pro forma income before income taxes for
the nine months ended September 30, 1997; (iv) income tax expense increased $0.6
million, or 27.7%, to $2.6 million for the nine months ended September 30, 1998
from $2.0 million pro forma income tax expense for the nine months ended
September 30, 1997; and (v) net income increased $1.2 million, or 34.9%, to $4.6
million for the nine months ended September 30, 1998 from $3.4 million pro forma
net income for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in June 1997, the Company funded its
operations and capital expenditures primarily through cash flow from operations,
borrowings under various lines of credit, capital lease arrangements, short-term
borrowings from its stockholders and their affiliates, and additional capital
contributions by its stockholders. In November 1997, the Company replaced its
previous $3.5 million line of credit with Norwest Business Credit, Inc. with a
$5.0 million revolving line of credit with Norwest Bank (the "Bank"), which
matures on April 30, 1999. Borrowings under the line of credit bear interest at
the Bank's prime rate. Under this line of credit, the Company is required to
maintain working capital of $17.5 million and tangible net worth of $25 million.
The Company may not pay dividends in an amount which would cause a failure to
meet these financial covenants. As of the date of this Form 10-Q, the Company
was in compliance with these financial covenants. Collateral for the line of
credit is the accounts receivable of the Company and subsidiaries.
The Company closed an initial public offering of common stock on June 24,
1997. The net proceeds, after deducting underwriting discounts and commissions
and offering expenses, were approximately $41.0 million. From the net proceeds,
the Company repaid substantially all of its outstanding indebtedness, which
included approximately $5.0 million of bank and mortgage indebtedness, $1.8
million of capital lease obligations and $8.0 million of notes payable to
principal stockholders arising from an S corporation dividend in an amount
approximating the additional paid-in capital and retained earnings of the
Company as of the closing date. The balance of the net proceeds (approximately
$26.2 million) was primarily used for working capital and other general
corporate purposes, including approximately $8.0 million for capital
expenditures to expand into new facilities and build-out of the Company's
existing facilities.
During the nine months ended September 30, 1998, the Company acquired land
and completed construction of a new 35,000 square foot call center facility in
Greeley, Colorado (the "Greeley Facility"). The Company purchased the Greeley
Facility in order to expand its call center capacity. The total construction
cost of the Greeley Facility and related equipment was approximately $3.5
million (excluding land). The Company financed the land for the Greeley Facility
through a $0.3 million non-interest bearing ten year promissory note. The ten
year promissory note shall decline on an equal basis, without payment, over ten
years so long as the Company does not sell or transfer the land or fail to
continuously operate a customer service center thereon. The Greeley Facility
became operational during the three months ended June 30, 1998.
During the nine months ended September 30, 1998, the Company purchased a
total of approximately $1.8 million in equipment, leasehold improvements and
other fixed assets in order to operate a 22,000 square foot call center facility
in Laramie, Wyoming in a leased building. The Laramie call center became
operational during the three months ended June 30, 1998. An option to purchase
the Laramie land and building for $365,000 was exercised on October 30, 1998.
During June 1998, the Company selected a software application to enable
multi-national customer support and product order fulfillment operations (the
"Fulfillment Software"). Through September 30, 1998, the Company expended
approximately $0.9 million for the purchase of the Fulfillment Software, other
related applications, training, consulting and support services.
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On July 8, 1998, the Company, through its wholly-owned subsidiary
StarTek USA, Inc., entered into certain financing agreements with the Industrial
Development Board of the County of Montgomery, Tennessee, (the "Board") in
connection with the Board's issuance to StarTek USA, Inc. of an Industrial
Development Revenue Note, Series A not to exceed $4.5 million (the "Facility
Note") and an Industrial Development Revenue Note, Series B not to exceed $3.5
million (the "Equipment Loan"). The Facility Note bears interest at 9% per annum
commencing on September 1, 1998, which is payable quarterly and matures on July
8, 2008. Concurrently, the Company advanced approximately $3.6 million in
exchange for the Facility Note and correspondingly entered into a lease
agreement, maturing July 8, 2008, with the Board for the use and acquisition of
a 305,000 square foot process management and distribution facility in
Clarksville, Tennessee (the "Facility Lease"). The Facility Lease provides for
the Company to pay to the Board lease payments sufficient to pay, when and as
due, the principal of and interest on the Facility Note due to the Company from
the Board. Pursuant to the provisions of the Facility Lease and upon the
Company's payment of the Facility Lease in full, the Company shall have the
option to purchase the 305,000 square foot, Clarksville, Tennessee facility for
a lump sum payment of one hundred dollars. The Equipment Loan generally contains
the same provisions as the Facility Note and provides for an equipment lease,
except the Equipment Loan and equipment lease mature on January 1, 2004. All
transactions related to the purchase of notes by the Company and the related
interest have been eliminated, while the assets acquired are included in
property, plant and equipment. The lease payments are equal to the amount of
principal and interest maturities on the notes. The Clarksville Facility became
operational during the three months ended September 30, 1998. During the fourth
quarter of 1998, the Company expects to use a portion if not all of the
remaining $0.9 million available to it pursuant to various terms and conditions
of the Facility Note and Facility Lease.
As of the date of this Form 10-Q, the Company has not advanced monies
to activate the Equipment Loan and equipment lease. Although the Company is not
obligated to do so, the Company expects to activate the Equipment Loan and
equipment lease in the fourth quarter of 1998. When the Equipment Loan and
equipment lease are activated, the Board will acquire equipment for lease to the
Company on terms similar to the Facility Lease and Facility Note but maturing
January 1, 2004.
As of September 30, 1998, the Company had cash, cash equivalents and
investments available for sale of $28.8 million, working capital of $32.1
million and net worth of $50.0 million. As of September 30, 1998, the Company
held in its investments available for sale portfolio corporate bonds, other debt
securities and various equity securities. Such investments held by the Company
could be materially and adversely effected by various domestic and foreign
economic conditions, such as recessions, increasing interest rates, adverse
foreign currency exchange fluctuations, foreign and domestic inflation and other
factors.
Net cash provided by operating activities increased to $7.7 million
during the nine months ended September 30, 1998 from $2.9 million for the same
period in the prior year. This increase was primarily a result of increases in
net income, depreciation and amortization expense, accounts payable, accrued
liabilities and other various current liabilities, partially offset by increases
in inventories, various other current assets and deferred taxes.
Net cash used in investing activities was $6.8 million and $18.5
million for the nine months ended September 30, 1997 and 1998, respectively.
This increase was primarily a result of an increase in purchases of property,
plant and equipment together with an increase in the level of investment
purchases, partially offset by proceeds from sale of assets.
Net cash provided by financing activities during the nine months ended
September 30, 1998 consisted of $0.1 million of proceeds received from certain
long term financing related to the Company's Laramie, Wyoming facility,
partially offset by principal payments on capital lease obligations. Net cash
provided by financing activities during the same period in 1997 was primarily
the result of net proceeds received from the June 1997 initial public offering
together with contributed capital from certain S corporation stockholders prior
to the June 1997 initial public offering, partially offset by repayments of
various debt obligations.
The effect of currency exchange rate changes on the translation of the
Company's United Kingdom operations was not substantial during the nine months
ended September 30, 1997 and 1998. The terms of the Company's agreements with
its clients and its foreign subcontracts are typically in US dollars except for
certain of its agreements related to its United Kingdom operations. Therefore
and for the foreseeable future, management currently believes the Company's
exposure to currency exchange risks is minimal.
The Company believes its current cash, cash equivalents and investments
available for sale balances, anticipated cash flows from future operations and
available financing under its $5.0 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. 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 the funds generated from the sources described above are insufficient to
fund the Company's activities in the short or long term, the Company will be
required to raise additional funds through public or private financing. No
assurance can be given that additional financing will be available or that, if
available, it will be available on terms favorable to the Company.
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RELIANCE ON PRINCIPAL CLIENT RELATIONSHIPS
A substantial portion of the Company's revenue is generated from relatively
few clients and the loss of a significant client or clients could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company's two largest clients during the nine months
ended September 30, 1998 were Microsoft Corporation ("Microsoft") and
Hewlett-Packard Company ("Hewlett Packard"). Microsoft, which began its
outsourcing relationship with StarTek in April 1996, accounted for approximately
67% and 76% of the Company's revenues during the nine and three months ended
September 30, 1998, respectively. The Company provides various outsourced
services to various divisions of Hewlett Packard, each of which the Company
considers to be separate clients since each division acts through a relatively
autonomous decision maker. Hewlett Packard's various divisions accounted for
approximately 15% of the Company's revenues during the nine months ended
September 30, 1998. Hewlett Packard began its outsourcing relationship with the
Company in 1987. There can be no assurance that the Company will be able to
retain its significant clients or that, if it were to lose one or more of its
significant clients, it would be able replace such clients with clients that
generate a comparable amount of revenues.
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 significantly lower in the first and second
quarters due to the timing of its clients' marketing programs and product
launches, which are typically geared toward the holiday buying season.
Additionally, the Company has experienced, and expects to continue to
experience, quarterly variations in operating results as a result of a variety
of factors, many of which are outside the Company's control, including: (i) the
timing of existing and future client product launches; (ii) the expiration or
termination of existing client projects; (iii) the timing and amount of costs
incurred to expand capacity in order to provide for further revenue growth from
current and future clients; (iv) the seasonal nature of certain clients'
businesses; (v) the cyclical nature of certain high technology clients'
businesses and (vi) changes in the Company's principal client base.
Revenues for the three months ended June 30, 1998 and September 30, 1998
were $24.7 million and $31.6 million, respectively. Typically, the Company's
revenues have been lower in the second quarter due to the seasonal nature of
various clients' businesses.
Gross profit as a percent of revenues remained relatively constant for the
second and third quarters of 1998.
The increase in selling, general and administrative expenses from the
second quarter of 1998 compared to the third quarter of 1998 was primarily a
result of increased personnel costs incurred to service increasing business and
costs associated with capacity expansion.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Some of the
Company's older computer programs and technologies fall into this category. As a
result, those programs have time-sensitive applications that recognize a date
using "00" as the year 1900 rather than the year 2000. This could cause system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in other normal business activities.
The Company formally created a year 2000 project team (the "Y2K Team")
during the first quarter of 1998. The Y2K Team reports directly to the Company's
executive committee and periodically provides the executive committee status
updates of its year 2000 compliance efforts. To date, the Y2K Team has, among
other things, completed its initial assessment of the Company's year 2000
compliance issues, identified non year 2000 compliant computer equipment and
software, communicated with applicable third party vendors of the Company in
order to gather information on year 2000 matters beyond the Company's internal
information technologies, scheduled and partially completed year 2000 testing of
the Company's applicable information systems and planned to develop and test a
year 2000 contingency plan. The total cost of the Company's year 2000 compliance
efforts is currently estimated to be approximately $0.1 million.
The Company currently anticipates that the Y2K Team will complete its year
2000 compliance efforts during the third quarter of 1999, which is prior to any
currently anticipated material adverse effect the year 2000 issue may have on
the Company's business, financial condition and results of operations. The
Company currently believes, based on its current year 2000 compliance planning,
the year 2000 issue will not pose material adverse problems to its business.
However, if the Company's year 2000 compliance efforts are not successful, or
not completed in a timely manner, the year 2000 issue could have a material
adverse effect on the operations of the Company.
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The anticipated cost and timing to complete the year 2000 compliance
efforts mentioned above are based on estimates which have been derived using
numerous assumptions of future events, including the continued availability of
certain resources and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to completely identify and correct all relevant
information systems, the ability to coordinate successfully with third party
vendors in order to attempt to insure year 2000 issues beyond the Company's
internal information systems are also successfully and timely addressed and
other uncertainties.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of domestic
and foreign inflation on its operations, the Company does not believe that
inflation has had, or is likely in the foreseeable future to have, a material
adverse effect on its results of operations or financial condition.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Sales of Unregistered Securities
The Company did not issue or sell any unregistered
securities during the three months ended September 30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.15 Microsoft Corporation Manufacturing
Agreement between StarTek, Inc. and
Microsoft Corporation dated as of January 1,
1998.*
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, 1998.
-----------------------------------------------------
* Certain portions of the exhibit have been
omitted pursuant to a request for
confidential treatment and have been filed
separately with the Securities and Exchange
Commission.
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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 13, 1998 /s/ MICHAEL W. MORGAN
-------------------------- ------------------------------------
Michael W. Morgan
President and Chief Executive Officer
Date: November 13, 1998 /s/ DENNIS M. SWENSON
-------------------------- ------------------------------------
Dennis M. Swenson
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit
No. Description
- -------- -----------
10.15 Microsoft Corporation Manufacturing Agreement between
StarTek, Inc. and Microsoft Corporation dated as of January
1, 1998.*
27.1 Financial Data Schedule