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 30,1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
111 Havana Street 80010
Denver, Colorado ----------
-------------------------------------- (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(303) 361-6000
-------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Not Applicable
-------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGE 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.
Outstanding at
Class of Common Stock November 10, 1997
Common Stock, par value $.01 per share 13,828,571
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STARTEK, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION Number
- ------------------------------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets--September 30, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Operations--Three
months ended September 30, 1997 and 1996; Nine months ended
September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows--Nine
months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
ASSETS
September 30, December 31,
1997 1996
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents ........................... $ 27,439 $ 2,742
Short term investments available for sale ........... 5,371 --
Trade accounts receivable, less
allowance for doubtful accounts of
$382 and $311, respectively ......................... 9,354 11,031
Inventories ......................................... 3,105 2,535
Deferred tax asset .................................. 438 --
Prepaid income tax .................................. 119 --
Prepaid expenses and other .......................... 396 140
-------- --------
Total current assets ..................................... 46,222 16,448
Property, plant and equipment, net ....................... 6,933 6,528
Other assets ............................................. 3 3
-------- --------
Total assets ............................................. $ 53,158 $ 22,979
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ...................................... -- $ 3,500
Accounts payable .................................... $ 7,201 6,962
Accrued liabilities ................................. 1,061 1,584
Current portion of capital lease obligations ........ 109 917
Current portion of long-term debt ................... -- 6
Other ............................................... 462 584
-------- --------
Total current liabilities ................................ 8,833 13,553
Capital lease obligations, less current portion .......... 133 1,504
Long-term debt, less current portion ..................... 200 548
Deferred income taxes .................................... 253 --
Other .................................................... 107 271
Stockholders' equity:
Common stock ........................................ 138 1
Additional paid-in capital .......................... 41,661 6,148
Cumulative translation adjustment ................... 44 129
Unrealized holding gain on investments .............. 11 --
Retained earnings ................................... 1,778 1,038
Note receivable-stockholder for the
exercise of stock options ........................... -- (213)
-------- --------
Total stockholders' equity ............................... 43,632 7,103
-------- --------
Total liabilities and stockholders' equity ............... $ 53,158 $ 22,979
======== ========
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 Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------------------
Pro Forma
1997 1996 1997 1997 1996
--------- --------- --------- --------- ---------
Revenues ........................... $ 20,226 $ 15,479 $ 52,960 $ 52,960 $ 44,806
Cost of services ................... 16,306 12,198 41,579 41,579 35,974
--------- --------- --------- --------- ---------
Gross profit ....................... 3,920 3,281 11,381 11,381 8,832
Selling, general and
administrative expenses ....... 2,135 1,756 6,251 6,251 5,319
Management fee
expense ....................... -- 498 -- 3,126 1,397
--------- --------- --------- --------- ---------
Operating profit ................... 1,785 1,027 5,130 2,004 2,116
Net interest expense and other
(income) ...................... (535) 69 (353) (353) 302
--------- --------- --------- --------- ---------
Income before
income taxes .................. 2,320 958 5,483 2,357 1,814
Income tax expense ................. 865 112 2,045 650 112
--------- --------- --------- --------- ---------
Net income ......................... $ 1,455 $ 846 $ 3,438 $ 1,707 $ 1,702
========= ========= ========= ========= =========
Net income per share ............... $ 0.11 $ --
Pro forma net income per share ..... -- $ 0.28
Weighted average shares
outstanding ................... 13,828,571 12,256,410
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5
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
Cash flows from operating activities
Net income ................................................ $ 1,707 $ 1,702
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ........................ 1,226 938
Changes in operating assets and liabilities:
Accounts receivable ............................... 1,677 5,772
Inventories ....................................... (570) (813)
Prepaid income tax ................................ (119)
Deferred tax asset ................................ (438) --
Prepaid expenses and other assets ................. (255) 33
Accounts payable .................................. 240 (3,632)
Accrued and other liabilities ..................... (810) 509
Deferred income taxes ............................. 253 --
------------- -------------
Net cash provided by operating activities ................. 2,911 4,509
Cash flows from investing activities
Acquisition of short-term investments, net ................ (5,371) --
Purchases of property, plant and equipment, net ........... (1,647) (581)
Collections on notes receivable-stockholders .............. 213 28
------------- -------------
Net cash used in investing activities ..................... (6,805) (553)
Cash flows from financing activities
Net payments on line of credit borrowings ................. (3,500) (2,564)
Principal advances (payments) on borrowings ............... (354) (5)
Proceeds from borrowings and capital lease
obligations ............................................... -- 368
Principal payments on capital lease obligations ........... (2,179) (626)
Dividend to S corporation principal stockholders .......... (8,000) --
Principal payments on notes payable-stockholders .......... -- (28)
Principal payments on note payable-affiliate .............. -- (1,111)
Net proceeds of initial public offering of common stock ... 41,042 --
Contributed capital ....................................... 1,641 --
------------- -------------
Net cash provided by (used in) financing activities ....... 28,650 (3,966)
Effect of exchange rate changes on cash ................... (70) 11
Effect of unrealized holding gain on investments .......... 11 --
------------- -------------
Net increase in cash and cash equivalents ................. 24,697 1
Cash and cash equivalents at beginning of year ............ 2,742 451
------------- -------------
Cash and cash equivalents at end of period ................ $ 27,439 $ 452
============= =============
Supplemental disclosure of non-cash activity
Equipment acquired or refinanced under capital leases ..... -- $ 963
Common stock split effected by stock dividend ............. $ 107 --
See accompanying Notes.
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6
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(unaudited)
NOTE (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. The condensed consolidated financial
statements reflect all adjustments (consisting of only normal recurring
accruals) which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of StarTek, Inc.,
and subsidiaries as of September 30, 1997 and 1996 and for the periods then
ended. Operating results for the three and nine months periods ended September
30, 1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997.
The unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's prospectus dated June 18, 1997 for the
Company's initial public offering.
NOTE (2) INITIAL PUBLIC OFFERING OF COMMON STOCK
On June 24, 1997 the Company completed 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
estimated costs associated with the offering were $41,042. Immediately prior to
the closing of the offering the Company completed a 320.1064-for-1 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.
NOTE (3) DIVIDEND TO S CORPORATION PRINCIPAL STOCKHOLDERS
Effective immediately prior to the June 24, 1997 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 June 30, 1997 from
the net proceeds of the initial public offering.
NOTE (4) 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 expense
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.
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7
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except share data)
(unaudited)
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 aggregate approximately $516 annually) and are
included in selling, general and administrative expenses. Such advisory fees and
salaries, together with payments under an operating lease terminated effective
December 31, 1996, are reflected as selling, general and administrative expense
as set forth below.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------ ------ ------ ------
Selling, general and administrative
expense ....................... $ 129 $ 135 $ 387 $ 406
Management fee expense ............... $ -- $ 498 $3,126 $1,397
NOTE (5) PRO FORMA INFORMATION
The pro forma condensed consolidated statement of operations present
the effect on the 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.
NOTE (6) WEIGHTED AVERAGE SHARES OUTSTANDING
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Shares outstanding after giving effect to
322.1064 for one stock split
effected by a stock dividend 10,828,571 10,828,571 10,828,571 10,828,571
Shares deemed outstanding to closing
of initial public offering, representing
the number of shares (at an initial
public offering price of $15.00 per share)
sufficient to fund payment of $8,000 Note
Payable to Principal Stockholders -- 533,333 339,927 533,333
3,000,000 shares issued in connection with
initial public offering completed June 24,
1997, for days outstanding in the
respective periods 3,000,000 -- 1,087,912 --
---------- ---------- ---------- ----------
Weighted average shares outstanding 13,828,571 11,361,904 12,256,410 11,361,904
---------- ---------- ---------- ----------
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STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except share data)
(unaudited)
NOTE (7) INCOME TAXES
The $650 income tax expense for the nine months ended September 30, 1997
is composed of income tax expense on earnings from the June 1997 period when the
Company became taxable as a C corporation as adjusted for a foreign tax benefit
item, less a one-time credit to record a net deferred tax asset of $299 upon
termination of S corporation status. Income taxes for the three months ended
September 30, 1997 reflect a provision for federal, state, and foreign income
taxes at an effective rate of 37.3%.
NOTE (8) INVENTORIES
Total inventories consisted of the following:
September 30, December 31,
1997 1996
------ ------
Raw materials ...................... $2,814 $2,327
Finished goods ..................... 291 208
------ ------
$3,105 $2,535
====== ======
NOTE (9) STOCK OPTIONS GRANTED
A summary of the Company's stock option activity follows:
Nine Months
Ended
September 30,
1997
--------
Outstanding at beginning of period ..... --
Granted ................................ 614,500
Cancelled .............................. (7,000)
--------
Outstanding at end of period ........... 607,500
========
Exercisable at end of period ........... 20,000
========
The exercise price for options outstanding as of September 30, 1997 was $15.00
per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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 1996 1997 1997 1996
-------- -------- -------- -------- --------
Revenues .......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services .................. 80.6 78.8 78.5 78.5 80.3
-------- -------- -------- -------- --------
Gross profit ...................... 19.4 21.2 21.5 21.5 19.7
SG&A expenses ..................... 10.6 11.3 11.8 11.8 11.9
Management fee expense ............ -- 3.2 -- 5.9 3.1
-------- -------- -------- -------- --------
Operating profit (loss) ........... 8.8 6.6 9.7 3.8 4.7
Net interest expense and other .... (2.7) 0.4 (0.7) (0.7) 0.7
-------- -------- -------- -------- --------
Income (loss) before income
taxes ............................. 11.5 6.2 10.4 4.5 4.0
Income tax expense (credit) ....... 4.3 0.7 3.9 1.2 0.2
-------- -------- -------- -------- --------
Net income (loss) ................ 7.2 5.5 6.5 3.2 3.8
======== ======== ======== ======== ========
The following table sets forth certain unaudited pro forma
condensed consolidated statement of operations data expressed in dollars and as
a percentage of revenues for the three and nine month periods ended September
30, 1996.
(DOLLARS IN THOUSANDS, (DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA) EXCEPT SHARE DATA)
----------------- -----------------
Revenues ......................... $ 15,479 100.0% $ 44,806 100.0%
Cost of services ................. 12,198 78.8 35,974 80.3
----------- ------- ----------- -------
Gross profit ..................... 3,281 21.2 8,832 19.7
SG&A expenses .................... 1,756 11.3 5,319 11.9
Management fee expense ........... -- -- -- --
----------- ------- ----------- -------
Operating profit ................. 1,525 9.9 3,513 7.8
Net interest expense and other ... 69 0.4 302 0.7
----------- ------- ----------- -------
Income before income taxes ....... 1,456 9.4 3,211 7.2
Income tax expense ............... 543 3.5 1,198 2.7
----------- ------- ----------- -------
Net income ....................... $ 913 5.9 $ 2,013 4.5
=========== ======= =========== =======
Pro forma net income per share ... $ 0.08 $ 0.18
Weighted average shares
outstanding ................. 11,361,904 11,361,904
Pro forma adjustments are described in Note 5 to Condensed
Consolidated Financial Statements.
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THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1996
Revenues. Revenues increased $4.7 million, or 30.7%, to $20.2 million
for the three months ended September 30, 1997 from $15.5 million for the three
months ended September 30, 1996. Revenues of $0.4 million for the three months
ended September 30, 1997 were attributable to new clients while existing clients
accounted for the remaining $4.3 million of this increase. Revenue from new
clients were partially offset by the effects of completion of projects for
existing and former clients, and fluctuating requirements with respect to
ongoing projects.
Cost of Services. Costs of services increased $4.1 million, or 33.7%,
to $16.3 million for the three months ended September 30, 1997 from $12.2
million for the three months ended September 30, 1996. As a percentage of
revenues, cost of services increased to 80.6% for the three months ended
September 30, 1997 from 78.8% for the three months ended September 30, 1996,
primarily due to increased work for a major client at lower relative margins and
decreased labor utilization.
Gross Profit. As a result of the foregoing factors, gross profit
increased $0.6 million, or 19.5%, to $3.9 million for the three months ended
September 30, 1997 from $3.3 million for the three months ended September 30,
1996. As a percentage of revenues, gross profit decreased to 19.4% for the three
months ended September 30, 1997 from 21.2% for the three months ended September
30, 1996.
Selling, General and Administrative Expenses. SG&A expenses increased
$0.4 million, or 21.7%, to $2.1 million for the three months ended September 30,
1997 from $1.8 million for the three months ended September 30, 1996, primarily
as a result of increased personnel costs incurred to service increasing
business. As a percentage of revenues, SG&A expenses decreased to 10.6% for the
three months ended September 30, 1997 from 11.3% for the three months ended
September 30, 1996, reflecting a lesser relative increase in SG&A expense as
compared to the increase in revenues.
Management Fee Expense. Management fee expense decreased $0.5 million
to zero for the three months ended September 30, 1997. 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 $0.8 million, or 73.8%, to $1.8 million for the three months
ended September 30, 1997 from $1.0 million for the three months ended September
30, 1996. As a percentage of revenues, operating profit increased to 8.8% for
the three months ended September 30, 1997 from 6.6% for the three months ended
September 30, 1996.
Net Interest Expense and Other (Income). Net interest expense and other
(income) was $0.5 million income for the three months ended September 30, 1997,
while it was $0.1 million expense in the three months ended September 30, 1996.
This increase in net interest earnings was primarily due to interest earnings
from the net proceeds of the Company's initial public offering and the
substantial absence of line-of-credit borrowing during the three months ended
September 30, 1997 as contrasted to the comparable period of 1996.
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11
Income Before Income Taxes. As a result of the foregoing factors,
income before income taxes increased $1.4 million, or 142.2%, to $2.3 million
for the three months ended September 30, 1997 from $1.0 million for the three
months ended September 30, 1996. As a percentage of revenues, income before
income taxes increased to 11.5% for the three months ended September 30, 1997
from 6.2% for the three months ended September 30, 1996.
Income Tax Expense. The Company operated as an S corporation for
federal and state income tax purposes until termination of S corporation status
on June 18, 1997 in connection with the Company's initial public offering.
Accordingly, the Company was not subject to federal or state income taxes
through June 17, 1997. A provision for federal , state, and foreign income taxes
as a C corporation of $0.9 million was made in the three months ended September
30, 1997, and a provision for foreign income taxes of $0.1 million was made in
the three months ended September 30, 1996.
Net Income. Based on the factors discussed above, net income increased
$0.6 million, or 72.0%, to $1.5 million for the three months ended September 30,
1997 from $0.8 million for the three months ended September 30, 1996. As a
percentage of revenues, net income increased to 7.2% for the three months ended
September 30, 1997 from 5.5% for the three months ended September 30, 1996.
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 three months ended September 30, 1996 compared to actual results for the
three months ended September 30, 1997. No pro forma presentation was applicable
to the three months ended September 30, 1997. Pro forma amounts for the three
months ended September 30, 1996 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 three months ended September 30, 1997 and
pro forma management fee expense is zero for the three months ended September
30, 1996; (ii) operating profit increased $0.3 million, or 17.0%, to $1.8
million for the three months ended September 30, 1997 from $1.5 million pro
forma operating profit for the three months ended September 30, 1996; (iii)
income before income taxes increased $0.9 million, or 59.3%, to $2.3 million for
the three months ended September 30, 1997 from $1.5 million pro forma income
before income taxes for the three months ended September 30, 1996; (iv) income
taxes increased $0.3 million, or 59.3%, to $0.9 million for the three months
ended September 30, 1997 from $0.5 million pro forma income tax expense for the
three months ended September 30, 1996; and (v) net income increased $0.5
million, or 59.4%, to $1.5 million for the three months ended September 30, 1997
from $0.9 million pro forma net income for the three months ended September 30,
1996.
11
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NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Revenues increased $8.2 million, or 18.2%, to $53.0 million
for the nine months ended September 30, 1997 from $44.8 million for the nine
months ended September 30, 1996. Revenues of $1.4 million for the nine months
ended September 30, 1997 were attributable to new clients while existing clients
accounted for the remaining $6.7 million of this increase. Revenues from new
clients were partially offset by the effects of completion of projects for
existing and former clients and fluctuating requirements with respect to ongoing
projects. A portion of the revenues for the nine months ended September 30, 1996
were attributable to two large projects, which generated unusually high
revenues.
Cost of Services. Cost of services increased $5.6 million, or 15.6%, to
$41.6 million for the nine months ended September 30, 1997 from $36.0 million
for the nine months ended September 30, 1996. As a percentage of revenues, cost
of services decreased to 78.5% for the nine months ended September 30, 1997 from
80.3% for the nine months ended September 30, 1996. This change was primarily
due to the absence of start-up costs for the Denver facility and product recall
and rework costs incurred on a certain product distributed from the United
Kingdom facility during the nine months ended September 30,1997 together with
slightly improved labor utilization on a year-to-date basis, partially offset by
increased work for a major client at lower relative margins.
Gross Profit. As a result of the foregoing factors, gross profit
increased $2.5 million, or 28.9%, to $11.4 million for the nine months ended
September 30, 1997 from $8.8 million for the nine months ended September 30,
1996. As a percentage of revenues, gross profit increased to 21.5% for the nine
months ended September 30, 1997 from 19.7% for the nine months ended September
30, 1996.
Selling, General and Administrative Expenses. SG&A expenses increased
$0.9 million, or 17.5%, to $6.3 million for the nine months ended September 30,
1997 from $5.3 million for the nine months ended September 30, 1996, primarily
as a result of increased personnel costs incurred to service increasing
business. As a percentage of revenues, SG&A expenses decreased to $11.8% for the
nine months ended September 30, 1997 from 11.9% for the nine months ended
September 30, 1996, reflecting a lesser relative increase in SG&A expense as
compared to the increase in revenues.
Management Fee Expense. Management fee expense increased $1.7 million,
or 123.8%, to $3.1 million for the nine months ended September 30, 1997 from
$1.4 million for the nine months ended September 30, 1996. As a percentage of
revenues, management fee expense increased to 5.9% for the nine months ended
September 30, 1997 from 3.1% for the nine months ended September 30, 1996. The
Company paid management fees and bonuses of $3.1 million in the period from
January 1, 1997 through the closing of the Company's initial public offering in
June 1997, at which time these management fees and bonus arrangements were
discontinued. These management fee and bonus payments gave consideration to
operating profits and the effects of certain expense timing differences for book
and tax purposes. For the nine months ended September 30, 1996, management fee
expense was accrued based on estimated tax requirements of the recipient.
12
13
Operating Profit. As a result of the foregoing factors, operating
profit decreased $0.1 million, or 5.3%, to $2.0 million for the nine months
ended September 30, 1997 from $2.1 million for the nine months ended September
30, 1996. As a percentage of revenues, operating profit decreased to 3.8% for
the nine months ended September 30, 1997 from 4.7% for the nine months ended
September 30, 1996.
Net Interest Expense and Other(Income). Net interest expense and other
(income) was $0.4 million income for the nine months ended September 30, 1997,
while it was $0.3 million expense for the nine months ended September 30, 1996.
This increase to net interest earnings was primarily due to interest earnings
from the net proceeds of the Company's initial public offering and the
substantial absence of line-of-credit borrowing during the three months ended
September 30, 1997 as contrasted to the comparable period of 1996.
Income Before Income Taxes. As a result of the foregoing factors,
income before income taxes increased $0.5 million, or 29.9%, to $2.4 million for
the nine months ended September 30, 1997 from $1.8 million for the nine months
ended September 30, 1996. As a percentage of revenues, income before income
taxes increased to 4.4% for the nine months ended September 30, 1997 from 4.0%
for the nine months ended September 30, 1996.
Income Tax Expense. The Company operated as an S corporation for
federal and state income tax purposes until termination of S corporation status
on June 18, 1997 in connection with the Company's initial public offering.
Accordingly, the Company was not subject to federal or state income taxes
through 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. A provision for foreign income taxes of
$0.1 million was made in the nine months ended September 30, 1996.
Net Income. Based on the factors discussed above, net income remained
relatively unchanged at $1.7 million for the nine months ended September 30,
1997 and 1996. As a percentage of revenues, net income decreased to 3.2% for the
nine months ended September 30, 1997 from 3.8% for the nine months ended
September 30, 1996.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Taxes and Pro Forma Net Income. Pro
forma amounts 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) pro forma management
fee expense is zero for the nine months ended September 30, 1997 and 1996; (ii)
pro forma operating profit increased $1.6 million, or 46.0%, to $5.1 million for
the nine months ended September 30, 1997 from $3.5 million for the nine months
ended September 30, 1996; (iii) pro forma income before income taxes increased
$2.3 million, or 70.8%, to $5.5 million for the nine months ended September 30,
1997 from $3.2 million for the nine months ended September 30, 1996; (iv) pro
forma income taxes increased $0.8 million, or 70.7%, to $2.0 million for the
nine months ended September 30, 1997 from $1.2 million for the nine months
September 30, 1996; and (v) pro forma net income increased $1.4 million, or
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70.7%, to $3.4 million for the nine months ended September 30, 1997 from $2.0
for the nine months ended September 30, 1996.
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 $17,500,000 and tangible net worth of
$25,000,000. Collateral for the line of credit is the Company's accounts
receivable.
The Company completed 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 it's 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 approximately equal to 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) will be used for working capital and other general
corporate purposes, including approximately $8.0 million for capital
expenditures to expand and build-out its existing facilities and systems, and to
potentially make strategic acquisitions of complementary businesses.
The Company had cash, cash equivalents and short-term investments
available for sale of $32.8 million at September 30, 1997. The Company's working
capital was $37.4 million.
The Company agreed to finance telecommunications computer hardware and
software through a 36 month operating lease which became effective in April
1997. Monthly payments approximate $28,500.
Net cash provided by operating activities decreased to $2.9 million for
the nine months ended September 30, 1997 from $4.5 million for the same period
in the prior year. The principal causes of this decrease were (i) a reduction in
accrued and other liabilities as contrasted to an increase in the comparable
period of 1996 and (ii) a lesser reduction in accounts receivable in the period,
partially offset by an increase in accounts payable as contrasted to the
decrease in the comparable period of 1996.
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Net cash used in investing activities increased to $1.4 million for the
nine months ended September 30, 1997 from $0.6 million for the same period in
the prior year. The principal causes for this increase were (i) acquisition of
short-term investments, net, of the net proceeds of the Company's initial public
offering and (ii) increases in purchases of property and equipment.
Net cash provided from financing activities increased to $28.7 million
in the nine months ended September 30, 1997 from $(4.0) million used in
financing activities for the same period in the prior year. The principal causes
of this increase were the net proceeds from the Company's initial public
offering, contributed capital from principal stockholders and reduction in
principal payments on an affiliate note, partially offset by a dividend to the
principal stockholders and the repayment of substantially all of the Company's
indebtedness.
The Company believes that cash flow from operations and net proceeds to
the Company from its initial public offering, together with available funds
under the line of credit, will be sufficient to support its operations and
capital expenditure and liquidity requirements for the next 12 months and
anticipated operations and cash expenditures for the foreseeable future.
However, long-term capital requirements depend on many factors including, but
not limited to, the rate at which the Company expands its business, whether
internally or through acquisitions and strategic alliances. To the extent that
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 the 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 acceptable to the Company.
VARIABILITY OF QUARTERLY OPERATING RESULTS
Historically, the Company's revenues have been significantly lower in
the first and second quarters of each year due to the timing of its clients'
marketing programs and the introduction of new products, which are typically
geared toward the Christmas holiday seasons. Additionally, the Company has
experienced, and expects to experience in the future, 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 new projects; (ii) the
expiration or termination of existing projects; (iii) the timing of increased
expenses incurred to obtain and support new business; (iv) the seasonal pattern
of certain of the businesses served by the Company; and (v) the cyclical nature
of certain client's businesses.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of
inflation on its operations, the Company does not believe that inflation has
had, or is likely in the foreseeable future to have, a material effect on its
results of operations or financial condition.
FORWARD-LOOKING STATEMENTS
All statements contained in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" or elsewhere in this quarterly
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report, 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, short-term investments and available
borrowing 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 "anticipates", "expects", "believes", 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,
and the loss or delay in implementation of a large project which could cause
quarterly variations in the Company's revenues and earnings. Readers are
encouraged to review the Risk Factors section of the Company's prospectus dated
June 18, 1997 for its initial public offering.
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 any unregistered
securities during the quarter ended September 30,
1997.
(d) Use of Proceeds
The Company filed a Registration Statement
(Commission file no. 333-20633) for the public
offering of 3,666,667 shares of common stock with the
Securities and Exchange Commission, which became
effective June 18, 1997. The managing underwriters
were Donaldson, Lufkin & Jenrette Securities
Corporation and Morgan Stanley Dean Witter. The
shares were sold for $15.00 per share for an
aggregate amount of $55,000,005. Of the shares sold,
3,000,000 shares ($45,000,000 aggregate amount) were
sold by the Company and 666,667 shares ($10,000,005
aggregate amount) were sold by five selling
stockholders, each of whom owned in excess of ten
percent of the outstanding shares prior to the
offering.
Expenses incurred for the Company's account in
connection with the issuance and distribution of the
common stock registered were as follows:
Underwriting discounts and commissions $3,150,000
Expenses paid to or for underwriters 22,327
Other expenses ($212,668 accrued as
of September 30, 1997) 785,363 (1)
----------
Total $3,957,690
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(1) There were no direct or indirect payments to
directors, officers or persons owning ten percent or
more of the Company's securities, or their associates
or affiliates. However, out-of-pocket expenses (i.e.
travel, lodging, and meals) directly in connection
with the offering were reimbursed and are included in
other expenses. The Company agreed to pay the
expenses of the selling stockholders, other than
underwriting discounts and commissions.
The net offering proceeds to the Company were
$41,042,310.
From June 18, 1997 through September 30, 1997, the
Company used net offering proceeds as follows:
Repayment of indebtedness:
Bank and mortgage indebtedness $ 4,932,000
Capitalized lease obligations 1,767,000
Notes payable to Principal Stockholders 8,000,000
-----------
14,699,000
Capital expenditures 842,000
Working capital 25,501,000
-----------
$41,042,000
===========
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following documents are filed as an exhibit to
this report:
10.10 Loan Agreement, dated November 6, 1997,
between StarTek, Inc. (the "Borrower")
and Norwest Bank Colorado, National
Association (the "Bank") and 360 Day
Promissory Note dated November 6, 1997,
payable by the Borrower to the Bank.
10.11 Amendment dated September 30,1997 to HP
Purchase Agreement dated September
1,1995 by and between Hewlett-Packard Company,
Starpak, Inc. and Starpak International Ltd.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K
during the three months ended September 30, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities 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 10, 1997 /s/ MICHAEL W. MORGAN
--------------------------- ------------------------------
Michael W. Morgan
President and Chief Executive
Officer
Date: November 10, 1997 /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 10.10 Loan Agreement Dated 11/6/97
Exhibit 10.11 Amendment Dated 9/30/97
Exhibit 27.1 Financial Data Schedule