-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UPny4l/chqz4ow7XXllsSEdSqudwl1OfdeUNHq7QgQ3jPokxtgasg3C+AI95yhfj J7lxsG5bNCRvBw6g83pOFQ== 0000950134-98-002763.txt : 19980401 0000950134-98-002763.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950134-98-002763 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARTEK INC CENTRAL INDEX KEY: 0001031029 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 841370538 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12793 FILM NUMBER: 98581900 BUSINESS ADDRESS: STREET 1: 111 HAVANA STREET CITY: DENVER STATE: CO ZIP: 80010 BUSINESS PHONE: 3033616000 MAIL ADDRESS: STREET 1: 111 HAVANA STREET STREET 2: 111 HAVANA STREET CITY: DENVER STATE: CO ZIP: 80010 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 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 -------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON ------------------- ------------------------- WHICH REGISTERED COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 27, 1998, 13,828,571 shares of common stock were outstanding and held by approximately 1,179 holders. The aggregate market value of common shares held by non-affiliates of the registrant on such date was approximately $27,600,000, based upon the closing price of the Company's common shares as quoted on the New York Stock Exchange composite tape on such date. Shares of Common Stock held by each executive officer and director and by each person who owned 5% or more of the outstanding Common Stock as of such date have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. DOCUMENTS INCORPORATED BY REFERENCE Part I and Part II incorporate certain information by reference from the registrant's Prospectus dated June 18th, 1997, as filed with the Securities and Exchange Commission, pursuant to Rule 424 (b) under the Securities Act of 1933, as amended. Part III incorporates certain information by reference from the registrant's Proxy Statement for its 1998 annual meeting of stockholders. With the exception of the pages of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement is not deemed to be filed as part of this Form 10-K. ================================================================================ 2 PART I All statements contained in this 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 "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 trend toward outsourcing, risks associated with the Company's contracts, risks associated with rapidly changing technology, risks of business interruption, 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 registrant's Prospectus dated June 18, 1997, which is incorporated herein by reference. ITEM 1. BUSINESS GENERAL StarTek is a leading international provider of integrated, value-added outsourced services primarily for Fortune 500 companies in targeted industries. The Company's integrated outsourced services encompass a wide spectrum of process management services and customer-initiated ("inbound") teleservices throughout a product's life cycle, including product order teleservices, supplier management, product assembly and packaging, product distribution, product order fulfillment, and customer care and technical support teleservices. By focusing on these services as its core business, StarTek allows its clients to focus on their primary business, reduce overhead, replace fixed costs with variable costs and reduce working capital needs. The Company has continuously expanded its business and facilities to offer additional services on an outsourced basis in response to the growing needs of its clients and to capitalize on market opportunities, both domestically and internationally. StarTek's goal is to grow profitably by focusing on providing high-quality integrated, value-added outsourced services. StarTek has a strategic partnership philosophy, through which the Company assesses each of its client's needs and, together with the client, develops and implements customized outsourcing solutions. Management believes that its entrepreneurial culture, long-term relationships with clients and suppliers, efficient operations, dedication to quality and use of advanced technology and management techniques provide StarTek a competitive advantage in attracting clients that outsource noncore operations. Two of the Company's top three clients have utilized its outsourced services for more than six years and the third client initiated services with the Company in April 1996. StarTek has focused primarily on the computer software, computer hardware, electronics, telecommunications and other technology-related industries because of their rapid growth, complex and evolving product offerings and large customer bases, which require frequent, often sophisticated, customer interaction. Management believes that there are substantial opportunities to cross-sell StarTek's wide spectrum of outsourced services to its existing base of clients. The Company intends to capitalize on the increasing trend toward outsourcing by focusing on potential clients in additional industries which could benefit from the Company's expertise in developing and delivering integrated, cost-effective outsourced services. StarTek operates from its Colorado facilities located in Denver and Greeley and from a facility located in Hartlepool, England. The Company also operates through a subcontract relationship in Singapore. The Company has a new facility under construction in Greeley, Colorado and has announced plans to open a facility in a leased building in Laramie, Wyoming. StarTek, Inc. was incorporated in the State of Delaware on December 30, 1996. The Company's principal executive offices are located at 111 Havana Street, Denver, Colorado 80010 and its telephone number is (303) 361-6000. StarTek's home page on the Internet can be located at www.startek.com. Prior to the formation of the Company, StarTek USA, Inc. and StarTek Europe, Ltd. (previously named StarPak, Inc. and StarPak International, Ltd., respectively) conducted business as affiliates under common control. 1 3 STARTEK'S INTEGRATED SERVICES The Company's interaction with a client's customers may begin with an inbound call or message via the Internet requesting information or placing an order for the client's product. A StarTek service representative takes the order, and if the Company manages the client's inventory, the Company packs and ships the order. If the Company does not manage the client's inventory, the Company transmits the customer's request directly to the client. In the event the Company manages the client's inventory, the Company may receive finished goods directly from a client or the Company may manage the production process on an outsourced basis, following product specifications provided by the client. In the latter case, the Company selects and contracts with the necessary suppliers and performs all tasks necessary to assemble and package the finished product, which may be held by the Company pending receipt of customer orders or shipped in bulk to distributors or retail outlets. The Company's clients typically provide their customers with telephone numbers for product questions and technical support. Calls are routed to StarTek customer care or technical support service representatives who have been trained to support specific products. A call may also lead to an order for another product or service offered by the client, in which case the Company takes the order and the cycle begins again. StarTek's clients may utilize one or more of the Company's outsourced services. BUSINESS STRATEGY StarTek's strategic objective is to increase revenues and earnings by maintaining and enhancing its position as a leading international provider of integrated value-added outsourced services. To reach this objective, the Company intends to: Provide Integrated Outsourced Services. StarTek seeks to provide integrated outsourced services which enable its clients to provide their customers with high-quality services at lower cost than through a client's own in-house operations. The Company believes that its ability to tailor operations, materials and employee resources objectively and to provide integrated, value-added outsourced services on a cost-effective basis will allow the Company to become an integral part of its clients' businesses. Develop Strategic Partnerships and Long-Term Relationships. StarTek seeks to develop long-term client relationships, primarily with Fortune 500 companies in targeted industries. The Company invests significant resources to establish strategic partnership relationships and to understand each client's processes, culture, decision, parameters and goals, so as to develop and implement customized solutions. The Company believes that this solution-oriented, value-added integrated approach to addressing its clients' needs distinguishes StarTek from its competitors and plays a key role in the Company's ability to attract and retain clients on a long-term basis. Maintain Low-Cost Position through Modern Process Management. StarTek strives to establish a competitive advantage by frequently redefining its operational process to reduce cost and improve quality. StarTek's continuous improvement philosophy and modern process management techniques enable the Company to reduce waste and increase efficiency in the following areas: (i) controlling overproduction; (ii) minimizing waiting time due to inefficient work sequences; (iii) reducing inessential handling of materials; (iv) eliminating nonessential movement and processing; (v) implementing fail-safe processes; (vi) improving inventory management; and (vii) preventing defects. Emphasize Quality. StarTek strives to achieve the highest quality standards in the industry. To this end, the Company has received ISO 9002 certification, an international standard for quality assurance and consistency in operating procedures, for all of its facilities and services. Certain of the Company's existing clients require evidence of ISO 9002 certification prior to selecting an outsourcing provider. Capitalize on Sophisticated Technology. The Company believes it has established a competitive advantage by capitalizing on sophisticated technology and proprietary software, including automatic call distributors, inventory management software, transportation management software, call tracking systems and telephone-computer integration software. These capabilities enable StarTek to improve efficiency, serve as a transparent extension of its clients, receive telephone calls and data directly from its clients' systems, and report detailed information concerning the status and results of the Company's services and interaction with clients on a daily basis. 2 4 SERVICES The Company offers a wide spectrum of outsourced services throughout a product's life cycle, designed to provide cost-effective and efficient management of the ancillary operations of its clients. The Company works closely with its clients to develop, refine and implement efficient and productive integrated outsourced solutions that link StarTek with such clients and their customers. The processes that create such solutions generally include the development of product manufacturing specifications, packaging and distribution requirements, as well as product-related software programs for telephone, facsimile, e-mail and Internet interactions involving product order fulfillment, customer care and technical support. Substantially all of the Company's teleservices activities are inbound telephone calls, rather than outbound calls. Specific services that StarTek provides to its clients include the following: Product Order Teleservices. Product order teleservices is generally the process by which a call from a client's customer is received, identified and routed to a StarTek service representative. Typically, a customer calls to request product service information, to place an order for an advertised product or to obtain assistance regarding a previous order or purchase. The information and results of the call are then communicated either to StarTek's employees for order processing and fulfillment or, if StarTek does not manage the client's inventory, the Company transmits the customer's request directly to the client. To properly handle these and other teleservices, StarTek utilizes automated call distributors to identify each inbound call by the number dialed by the customer and immediately route the call to a StarTek service representative trained for that product. Product orders also occur as a result of a StarTek service representative offering products in connection with a customer care or technical support call. To facilitate product orders, the Company can process credit card charges and other payment methods in connection with its product order teleservices. Supplier Management. Company personnel are responsible for maintaining and managing multiple supplier relationships. When the Company is selected by a client to provide product assembly and packaging services, the Company qualifies, selects, certifies and manages the sourcing and manufacturing of the various products and related components including, among other things, the printing of boxes, labels, manuals and other printed materials to be included with the client's product and the mass duplication of software onto various media. Such product and related components are then assembled and packaged at the Company's facilities. The Company monitors the quality of its suppliers through visits to manufacturing facilities and utilizes just-in-time production to minimize inventory in the Company's warehouses. Management believes that the Company's strong, long-term relationships with multiple suppliers allows the Company to be flexible and responsive to its clients, while minimizing costs and the Company's dependency on any single supplier. Product Assembly and Packaging. The Company assembles and packages products in various containers, including folding cartons, set-up boxes, compact disc jewel cases, digi-packs, binders and slip cases. The Company assembles and packages products in the United States, the United Kingdom and Singapore. The Company's assembly lines have been designed with significant flexibility, enabling the Company to assemble and package various types of products and rapidly change the type of product produced. During peak periods of operations, the Company's capacity is dependent upon (i) the complexity of the product to be assembled; (ii) the availability of materials from suppliers; (iii) the availability of temporary personnel to increase capacity; (iv) the number of shifts operated by the Company; and (v) the ability to activate additional production lines. Product Distribution. The Company's inventory management systems enable the Company to ship and track products to distribution centers, to individual stores and to its clients' customers directly. Product orders are received by the Company via file transfer protocol (FTP), the Internet, electronic data interchange (EDI) and facsimile, as well as through the Company's product order teleservices described above. Product Order Fulfillment. StarTek personnel process, pack and ship product orders and requests for promotional and educational literature, and direct customers of the Company's clients to product or service sources ("fulfillment") by telephone, e-mail, facsimile and the Internet, 24 hours per day, seven days per week. The Company provides same-day shipping of customer orders if the product is available. Customer Care Teleservices. Customer care programs are customized by the Company to meet it's clients' needs. The Company customizes responses to various customer product inquiries by designing special greetings, marketing messages, and specific queue-time controls. A StarTek service representative receiving a call can enter customer information into the Company's call-tracking system, listen to a question, and quickly access a proprietary networked database via personal computer to locate an answer to a customer's question. A senior quality control team member is available to provide additional assistance for complex or unique customer questions. As additional product information becomes available, the Company promptly integrates such information into its database, thereby ensuring that answers are based upon the latest product information. 3 5 Each customer interaction presents the Company and its clients with an opportunity to gather valuable customer information, including the customer's demographic profile and preferences. This information can prompt the StarTek service representative to make logical, progressive inquiries about the customer's interest in additional products and services, identify additional revenue generating and cross-selling opportunities, or resolve other issues relating to a client's products or services. Technical Support Teleservices. StarTek service representatives provide technical support services by telephone, e-mail, facsimile and the Internet, 24 hours per day, seven days per week. Technical support inquiries are generally driven by a customer's purchase of a product or by a customer's need for ongoing technical assistance. Customers of StarTek's clients dial a technical support number listed in their product manuals and, based on touch-tone responses, are automatically connected to an appropriate StarTek service representative who is specially trained in the applicable product. Each StarTek service representative acts as a transparent extension of its clients when resolving complaints, diagnosing and resolving product or service problems, or answering technical questions. INTERNATIONAL OPERATIONS StarTek provides its outsourced services on an international basis from the United Kingdom and Singapore. The Company's facility in the United Kingdom provides the full range of the Company's outsourced services for clients throughout Europe, including supplier management, product assembly and packaging, product distribution, product order fulfillment, inbound product order, customer care and technical support teleservices in several languages. The Company currently provides supplier management, product assembly and packaging and product distribution for two of its major clients through a subcontract relationship with a company in Singapore. The subcontract relationship operates on a purchase order basis. See Note 13 to the Consolidated Financial Statements for revenue, operating profit and identifiable assets attributable to geographic areas. CLIENTS StarTek provided services to approximately 75 clients during 1997. StarTek's clients included companies engaged primarily in the computer software, computer hardware, electronics, communications, transportation, financial services and other technology-related industries. Approximately 56.3% and 25.4% of the Company's revenues in 1997 were attributable to Microsoft and Hewlett Packard, respectively. The Company typically enters into a written agreement with each client for outsourced services or performs services on a purchase order basis. Under substantially all of the Company's significant arrangements with its clients, the Company generates revenues based in large part, on the number and duration of customer inquiries (subject to certain minimum monthly payments) and the volume, complexity and type of components involved in the clients products. Although the Company currently seeks to sign multi-year contracts with its clients, the Company's contracts generally (i) permit termination upon relatively short notice by the client, (ii) do not designate the Company as the clients exclusive outsourced service provider and (iii) do not penalize the client for early termination. To the extent the Company works on a purchase order basis, the agreement with the client frequently does not provide for minimum purchase requirements, except in connection with its customer care and technical support services. Hewlett Packard began its outsourcing relationship with the Company in 1987. The Company currently performs the full range of its services for numerous separate divisions of Hewlett Packard which the Company considers to be separate clients based upon the fact that each division acts through a relatively autonomous decision maker. Services are presently typically performed on a purchase order basis. The master purchase agreement has expired and the Company currently operates under separate agreements or purchase orders. Microsoft began its outsourcing relationship with the Company in April 1996. The Company currently performs supplier management, product manufacturing, and product distribution services for Microsoft. Services are performed on a purchase order basis, subject to a supply, manufacturing and services agreement (the "MSFT Agreement"). The MSFT Agreement provides that the engagement of the Company's agreement renews automatically for one-year periods, subject to termination, at any time, upon 90 days prior to written notice. The Company has agreed to maintain ISO 9002 certification of its facility in Greeley, Colorado, and a designated product manufacturing capacity. The Company currently maintains capacity at this facility sufficient to satisfy its obligations under the MSFT Agreement and the ongoing product manufacturing, assembly, packaging and distribution needs of other clients. 4 6 SALES AND MARKETING The Company's marketing objective is to develop long-term relationships with existing and potential clients to become the preferred worldwide vendor of outsourced services. StarTek invests significant resources to create a strategic partnership with its clients to understand their existing operations, customer service processes, culture, decision parameters and goals. A StarTek team assesses the client's outsourcing service needs, and, together with the client, develops and implements customized solutions. Management believes that, as a result of StarTek's strategic relationship with its clients and comprehensive understanding of their businesses, the Company can identify new revenue generating opportunities, customer interaction possibilities and product service improvements not adequately addressed by the client. The Company's sales strategy emphasizes multiple contacts with a client to strengthen its relationship and facilitate the cross-selling of services. StarTek markets its outsourced services through a variety of methods, including personal sales calls, client referrals, attendance at trade shows, advertisements in industry publications, and the cross-selling of services to existing clients. As part of its marketing efforts, the Company encourages visits to its facilities, where the Company demonstrates its services, quality procedures and ability to accommodate additional business. Management believes a key element to sales growth is the ability to flexibly, effectively and efficiently expand service capacity to meet client needs as its clients grow or outsource more of their non-core operations to the Company. In addition, to attract new clients to StarTek's services, the Company must have the resources to develop a strategy to meet new client's outsourcing goals promptly, as well as the ability to implement operations for such client quickly and accurately. TECHNOLOGY The Company employs sophisticated technology and proprietary software that incorporates digital switching, relational database management systems, call tracking systems, workforce management systems, object-oriented software modules and computer telephony integration. The Company's digital switching technology enables calls to be routed to the next available teleservice representative with the appropriate product knowledge, skill and language abilities. Call tracking and workforce management systems generate and track historical call volumes by client, enabling the Company to schedule personnel efficiently, anticipate fluctuations in call volume and provide clients with detailed information concerning the status and results of the Company's services on a daily basis. Management believes that the Company's proprietary technology platform provides the Company with a competitive advantage in maintaining existing clients and attracting new clients. EMPLOYEES AND TRAINING StarTek's success in recruiting, hiring, and training large numbers of full-time, skilled employees and obtaining large numbers of hourly and temporary employees during peak periods for product assembly, packaging and distribution services is critical to the Company's ability to provide high quality outsourced services. To maintain good employee relations and to minimize turnover, the Company offers competitive pay, hires employees who are eligible to receive the full range of employee benefits, and provides employees with clear, visible career paths. To meet the Company's service objectives, the Company also utilizes temporary help. As of December 31, 1997 the Company had approximately 1,360 full-time equivalent employees. The number of temporary employees varies significantly during the year due to the seasonal variations of the Company's business. Management believes that the demographics surrounding its facilities, and its reputation, stability and compensation plans should allow the Company to continue to attract and retain qualified employees. However, the Company operates in some locations where unemployment levels are currently at low levels compared to historic norms. If low levels of unemployment persist in these areas, the Company's ability to attract qualified employees could be affected. The Company's operations in four localities, with a fifth locality being added in Laramie, Wyoming, should reduce this exposure. The Company considers its employee relations to be good. In keeping with StarTek's continuous improvement philosophy, the Company is committed to training all of its employees. StarTek provides formal training for senior management, supervisors, process managers, quality coordinators, and teleservice representatives. StarTek also maintains an employee quality program to backup every employee, including specialized quality coordinators who teach problem solving, assist with teleservice calls and offer immediate performance feedback. On a more informal basis, the Company provides on-the-job process training and tutoring for all process management personnel. Employee teams gather daily to receive information about products to be produced and techniques to be utilized, and have an opportunity to ask questions and receive one-on-one training, as necessary. 5 7 The Company's in-house training program for customer care and technical support teleservicing employees is founded on an in-depth, structured learning environment that builds technical competence and teaches critical software skills necessary to provide effective customer care and technical support teleservices. Each teleservice representative is specially designated and trained to support a particular product or group of products for a particular client. A teleservice representative receives training in product knowledge, call listening and computer skills prior to answering any customer calls independently. This training time depends on the complexity of the product for which such representative will provide teleservices. Further, the Company uses live and taped call reviews and customer feedback surveys to continue to monitor and enhance its level of customer support services. INDUSTRY AND COMPETITION With the goal of focusing on their core businesses, companies are increasingly turning to outsourced service companies to perform specialized functions and services. Outsourcing of non-core activities offers a strategic advantage to companies in a wide range of industries by offering them an opportunity to reduce operating costs and working capital needs, improve their reaction to business cycles, manage capacity and improve customer and technical information gathering and utilization. To realize these advantages, companies are outsourcing the process of planning, implementing, and controlling the efficient flow of goods, services, teleservices and related information from the point of origin to the point of consumption. Additionally, rapid technological changes and rising customer expectations for high-quality goods and services make it increasingly difficult and expensive for companies to maintain the necessary personnel and product capabilities in-house to support a product's life-cycle on a cost-effective basis. Companies which focus on providing these services as their core business, including StarTek, are expected to continue to benefit from these outsourcing trends. StarTek competes on the basis of quality, reliability of service, price, efficiency, speed and flexibility in tailoring services to client needs. Management believes its comprehensive and integrated services differentiate it from its non-client competitors who may only be able to provide one or a few of the outsourced services that StarTek provides. The Company continuously explores new outsourcing service opportunities, typically in circumstances where clients are experiencing inefficiencies in non-core areas of their businesses and management believes it can develop a superior outsourced solution to such inefficiency on a cost-effective basis. Management believes that it competes primarily with the in-house teleservice, customer service and logistics management operations of its current and potential clients. StarTek also competes with certain companies that provide similar services on an outsourced basis. There are numerous competitors of all sizes that provide product order teleservices and product fulfillment distribution services. ITEM 2. PROPERTIES FACILITIES StarTek's facilities include a Company-owned 138,000-square-foot building in Denver, Colorado (which also contains the Company's executive offices), a 100,000-square-foot Company owned building and a 10,500-square-foot Company-owned building, both located in Greeley, Colorado. StarTek performs its international outsourced services from a leased 53,000-square-foot building in Hartlepool, County Durham on the northeast coast of England. In Asia, the Company utilizes a subcontractor that operates from a 25,000-square-foot facility located in Singapore. The Company has acquired land in Greeley, Colorado and is in the process of constructing a new 35,000 square foot facility. The Company has announced plans to open a 22,000 square foot facility in a leased building in Laramie, Wyoming. The Company's facility in Denver, Colorado, which was initially occupied at the end of 1995, is approximately one-half utilized and capacity can be expanded to accommodate additional outsourced services. Management believes that its existing facilities are adequate for its current operations, but that additional facility capacity will be required to support continued growth. Management intends to maintain a certain amount of excess capacity to enable it to respond to new or expanding client demands. ITEM 3. LEGAL PROCEEDINGS The Company has been involved from time to time in litigation arising in the normal course of business, none of which is expected by management to have a material adverse effect on the business, financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted for a vote of security holders during the fourth quarter of 1997. 6 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET PRICE OF COMMON STOCK The Company's Common Stock has been traded under the symbol "SRT" on the New York Stock Exchange since July 19, 1997, the effective date of the Company's initial public offering. The high and low prices of the Common Stock for 1997 are set forth below:
1997 HIGH LOW ---- ------ ------ Second Quarter (beginning June 19, 1997) .......... 16 3/8 14 Third Quarter...................................... 16 1/8 11 1/4 Fourth Quarter..................................... 14 3/8 10 5/8
The closing sale price for the Common Stock on March 17, 1998 was $11 5/8. HOLDERS OF COMMON STOCK As of February 27, 1998, there were approximately 1,179 stockholders of record of the Company's Common Stock and 13,828,571 shares of common stock outstanding. DIVIDEND POLICY The Company presently intends to retain all future earnings in order to finance continued growth and development of its business and does not expect to pay any cash dividends with respect to its Common Stock in the foreseeable future. The payment of any dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the availability of funds, future earnings, capital requirements, contractual restrictions, the general financial condition of the Company and general business conditions. Under its revolving line of credit, the Company may not pay dividends in an amount which would cause a failure to meet its financial covenants with the bank. SALES OF UNREGISTERED SECURITIES The Company did not issue or sell any unregistered securities during the quarter ended December 31, 1997, except that the Company granted options to purchase a total of 8,000 shares of Common Stock to three employees pursuant to the Company's Stock Option Plan at an exercise price of $13.06 per share, the market value on the date the options were granted. These options have a term of ten years and vest at a rate of 20% per year. 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 19, 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 Expenses paid to or for underwriters ...................... 22 Other expenses ($216 accrued as of December 31, 1997) .................................... 786 (1) ------ Total ..................................................... $3,958 ======
7 9 (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 24, 1997 through December 31, 1997, the Company used net offering proceeds as follows: Repayment of indebtedness: (IN THOUSANDS) Bank and mortgage indebtedness ........ $ 4,932 Capitalized lease obligations ......... 1,767 Notes payable to Principal Stockholders 8,000 ------- 14,699 Capital expenditures ....................... 2,145 Working capital ............................ 24,198 ------- $41,042 =======
8 10 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- PRO FORMA 1997(a) 1997 1996 1995 1994 1993 --------- -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues .......................... $ 89,150 $ 89,150 $ 71,584 $ 41,509 $ 26,341 $ 23,044 Cost of services .................. 71,986 71,986 57,238 33,230 21,355 18,039 -------- -------- -------- -------- -------- -------- Gross profit ...................... 17,164 17,164 14,346 8,279 4,986 5,005 Selling, general and administrative expenses ..................... 8,703 8,703 7,764 5,341 4,489 3,479 Management fee expense ............ -- 3,126 6,172 2,600 612 1,702 -------- -------- -------- -------- -------- -------- Operating profit (loss) ........... 8,461 5,335 410 338 (115) (176) Net interest income (expense) and other ........................ 933 933 (372) (396) (216) (193) -------- -------- -------- -------- -------- -------- Income (loss) before income taxes . 9,394 6,268 38 (58) (331) (369) Income tax expense ................ 3,504 2,110 112 -- -- -- -------- -------- -------- -------- -------- -------- Net income (loss) (a) ............. $ 5,890 $ 4,158 $ (74) $ (58) $ (331) $ (369) ======== ======== ======== ======== ======== ======== Net income per share (a)(b) ....... $ 0.47 Shares outstanding (b) ............ 12,653 SELECTED OPERATING DATA: Capital expenditures .............. $ 3,191 $ 3,191 $ 1,333 $ 2,104 $ 670 $ 1,239 Depreciation and amortization ..... 1,829 1,829 1,438 873 588 456 BALANCE SHEET DATA (END OF PERIOD): Working capital ................... $ 38,704 $ 2,895 $ 798 $ 434 $ 943 Total assets ...................... 58,172 22,979 21,580 12,352 7,712 Total debt ........................ 664 6,475 7,294 3,288 2,473 Total stockholders' equity ........ 46,006 7,103 3,798 3,006 2,624
(a) The Company was an S corporation for federal and state income tax purposes from July 1, 1992 through June 17, 1997, and accordingly, was not subject to federal or state income taxes. The S corporation election was terminated on June 17, 1997 in contemplation of the Company's initial public offering. Since June 18, 1997, the Company has been a C corporation for federal and state income tax purposes. Pro forma net income (i) reflects the elimination of management fee expense and (ii) includes a provision for federal, state and foreign income taxes at an effective rate of 37.3% during the applicable S corporation period. Management fee expense was discontinued with the initial public offering in June 1997. Unaudited pro forma financial data for 1996-1994 is set forth below:
1996 1995 1994 ------- ------- ------- Historical net loss ........................................ $ (74) $ (58) $ (331) Add back management fee expense ............................ 6,172 2,600 612 Adjust provision for federal, state and foreign income taxes to 37.3% ................................................ (2,204) (948) (105) ------- ------- ------- Pro forma net income ....................................... $ 3,894 $ 1,594 $ 176 ======= ======= =======
(b) Pro forma net income per common share is based on the following number of shares of the Company's common stock: Shares outstanding after giving effect to 322.1064-for-one stock split effected by a stock dividend ... 10,829 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 million Note Payable to principal stockholders .......................................................... 254 3 million shares issued in connection with initial public offering completed June 24, 1997, for days outstanding in the respective periods ........................................................... 1,570 ------ Weighted average shares outstanding .................................................................. 12,653 ======
9 11 ITEM 7. 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 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 "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 trend toward outsourcing, risks associated with the Company's contracts, risks associated with rapidly changing technology, risks of business interruption, 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 registrant's Prospectus dated June 18, 1997, which is incorporated herein by reference. The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this report. OVERVIEW The Company has grown profitably by developing integrated, value-added outsourced services that enable its clients to provide their customers with high-quality services at lower costs than the clients' own in-house operations. StarTek has continuously expanded its business and facilities to offer additional services in response to the growing needs of its clients and to capitalize on market opportunities both domestically and internationally. From 1993 to 1997, the Company's revenues grew at a compound annual growth rate of 40.2%. For 1997, the Company's revenues increased approximately 24.5% to $89.2 million from $71.6 million for 1996. For 1997, pro forma net income increased approximately 51.3% to $5.9 million from $3.9 million for 1996. Management attributes this growth to the successful implementation of the Company's strategy of developing long-term strategic relationships with large clients in targeted industries. StarTek generates its revenues by providing integrated, value-added outsourced services throughout a product's life cycle, including product order teleservices, supplier management, product assembly and packaging, product distribution, product order fulfillment, and inbound customer care and technical support teleservices. The Company generally recognizes revenues as services are performed under each contract. Substantially all of the Company's significant arrangements with its clients for its services generate revenues based, in large part, on the number and duration of customer inquiries (subject to certain minimum monthly payments) and the volume, complexity and type of components involved in the handling of the client's products. Changes in the number or type of components in the product units assembled by the Company may have an effect on the Company's revenues, independent of the number of product units assembled. A key element of the Company's ability to grow is the availability of capacity to respond quickly to the needs of new clients or the increased needs of existing clients. The Company's 138,000-square-foot facility in Denver, Colorado, which was initially occupied at the end of 1995, is approximately one-half utilized and capacity can be expanded to accommodate additional outsourced services. Management also believes that it can expand the capacity of its Greeley, Colorado and Hartlepool, England facilities. A new 35,000 square-foot facility is under construction in Greeley, Colorado. The Company has announced plans to open a 22,000 square foot facility in a leased building in Laramie, Wyoming. Management believes that its existing facilities are adequate for its current operations, but that additional facility capacity will be required to support continued growth. Management intends to maintain a certain amount of excess capacity to be able to respond to new or expanding client demands. The Company's cost of services primarily includes labor, telecommunications, materials and freight charges that are variable in nature, as well as certain facilities charges. Competitive vendor rates for materials, printing, compact disc duplication and packaging costs, together with competitive labor rates which comprise the majority of the Company's costs, have been and are expected to continue to be a key component of the Company's expenses. All other expenses, including expenses attributed to technology support, sales and marketing, human resource management and other administrative functions that are not allocable to 10 12 specific client services, are recorded as selling, general and administrative ("SG&A") expenses. SG&A expenses tend to be either semi-variable or fixed in nature. From July 1992, through June 17, 1997, the Company operated as an S corporation and, accordingly, was not subject to federal or state income taxes. As an S corporation, in addition to general compensation for services rendered, the Company historically paid certain management fees, bonuses and other fees to the principal stockholders and/or their affiliates in amounts on an annual basis which were approximately equal to the annual earnings of the Company, and all such amounts were reflected as management fee expense in the consolidated statement of operations. Upon receipt of such management fees and bonuses, the principal stockholders historically contributed approximately 53% of such amounts to the Company to provide the Company with necessary working capital, with substantially all of the balance used to pay applicable federal and state income taxes. The amounts so contributed are reflected in additional paid-in-capital on the Company's consolidated balance sheet. Effective with the closing of the Company's initial public offering, these management fees and bonus arrangements were discontinued. See Note 1 to the Consolidated Financial Statements. Compensation has continued to be payable to the principal stockholders as general compensation for services rendered in the form of salaries, bonuses or advisory fees and all such payments are reflected in SG&A expenses on the consolidated statement of operations. At current rates, such payments aggregate approximately $516,000 annually. See Note 1 to the Consolidated Financial Statements. The S corporation status of the Company terminated in June 1997 in connection with closing the Company's initial public offering and, thereafter, the Company has been subject to federal and state income taxes. Pro forma net income (i) reflects elimination of management fee expense and (ii) includes a provision for federal, state and foreign income taxes at an effective rate of 37.3%. The Company frequently purchases components of its clients' products as an integral part of its supplier management services and in advance of providing its product assembly and packaging services. These components are shown as raw materials inventory in the Company's balance sheet. At the close of an accounting period, packaged and assembled products (together with other associated costs) are reflected as finished goods inventory, pending shipment. The Company generally has the right to be reimbursed by the client for unused inventory. Client-owned inventories are not reflected on the Company's consolidated balance sheet. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of revenues.
YEAR ENDED DECEMBER 31, ---------------------------------------- PRO FORMA 1997 1997 1996 1995 ------ ------ ------ ------ Revenues .............................. 100.0% 100.0% 100.0% 100.0% Cost of services ...................... 80.7 80.7 80.0 80.1 ------ ------ ------ ------ Gross profit .......................... 19.3 19.3 20.0 19.9 SG&A expenses ......................... 9.8 9.8 10.8 12.8 Management fee expense ................ -- 3.5 8.6 6.3 ------ ------ ------ ------ Operating profit ...................... 9.5 6.0 0.6 0.8 Net interest income (expense) and other 1.0 1.0 (0.5) (1.0) ------ ------ ------ ------ Income (loss) before income taxes ..... 10.5 7.0 0.1 (0.2) Income tax expense .................... 3.9 2.3 0.2 -- ------ ------ ------ ------ Net income (loss) ..................... 6.6% 4.7% (0.1)% (0.2)% ====== ====== ====== ======
11 13 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 years ended 1996 and 1995.
1996 1995 ----------------------------- ----------------------------- DOLLARS % DOLLARS % ------------ --------- ------------ --------- (DOLLARS IN THOUSANDS, (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) EXCEPT SHARE DATA) Revenues .............................. $ 71,584 100.0% $ 41,509 100.0% Cost of services ...................... 57,238 80.0 33,230 80.1 ------------ --------- ------------ --------- Gross profit .......................... 14,346 20.0 8,279 19.9 SG&A expenses ......................... 7,764 10.8 5,341 12.8 ------------ --------- ------------ --------- Operating profit (loss) ............... 6,582 9.2 2,938 7.1 Net interest income (expense) and other (372) (0.5) (396) (1.0) ------------ --------- ------------ --------- Income before income taxes ............ 6,210 8.7 2,542 6.1 Income tax expense .................... 2,316 3.3 948 2.3 ------------ --------- ------------ --------- Net income (loss) ..................... $ 3,894 5.4% $ 1,594 3.8% ============ ========= ============ ========= Pro forma net income per share ........ $ 0.34 Weighted average shares outstanding ... 11,361,904
Pro forma adjustments are described in Note 2 to the consolidated financial statements. 1997 Compared to 1996 Revenues. Revenues increased $17.6 million, or 24.5%, to $89.2 million for 1997 from $71.6 million for 1996. This increase was primarily from existing clients. A portion of the revenues for 1996 were attributable to two large projects, which generated unusually high revenues. Cost of Services. Cost of services increased $14.7 million, or 25.8%, to $71.9 million for 1997 from $57.2 million for 1996. As a percent of revenues, cost of services increased 0.7%. Factors pertaining to this increase were decreased labor utilization primarily from Greeley capacity constraints in latter 1997, increased training costs and a greater penetration of business with a large client at lower relative margins. These increased cost factors were partially offset by the absence of start-up costs in Denver and product rework costs as compared to 1996. Gross Profit. As a result of the foregoing factors, gross profit increased $2.8 million, or 19.6%, to $17.2 million for 1997 from $14.3 million for 1996. As a percentage of revenues, gross profit decreased to 19.3% for 1997 from 20.0% for 1996. Selling, General and Administrative Expenses. SG&A expenses increased $0.9 million, or 12.0%, to $8.7 million for 1997 from $7.8 million for 1996, primarily as a result of increased personnel costs incurred to service increasing business. As a percentage of revenues, SG&A expenses decreased to 9.8% for 1997 from 10.8% for 1996, reflecting the spreading of fixed and semi-variable costs over a larger revenue base. Management Fee Expense. Management fee expense decreased $3.1 million, or 49.3%, to $3.1 million for 1997 from $6.2 million for 1996. As a percentage of revenues, management fee expense decreased to 3.5% for 1997 from 8.6% for 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. Management fee expense was determined by the Board of Directors and related primarily to changes in operating profit of the Company for 1996. 12 14 Operating Profit. As a result of the foregoing factors, operating profit increased $4.9 million, or 1200%, to $5.3 million for 1997 from $0.4 million for 1996. As a percentage of revenues, operating profit increased to 6.0% for 1997 from 0.6% for 1996. Net Interest Expense (Income) and Other. Net interest expense (income) and other was $0.9 million income for 1997, while it was $0.4 million expense in 1996. This increase in net interest earnings was primarily due to interest earnings from the net proceeds of the Company's initial public offering in June 1997 and the substantial absence of line-of-credit borrowing during the third and fourth quarters of 1997. Income Before Income Taxes. As a result of the foregoing factors, income before income taxes increased $6.3 million to $6.3 million for 1997 from zero for 1996. As a percentage of revenues, income before income taxes increased to 7.0% for 1997 from 0.1% for 1996. Income Tax Expense. The Company operated as an S corporation for federal and state income tax purposes until termination of S corporation status 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 1997, a provision for income taxes as a C corporation was made for the period June 18, 1997 through December 31, 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 1996. Net Income (Loss). Based on the factors discussed above, net income increased $4.3 million, to $4.2 million for 1997 from $(0.1) million for 1996. As a percentage of revenues, net income increased to 4.7% for the year ended December 31, 1997 from (0.1)% for 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 paid to stockholders and their affiliates as these fees and bonuses were discontinued upon 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: (1) pro forma management fee expense is zero for 1997 and 1996; (2) pro forma operating profit increased $1.9 million, or 28.5% to $8.5 million for 1997 from $6.6 million for 1996; (3) pro forma income before income taxes increased $3.2 million, or 51.3%, to $9.4 million for 1997 from $6.2 million in 1996; (4) pro forma income taxes increased $1.2 million, or 51.4%, to $3.5 million for 1997 from $2.3 million 1996; and (5) pro forma net income increased $2.0 million, or 51.3% to $5.9 million for 1997 from $3.9 million for 1996. 1996 Compared to 1995 Revenues. Revenues increased $30.1 million, or 72.5%, to $71.6 million for 1996 from $41.5 million for 1995. This increase was primarily attributable to the addition of a significant new client in April 1996. Revenues for 1996 reflect the addition of the Denver facility, which opened at the end of 1995. Cost of Services. Cost of services increased $24.0 million, or 72.2%, to $57.2 million for 1996 from $33.2 million for 1995. As a percentage of revenues, cost of services was relatively unchanged at 80.0% for 1996 from 80.1% for 1995. Gross Profit. As a result of the foregoing factors, gross profit increased $6.0 million, or 73.3%, to $14.3 million for 1996 from $8.3 million for 1995. As a percentage of revenues, gross profit was relatively unchanged at 20.0% for 1996 from 19.9% for 1995. Selling, General and Administrative Expenses. SG&A expenses increased $2.4 million, or 45.4%, to $7.8 million for 1996 from $5.3 million for 1995. As a percentage of revenues, SG&A expenses decreased to 10.8% for 1996 from 12.8% for 1995, reflecting the spreading of fixed and semi-variable costs over a larger revenue base. Management Fee Expense. Management fee expense increased $3.6 million, or 137.4%, to $6.2 million for 1996 from $2.6 million for 1995. As a percentage of revenues, management fee expense increased to 8.6% for 1996 from 6.3% for 1995. Management fee expense was determined by the Board of Directors and related primarily to changes in operating profit of the Company. Effective with the closing of the initial public offering in June 1997, these management fee and bonus arrangements were discontinued. 13 15 Operating Profit. As a result of the foregoing factors, operating profit increased $0.1 million, or 21.3%, to $0.4 million for 1996 from $0.3 million for 1995. As a percentage of revenues, operating profit decreased to 0.6% for 1996 from 0.8% for 1995. Net Interest Expense (Income) and Other. Net interest expense (income) and other remained relatively unchanged at $0.4 million expense for 1996 and 1995. As a percentage of revenues, net interest expense (income) and other decreased to 0.5% expense for 1996 from 1.0% expense for 1995, reflecting lower outstanding borrowings relative to revenues of the Company. Income (Loss) Before Income Taxes. As a result of the foregoing factors, income before income taxes increased $0.1 million to zero for 1996 from $(0.1) million loss before income taxes for 1995. As a percentage of revenues, income before income taxes increased to 0.1% for 1996 from (0.2)% for 1995. Income Tax Expense. The Company operated as an S corporation for federal and state income tax purposes and, accordingly, was not subject to federal or state income taxes. The Company was, however, subject to certain foreign income taxes. Net Income (Loss). Based upon its S corporation status and the factors discussed above, net loss remained relatively unchanged at $(0.1) million for 1996 and 1995. As a percentage of revenues, net loss for 1996 and 1995 remained relatively unchanged at 0.1% and 0.2%, respectively. 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. Collateral for the line of credit is the accounts receivable of the Company and subsidiaries. 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 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) are for working capital and other general corporate purposes, including approximately $8.0 million for capital expenditures to expand into new facilities and build-out its existing facilities, and to potentially make strategic acquisitions of complementary businesses. The Company has acquired land and is in the process of constructing a new facility in Greeley, Colorado. The estimated cost to complete and finish the facility is approximately $3.5 million, of which $2.9 million was under contract with construction contractors and suppliers at December 31, 1997. In connection with the new Greeley facility, the Company acquired land for $0.3 million and financed the purchase through a non-interest bearing ten-year promissory note. The note shall decline on an equal basis, without payment, over ten years so long as the Company does not sell or transfer the parcel or fail to continuously operate thereon a customer service center. The Company has announced plans to open a facility on leased property in Laramie, Wyoming. The Company has contracted for $0.8 million of equipment in connection with the Laramie facility. The Company had cash, cash equivalents and short-term investments available for sale of $34.3 million at December 31, 1997. The Company's working capital was $38.7 million. The Company agreed to finance telecommunications computer hardware and software through a 36 month operating lease which became effective April 1997. Monthly payments approximate $28,500. Net cash provided by operating activities increased to $6.1 million for 1997 from $1.4 million for 1996. The principal causes of this $4.7 million change were (i) an increase of $4.2 million in net income, (ii) an increase in net accounts payable and accrued liabilities, (iii) the absence of a significant change in inventories, offset by (iv) an increase in accounts receivable. Net cash provided by operating activities increased to $1.4 million for the year ended December 31, 1996 from net cash used in operating activities of $1.5 million for 1995. The principal causes of this $2.9 million change were (i) an increase in depreciation and amortization and (ii) a decrease in accounts receivable, partially offset by a decrease in accounts payable (net of an increase in accrued and other liabilities) and an increase in inventories. 14 16 Net cash used in investing activities increased to $10.5 million for 1997 from $0.7 million for 1996. The principal causes for this increase were purchases of short-term investments of $7.5 million and increased purchases of property, plant and equipment. Net cash used in investing activities was $0.7 million for the year ended December 31, 1996 as compared to $1.3 million of net cash used in investing activities for 1995. The principal cause for this decrease related to reduced purchases of property, plant and equipment in 1996. Net cash provided from financing activities increased to $28.6 million in 1997 from $1.4 million for 1996. The principal causes of this increase were (i) the $41.0 million net proceeds from the Company's initial public offering and (ii) a reduction in principal payments on an affiliate note, partially offset by (iii) a reduction in contributed capital from principal stockholders, (iv) a dividend to the principal stockholders and (v) the repayment of substantially all of the Company's indebtedness. Net cash provided by financing activities decreased to $1.4 million for the year ended December 31, 1996 from $3.2 million for 1995. The principal causes for this decrease were (i) reduced bank borrowings in 1996 and (ii) payments of notes payable-affiliate and stockholder in 1996, partially offset by increases in contributed capital. 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 expenditures 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. QUARTERLY RESULTS Note 15 to the Consolidated Financial Statements reflects unaudited statement of operations data for the quarters in 1997 and 1996 on a historical and pro forma basis. The unaudited historical quarterly information has been prepared on the same basis as the annual information and, in management's opinion, includes all adjustments necessary to present fairly the information for the quarters presented. The following table sets forth certain unaudited historical and pro forma statement of operations data, expressed as a percentage of revenues.
1997 QUARTERS ENDED 1996 QUARTERS ENDED ------------------------------------- ------------------------------------ MAR 31 JUN 30 SEPT 30 DEC 31 MAR 31 JUN 30 SEPT 30 DEC 31 ------ ------ ------- ------ ------ ------ ------- ------ Historical: Revenues .............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit .......... 23.6 21.9 19.4 16.0 16.8 21.2 21.2 20.6 SG&A expenses ......... 13.0 12.1 10.6 6.8 11.2 13.2 11.3 9.1 Management fee expense 4.7 14.5 -- -- 1.3 5.0 3.2 17.8 Operating profit (loss) 5.9 (4.7) 8.8 9.2 4.3 3.0 6.7 (6.3) Pro forma: Revenues .............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit .......... 23.6 21.9 16.8 21.2 21.2 20.6 SG&A expenses ......... 13.0 12.1 11.2 13.2 11.3 9.1 Management fee expense -- -- -- -- -- -- Operating profit (loss) 10.6 9.8 5.6 8.0 9.9 11.5
The Company's business is highly seasonal. Historically, the Company's revenues have been significantly lower in the first and second quarters of each year due to the timing of its client's marketing programs and the introduction of new products, which are typically geared toward the Christmas holiday season. 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 clients' businesses. If the Company's revenues are below management's expectations in any given quarter, StarTek's operating results could be materially adversely affected for that quarter. 15 17 For the quarterly periods in 1997 and 1996, revenues fluctuated principally due to the seasonal pattern of certain of the businesses served by the Company and the continuing effect of the net addition of new client programs. Revenues in the first quarter of 1997 as compared to the fourth quarter of 1996 declined principally due to the seasonal pattern of certain businesses serviced by the Company. Revenues in the second quarter of 1996 were higher than expected, as compared to prior seasonal patterns, due to increased activities for a significant new client that began business with the Company in that quarter; this business continued in 1997. For the quarterly periods in 1997 and 1996, gross profit fluctuations as a percentage of revenues were significantly influenced by the mix of services performed for clients. Gross profit as a percentage of revenues was lower than expected in the first and second quarters of 1996, partially as a result of product rework costs. In addition, the first quarter of 1996 was adversely affected by start-up costs of the Denver facility, which opened at the end of 1995. Gross profit as a percentage of revenues in the first quarter of 1997 as compared to the fourth quarter of 1996 increased principally because of improved labor utilization and the mix of services performed for clients. Gross profit as a percentage of revenues in the second quarter of 1997, as compared to the first quarter of 1997, declined primarily because of increased work for a major client and other clients at lower relative margins. Gross profit as a percentage of revenues in the third quarter of 1997, as compared to the second quarter of 1997, decreased primarily due to lower labor utilization and increased work for a major client at lower relative margins. Gross profit as a percentage of revenues in the fourth quarter of 1997, as compared to the third quarter of 1997, decreased primarily due to lower labor utilization primarily from Greeley capacity constraints, increased training costs and a greater penetration of business with a significant client at lower relative margins. For the quarterly periods in 1997 and 1996, SG&A expenses as a percentage of revenues fluctuated principally due to the spreading of fixed and semi-variable costs over a revenue base that fluctuates from quarter to quarter. The Company paid management fees and bonuses of $3.1 million in the period 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 1997 management fees and bonus arrangements gave consideration to operating profits and the effects of certain expense timing differences for book and tax purposes. For the quarterly periods in 1996, management fee expense fluctuated as a percentage of revenues generally based on estimated tax requirements of the recipients of the management fees and bonuses in the first three quarters of each year and, in the fourth quarter of the year, on cumulative operating profits for the entire year less management fee expense for the preceding three quarters. Operating profit (loss) fluctuated within the quarterly periods of 1997 and 1996 based primarily on the factors noted above. The unaudited pro forma quarterly information for the first two quarters of 1997 and all of 1996 presents the effects on operating profit of the elimination of management fee expense paid to stockholders and their affiliates as these fees were discontinued effective with closing of the Company's initial public offering and no further management fees will be payable thereafter by the Company. YEAR 2000 COMPLIANCE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Some of the Company's older computer programs fall into this category. As a result, those programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is currently estimated at approximately $100,000. 16 18 The project is estimated to be completed not later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Company believes, with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, the Year 2000 Issue could have a material adverse impact on the operations of the Company. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee 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 locate and correct all relevant computer codes, and similar uncertainties. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA The consolidated financial statements and supplemental data of the Company required by this Item are set forth at the pages indicated at Item 14(a). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10 THROUGH 13 The information required under Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and Related Transactions) is included in the registrant's Proxy Statement for its 1998 annual meeting, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Document List 1. Financial Statements Response to this portion of Item 14 is submitted per the Index to Financial Statements, Supplementary Data and Financial Statement Schedules on page 18 of this report. 2. Supplementary Data and Financial Statement Schedules Response to this portion of Item 14 is submitted per the Index to Financial Statements, Supplementary Data and Financial Statement Schedules on page 18 of this report. 3. An Index of Exhibits is on page 39 of this report. (b) Reports on Form 8-K filed in the fourth quarter of 1997. None. 17 19 STARTEK, INC. INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND FINANCIAL STATEMENT SCHEDULES
PAGE NUMBER IN FORM 10-K -------------- FINANCIAL STATEMENTS: Report of Independent Auditors 19 Consolidated Balance Sheets, December 31, 1997 and 1996 20 Consolidated Statements of Operations, years ended December 31, 1997, 1996 and 1995 21 Consolidated Statements of Cash Flows, years ended December 31, 1997, 1996 and 1995 22 Consolidated Statements of Stockholders' Equity, years ended December 31, 1997, 1996 and 1995 23 Notes to Consolidated Financial Statements 24 SUPPLEMENTAL DATA: Selected Financial Data 9 FINANCIAL STATEMENT SCHEDULES: None. All schedules have been included in the Consolidated Financial Statements or notes thereto.
18 20 REPORT OF INDEPENDENT AUDITORS Board of Directors StarTek, Inc. We have audited the accompanying consolidated balance sheets of StarTek, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of StarTek, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Denver, Colorado February 20, 1998 19 21 STARTEK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
DECEMBER 31, --------------------- 1997 1996 -------- -------- Current assets: Cash and cash equivalents ............................... $ 26,960 $ 2,742 Short-term investments available for sale ............... 7,356 -- Trade accounts receivable, less allowance for doubtful accounts of $383 and $311 in 1997 and 1996, respectively ....................................... 12,518 11,031 Inventories (Note 4) .................................... 2,539 2,535 Deferred income tax (Note 9) ............................ 440 -- Prepaid expenses and other .............................. 205 140 -------- -------- Total current assets ......................................... 50,018 16,448 Property, plant and equipment, net (Note 5) .................. 8,151 6,528 Other assets ................................................. 3 3 -------- -------- Total assets ................................................. $ 58,172 $ 22,979 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit (Note 6) ................................. $ -- $ 3,500 Accounts payable ........................................ 9,387 6,962 Accrued liabilities ..................................... 1,292 1,584 Income taxes payable (Note 9) ........................... 106 -- Current portion of capital lease obligations ............ 82 917 Current portion of long-term debt ....................... 26 6 Other ................................................... 421 584 -------- -------- Total current liabilities .................................... 11,314 13,553 Capital lease obligations, less current portion (Note 7) ..... 121 1,504 Long-term debt, less current portion (Note 8) ................ 435 548 Deferred income tax (Note 9) ................................. 231 -- Other ........................................................ 65 271 Commitments (Notes 5 and 7) Stockholders' equity (Notes 11 and 12): Common stock ............................................ 138 1 Additional paid-in capital .............................. 41,661 6,148 Cumulative translation adjustment ....................... 70 129 Unrealized holding loss on available for sale investments (92) -- Retained earnings ....................................... 4,229 1,038 Note receivable-stockholder for the exercise of stock options ............................................ -- (213) -------- -------- Total stockholders' equity ................................... 46,006 7,103 -------- -------- Total liabilities and stockholders' equity ................... $ 58,172 $ 22,979 ======== ========
See accompanying notes. 20 22 STARTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------------------------ PRO FORMA 1997 (NOTE 2) 1997 1996 1995 ----------- ----------- ----------- ----------- (UNAUDITED) Revenues .............................. $ 89,150 $ 89,150 $ 71,584 $ 41,509 Cost of services ...................... 71,986 71,986 57,238 33,230 ----------- ----------- ----------- ----------- Gross profit .......................... 17,164 17,164 14,346 8,279 Selling, general and administrative expenses ......................... 8,703 8,703 7,764 5,341 Management fee expense (Note 2) ....... -- 3,126 6,172 2,600 ----------- ----------- ----------- ----------- Operating profit ...................... 8,461 5,335 410 338 Net interest income (expense) and other (Note 10) ........................ 933 933 (372) (396) ----------- ----------- ----------- ----------- Income (loss) before income taxes ..... 9,394 6,268 38 (58) Income tax expense (Notes 2 and 9) .... 3,504 2,110 112 -- ----------- ----------- ----------- ----------- Net income (loss) ..................... $ 5,890 $ 4,158 $ (74) $ (58) =========== =========== =========== =========== Pro forma net income per share (Note 2) ......................... $ 0.47 Shares outstanding (Note 2) ........... 12,652,680
See accompanying notes. 21 23 STARTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) .................................... $ 4,158 $ (74) $ (58) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ................... 1,829 1,438 873 Deferred income taxes ........................... (153) -- -- Changes in operating assets and liabilities: Accounts receivable ........................ (1,487) 2,231 (6,225) Inventories ................................ (4) (1,177) (471) Prepaid expenses and other assets .......... (65) 87 (75) Accounts payable ........................... 2,425 (2,744) 4,147 Accrued and other liabilities .............. (555) 1,657 283 -------- -------- -------- Net cash provided by (used in) operating activities .. 6,148 1,418 (1,526) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment, net ...... (3,191) (1,333) (2,104) Purchase of investments .............................. (7,504) Collections on notes receivable-stockholders ......... 213 663 110 Collections on notes receivable-affiliate ............ -- -- 668 -------- -------- -------- Net cash used in investing activities ................ (10,482) (670) (1,326) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from line of credit borrowings .......... (3,500) 49 1,452 Principal payments on borrowings ..................... (1,854) (7) (2) Proceeds from borrowings and capital lease obligations 1,500 819 362 Principal payments on capital lease obligations ...... (2,218) (847) (590) Principal payments on notes payable-stockholders ..... -- (738) -- Dividend to S corporation principal stockholders ..... (8,000) -- -- Proceeds from (principal payments on) note payable- affiliate ....................................... -- (1,112) 1,112 Issuance of common stock ............................. -- -- 107 Net proceeds from initial public offering of common stock ........................................... 41,042 -- -- Contributed capital .................................. 1,641 3,240 867 Repurchase of common stock ........................... -- -- (129) -------- -------- -------- Net cash provided by financing activities ............ 28,611 1,404 3,179 Effect of exchange rate changes on cash .............. (59) 139 5 -------- -------- -------- Net increase in cash and cash equivalents ............ 24,218 2,291 332 Cash and cash equivalents at beginning of year ....... 2,742 451 119 -------- -------- -------- Cash and cash equivalents at end of year ............. $ 26,960 $ 2,742 $ 451 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest ............................... $ 368 $ 535 $ 366 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY Equipment acquired or refinanced under capital leases -- $ 1,017 $ 1,672 Note received in exchange for the purchase of common stock from options exercised .................... -- -- $ 213 Land acquired under long-term debt ................... $ 261 -- -- Unrealized losses, net of deferred taxes of $56 ...... $ 92 -- --
See accompanying notes. 22 24 STARTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands, except share data)
UNREALIZED HOLDING LOSS ON COMMON STOCK ADDITIONAL CUMULATIVE AVAILABLE ----------------------------- PAID-IN TRANSLATION FOR SALE SHARES AMOUNT CAPITAL ADJUSTMENT INVESTMENTS ----------- ------ -------- ------ ------ Balance, January 1, 1995 .................. 42,537 $ 1 $ 1,850 $ (15) $ -- Issuance of stock for cash ........... 820 -- 89 -- -- Issuance of stock for options exercised ........................... 1,728 -- 231 -- -- Note receivable-stockholder .......... -- -- -- -- -- Repurchase of stock .................. (1,885) -- (129) -- -- Contributed capital .................. -- -- 867 -- -- Translation gain ..................... -- -- -- 5 -- Net loss ............................. -- -- -- -- -- ----------- ------ -------- ------ ------ Balance, December 31, 1995 ................ 43,200 1 2,908 (10) -- Contributed capital .................. -- -- 3,240 -- -- Translation gain ..................... -- -- -- 139 -- Net loss ............................. -- -- -- -- -- ----------- ------ -------- ------ ------ Balance, December 31, 1996 ................ 43,200 1 6,148 129 -- Payment of note receivable-stockholder -- -- -- -- -- Contribution of StarTek Europe, Ltd .. (9,582) -- -- -- -- Contributed capital .................. -- -- 1,641 -- -- 322.1064-for-one common stock split effected by stock dividend, immediately prior to closing of initial public offering (Note 11) 10,794,953 107 (107) -- -- Dividend to principal stockholders (Note 11) ....................... -- -- (7,033) -- -- Issuance of common stock pursuant to initial public offering, net of stock issuance costs of $3,958 .. 3,000,000 30 41,012 -- -- Unrealized investment holding loss ... -- -- -- -- (92) Translation loss ..................... -- -- -- (59) -- Net income ........................... -- -- -- -- -- ----------- ------ -------- ------ ------ Balance, December 31, 1997 ............... 13,828,571 $ 138 $ 41,661 $ 70 $ (92) =========== ====== ======== ====== ======
TOTAL NOTE STOCK- RETAINED RECEIVABLE- HOLDERS' EARNINGS STOCKHOLDER EQUITY ------- ------ -------- Balance, January 1, 1995 .................. $ 1,170 $ -- $ 3,006 Issuance of stock for cash ........... -- -- 89 Issuance of stock for options exercised ........................... -- -- 231 Note receivable-stockholder .......... -- (213) (213) Repurchase of stock .................. -- -- (129) Contributed capital .................. -- -- 867 Translation gain ..................... -- -- 5 Net loss ............................. (58) -- (58) ------- ------ -------- Balance, December 31, 1995 ................ 1,112 (213) 3,798 Contributed capital .................. -- -- 3,240 Translation gain ..................... -- -- 139 Net loss ............................. (74) -- (74) ------- ------ -------- Balance, December 31, 1996 ................ 1,038 (213) 7,103 Payment of note receivable-stockholder -- 213 213 Contribution of StarTek Europe, Ltd .. -- -- -- Contributed capital .................. -- -- 1,641 322.1064-for-one common stock split effected by stock dividend, immediately prior to closing of initial public offering (Note 11) -- -- -- Dividend to principal stockholders (Note 11) ....................... (967) -- (8,000) Issuance of common stock pursuant to initial public offering, net of stock issuance costs of $3,958 .. -- -- 41,042 Unrealized investment holding loss ... -- -- (92) Translation loss ..................... -- -- (59) Net income ........................... 4,158 -- 4,158 ------- ------ -------- Balance, December 31, 1997 ............... $ 4,229 $ -- $ 46,006 ======= ====== ========
See accompanying notes. 23 25 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES StarTek, Inc. (the "Company" or "StarTek") was incorporated in Delaware on December 30, 1996. Prior to the formation of the Company, StarTek USA, Inc. and StarTek Europe, Ltd. (previously named StarPak, Inc. and StarPak International, Ltd., respectively, and whose stockholder groups were substantially identical) conducted business as affiliates under common control. Effective January 1, 1997, the stockholders of StarTek USA, Inc. exchanged all of the outstanding shares of capital stock of StarTek USA, Inc. for shares of common stock of the Company, and StarTek USA, Inc. became a wholly-owned subsidiary of the Company. Effective January 24, 1997, the stockholders of StarTek Europe, Ltd. contributed all of its outstanding shares of capital stock to the Company and StarTek Europe, Ltd. became a wholly-owned subsidiary of the Company. Because the shareholder groups of StarTek USA, Inc. and StarTek Europe, Ltd. were substantially identical and the relative holdings of the individual stockholders in StarTek were not altered as a result of the contributions, the formation of StarTek has been treated as a combination of entities under common control and accounted for as if it were a pooling of interests. References to the Company and StarTek include these combined entities. Financial statements for periods prior to January 1, 1997 reflect the combined accounts of StarTek USA, Inc. and StarTek Europe, Ltd. After January 1, 1997, the accompanying consolidated financial statements include the accounts of StarTek, Inc. and its wholly-owned subsidiaries, StarTek USA, Inc. and StarTek Europe, Ltd. All significant intercompany transactions have been eliminated. Business Operations The Company is an international provider of integrated, value added outsourced services primarily for Fortune 500 companies in targeted industries. The Company offers a wide spectrum of services through a product's life cycle, including product order teleservices, supplier management, product assembly and packaging, product distribution, product fulfillment, customer care and technical support teleservices. The Company has operations in North America, Europe and Asia. Capital Stock Immediately prior to the closing of the Company's initial public offering in June 1997, the Company declared a 322.1064-for-one stock split of the Company's common stock. All references in the notes to the consolidated financial statements to shares and related prices in per share calculations, per share amounts and stock option plan data have been restated to reflect the split. Foreign Currency Translation Translation gains and losses, net of applicable deferred income taxes, are accumulated as a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in determining net income (loss). Such gains and losses were not material for any period presented. 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 periods presented, 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 the options. 24 26 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 impact of the adoption of Statement No. 131 is not known at this time. Information presented under Statement No. 131 must be restated to 1997 and 1996. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenues recognized as services are generally performed under client purchase orders, which services may include product order teleservices, supplier management, product assembly and packaging, product distribution, product order fulfillment, and customer care technical support teleservices. Training Costs of training pertaining to start-up and ongoing projects are expensed as incurred. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, short-term investments available for sale, accounts receivable and payable, notes receivable, debt and capital lease obligations. The carrying values of cash and cash equivalents, and accounts receivable and payable approximate fair value. Short-term investments for sale are reported at fair value. Management believes the difference between the fair values and carrying values of debt and capital lease obligations would not be materially different because interest rates approximate market rates for material items. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Short-Term Investments Available for Sale Available-for-sale investments consist of debt securities which are reported at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. There have been no unrealized gains and losses or declines in value judged to be other than temporary on available-for-sale investments. The cost of investments sold is based on the specific identification method. Interest on investments classified as available-for-sale is included in interest income. 25 27 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Inventories Inventories are stated at the lower of cost (first-in, first-out basis) or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. Additions, improvements and major renewals are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. Costs related to the internal development of software are expensed as incurred. Depreciation and amortization of equipment are computed using the straight-line method based on the following estimated useful lives:
Estimated Useful Life --------------------- Buildings ................................................ 30 years Equipment, and equipment acquired under capital leases ... 3 to 5 years Furniture and fixtures ................................... 7 years
Income Taxes Effective July 1, 1992, StarTek USA, Inc. elected Subchapter S status for income tax purposes, and StarTek Europe, Ltd. elected Subchapter S status at inception. On June 17, 1997, Subchapter S status was terminated and the Company has thereafter been taxable as a C corporation. During the Subchapter S status period, income and expenses of the Company were reportable on the tax returns of the stockholders, and no provision was made for federal and state income taxes. The Company is subject to foreign income taxes on certain of its operations. Management Fee Expense Historically, in addition to general compensation for services rendered, 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 expense. Such management fees have been 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. After the closing of the initial public offering in June 1997, all compensation payable to persons who are now stockholders of the Company (or an affiliate of such stockholder) are 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 expense. Such advisory fees and salaries, together with payments under the operating lease described in Note 7, are reflected as set forth below.
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 1995 ----------- -------------- ------------- Selling, general and administrative expense ........................... $ 512 $ 564 $ 560 Management fee expense ................. $ 3,126 $ 6,172 $ 2,600
26 28 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. PRO FORMA INFORMATION (UNAUDITED) Pro Forma Consolidated Statement of Operations The pro forma consolidated statement of operations for the year ended December 31, 1997 presents 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 initial public offering in June 1997 and the provision of related income taxes for the entire year as if the Company were taxed as a C corporation. Income Taxes In connection with the closing of the initial public offering in June 1997, the Company's S corporation status terminated. The pro forma consolidated statement of operations reflects a provision for federal, state and foreign income taxes at an effective rate of 37.3% for the entire year 1997. Pro Forma Net Income Per Common Share Pro forma net income per common share is based on the following number of shares of StarTek common stock: Shares outstanding after giving effect to 322.1064-for-one stock split effected by a stock dividend ......... 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 ................................................................. 254,246 3,000,000 shares issued in connection with initial public offering completed June 24, 1997, for days outstanding in the respective periods .................................................................. 1,569,863 ---------- Weighted average shares outstanding ......................................................................... 12,652,680 ==========
Diluted pro forma net income per share is not presented because exercisable options did not have a dilutive effect in 1997. 3. INVESTMENTS The following is a summary of available-for-sale investments at 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 ====== ====== ====== ======
27 29 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) The amortized cost and estimated fair value of available-for-sale debt securities at December 31, 1997, by contractual maturity, are shown below:
ESTIMATED COST FAIR VALUE ------ ---------- Due in one year or less $ 945 $ 948 Due after five years ..................... 1,260 1,217 ------ ------ 2,205 2,165 Other debt securities .................... 5,299 5,191 ------ ------ Total .................................... $7,504 $7,356 ====== ======
4. INVENTORIES The Company frequently purchases components of its clients' products as an integral part of its supplier management services and in advance of providing its product assembly and packaging services. These components are shown as raw materials inventory in the Company's balance sheet. At the close of an accounting period, packaged and assembled products (together with other associated costs) are reflected as finished goods inventory, pending shipment. The Company generally has the right to be reimbursed by the client for unused inventory. Client-owned inventories are not reflected in the Company's balance sheet. Total inventories consisted of the following:
DECEMBER 31, ------------------- 1997 1996 ------ ------ Raw materials.............................. $2,171 $2,327 Finished goods............................. 368 208 ------ ------ $2,539 $2,535 ====== ======
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are summarized as follows:
DECEMBER 31, ------------------------ 1997 1996 -------- -------- Land ......................................... $ 636 $ 374 Buildings .................................... 1,771 1,553 Equipment .................................... 10,262 7,340 Furniture and fixtures ....................... 978 928 -------- -------- 13,647 10,195 Less accumulated depreciation and amortization ............................ (5,496) (3,667) ======== ======== Property, plant and equipment, net............ $ 8,151 $ 6,528 ======== ========
28 30 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) The Company has acquired land and is in the process of constructing a new facility in Greeley, Colorado. The estimated cost to complete and finish the facility is approximately $3.5 million, of which $2.9 million was under contract with construction contractors and suppliers at December 31, 1997. 6. LINE OF CREDIT At December 31, 1997, the Company had a revolving line of credit agreement with a bank whereby the bank agreed to loan the Company up to $5,000. No amount was outstanding under the line at December 31, 1997. Interest is payable monthly and accrues at the bank's prime rate (8.5 % at December 31, 1997). This revolving line of credit will mature on April 30, 1999. The Company has pledged as security all of its receivables under the revolving line of credit agreement. The Company must maintain working capital of $17.5 million and tangible net worth of $25 million and maintain not less than $250 in non-interest bearing accounts with the bank. The Company may not pay dividends in an amount which would cause a failure to meet these financial covenants. At December 31, 1996, the Company had $3,500 outstanding under a line of credit with a bank. The line of credit was repaid from the proceeds of the Company's initial public offering in June 1997. 7. LEASES Prior to 1997, the Company had an operating lease for office space with a partnership in which major stockholders of the Company were the general partner and limited partner. Payments under the lease for the years ended December 31, 1996 and 1995 were $70 each year. The lease was canceled effective December 31, 1996. During 1997, the Company paid the majority of its capital lease obligations from the proceeds of its initial public offering. The Company's property held under capital leases consists of the following, which is included in property, plant and equipment:
DECEMBER 31, ---------------------- 1997 1996 ------- ------- Equipment ...................................... $ 261 $ 4,650 Less accumulated amortization................... (165) (1,930) ------- ------- $ 96 $ 2,720 ======= =======
Amortization of leased assets is included in depreciation and amortization expense. As of December 31, 1997, future minimum rental commitments, by year and in the aggregate, for the capital and operating leases are as follows:
CAPITAL OPERATING YEAR ENDED DECEMBER 31, LEASES LEASES ------- --------- 1998 .............................................. $ 100 $ 390 1999 .............................................. 57 380 2000 .............................................. 44 149 2001 .............................................. 40 20 ----- ----- Total minimum lease payments ...................... 241 $ 939 ===== Amounts representing interest ..................... (38) ----- Present value of net minimum lease payments........ $ 203 =====
Rental expense, including equipment rentals, for 1997, 1996 and 1995 was $271, $382 and $295, respectively. 29 31 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ------------------ 1997 1996 ----- ----- Mortgage loan .................................... $ -- $ 354 Economic development loan ........................ 200 200 Promissory note with waiver provisions............ 261 -- ----- ----- 461 554 Less current portion ............................. (26) (6) ----- ----- $ 435 $ 548 ===== =====
During 1995, the Company purchased land and an existing building for approximately $1,500. The purchase was financed through the Company's revolving line of credit and a mortgage loan in the amount of $362. In January 1997, the outstanding balance of $354 was refinanced from proceeds of a $1,500 mortgage loan at the lender's base rate plus 2%. The remaining balance on the $1,500 loan was repaid from proceeds of the Company's initial public offering. In December 1996, the Company received a $200 economic development loan which bears interest at 6% per annum and is collateralized by certain equipment. In December 1997, the Company acquired land for $261 and financed the purchase through a non-interest bearing ten-year promissory note. The note shall decline on an equal basis, without payment, over ten years so long as the Company does not sell or transfer the parcel or fail to continuously operate thereon a customer support service center. Future scheduled annual principal payments of long-term debt as of December 31, 1997 are as follows: 1998................................................... $ 26 1999................................................... 86 2000................................................... 86 2001................................................... 106 2002................................................... 26 Thereafter............................................. 131 ---- $461 ====
9. 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. Since June 18, 1997, the Company has been taxable as a C corporation and income taxes have been accrued since that date. The Company is subject to foreign income taxes on certain of its operations. Pretax income from the taxable period June 18, 1997 through December 31, 1997 was $6,818, of which $6,143 and $675 were attributable to domestic and foreign operations, respectively. 30 32 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) Significant components of the provision for income taxes for the period June 18, 1997 through December 31, 1997 are as follows: Current: Federal ........... $ 2,211 Foreign ........... 9 State ............. 99 ------- Total current .......... 2,319 Deferred: Federal ........... (181) State ............. (28) ------- Total deferred ......... (209) ------- Total income tax expense $ 2,110 =======
Deferred tax assets and liabilities are comprised of the following at December 31, 1997: Deferred income tax assets: Bad debt allowance ............................ $ 143 Vacation accrual .............................. 92 Other ......................................... 205 ----- Total deferred tax assets ..................... 440 Long-term deferred income tax liability: Tax depreciation in excess of book depreciation (231) ----- Net deferred tax assets ....................... $ 209 =====
The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense for the period June 18, 1997 through December 31, 1997 is as follows:
AMOUNT PERCENT ------- ------ Tax at U.S. statutory rates ...... $ 2,318 34.0% State income taxes, net of federal tax benefit ......... 225 3.3 One-time credit to record deferred tax asset upon termination of S corporation status ........... (299) (4.4) Other, net ....................... (134) (2.0) ------- ------ $ 2,110 30.9% ======= ======
Total income tax payments during the period June 18, 1997 through December 31, 1997 were $2,263. 31 33 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. NET INTEREST INCOME (EXPENSE) AND OTHER Net interest income (expense) and other consists of the following items:
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ------- ------- ------- Interest expense ..... $ (373) $ (443) $ (446) Interest income ...... 1,229 18 3 Other income and expense ......... 77 53 47 ------- ------- ------- Total income (expense) $ 933 $ (372) $ (396) ======= ======= =======
11. STOCKHOLDERS' EQUITY Immediately prior to the closing of the Company's initial public offering in June 1997, the Company declared a 322.1064-for-one stock split of the Company's common stock. All references in the notes to the consolidated financial statements to shares and related prices in per share calculations, per share amounts and stock option plan data have been restated to reflect the split. Immediately prior to closing the offering, the Company also declared an $8,000 dividend approximating the additional paid-in capital and retained earnings of the Company as of the closing date, payable to the principal stockholders (the "Principal Stockholders") pursuant to certain promissory notes. The promissory notes payable to the Principal Stockholders were paid from net proceeds of the Company's initial public offering. The capital stock and additional paid-in capital of StarTek as of December 31, 1997 were as follows: Preferred stock-undesignated; 15,000,000 shares, $.01 par value, authorized; no shares outstanding ................. $ -- Common stock; 95,000,000 shares, $.01 par value, authorized; 13,828,571 shares outstanding ............................ 138 Additional paid-in capital .................................... 41,661 ------- $41,799 =======
The consolidated common stock and additional paid-in capital on a company-by-company basis as of December 31, 1996 were as follows:
ADDITIONAL COMMON PAID-IN STOCK CAPITAL ------ ------ StarTek USA, Inc - 5,000,000 shares, $.01 par value, authorized; 10,828,571 shares outstanding ....................................... $ 1 $5,639 StarTek Europe, Ltd - 5,000,000 shares, $.01 par value, authorized; 3,086,424 shares outstanding ............................ -- 509 ------ ------ $ 1 $6,148 ====== ======
32 34 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. STOCK OPTIONS 1987 Stock Option Plan Effective July 24, 1987, the stockholders of StarTek USA, Inc. approved a Stock Option Plan ("Plan") which provided for the grant of stock options, stock appreciation rights ("SARs") and supplemental bonuses to key employees. The stock options were intended to qualify as "incentive stock options" as defined in Section 422A of the Internal Revenue Code unless specifically designated as "nonstatutory stock options." The options granted under the Plan could be exercised for a period of not more than ten years and one month from the date of grant, or any shorter period as determined by StarTek USA, Inc.'s Board of Directors. The option price of any incentive stock option would be equal to or exceed the fair market value per share on the date of grant, or 110% of the fair market value per share in the case of a 10% or greater stockholder. Options generally vested ratably over a five-year period from the date of grant. Unexercised vested options remained exercisable for three calendar months from the date of termination of employment. During 1995, StarTek USA, Inc.'s Board of Directors accelerated the vesting on all outstanding options under the Plan to allow the holders to exercise any granted option. Subsequently, all outstanding options were exercised. In aggregate, the option holders paid $18 in cash and delivered a note of $213 bearing interest at 4.63% to StarTek USA, Inc. in exchange for shares of common stock. This note was secured by 288,607 shares of StarTek USA, Inc. common stock. On January 22, 1997, the note and all accrued interest thereon was repaid in full. Exercise prices for options outstanding under the Plan as of December 31, 1994 and exercised during 1995 ranged from $0.07 to $0.99 and had a weighted average price of $0.42. Options for 2,124,936 shares of common stock were available for grant at the beginning and end of 1996 and 1995. The Plan was terminated effective January 24, 1997. 1997 Stock Option Plan On February 13, 1997, the Company's Board of Directors approved the StarTek, Inc. Stock Option Plan ("Option Plan") and, on January 27, 1997, the Director Stock Option Plan ("Director Option Plan"). The Option Plan was established to provide stock options, SARs and incentive stock options (cumulatively referred to as "Options") to key employees, directors (other than non-employee directors), consultants, and other independent contractors. The Option Plan provides for Options to be granted for a maximum of 985,000 shares of common stock, which are to be awarded by determination of a committee of non-employee directors. Unless otherwise determined by the committee, all Options granted under the Option Plan vest 20% annually beginning on the first anniversary of the Options' grant date and expire at the earlier of (i) ten years (or five years for participants owning greater than 10% of the voting stock) from the Options' grant date, (ii) three months after the termination of employment of the participant as outlined by the Option Plan, (iii) the date six months after the participant's death, or (iv) immediately upon termination for "cause." The Director Option Plan was established to provide stock options to non-employee directors who are elected prior to the option's grant date and serve continuously from the commencement of their term. The plan provides for stock options to be granted for a maximum of 90,000 shares of common stock. Participants are automatically granted options to acquire 10,000 shares of common stock upon the latter of their election as a director or the closing of the initial public offering of the Company's common stock. Additionally, each participant will be automatically granted options to acquire 3,000 shares of common stock on the date of each annual meeting of stockholders thereafter at which such director is reelected. All options granted under the Director Option Plan are fully vested upon grant and expire at the earlier of (i) the date of the participant's membership on the board is terminated for cause, (ii) ten years from the option grant date, or (iii) the date of one year after the director's death. 33 35 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. STOCK OPTIONS (CONTINUED) A summary of the Company's stock option activity under the various plans and related information follows:
1997 1996 1995 -------- --------- -------- Outstanding-beginning of year -- -- 556,600 Granted ..................... 618,500 -- -- Exercised ................... -- -- 556,600 Canceled .................... (7,000) -- -- -------- --------- -------- Outstanding at end of year .. 611,500 -- -- ======== ========= ======== Exercisable at end of year .. 20,000 -- -- ======== ========= ========
Exercise prices for options issued and outstanding at December 31, 1997 were $15.00, except for 8,000 options which were priced at $13.06, and have a remaining contractual life of approximately 9.5 years. Options for 393,500 and 70,000 shares of common stock were available for grant at December 31, 1997 under the Option Plan and Director Option Plan, respectively. The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense has been recognized. Pro forma information regarding net income and net income per share is required by Statement 123, Accounting For Stock Based Compensation, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model assuming a 6% risk-free interest rate, a seven year life for the options, a 30% expected volatility and no dividends. The weighted average grant date fair market value of options issued was approximately $7 per share in 1997. Had this method been used in the determination of pro forma net income for 1997, pro forma net income would have decreased by $586 and pro forma net income per share would have decreased by $0.05. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's option, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. 13. GEOGRAPHIC AREA INFORMATION To date, the Company operates in North America, Europe and Asia. The Company's operations in Asia were not material and have been combined with North America in the following table. 34 36 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. GEOGRAPHIC AREA INFORMATION (CONTINUED) Information regarding geographical areas is as follows:
NORTH AMERICA EUROPE ELIMINATIONS TOTAL ------- ------- ------------ ------- YEAR ENDED DECEMBER 31, 1995 Revenues ................... $37,376 $ 4,133 -- $41,509 ======= ======= ======= ======= Operating profit ........... $ 174 $ 164 -- $ 338 ======= ======= ======= ======= Identifiable assets ........ $19,356 $ 3,090 $ (866) $21,580 ======= ======= ======= ======= YEAR ENDED DECEMBER 31, 1996 Revenues ................... $59,563 $12,021 -- $71,584 ======= ======= ======= ======= Operating profit ........... $ 377 $ 33 -- $ 410 ======= ======= ======= ======= Identifiable assets ........ $21,236 $ 3,459 $(1,716) $22,979 ======= ======= ======= ======= YEAR ENDED DECEMBER 31, 1997 Revenues ................... $79,011 $10,139 -- $89,150 ======= ======= ======= ======= Operating profit ........... $ 4,587 $ 748 -- $ 5,335 ======= ======= ======= ======= Identifiable assets ........ $55,072 $ 4,123 $(1,023) $58,172 ======= ======= ======= =======
14. SIGNIFICANT CLIENTS Two clients accounted for 56.3% and 25.4% of revenues for the year ended December 31, 1997. Two clients accounted for 38.4% and 33.4% of revenues for the year ended December 31, 1996. Two clients accounted for 46.3% and 10.9% of revenues for the year ended December 31, 1995. The loss of one or more of its significant clients could have a material adverse effect on the Company's business, operating results or financial condition. To limit the Company's credit risk, management performs ongoing credit evaluations of its clients and maintains allowances for potentially uncollectible accounts. Although the Company is directly impacted by economic conditions in which its clients operate, management does not believe significant credit risk exists at December 31, 1997. 35 37 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. QUARTERLY DATA (UNAUDITED)
1997 QUARTERS ENDED ------------------------------------------------------ MAR 31 JUN 30 SEPT 30 DEC 31 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Historical: Revenues ................................... $ 16,667 $ 16,067 $ 20,226 $ 36,190 Gross profit ............................... 3,935 3,526 3,920 5,783 SG&A expense ............................... 2,164 1,952 2,135 2,452 Management fee expense ..................... 793 2,333 -- -- Operating profit (loss) .................... 978 (760) 1,785 3,332 Net income (loss) .......................... 894 (642) 1,454 2,452 Net income per share ....................... 0.11 0.18 Shares outstanding ......................... 13,829 13,829 Pro Forma(a): Revenues ................................... $ 16,667 $ 16,067 Gross profit ............................... 3,935 3,526 SG&A expense ............................... 2,164 1,952 Management fee expense ..................... -- -- Operating profit ........................... 1,771 1,574 Net income ................................. 1,058 925 Net income per share ....................... 0.09 0.08 Shares outstanding ......................... 11,362 11,552 Weighted Average Shares Outstanding: Shares outstanding after giving effect to 322.1064 for one stock split effected by a stock dividend ......................... 10,829 10,829 10,829 10,829 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 ........ 533 492 -- -- 3,000 shares issued in connection with initial public offering in June 1997, for days outstanding in the respective periods .................................. -- 231 3,000 3,000 -------- -------- -------- -------- Weighted average shares outstanding ........ 11,362 11,552 13,829 13,829 ======== ======== ======== ========
36 38 STARTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. QUARTERLY DATA (UNAUDITED) (CONTINUED)
1996 QUARTERS ENDED ----------------------------------------------------- MARCH 31 JUNE 30 SEPT 30 DEC 31 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Historical: Revenues ................................ $ 15,219 $ 14,108 $ 15,479 $ 26,778 Gross profit ............................ 2,564 2,987 3,281 5,514 SG&A expense ............................ 1,706 1,857 1,756 2,445 Management fee expense .................. 199 700 498 4,775 Operating profit (loss) ................. 659 430 1,027 (1,706) Net income (loss) ....................... 533 322 958 (1,888) Pro Forma(a): Revenues ................................ $ 15,219 $ 14,108 $ 15,479 $ 26,778 Gross profit ............................ 2,564 2,987 3,281 5,514 SG&A expense ............................ 1,706 1,857 1,756 2,445 Management fee expense .................. -- -- -- -- Operating profit ........................ 858 1,130 1,525 3,069 Net income .............................. 459 641 913 1,881 Net income per share .................... 0.04 0.06 0.08 0.17 Shares outstanding ...................... 11,362 11,362 11,362 11,362 Weighted Average Shares Outstanding: Shares outstanding after giving effect to 322.1064-for-one stock split effected by a stock dividend ...................... 10,829 10,829 10,829 10,829 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 ................ 533 533 533 533 -------- -------- -------- -------- Weighted average shares outstanding ..... 11,362 11,362 11,362 11,362 ======== ======== ======== ========
(a) For 1996 and until the June 1997 initial public offering, the Company was an S corporation and, accordingly, was not subject to federal or state income taxes. Subsequent to the initial public offering, the Company has been subject to income taxation as a C corporation. Pro forma net income for quarters through June 30, 1997 (i) reflects the elimination of management fee expense and (ii) includes a provision for federal, state and foreign income taxes at an effective rate of 37.3%. Management fee expense was discontinued with the initial public offering in June 1997. 37 39 SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) 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) By: /s/ Dennis M. Swenson - ------------------------------------- Dennis M. Swenson Executive Vice President, Chief Financial Officer, Secretary and Treasurer Date: March 31, 1998 - ------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Michael W. Morgan - ------------------------------------- Michael W. Morgan President, Chief Executive Officer and Director (Principal Executive Officer) Date: March 31, 1998 - ------------------------------------- /s/ Dennis M. Swenson - ------------------------------------- Dennis M. Swenson Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 31, 1998 - ------------------------------------- /s/ E. Preston Sumner, Jr. - ------------------------------------- E. Preston Sumner, Jr. Executive Vice President and Chief Operating Officer Date: March 31, 1998 - ------------------------------------- /s/ A. Emmet Stephenson, Jr. - ------------------------------------- A. Emmet Stephenson, Jr. Chairman of the Board Date: March 31, 1998 - ------------------------------------- /s/ Thomas O. Ryder - ------------------------------------- Thomas O. Ryder Date: March 31, 1998 - ------------------------------------- /s/ Ed Zschau - ------------------------------------- Ed Zschau Director Date: March 31, 1998 - ------------------------------------- 38 40 STARTEK, INC. INDEX OF EXHIBITS EXHIBITS - ------------ 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference from Form S-1 Registration Statement filed with the Securities and Exchange Commission on January 29, 1997). 3.2 Restated Bylaws of the Company (incorporated by reference from Form S-1 Registration Statement filed with the Securities and Exchange Commission on January 29, 1997). 4.1 Specimen Common Stock certificate (incorporated by reference from Amendment No. 1 to Form S-1 Registration Statement filed with the Securities and Exchange Commission on March 7, 1997). 10.1 StarTek, Inc. Stock Option Plan (incorporated by reference from Amendment No. 1 to Form S-1 Registration Statement filed with the Securities and Exchange Commission on March 7, 1997). 10.2 Form of Stock Option Agreement (incorporated by reference from Amendment No. 1 to Form S-1 Registration Statement filed with the Securities and Exchange Commission on March 7, 1997). 10.3 StarTek, Inc. Director Stock Option Plan (incorporated by reference from Form S-1 Registration Statement filed with the Securities and Exchange Commission on January 29, 1997). 10.4 Lease by and between East Mercia Developments Limited and StarTek Europe, Ltd. and StarTek USA Inc. (formerly named StarPak International, Ltd. and StarPak, Inc., respectively) (incorporated by reference from Form S-1 Registration Statement filed with the Securities and Exchange Commission on January 29, 1997). 10.5 Promissory Note of StarTek USA, Inc. (formerly named StarPak, Inc.) dated December 29, 1995 in the principal amount of $1,111,844.17 payable to the order of General Communications, Inc. (incorporated by reference from Form S-1 Registration Statement filed with the Securities and Exchange Commission on January 29, 1997). 10.6 HP Purchase Agreement dated September 1, 1995 by and between Hewlett-Packard Company, StarTek USA, Inc. and StarTek Europe, Ltd. (formerly named StarPak, Inc. and StarPak International, Ltd., respectively) (incorporated by reference from Amendment No. 3 to Form S-1 Registration Statement filed with the Securities and Exchange Commission on March 26, 1997). 10.7 Microsoft Supply, Manufacturing and Services Agreement dated March 28, 1996 by and between Microsoft Corporation and StarTek USA, Inc. (formerly named StarPak, Inc.). (Incorporated by reference from Amendment No. 3 to Form S-1 Registration Statement filed with the Securities and Exchange Commission on March 26, 1997.) 10.8 Equipment Lease (Schedule No. 01) between Varilease Corporation, as Lessor, and StarTek USA, Inc. (formerly StarPak, Inc.), as Lessee, dated March 7, 1997 (incorporated by reference from Amendment No. 4 to Form S-1 Registration Statement filed with the Securities and Exchange Commission on May 23, 1997). 10.9 Equipment Lease (Schedule No. 2) between Varilease Corporation, as Lessor, and StarTek USA, Inc. (formerly StarPak, Inc.), as Lessee, dated April 15th, 1997 (incorporated by reference from Amendment No. 4 to Form S-1 Registration Statement filed with the Securities and Exchange Commission on May 23, 1997). 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 (incorporated by reference from Form 10-Q Quarterly Report filed with the Securities and Exchange Commission on November 13, 1997). 10.11 Amendment dated September 30, 1997 to HP Purchase Agreement dated September 1, 1995 by and between Hewlett-Packard Company, StarTek USA, Inc. and StarTek Europe, Ltd. (formerly named StarPak, Inc. and StarPak International, Ltd., respectively) (incorporated by reference from Form 10-Q Quarterly Report filed with the Securities and Exchange Commission on November 13, 1997). *10.12 Standard Form of Agreement Between Owner (StarTek USA, Inc.) and Contractor (Landmark Builders of Greeley, Inc.) dated December 1, 1997. *10.13 HP Master Agreement Technical Support Services dated January 7, 1998 by and between Hewlett Packard Company and StarTek USA, Inc. *21.1 Subsidiaries of the Registrant. *27.1 Financial Data Schedule.
- --------------- * Filed with this report. EX-10.12 2 STANDARD FORM OF AGREEMENT 1 EXHIBIT 10.12 THE AMERICAN INSTITUTE OF ARCHITECTS [LOGO] - -------------------------------------------------------------------------------- AIA Document A101 STANDARD FORM OF AGREEMENT BETWEEN OWNER AND CONTRACTOR where the basis of payment is STIPULATED SUM 1987 EDITION THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES; CONSULTATION WITH AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION. The 1987 Edition of AIA Document A201, General Conditions of the Contract for Construction, is adopted in this document by reference. Do not use with other general conditions unless this document is modified. This document has been approved and endorsed by The Associated General Contractors of America. - -------------------------------------------------------------------------------- AGREEMENT made as of the 1st day of December in the year of Nineteen Hundred and Ninety Seven. BETWEEN the Owner: (Name and address) StarTek USA, Inc. 111 Havana Street Denver, CO 80010 and the Contractor: (Name and address) Landmark Builders of Greeley, Inc. 3812 Carson Street Evans, CO 80620 The Project is: (Name and address) A New Office Building 1250 H Street Greeley, CO 80631 The Architect is: (Name and address) Roberts Architects 809 9th Street Greeley, CO 80631 The Owner and Contractor agree as set forth below. - -------------------------------------------------------------------------------- Copyright 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1967, 1974, 1977, (C)1987 by The American Institute of Architects, 1735 New York Avenue, N.W., Washington, D.C. 20006. Reproduction of the material herein or substantial quotation of its provisions without written permission of the AIA violates the copyright laws of the United States and will be subject to legal prosecution. - -------------------------------------------------------------------------------- AIA DOCUMENT A101 - OWNER-CONTRACTOR AGREEMENT - TWELFTH EDITION - AIA(R) - (C)1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 A101-1987 1 WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO LEGAL PROSECUTION. 2 ARTICLE 1 THE CONTRACT DOCUMENTS The Contract Documents consist of this Agreement, Conditions of the Contract (General, Supplementary and other Conditions), Drawings, Specifications, addenda issued prior to execution of this Agreement, other documents listed in this Agreement and Modifications issued after execution of this Agreement; these form the Contract, and are as fully a part of the Contract as if attached to this Agreement or repeated herein. The Contract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations or agreements, either written or oral. An enumeration of the Contract Documents, other than Modifications, appears in Article 9. The words "Owner" shall be substituted for the word "Architect" wherever it appears in this agreement. ARTICLE 2 THE WORK OF THIS CONTRACT The Contractor shall execute the entire Work described in the Contract Documents, except to the extent specifically indicated in the Contract Documents to be the responsibility of others, or as follows: Per Proposal Dated November 25, 1997 Per Floor Plan Dated November 17, 1997 Per Elevation Plan Dated November 6, 1997 Per Site Plan Dated November 17, 1997 ARTICLE 3 DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION 3.1 The date of commencement is the date from which the Contract Time of Paragraph 3.2 is measured, and shall be the date of this Agreement, as first written above, unless a different date is stated below or provision is made for the date to be fixed in a notice to proceed issued by the Owner. (Insert the date of commencement, if it differs from the date of this Agreement or, if applicable, state that the date will be fixed in a notice to proceed.) Unless the date of commencement is established by a notice to proceed issued by the Owner, the Contractor shall notify the Owner in writing not less than five days before commencing the Work to permit the timely filing of mortgages, mechanic's liens and other security interests. 3.2 The Contractor shall achieve Substantial Completion of the entire Work not later than (Insert the calendar date or number of calendar days after the date of commencement. Also insert any requirements for earlier Substantial Completion of certain portions of the Work, if not stated elsewhere in the Contract Documents.) The Contract Sum will be reduced by $20,000 if substantial completion is not achieved by April 25, 1998, and the contract sum shall be reduced an additional $30,000 if substantial completion is not achieved as of May 2, 1998. If substantial completion in not achieved by May 9, 1998, the contract sum shall be reduced an additional $25,000 for a total of $75,000. If Substantial Completion is not achieved as a result of strikes exceeding 10 days, the aforementioned dates will have added to them the number of strike delay days in excess of 10. , subject to adjustments of this Contract Time as provided in the Contract Documents. (Insert provisions, if any, for liquidated damages relating to failure to complete on time.) 3 ARTICLE 4 CONTRACT SUM 4.1 The Owner shall pay the Contractor in current funds for the Contractor's performance of the Contract the Contract Sum of One Million Eight hundred eighty five thousand seven hundred thirty-two Dollars ($1,885,732.00), subject to additions and deductions as provided in the Contract Documents. 4.2 The Contract Sum is based upon the following alternates, if any, which are described in the Contract Documents and are hereby accepted by the Owner: (State the numbers or other identification of accepted alternates. If decisions on other alternates are to be made by the Owner subsequent to the execution of this Agreement, attach a schedule of such other alternates showing the amount for each and the date until which that amount is valid.) 4.3 Unit prices, if any, are as follows: Adjustments to the Contract Sum will be calculated by multiplying the direct costs of changes by 1.125. 3 4 ARTICLE 5 PROGRESS PAYMENTS 5.1 Based upon Applications for Payment submitted to the Architect by the Contractor and Certificates for Payment issued by the Architect, the Owner shall make progress payments on account of the Contract Sum to the Contractor as provided below and elsewhere in the Contract Documents. 5.2 The period covered by each Application for Payment shall be one calendar month ending on the last day of the month, or as follows: Progress Payments as follows: Progress Payment Request - 25th day of each month 5.3 Provided an Application for Payment is received by the Architect not later than the twenty fifth (25th) day of a month, the Owner shall make payment to the Contractor not later than the tenth (10th) day of the following month. If an Application for Payment is received by the Architect after the application date fixed above, payment shall be made by the Owner not later than fifteen days after the Architect receives the Application for Payment. 5.4 Each Application for Payment shall be based upon the schedule of values submitted by the Contractor in accordance with the Contract Documents. The schedule of values shall allocate the entire Contract Sum among the various portions of the Work and be prepared in such form and supported by such data to substantiate its accuracy as the Architect may require. This schedule, unless objected to by the Architect, shall be used as a basis for reviewing the Contractor's Applications for Payment. 5.5 Applications for Payments shall indicate the percentage of completion of each portion of the Work as of the end of the period covered by the Application for Payment. 5.6 Subject to the provisions of the Contract Documents, the amount of each progress payment shall be computed as follows: 5.6.1 Take that portion of the Contract Sum properly allocable to completed Work as determined by multiplying the percentage completion of each portion of the Work by the share of the total Contract Sum allocated to that portion of the Work in the schedule of values, less retainage of ten percent (10%). Pending final determination of cost to the Owner of changes in the Work, amounts not in the dispute may be included as provided in Subparagraph 7.3.7 of the General Conditions even though the Contract Sum has not yet been adjusted by Change Order; 5.6.2 Add that portion of the Contract Sum properly allocable to materials and equipment delivered and suitably stored at the site for subsequent incorporation in the completed construction (or, if approved in advance by the Owner, suitably stored off the site at a location agreed upon in writing), less retainage of ten percent (10%); 5.6.3 Subtract the aggregate of previous payments made by the Owner; and 5.6.4 Subtract amounts, if any, for which the Architect has withheld or nullified a Certificate for Payment as provided in Paragraph 9.5 of the General Conditions. 5.7 The progress payment amount determined in accordance with Paragraph 5.6 shall be further modified under the following circumstances: 5.7.1 Add, upon Substantial Completion of the Work, a sum sufficient to increase the total payments to Ninety Five percent (95%) of the Contract Sum, less such amounts as the Architect shall determine for incomplete Work and unsettled claims; and 5.7.2 Add, if final completion of the Work is thereafter materially delayed through no fault of the Contractor, any additional amounts payable in accordance with Subparagraph 9.10.3 of the General Conditions. 5.8 Reduction or limitation of retainage, if any, shall be as follows: (If it is intended, prior to Substantial Completion of the entire Work, to reduce or limit the retainage resulting from the percentages inserted in Subparagraphs 5.6.1 and 5.6.2 above, and this is not explained elsewhere in the Contract Documents, insert here provisions for such reduction or limitation.) 4 5 ARTICLE 6 FINAL PAYMENT Final payment, constituting the entire unpaid balance of the Contract Sum, shall be made by the Owner to the Contractor when (1) the Contract has been fully performed by the Contractor except for the contractor's responsibility to correct nonconforming Work as provided in Subparagraph 12.2.2 of the General Conditions and to satisfy other requirements, if any, which necessarily survive final payment; and (2) a final Certificate for Payment has been issued by the Architect; such final payment shall be made by the Owner not more than 30 days after the issuance of the Architect's final Certificate for Payment, or as follows: Final payment is due upon the City of Greeley issuing a Certificate of occupancy and approval of the project by the owner. ARTICLE 7 MISCELLANEOUS PROVISIONS 7.1 Where reference is made in this Agreement to a provision of the General Conditions or another Contract Document, the reference refers to that provision as amended or supplemented by other provisions of the Contract Documents. 7.2 Payments due and unpaid under the Contract shall bear interest from the date payment is due at the rate stated below, or in the absence thereof, at the legal rate prevailing from time to time at the place where the Project is located. (Insert rate of interest agreed upon, if any.) (Usury laws and requirements under the Federal Truth in Lending Act, similar state and local consumer credit laws and other regulations at the Owner's and Contractor's principal places of business, the location of the Project and elsewhere may affect the validity of this provision. Legal advice should be obtained with respect or modifications, and also regarding requirements such as written disclosures or waivers.) 7.3 Other provisions: ARTICLE 8 TERMINATION OR SUSPENSION 8.1 The Contract may be terminated by the Owner or the Contractor as provided in Article 14 of the General Conditions. 8.2 The Work may be suspended by the Owner as provided in Article 14 of the General Conditions. 5 6 ARTICLE 9 ENUMERATION OF CONTRACT DOCUMENTS 9.1 The Contract Documents, except for Modifications issued after execution of this Agreement, are enumerated as follows: 9.1.1 The Agreement is this executed Standard Form of Agreement Between Owner and Contractor, AIA Document A101, 1987 Edition. 9.1.2 The General Conditions are the General Conditions of the Contract for Construction, AIA Document A201, 1987 Edition. 9.1.3 The Supplementary and other Conditions of the Contract are those contained in the Project Manual dated November 25, 1997, and are as follows: DOCUMENT TITLE PAGES Site Plan Dated November 17, 1997 Floor Plan Dated November 17, 1997 Elevation Plan Dated November 6, 1997 9.1.4 The Specifications are those contained in the Project Manual dated as in Subparagraph 9.1.3, and are as follows: (Either list the Specifications here or refer to an exhibit attached to this Agreement.) SECTION TITLE PAGES Per proposal dated November 25, 1997 6 7 9.1.5 The Drawings are as follows and are dated November 17, 1997 unless a different date is shown below: (Either list the Drawings here or refer to an exhibit attached to this Agreement.) NUMBER TITLE DATE Proposal dated November 25, 1997 Elevation Plan dated November 6, 1997 9.1.6 The addenda, if any, are as follows: NUMBER DATE PAGES None Portions of addenda relating to bidding requirements are not part of the Contract Documents unless the bidding requirements are also enumerated in this Article 9. - ------------------------------------------------------------------------------ AIA DOCUMENT A101 o OWNER-CONTRACTOR AGREEMENToTWELFTH EDITIONoAIA(R)o(C)1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 WARNING UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO LEGAL PROSECUTION. A101-1987 7 8 9.1.7 Other documents, if any, forming part of the Contract Documents are as follows: (List here any additional documents which are intended to form part of the Contract Documents. The General Conditions provide that bidding requirements such as advertisement or invitation to bid, instructions to Bidders, sample forms and the Contractor's bid are not part of the Contract Documents unless enumerated in this Agreement. They should be listed here only if intended to be part of the Contract Documents.) None This Agreement is entered into as of the day and year first written above and is executed in at least three original copies of which one is to be delivered to the Contractor, one to the Architect for use in the administration of the Contract, and the remainder to the Owner. OWNER -- STARTEK USA, INC. CONTRACTOR -- LANDMARK BUILDERS OF GREELEY INC. By: /s/ E. PRESTON SUMNER, JR. By: /s/ DENNIS WERNSMAN -------------------------- -------------------------- (Signature) (Signature) E. PRESTON SUMNER, JR., EXECUTIVE VICE PRESIDENT DENNIS WERNSMAN, PRESIDENT - ----------------------------- ----------------------------- (Printed name and title) (Printed name and title) [AIA] CAUTION: YOU SHOULD SIGN AN ORIGINAL AIA DOCUMENT WHICH HAS THIS CAUTION PRINTED IN RED. AN ORIGINAL ASSURES THAT CHANGES WILL NOT BE OBSCURED AS MAY OCCUR WHEN DOCUMENTS ARE REPRODUCED. - ------------------------------------------------------------------------------ AIA DOCUMENT A101 o OWNER-CONTRACTOR AGREEMENT o TWELFTH EDITION o AIA(R) o (C) 1987 THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE, N.W., WASHINGTON, D.C. 20006 WARNING UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND IS SUBJECT TO LEGAL PROSECUTION. A101-1987 8 EX-10.13 3 HP MASTER AGREEMENT TECHNICAL SUPPORT SERVICES 1 EXHIBIT 10.13 MASTER AGREEMENT TECHNICAL SUPPORT SERVICES This Master Agreement is entered into by and between Hewlett-Packard Company ("HP"), located at 11311 Chinden Boulevard, Boise, ID 83714 and StarTek USA, Inc. ("Seller"), located at 111 Havana Street, Denver, CO 80010. The Terms and Conditions herein constitute the Master Agreement for all call center activity between HP and the Seller. To the extent that the terms and conditions of a Program Specification Document are intended to supersede the terms and conditions contained in this Master Agreement, the Program Specification Document must expressly and clearly state which terms and conditions in this Master Agreement are being superseded. 1. NOTICES Any notices sent by the Seller pursuant to this Master Agreement are to be sent to the HP address specified in this Agreement to the attention of the contract manager. 2. CHOICE OF LAW This Agreement shall be interpreted and governed in all respects by the laws of the State of Idaho. 3. TERM 3.1. This shall be a twelve (12) month Agreement for the period of December 1, 1997 to November 30, 1998, inclusive. Either party may, at any time, terminate this Agreement in writing upon sixty (60) days prior notice. If no such notice is given, this Agreement will expire on the first (1st) anniversary of the commencement date. HP shall be liable only for payment in accordance with the provisions of this Agreement for work performed prior to the effective date of termination. 3.2. 60 days prior to the expiration date of this Agreement, HP and the Seller will each provide notification to the other party of their intent regarding continuation of the relationship. This intent may include: renewal of the terms and conditions contained in this document, re-negotiation of the terms and conditions of the relationship, or termination of the relationship. 3.3. If the expiration date of this Agreement is reached and HP and the Seller are in the process of renegotiating the terms and conditions of the relationship, the terms of this agreement may be extended on a month-to-month basis contingent upon the mutual written agreement of HP and the Seller. 4. DEFINITIONS 4.1. Definitions in addition to the terms defined in the Agreement: 4.1.1. "US PSD Support" - Hewlett-Packard's Products Support Division in Boise, Idaho and Loveland, Colorado. 4.1.2. "CSC" - Hewlett-Packard's Customer Support Center in Boise, Idaho and Loveland, Colorado. 4.1.3. "Customers" - end-users of Hewlett-Packard products or services. Additionally, customers may be Hewlett-Packard resellers, Hewlett-Packard employees, HP OEMs (Original Equipment Manufacturers), HP TPMs (Third Party Maintainers) and Hewlett-Packard sales force representatives who are contacting Seller for services specified in this agreement or in Program Specific Documents. 4.1.4. "Program Specification Document" - Attachments to this agreement that specify scope of work and pricing for individual projects delivered by Seller. 4.1.5. "The Work" - The services performed by the Seller as described in this Agreement and its attachments shall hereinafter be referred to as "the work". Agreement for Technical Support 3/27/98 Hewlett-Packard/StarTek Services Addendum C page 1 of 10 2 4.1.6. "CIMS" - the Customer Information Management System call tracking system owned by HP and used by Seller. 4.1.7. "SEARCH 97" - a knowledge base tool owned by HP and used by Seller. 4.1.8. "Technician" or "Agent"- interchangeable terms referring to a Seller employee whose primary responsibility is answering Customer inquiries on HP products or services. 4.1.9. "Talk-time" - the amount of time a Technician spends talking to customers. This is measured on a per call or per day basis. 4.1.10. "After call work time" or "Wrap up time" interchangeable terms referring to the amount of time spent by a Technician capturing call information after the customer / Technician conversation has ended. 4.1.11. "Transaction Time" - the sum of "talk time" plus "wrap up time". 4.1.12. "Availability" - the amount of time when a Technician is logged on to the phone system and is ready to accept a call from a customer but there are no calls from customers waiting to be handled. 4.1.13. "Idle" - the amount of time when an agent is logged on to the phone system but is not ready to accept an incoming call from a customer. 4.1.14. "Scheduled On-line time" - the amount of time a Technician is scheduled to be on the phone ready to take calls from customers. 4.1.15. "Off-line time" - the amount of time a Technician is not scheduled to be on the phone ready to take calls from customers. 4.1.16. "Silent Monitor" - a quality call measure performed by listening to live agent calls as they happen. This may be performed at any time but will occur at least on a monthly basis. 4.1.17. "Current HP Products" - those HP products where support is provided to the end user without charge. 4.1.18. "Fee Based Product" - those HP products where supported is provided to end users for a fee. 4.1.19. "Minutes per Day" - total minutes for the month divided by the number of days service was provided during the month. 5. SERVICES PROVIDED 5.1. SERVICE DESCRIPTION This Agreement covers the answering and processing of telephone calls and facsimile requests from HP customers. These processes shall all take place in a Seller owned facility. A detailed listing of responsibilities is included in the attached Program Specification Documents. 5.2. PRODUCTS Seller will provide Services for all products listed on Exhibits attached to the Program Specification Document. An Exhibit for each Product and or Product family, for which Seller will provide Services, may be attached to the Program Document. The Exhibit may include but is not limited to: the performance commitments, service level, hours of operation, call tracking, training requirements and reporting requirements and any other product specific services agreed upon by the parties. Additional Products may be added to this Agreement by Exhibit, at any time with mutual written consent of parties. 5.3. CALL TRANSFERS AND CALL REFERRALS The Seller may be required to transfer or refer the Customer to other HP locations. These may include, but are not limited to, transfers to the Customer Support Center, HP product repair facilities, HP driver distribution facilities, HP dealer locator services, and HP bulletin board services, Service Parts ID (SPI), Direct Marketing Organization (DMO), and Order Fulfillment Center (OFC). Details of call transfers or referrals will be spelled out in the Program Specification Documents. 6. RELATIONSHIP OF THE PARTIES Agreement for Technical Support 3/27/98 Hewlett-Packard/StarTek Services Addendum C page 2 of 10 3 6.1. The relationship of the parties to this Agreement is that of owner and contracting firm. 6.2. Seller shall neither assign any rights nor delegate any duties under this Agreement without the prior written consent of HP. This prohibition extends to all assignments and delegations that may be prohibited by agreement. Seller shall not subcontract any of the work without the prior consent of HP. If HP consents to the use of a subcontractor, such subcontractor shall be bound by the terms and conditions of this Agreement as an agent of the Seller. 6.3. The Seller shall be solely responsible for any and all employment related taxes, insurance premiums, or other employment benefits related to the Seller's performance of services under this Agreement, and shall hold HP harmless on account thereof. 7. TRANSPARENCY OF SELLER TO HP CUSTOMERS The Seller will provide support in a manner in which the origin of the support is transparent to HP Customers. Generally, Customers are not to know whether they are speaking with HP or with the Seller acting on behalf of HP. 7.1. Generically, technicians will answer the phone "Thank you for calling Hewlett-Packard Support, my name is 'technician name'". More specific salutations are included in the attached Program Specification Documents. 7.2. In the event that a customer specifically asks the seller technician of their employment status, the response shall be "I am an employee of StarTek USA, Inc. who has contracted with Hewlett-Packard to provide certain services". 8. HP BUSINESS FORECASTS All business volume forecasts provided by HP pursuant to this Agreement are only estimates, and shall not be construed to be commitments to a certain level of business, and may be revised by HP as business requirements change. All Forecasts are confidential. 9. PRICING 9.1. REVIEW PERIOD The price for project start-up costs, facsimile services and teleservices is in U.S. dollars, unless otherwise stated, and shall remain in effect during the term of this Agreement. Price changes must be agreed to in writing by both HP and Seller. 9.2. PAYMENT HP shall pay Seller fees for services detailed in this Agreement in accordance with the fee schedules in the Program Specification Documents. Seller shall bill HP at the end of each calendar month, based upon actual costs incurred during that month, and HP shall pay such invoices net 37 days after receipt of an appropriate invoice from Seller. 10. PERSONNEL REQUIREMENTS AND SELLER EMPLOYEE CONDUCT 10.1. LIST OF PERSONNEL 10.1.1. Prior to the start of work, and subsequently as personnel are added, Seller shall submit to HP a list of Seller's personnel who will perform any portion of the work. This list shall state the names of each Seller employee assigned. Prior to granting new personnel access to HP confidential information or proprietary HP computer systems, Seller will ensure that each Seller employee assigned is made aware of and understands the Confidential Disclosure Agreement between HP and the Seller and its applicability to the Seller's employees. 10.2. SUPERVISION All persons engaged in the work described in this Agreement shall be subject to the direction, supervision, and control of the Seller. Seller shall enforce strict discipline and good order among Seller's employees and agents at all times during the performance of this work. Seller shall assure that all persons involved in the work are appropriately skilled for that portion of the work assigned to them. 10.3. SELLER'S EMPLOYEE OBLIGATIONS Agreement for Technical Support 3/27/98 Hewlett-Packard/StarTek Services Addendum C page 3 of 10 4 When Seller employees are visiting an HP location, all employees of the Seller are obliged and required to follow all written/verbal HP plant, safety and security rules in place while on the premises of HP. 10.4. SELLER EMPLOYEE CONDUCT Seller employees who work directly with HP customers will be required to understand and abide by certain sections of the HP Standards of Business Conduct when interacting with HP Customers on behalf of HP. The pertinent sections of the HP Standards of Business Conduct are attached to this agreement as Addendum B. 10.5. SELLER ACCESS TO HP PROPRIETARY DATABASES AND DOCUMENTATION The Seller will, during the undertaking of the processes defined in this agreement, have access to HP confidential and proprietary databases and documentation which are necessary for the successful completion of such processes. Seller's obligations regarding treatment of this data are detailed in the Electronic Communication Confidential Disclosure Agreement (Addendum A). 11. INSPECTION AND AUDIT 11.1. HP shall have the right to physically inspect at will the teleservices processes being performed by the Seller. HP shall also have the right to perform audits to ensure that customer service, quality, process, and business controls are maintained. HP may perform this inspection either by monitoring the seller's performance in person, at the seller's place of business, or by remote silent monitoring of seller's employees' incoming telephone calls from HP customers. HP's inspection may be for any purpose reasonably related to this Agreement including, without limitation, to assure Seller's compliance with HP's quality requirements. 11.2. HP may periodically place simulated calls to the Seller as a means of auditing the quality of the service provided by the Seller. 11.3. HP may conduct periodic Customer surveys to determine the quality of the service provided by the Seller. 11.4. In order to verify the financial stability of the Seller's corporation, the Seller will provide HP with annual audited financial results each year the technical support relationship remains in effect. 11.5. HP may periodically audit StarTek USA, Inc.. These audits will focus on both process and HP call volume issues. HP will provide StarTek USA, Inc. 15 days advance notice prior to an audit. 12. PHONE CALL RECORDING NOTIFICATION 12.1. If the initial phone call terminates within the Seller's phone switch, the Seller's VRU must contain clear notification to Customers that phone calls may be recorded. This notification must occur immediately after the initial VRU salutation. This notification and the timing thereof must comply with all applicable laws, rules and regulations. 12.2. Sample VRU scripting: "Thank you for calling Hewlett-Packard Technical Support. To ensure high quality service, your call may be monitored or recorded." Specific VRU scripting will be specified in the attached Program Specification Documents. 13. HP EQUIPMENT HP may provide equipment to Seller for the purposes of fulfilling the requirements of this agreement. This equipment will remain the sole property of Hewlett-Packard and shall only be provided to the Seller on an "on loan" basis. In the event that HP does provide equipment or other materials for use by Seller, the HP equipment shall: 13.1. Be clearly marked or tagged as property of HP. 13.2. Be subject to inspection by HP at any time. 13.3. Be used only in servicing HP customer needs. Agreement for Technical Support 3/27/98 Hewlett-Packard/StarTek Services Addendum C page 4 of 10 5 13.4. Be reasonably separated from other materials, tools, or property of Seller or held by Seller. 13.5. Not be modified in any manner by Seller unless so directed by HP. 13.6. Have periodic maintenance performed by Seller. 13.7. Be kept free of liens and encumbrances which may arise due to actions of Seller. 13.8. Be returned, in good working condition, to HP promptly upon HP's request or upon termination of this agreement. 13.9. The Seller will maintain an inventory list of HP owned equipment and will audit the inventory of HP equipment biannually. Results of the biannual inventory audit will be reported to HP. 14. DISASTER RECOVERY 14.1. The Seller will have disaster recovery plans in effect at all times and provide disaster recovery plans to HP upon request. These will address the Seller's disaster avoidance plan and contingency plans in the event phone service, computer activity, or facility power is interrupted. 14.2. The Seller will notify HP immediately after identifying any occurrence which has interrupted or will interrupt the ability of the Seller perform the services described in this agreement or the attached program specification documents. 15. INDEMNIFICATION 15.1. RESPONSIBILITIES OF PARTIES a) Seller shall defend, indemnify and hold harmless HP from and against any and all claims, losses, demands, reasonable attorney fees, damages, liabilities, costs, expenses, obligations, causes of action or suits; b) For damage or injury (including death) to any person (including employees) or damage to or loss of any property; o arising out of or resulting from any negligent or criminal act or omission by the Seller or its employees or agents; o arising out of or relating to a failure by the Seller to comply with any applicable federal, state or local law, regulation, order, judgment or decree; o arising out of or resulting from breach by the Seller of obligations under this Agreement; o arising out of any act by the Seller not authorized by this Agreement. 15.2. NOTIFICATION Seller shall promptly notify HP in writing if Seller becomes aware of any matter as to which the above indemnification obligation relates. 15.3. DEFENSE OF CLAIMS HP shall promptly notify the Seller of the existence of any claim, demand, or other matter requiring a defense to which the Seller's obligations under this section would apply. HP shall give the Seller a reasonable opportunity to defend the claim, demand or matter at the Seller's own expense and with counsel selected by the Seller and satisfactory to HP; provided that HP shall at all times also have the right to fully participate in the defense at its own expense. HP shall provide Seller with reasonable assistance and information necessary to respond to and defend such claim, comment, demand or other matter. Any such claim, demand or other matter shall not be settled or compromised without the consent of HP - such consent will not be unreasonably withheld; If the Seller shall, within a reasonable time after the receipt of the notice, fail to defend, HP shall have the right, but not the obligation, to undertake the defense, and to compromise or settle, exercising reasonable business judgment, the claim, demand or other matter on behalf, for the account and at the risk of the Seller. If the claim is one Agreement for Technical Support 3/27/98 Hewlett-Packard/StarTek Services Addendum C page 5 of 10 6 that cannot by its nature be defended solely by the Seller (including, without limitation, any federal or state proceeding), HP shall make available, or cause to be made available, all information and assistance that the Seller may reasonably request as reasonably related to the defense of the claim. 15.4. LIMITATION OF LIABILITY. Seller's liability to HP customers herein shall in no event exceed the liability that HP would have to its customers if HP were providing the services to be performed by Seller hereunder. NEITHER SELLER NOR HP SHALL BE LIABLE TO THE OTHER FOR INCIDENTIAL, CONSEQUENTIAL, EXEMPLARY, INDIRECT OR SPECIAL DAMAGES OF ANY KIND, INCLUDING WITHOUT LIMITATION, LOSS OF PROFITS, SAVINGS, OR REVENUES WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH LOSS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY ARISING OUT OF THIS AGREEMENT. 16. EXCLUSIVITY 16.1. To ensure HP proprietary information, Seller will not perform technical support activities for products of companies that are direct competitors of the HP products covered in the Program Specification Document at the same site. If Seller is approached by a company whose competitors status with HP is unclear, Seller will notify HP and HP will make the determination of that company's competitor status. 16.2. While this Agreement is in effect, Seller Technicians will perform service exclusively for HP. If the business under this Agreement is insufficient to keep all Technicians assigned hereto busy, such Agents shall be reassigned to another HP project or programs pursuant to another program specification document between HP or other division of HP and Seller. 17. INFORMATION OWNERSHIP AND USE 17.1. During the term of this Agreement HP will supply significant documentation to the Seller. Additionally, documentation and information will be created, both by HP and the Seller. This documentation and information will reside in various forms, including: Search 97 database, HP developed support notes, Seller developed support notes, call tracking systems, product manuals, etc. 17.1.1. HP will retain ownership of all information provided by HP. 17.1.2. HP will assume ownership of all information created by the Seller as a result of the activity described in this Agreement. 17.1.3. The Seller may not use HP documentation or information for any activity outside those activities intended by this Agreement. 17.1.4. Seller will provide HP with unlimited access to all information held at the Seller's location that directly relates to the Work or to HP. 17.2. All information provided by HP or collected by the Seller will be considered confidential and will be handled by the Seller as HP Confidential Information, otherwise described in section 18 of this Agreement. 17.3. HP reserves the right to review and approve or disapprove any documentation created by the Seller for use in this project. 18. CONFIDENTIAL INFORMATION 18.1. CONFIDENTIAL DISCLOSURE AGREEMENT A Confidential Disclosure Agreement must be in place and/or updated and signed by the appropriate company representatives when confidential information is shared and identified. The consistent terms of any Confidential Disclosure Agreement are hereby incorporated by reference in this Agreement. 18.2. DEFINITION OF CONFIDENTIAL INFORMATION Seller shall not disclose to any person or entity, except as necessary to perform work under this Agreement, any confidential information of HP, whether written or oral, which Agreement for Technical Support 3/27/98 Hewlett-Packard/StarTek Services Addendum C page 6 of 10 7 Seller may obtain from HP or otherwise, discover. As used in this article, the term "confidential information" shall include, without limitation: a) All information or data concerning or related to HP products (including the discovery, invention, research, improvement, development, manufacture, or sale of HP products) or business operations (including sales costs, profits, pricing methods, organizations, employee or customer lists and processes, whether oral , written or in computer readable format); b) All forecasts for production, support, or service requirements submitted by HP pursuant to this Agreement, whether oral, written, or communicated in computer-readable format; and c) All HP software or other property of a confidential nature, including without limitation, any and all software tools and databases provided. Such software and any and all copies thereof shall remain the sole property of HP. 18.3. RELATIONSHIP EXISTENCE HP's expectation is that this relationship will remain confidential. The existence of this relationship or terms of this Agreement will not be disclosed without prior written approval from an HP division general manager or HP vice president except as may be required by the United States Securities Laws or other laws, in which case Seller will maximize HP's confidentiality which may be available under the law. 18.4. SEPARATION OF BUSINESS HP business and information related to HP business will be physically and logically separated from other Seller business and information. The Seller will provide proof of this separation to HP. 18.5. ACCESS Seller shall maintain all confidential information in strict confidence. Seller shall take all reasonable steps to ensure that no unauthorized person or entity has access to confidential information, and that all authorized persons having access to confidential information refrain from any unauthorized disclosure. Seller may only use the confidential information for the purposes set forth herein and for no other purpose, and may only make copies of any software provided if expressly authorized by HP in writing and in any case only as reasonable necessary by Seller to perform its obligations hereunder. 18.6. EXCLUSIONS These provisions related to confidential information shall not apply to any information that a) Is rightfully known to Seller prior to disclosure by HP; b) Is rightfully obtained by Seller from any third party without any obligation of confidentiality; c) Is made available by HP to the public without restrictions; d) Is disclosed by Seller with the prior written approval of HP; or e) Is independently developed by Seller. 18.7. DOCUMENTATION HP shall provide any proprietary or non-proprietary documentation to Seller regarding the products and parts deemed necessary by HP to give customer service for such products and parts. All documentation provided by HP or created by the Seller as a result of this Agreement shall be treated by the Seller as HP confidential information. 18.8. SURVIVAL OF SECTION This section "Confidential Information" of this Agreement shall survive the termination of this Agreement, and remain in force perpetually unless HP agrees otherwise in writing. 19. CONTINGENCIES 19.1. DELAYING CAUSES Seller shall not be liable for any delay in performance under this Agreement caused by an act of God or any other cause beyond Seller's control and without Seller's fault or Agreement for Technical Support 3/27/98 Hewlett-Packard/StarTek Services Addendum C page 7 of 10 8 negligence (collectively "delaying cause"). Seller shall, in the event of a delaying cause, immediately give notice to HP of that cause. 19.2. HP'S RIGHTS In the event of a delaying cause, HP may elect in its sole discretion to suspend the Agreement in whole or in part for the duration of the delaying cause; or terminate this Agreement or any part thereof. 20. DEFAULT 20.1. HP'S RECOURSE If the Seller fails to perform or breaches any material provision of this Agreement, HP may provide written notice to the Seller of such failure to perform or breach, and Seller must provide a written response within ten (10) days from HP's written notice, and cure the failure to perform or breach within thirty (30) days from the receipt of such written notice or HP may terminate the whole or any part of this Agreement. Further, if voluntary bankruptcy proceedings are instituted against Seller and not discharged within sixty (60) days, HP may, except as otherwise prohibited by United States Bankruptcy laws, terminate the whole or any part of this Agreement. 20.2. PROCUREMENT OF SERVICES In the event that HP terminates this Agreement in whole or in part, as provided in this section on Default, HP may procure, upon such terms and in such manner as HP deems appropriate, services similar to the services as to which this Agreement is terminated. Seller shall reimburse HP upon demand for all startup costs incurred by HP in purchasing such similar services. 20.3. RIGHTS OF LAW The rights and remedies granted to HP pursuant to this Agreement are in addition to, and shall not be deemed to limit or affect, any other rights or remedies available at law or in equity. 21. PROGRAM CONTACTS 21.1. Written correspondence regarding this Master Agreement should be addressed as follows: If to HP: Hewlett-Packard Company Customer Support Center Attn: Heidi Van Stone 11311 Chinden Blvd. MS 516 Boise, ID 83714 If to Seller: StarTek USA, Inc. Attn: Preston Sumner 111 Havana Street Denver, CO 80010 Or: Bill Pringle 237 22nd Street Greeley, CO 80631 21.2. Electronic mail correspondence regarding this Master Agreement should be addressed as follows: Agreement for Technical Support 3/27/98 Hewlett-Packard/StarTek Services Addendum C page 8 of 10 9 If to HP: heidi_vanstone@hp.com If to Seller: psumner@Startek.net bpringle@Startek.com 21.3. Telephone contacts regarding this Agreement are: HP Heidi Van Stone (208) 333-6456 --------------------- FAX number (208) 333-3692 -------------------------- Seller ------ Preston Sumner (303) 739-4991 ---------------------- FAX number (303) 739-4584 -------------------------- Bill Pringle (970) 339-7251 ------------------------ FAX number (970) 339-7171 -------------------------- 21.4. Contacts regarding specific work performed by the Seller shall be called out in the Program Specification Documents. 22. USE OF THE HEWLETT-PACKARD NAME AND TRADEMARKS 22.1. The Fulfillment Contractor Trademark Agreement between StarTek USA, Inc. (formally known as StarPak) dated May 6, 1991, governs the use of HP trademarks by StarTek USA, Inc.. 22.2. HP grants to Seller a personal non-exclusive license to use the trademarks identified below in conjunction with the services performed pursuant to this Agreement provided that Seller and Seller's agents meet the HP quality requirements set out in this Agreement or otherwise set by HP. In connection with the use of these trademarks, Seller shall not represent that Seller has any ownership in the Trademarks, Seller will not attempt to register the mark in any form, and the parties acknowledge that the use of the Trademarks shall be only for the benefit of HP. HP may terminate this license immediately if Seller does not meet the HP quality requirements or if this agreement is terminated. Seller shall indemnify HP from any cost, claims or damages arising from the intentional acts of Seller or its agents relating to the use of the Trademark in any manner except as permitted by this Agreement. 22.3. Trademarks authorized for use by Seller: "HP", "Hewlett-Packard". 23. PRECEDENCE 23.1. The provisions of this Agreement and the attached exhibits and addenda hereto take precedence over the Seller's additional or different terms and conditions, to which notice of objection is hereby given. 23.2. This Agreement comprises the entire understanding between the parties and supersedes any previous or contemporaneous communications, representations, or contracts, whether oral or written. No change or modification of any of the terms and conditions herein shall be valid or binding on either party unless in writing and signed by an authorized representative of each party. 23.3. In the event of any conflict between the provisions of this Agreement and any addenda or attachments, the order of precedence is as follows: 23.3.1. This Agreement and any modifications to this Agreement ; 23.3.2. The applicable addenda to this Agreement and any modifications to the addenda; Agreement for Technical Support 3/27/98 Hewlett-Packard/StarTek Services Addendum C page 9 of 10 10 23.3.3. Any Program Specification Documents for specific work. 24. ADDENDA ATTACHED All addenda to this Agreement shall be deemed a part of this Agreement and incorporated herein. Terms which are defined in this Agreement, and used in any addendum, have the same meaning in the addendum as in the Agreement. The following addenda are hereby made a part of this Agreement: Addendum A -- Confidential Disclosure Agreement Addendum B -- HP Standards Of Business Conduct Addendum C -- HP Information Assets Access Agreement IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their duly authorized representatives. Hewlett-Packard Company StarTek USA, Inc. By: Lyle Hurst By: Preston Sumner Title: General Manager Title: Chief Operating Officer Signature: /s/ Lyle Hurst Signature: /s/ Preston Sumner ----------------------------------------- --------------------------------- Date Signed: 1/7/98 Date Signed: 12/12/97 ----------------------------------------- ---------------------------------
Agreement for Technical Support 3/27/98 Hewlett-Packard/StarTek Services Addendum C page 10 of 10 EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT NAME OF STATE OF SUBSIDIARIES SUBSIDIARIES INCORPORATION ARE DOING BUSINESS - ---------------- ------------------- -------------------------------- StarTek USA, Inc. (formerly named StarPak, Inc.) Colorado StarTek Teleservices, Inc. StarTek Technical Services, Inc. StarTek Internet, Inc. StarTek, Inc. StarTek Europe, Ltd. (formerly named StarTek International, Ltd.) Colorado StarPak, Inc. EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 26,960 7,356 13,051 383 2,539 50,018 13,647 5,496 58,172 11,314 556 0 0 138 42,868 58,172 0 89,150 0 71,986 10,398 125 373 6,268 2,110 4,158 0 0 0 4,158 0 0 PRO FORMA NET INCOME IS $5,890 (REFLECTS ELIMINATION OF MANAGEMENT FEE EXPENSE AND PROVIDES INCOME TAXES AT 37.3% EFFECTIVE RATE). PRO FORMA NET INCOME PER SHARE - PRIMARY $0.47. PRO FORMA NET INCOME PER SHARE - FULLY DILUTED $0.47.
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