-----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, If4Jn1GT8/ff4i9brMBx5R9oR0x8uAIk1TABDil3uOTGfr0SywGxCngnxbM3vCR9 OBSNt/HpttDNeJgWf+Nh0A== 0000950134-99-010144.txt : 19991117 0000950134-99-010144.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950134-99-010144 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 001-12793 FILM NUMBER: 99754323 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-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1999. ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . ------- -------- Commission File Number 1-12793 ------- STARTEK, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 84-1370538 - --------------------------------------------------------------- --------------------------------------------------------- (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
111 HAVANA STREET DENVER, COLORADO 80010 ---------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (303) 361-6000 - -------------------------------------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE - -------------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value-- 13,985,701 shares as of November 14, 1999. 2 STARTEK, INC. FORM 10-Q INDEX
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets - December 31, 1998 and September 30, 1999 3 Condensed Consolidated Statements of Operations - Three months ended September 30, 1998 and 1999; Nine months ended September 30, 1998 and 1999 4 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk 16 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) STARTEK, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (dollars in thousands)
DECEMBER 31 SEPTEMBER 30 1998 1999 ----------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 19,593 $ 20,745 Investments 16,829 25,936 Trade accounts receivable, less allowance for doubtful accounts of $441 and $774, respectively 20,476 18,235 Inventories 2,772 2,592 Deferred tax assets 1,135 1,772 Prepaid expenses and other 165 217 Prepaid income taxes -- 30 ----------- ------------ Total current assets 60,970 69,527 Property, plant and equipment, net 19,171 21,660 Investment in Good Catalog Company, at cost -- 2,606 Note receivable from Good Catalog Company -- 7,818 Other assets 60 171 =========== ============ Total assets $ 80,201 $ 101,782 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 17,433 $ 17,474 Accrued liabilities 2,092 4,441 Income taxes payable 1,944 -- Current portion of capital lease obligations 46 33 Due to Good Catalog Company -- 10,424 Current portion of long-term debt 906 950 Other 213 606 ----------- ------------ Total current liabilities 22,634 33,928 Capital lease obligations, less current portion 77 51 Long-term debt, less current portion 3,196 2,488 Deferred income taxes 144 620 Other 17 -- Stockholders' equity: Common stock 138 139 Additional paid-in capital 41,661 44,267 Cumulative translation adjustment 167 109 Unrealized loss on investments available for sale (606) (546) Retained earnings 12,773 20,726 ----------- ------------ Total stockholders' equity 54,133 64,695 =========== ============ Total liabilities and stockholders' equity $ 80,201 $ 101,782 =========== ============
See notes to condensed consolidated financial statements. 3 4 STARTEK, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (dollars in thousands, except per share data) (unaudited)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30 ---------------------------------- ---------------------------------- 1998 1999 1998 1999 -------------- --------------- --------------- -------------- Revenues $ 31,617 $ 52,279 $ 80,630 $ 138,852 Cost of services 25,796 42,589 65,561 112,969 -------------- --------------- --------------- -------------- Gross profit 5,821 9,690 15,069 25,883 Selling, general and administrative expenses 3,483 5,576 9,500 15,207 -------------- --------------- --------------- -------------- Operating profit 2,338 4,114 5,569 10,676 Net interest income and other 436 752 1,680 2,022 -------------- --------------- --------------- -------------- Income before income taxes 2,774 4,866 7,249 12,698 Income tax expense 987 1,830 2,612 4,745 ============== =============== =============== ============== Net income $ 1,787 $ 3,036 $ 4,637 $ 7,953 ============== =============== =============== ============== Earnings per share: Basic $ 0.13 $ 0.22 $ 0.34 $ 0.57 Diluted $ 0.13 $ 0.21 $ 0.34 $ 0.57
See notes to condensed consolidated financial statements. 4 5 STARTEK, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (dollars in thousands) (unaudited)
NINE MONTHS ENDED SEPTEMBER 30 ---------------------- 1998 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,637 $ 7,953 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,982 3,399 Deferred income taxes (241) (205) (Gain) loss on sale of assets (113) 3 Changes in operating assets and liabilities: Purchases of trading securities, net -- (3,341) Accounts receivable (137) 2,241 Inventories (842) 180 Prepaid expenses and other assets (295) (163) Prepaid income taxes -- (30) Accounts payable 2,304 41 Income taxes payable 93 (1,944) Accrued and other liabilities 309 2,793 -------- -------- Net cash provided by operating activities 7,697 10,927 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (12,767) (5,980) Proceeds from disposition of property, plant and equipment 181 2 Purchases of investments available for sale (5,937) (19,206) Proceeds from disposition of investments available for sale -- 13,532 -------- -------- Net cash used in investing activities (18,523) (11,652) CASH FLOWS FROM FINANCING ACTIVITIES Stock options exercised -- 2,607 Proceeds from (principal payments on) borrowings, net 101 (664) Principal payments on capital lease obligations (63) (13) -------- -------- Net cash provided by financing activities 38 1,930 Effect of exchange rate changes on cash 12 (53) -------- -------- Net (decrease) increase in cash and cash equivalents (10,776) 1,152 Cash and cash equivalents at beginning of period 26,960 19,593 -------- -------- Cash and cash equivalents at end of period $ 16,184 $ 20,745 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 23 $ 214 Income taxes paid $ 2,375 $ 5,808 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY Change in unrealized loss on investments available for sale, net of tax $ (648) $ 60
See notes to condensed consolidated financial statements. 5 6 STARTEK, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (dollars in thousands, except per share data) (unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999, or for any other interim period of 1999. The balance sheet as of December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in StarTek, Inc.'s annual report on Form 10-K for the year ended December 31, 1998. 2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, ("SFAS No. 133") "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allow a derivative's gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. SFAS No. 133 is effective for fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements and has not determined the timing or method of adoption of SFAS No. 133. 3. EARNINGS PER SHARE Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options using the "treasury stock" method. The components of basic and diluted earnings per share were:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------------- --------------------------- 1998 1999 1998 1999 ----------- ----------- ----------- ----------- Net income (A) $ 1,787 $ 3,036 $ 4,637 $ 7,953 ----------- ----------- ----------- ----------- Weighted average shares of common stock (B) 13,828,571 13,856,554 13,828,571 13,839,226 Dilutive effect of stock options -- 334,806 -- 172,354 ----------- ----------- ----------- ----------- Common stock and common stock equivalents (C) 13,828,571 14,191,360 13,828,571 14,011,580 =========== =========== =========== =========== Earnings per share: Basic (A/B) $ 0.13 $ 0.22 $ 0.34 $ 0.57 Diluted (A/C) $ 0.13 $ 0.21 $ 0.34 $ 0.57
6 7 STARTEK, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (continued) (dollars in thousands, except per share data) (unaudited) 4. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement No. 130, ("SFAS No. 130") "Reporting Comprehensive Income", which was effective in 1998 for the Company. SFAS 130 establishes rules for the reporting and display of comprehensive income. Comprehensive income is defined essentially as all changes in stockholders' equity, exclusive of transactions with owners. Comprehensive income was $1,322 and $2,815 for the three months ended September 30, 1998 and 1999, respectively. Comprehensive income was $4,001 and $7,955 for the nine months ended September 30, 1998 and 1999, respectively. 5. INVESTMENTS The following is a summary of investments available for sale as of December 31, 1998:
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Corporate bonds $ 8,987 $ 80 $ (239) $ 8,828 Foreign government bonds 2,915 150 (308) 2,757 Bond mutual funds 4,005 1 (132) 3,874 Other debt securities 286 -- (138) 148 Equity securities 1,598 -- (376) 1,222 --------- ---------- ---------- --------- Total $ 17,791 $ 231 $ (1,193) $ 16,829 ========= ========== ========== =========
The following is a summary of investments available for sale as of September 30, 1999:
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Corporate bonds $ 14,898 $ 48 $ (364) $ 14,582 Foreign government bonds 4,416 121 (199) 4,338 Bond mutual funds 1,300 6 (5) 1,301 Equity securities 2,851 126 (603) 2,374 --------- ---------- ---------- --------- Total $ 23,465 $ 301 $ (1,171) $ 22,595 ========= ========== ========== =========
The amortized cost and estimated fair value of investments available for sale as of September 30, 1999, by contractual maturity, are:
ESTIMATED COST FAIR VALUE -------- ------------ Corporate bonds and foreign government bonds maturing within: One year $ 5,644 $ 5,589 Two to five years 11,234 10,985 Due after five years 2,436 2,346 -------- ------------ 19,314 18,920 Bond mutual funds 1,300 1,301 Equity securities 2,851 2,374 -------- ------------ Total $ 23,465 $ 22,595 ======== ============
Bond mutual funds are primarily invested in investment grade bonds of U.S. and foreign issuers denominated in U.S. and foreign currencies, and interests in floating or variable rate senior collateralized loans to corporations, partnerships, and other entities in a variety of industries and geographic regions. Equity securities consist of real estate investment trusts, equity mutual funds, and publicly traded common stock of U.S. based companies. Investments available for sale are reported at fair value, with the gross unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. 7 8 STARTEK, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (continued) (dollars in thousands, except per share data) (unaudited) 5. INVESTMENTS (CONTINUED) As of September 30, 1999, the Company was also invested in trading securities which, in the aggregate, had an original cost and fair market value of approximately $3,071 and $3,341, respectively. Trading securities are recorded on a trade date basis and are carried at fair market values. Fair market values are determined by the most recently traded price of the security as of the balance sheet date. Gross unrealized gains and losses are reflected in income currently, and as part of interest income and other in the accompanying unaudited consolidated statements of operations. Trading securities consist primarily of publicly traded common stock of U.S. based companies and international equity mutual funds, together with certain hedging securities, and various forms of derivative securities. 6. INVENTORIES The Company frequently purchases components of its clients' products as an integral part of its process management services. At the close of an accounting period, packaged and assembled products (together with other associated costs) are reflected as finished goods inventories pending shipment. The Company generally has the right to be reimbursed from its clients for unused inventories. Client-owned inventories are not reflected in the Company's balance sheet. Inventories consist of:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ---------------- -------------- Purchased components and fabricated assemblies $ 2,313 $ 1,709 Finished goods 459 883 ---------------- -------------- $ 2,772 $ 2,592 ================ ==============
7. GOOD CATALOG COMPANY Effective September 15, 1999, the Company, through its wholly-owned subsidiary Domain.com, Inc. ("Domain.com"), entered into a contribution agreement (the "Contribution Agreement") and stockholders agreement with The Reader's Digest Association, Inc. ("Reader's Digest") and Good Catalog Company, previously a wholly-owned subsidiary of Reader's Digest. On November 8, 1999, pursuant to the Contribution Agreement, Domain.com purchased 19.9% of the outstanding common stock of Good Catalog Company for approximately $2,606 in cash. Reader's Digest owns the remaining 80.1% of the outstanding common stock of Good Catalog Company. The Contribution Agreement provides for; (i) an assignment from Domain.com to Good Catalog Company of Domain.com's right, title, and interest in and to the URL www.gifts.com; and (ii) an undertaking by Good Catalog Company to effect a change in its name to Gifts.com, Inc. Domain.com has the right to designate at least one member of Good Catalog Company's board of directors, which will consist of at least five directors. Effective November 1, 1999, Domain.com, Reader's Digest, and Good Catalog Company entered into a loan agreement pursuant to which Domain.com advanced an unsecured loan of $7,818 and Reader's Digest advanced an unsecured loan of $18,433 to Good Catalog Company ( the "Loans"). The Loans mature November 1, 2002, bear interest at a rate equal to a three month LIBO rate plus 2% per annum, and interest is payable quarterly. Currently, Good Catalog Company, doing business as Gifts.com, provides an Internet Web site accessed through the URL www.gifts.com that sells gifts on-line. The Company agreed to perform certain fulfillment services for Good Catalog Company in connection with certain products and services to be sold in connection with gifts.com. 8. PRINCIPAL CLIENT One client accounted for approximately 75.5% and 80.3% of the Company's revenues during the three months ended September 30, 1998 and 1999, respectively. The loss of its principal client or a substantial decrease in the amount of revenues derived from its principal client would have a material adverse effect on the Company's business, operating results, and financial condition. 8 9 STARTEK, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (continued) (dollars in thousands, except per share data) (unaudited) 9. SUBSEQUENT EVENTS On October 14, 1999, the Company purchased an 88,000 square-foot building in Greeley, Colorado for $4,230 in cash. The building is to be used for E-commerce support operations and telecommunications provisioning management business. On October 22, 1999, the Company, through its wholly-owned subsidiary StarTek USA, Inc., completed an equipment loan arrangement with a finance company, which matures on October 22, 2003. In connection with the equipment loan, the Company received cash of $2,031 in exchange for providing, among other things, certain collateral which generally consisted of computer hardware and software, various forms of telecommunications equipment, and furniture and fixtures whose estimated cost was equal to the principal amount of the equipment loan. The equipment loan arrangement provides for interest at the prime rate minus 1.60% (6.65% on October 22, 1999), and forty-eight consecutive monthly payments. StarTek USA, Inc. is required, from time to time, to maintain certain operating ratios. As of the date of this Form 10-Q, StarTek USA, Inc. was in compliance with these financial covenants. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" or elsewhere in this Form 10-Q that are not statements of historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve substantial risks and uncertainties. Forward-looking statements are preceded by terms such as "may", "will", "should", "anticipates", "expects", "believes", "plans", "future", "estimate", "continue", and similar expressions. The following are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements; these include, but are not limited to, general economic conditions in the Company's markets, the loss of the Company's principal client, the loss or delayed implementation of a large project which could cause quarterly variation in the Company's revenues and earnings, difficulties of managing rapid growth, dependence on key personnel, dependence on key industries and the 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, the year 2000 issue, both as a computer malfunction and distortion of order patterns of the Company's clients, and highly competitive markets. These factors include risks and uncertainties beyond the Company's ability to control; and, in many cases, the Company and its management cannot predict the risks and uncertainties that could cause actual results to differ materially from those indicated by use of forward-looking statements. All forward-looking statements herein are qualified in their entirety by the information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations"--"Factors That May Affect Future Results" section of StarTek, Inc.'s annual report on Form 10-K for the year ended December 31, 1998. The following table sets forth, for the periods indicated, certain unaudited condensed consolidated statement of operations data expressed as a percentage of revenues:
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30 1998 1999 1998 1999 ------------ ------------ ---------- ---------- Revenues 100.0% 100.0% 100.0% 100.0% Cost of services 81.6 81.5 81.3 81.4 ------------ ------------ ---------- ---------- Gross profit 18.4 18.5 18.7 18.6 Selling, general and administrative expenses 11.0 10.7 11.8 10.9 ------------ ------------ ---------- ---------- Operating profit 7.4 7.8 6.9 7.7 Net interest income and other 1.4 1.5 2.1 1.5 ------------ ------------ ---------- ---------- Income before income taxes 8.8 9.3 9.0 9.2 Income tax expense 3.1 3.5 3.2 3.4 ------------ ------------ ---------- ---------- Net income 5.7% 5.8% 5.8% 5.8% ============ ============ ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 Revenues. Revenues increased $20.7 million, or 65.4%, from $31.6 million during the three months ended September 30, 1998 to $52.3 million during the three months ended September 30, 1999. This increase was primarily from existing and new clients, partially offset by decreases in the volume of services provided to other existing clients. Also, management believes changes in the timing of the volume of services provided to the Company's clients due to year 2000 buying patterns contributed to the increase in revenues experienced by the Company during the three months ended September 30, 1999 by accelerating significant revenue into the third quarter revenues that may have otherwise occurred in the fourth quarter. Cost of Services. Cost of services increased $16.8 million, or 65.1%, from $25.8 million during the three months ended September 30, 1998 to $42.6 million during the three months ended September 30, 1999. As a percentage of revenues, cost of services was 81.6% and 81.5% during the three months ended September 30, 1998 and 1999, respectively. This percentage amount remained relatively consistent from period to period. Gross Profit. Due to the foregoing factors, gross profit increased $3.9 million, or 66.5%, from $5.8 million during the three months ended September 30, 1998 to $9.7 million during the three months ended September 30, 1999. As a percentage of revenues, gross profit was 18.4% and 18.5% during the three months ended September 30, 1998 and 1999, respectively. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2.1 million, or 60.1%, from $3.5 million during the three months ended September 30, 1998 to $5.6 million during the three months ended September 30, 1999, primarily as a result of increased personnel costs and related expansion costs incurred to service increasing business. As a percentage of revenues, selling, general and administrative expenses decreased from 11.0% during the three months ended September 30, 1998 to 10.7% during the three months ended September 30, 1999, generally reflecting a lesser relative increase in selling, general and administrative expenses as compared to the increase in revenues. 10 11 Operating Profit. As a result of the foregoing factors, operating profit increased from $2.3 million during the three months ended September 30, 1998 to $4.1 million during the three months ended September 30, 1999. As a percentage of revenues, operating profit increased from 7.4% during the three months ended September 30, 1998 to 7.8% during the three months ended September 30, 1999. Net Interest Income and Other. Net interest income and other was approximately $0.4 million and $0.8 million during the three months ended September 30, 1998 and 1999, respectively. A substantial portion of net interest income and other continues to be derived from cash equivalents and investment balances, partially offset by interest expense incurred as a result of the Company's various debt arrangements. Income Before Income Taxes. As a result of the foregoing factors, income before income taxes increased $2.1 million, or 75.4%, from $2.8 million during the three months ended September 30, 1998 to $4.9 million during the three months ended September 30, 1999. As a percentage of revenues, income before income taxes increased from 8.8% during the three months ended September 30, 1998 to 9.3% during the three months ended September 30, 1999. Income Tax Expense. Income tax expense during the three months ended September 30, 1998 and 1999 reflects a provision for federal, state, and foreign income taxes at an effective rate of 35.6% and 37.6%, respectively. Net Income. Based on the factors discussed above, net income increased $1.2 million, or 69.9%, from $1.8 million during the three months ended September 30, 1998 to $3.0 million during the three months ended September 30, 1999. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 Revenues. Revenues increased $58.3 million, or 72.2%, from $80.6 million during the nine months ended September 30, 1998 to $138.9 million during the nine months ended September 30, 1999. This increase was primarily from existing and new clients, partially offset by decreases in the volume of services provided to other existing clients. Also, management believes changes in the timing of the volume of services provided to the Company's clients due to year 2000 buying patterns during the three months ended September 30, 1999 contributed to the increase in revenues experienced by the Company during the nine months ended September 30, 1999 by accelerating significant revenue into the third quarter revenues that may have otherwise occurred in the fourth quarter. Cost of Services. Cost of services increased $47.4 million, or 72.3%, from $65.6 million during the nine months ended September 30, 1998 to $113.0 million during the nine months ended September 30, 1999. As a percentage of revenues, cost of services was 81.3% and 81.4% during the nine months ended September 30, 1998 and 1999, respectively. This percentage amount remained relatively consistent from period to period. Gross Profit. Due to the foregoing factors, gross profit increased $10.9 million, or 71.8%, from $15.0 million during the nine months ended September 30, 1998 to $25.9 million during the nine months ended September 30, 1999. As a percentage of revenues, gross profit was 18.7% and 18.6% during the nine months ended September 30, 1998 and 1999, respectively. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $5.7 million, or 60.1%, from $9.5 million during the nine months ended September 30, 1998 to $15.2 million during the nine months ended September 30, 1999, primarily as a result of increased personnel and related expansion costs incurred to service increasing business. As a percentage of revenues, selling, general and administrative expenses decreased from 11.8% during the nine months ended September 30, 1998 to 10.9% during the nine months ended September 30, 1999, generally reflecting a lesser relative increase in selling, general and administrative expenses as compared to the increase in revenues. Operating Profit. As a result of the foregoing factors, operating profit increased from $5.6 million during the nine months ended September 30, 1998 to $10.7 million during the nine months ended September 30, 1999. As a percentage of revenues, operating profit increased from 6.9% during the nine months ended September 30, 1998 to 7.7% during the nine months ended September 30, 1999. Net Interest Income and Other. Net interest income and other was $1.7 million during the nine months ended September 30, 1998 and $2.0 million during the nine months ended September 30, 1999. A substantial portion of net interest income and other continues to be derived from cash equivalents and investment balances, partially offset by interest expense incurred as a result of the Company's various debt arrangements. 11 12 Income Before Income Taxes. As a result of the foregoing factors, income before income taxes increased $5.4 million, or 75.2%, from $7.3 million during the nine months ended September 30, 1998 to $12.7 million during the nine months ended September 30, 1999. As a percentage of revenues, income before income taxes increased from 9.0% during the nine months ended September 30, 1999 to 9.2% during the nine months ended September 30, 1999. Income Tax Expense. Income tax expense during the nine months ended September 30, 1998 and 1999 reflects a provision for federal, state and foreign income taxes at an effective rate of 36.0% and 37.4%, respectively. Net Income. Based on the factors discussed above, net income increased $3.4 million, or 71.5%, from $4.6 million during the nine months ended September 30, 1998 to $8.0 million during the nine months ended September 30, 1999. LIQUIDITY AND CAPITAL RESOURCES In June 1997, the Company completed an initial public offering of its common stock, which yielded net proceeds to the Company of approximately $41.0 million. The Company applied such proceeds to repay substantially all of its then outstanding debt, and for working capital and other general corporate purposes, including capital expenditures to expand its operating capacity. Since fully applying the net proceeds received from its June 1997 initial public offering, the Company has primarily financed its operations, liquidity requirements, capital expenditures, and capacity expansion through cash flows from operations and, to a lesser degree, through various forms of debt financing and leasing arrangements. The Company has a $5.0 million line of credit with Norwest Bank Colorado, N.A. (the "Bank"), which matures on April 30, 2001. 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 $25.0 million. The Company may not pay dividends in an amount which would cause a failure to meet these financial covenants. As of September 30, 1999 and the date of this Form 10-Q, the Company was in compliance with these financial covenants. Collateral for the line of credit is trade accounts receivable of certain of the Company's wholly-owned subsidiaries. As of September 30, 1999 and the date of this Form 10-Q, no amount was outstanding under the $5.0 million line of credit. On February 16, 1999, the Company entered into a lease agreement for building space in Grand Junction, Colorado, to be used for a call center, general office use and other services offered by the Company (the "Grand Junction Facility"). The term of the lease agreement commenced on May 1, 1999 and unless earlier terminated or extended, continues until April 30, 2009. Pursuant to the terms of the lease agreement, the Company was granted, among other things: (i) a right of first refusal to purchase the property, of which the leased space is a part, during the lease term; and (ii) a right to terminate the lease agreement anytime after the end of the fifth year, by giving the landlord 180 day prior written notice to terminate. Assuming the lease agreement is not terminated after the end of the fifth year, total minimum rental commitments, in the aggregate, excluding certain taxes and utilities as defined, are approximately $1.1 million and are payable on a monthly basis from May 1999 through April 2009. On July 16, 1999, the Company entered into a lease agreement for building space in Hartlepool, England, to be used for the continuing operations of StarTek Europe, Ltd. (a wholly-owned subsidiary of the Company). The term of the lease agreement commenced on May 1, 1998 and unless earlier terminated, extended, or otherwise revised, continues until April 30, 2013. If the Company and the landlord do not complete a new lease agreement for additional premises, as defined, the Company was granted the right to terminate the lease agreement on May 1, 2003 by giving the landlord at least six months written notice to terminate. Additionally, if a new lease agreement for additional premises, as defined, is consummated, the Company was granted the right to terminate the lease agreement on May 1, 2008 by giving the landlord at least six months written notice to terminate. Pursuant to the terms of the lease agreement, the Company was granted an option, which commences on May 1, 2008 and expires on July 31, 2008, to purchase the leased property at market value as determined at such time. The lease agreement provides for quarterly lease payments which, in the aggregate for the periods described, are: 106,000 British Pounds from May 1, 1998 through April 30, 1999, all of which the Company has paid; 584,000 British Pounds from May 1, 1999 through April 30, 2003, a portion of which the Company has paid pursuant to the quarterly lease payment schedule provided for in the lease agreement; and 1,095,000 British Pounds from May 1, 2003 through April 30, 2008. Quarterly lease payments from May 1, 2008 through April 30, 2013 are lease payments as agreed to between the landlord and the Company, or by formula in the absence of such an agreement. 12 13 As of September 30, 1999, the Company had cash, cash equivalents, and investment balances of $46.7 million, working capital of $35.6 million and stockholders' equity of $64.7 million. The Company's cash and cash equivalents are not restricted. The Company's investments available for sale generally consist of corporate bonds, foreign government bonds denominated in U.S. dollars, bond mutual funds, real estate investment trusts, equity mutual funds, and publicly traded common stock of U.S. based companies. The Company's trading securities generally consist of publicly traded common stock of U.S. based companies and international equity mutual funds, together with certain hedging securities, and various forms of derivative securities. The Company's investments available for sale and trading securities could be materially and adversely affected by: (i) various domestic and foreign economic conditions, such as recession, increasing interest rates, adverse foreign currency exchange fluctuations, foreign and domestic inflation, and other factors; (ii) the inability of certain corporations to repay their debts, including interest amounts, to the Company; and (iii) changes in market price of common stocks, international equity mutual funds, hedging securities, and other derivative securities held by the Company due to the level of trading in such securities, and other risks generally attributable to U.S. based publicly traded companies. See "Quantitative and Qualitative Disclosure About Market Risk" set forth herein for further discussions regarding the Company's cash, cash equivalents, investments available for sale, and trading securities. Net cash provided by operating activities increased from $7.7 million during the nine months ended September 30, 1998 to $10.9 million during the nine months ended September 30, 1999. This increase was primarily a result of increases in net income, accrued and other liabilities, and decreases in accounts receivable, net deferred income taxes and inventories. The positive effects of the foregoing were partially offset by decreases in accounts payable, income taxes payable, and increases in net purchases of trading securities, prepaid expenses and other assets, and prepaid income taxes. Net cash used in investing activities was $18.5 million during the nine months ended September 30, 1998 and $11.7 million during the nine months ended September 30, 1999. This decrease was primarily due to decreases in net purchases of property, plant, and equipment, and net purchases of investments available for sale. Net cash provided by financing activities during the nine months ended September 30, 1998 consisted of proceeds received from certain long-term financing related to the Company's Laramie, Wyoming facility, partially offset by principal payments on capital lease obligations. Net cash provided by financing activities during the same period in 1999 was primarily the result of proceeds received from exercises of employee stock options during the nine months ended September 30, 1999, partially offset by principal payments on capital lease and debt obligations. The effect of currency exchange rate changes on the translation of the Company's United Kingdom and Singapore operations was not substantial during the nine months ended September 30, 1998 and 1999. The terms of the Company's agreements with its clients and its subcontracts are typically in U.S. dollars except for certain of its agreements related to its United Kingdom and Singapore operations. As the international portion of the Company's business grows, more revenues and expenses will be denominated in foreign currencies, and this will increase the Company's exposure to fluctuations in currency exchange rates. See "Quantitative and Qualitative Disclosure About Market Risk" set forth herein for a further discussion of the Company's exposure to foreign currency exchange risks in connection with certain of its investments. The Company believes its current cash, cash equivalents, and investment balances, anticipated cash flows from future operations, and the $5.0 million of currently available financing under its line of credit, will be sufficient to support its operations, capital expenditures, and various repayment obligations under its debt and lease agreements for the foreseeable future. However, liquidity and capital requirements depend on many factors, including, but not limited to, the Company's ability to retain or successfully and timely replace its principal client and the rate at which the Company expands its business, whether internally or through acquisitions and strategic alliances. To the extent the funds generated from the sources described above are insufficient to fund the Company's activities in the short or long-term, the Company will be required to raise additional funds through public or private financing. No assurance can be given that additional financing will be available, or that if available, it will be available on terms favorable to the Company. 13 14 Effective September 15, 1999, the Company, through its wholly-owned subsidiary Domain.com, Inc. ("Domain.com"), entered into a contribution agreement (the "Contribution Agreement") and stockholders agreement with The Reader's Digest Association, Inc. ("Reader's Digest") and Good Catalog Company, previously a wholly-owned subsidiary of Reader's Digest. On November 8, 1999, pursuant to the Contribution Agreement, Domain.com purchased 19.9% of the outstanding common stock of Good Catalog Company for approximately $2.6 million in cash. Reader's Digest owns the remaining 80.1% of the outstanding common stock of Good Catalog Company. The Contribution Agreement provides for; (i) an assignment from Domain.com to Good Catalog Company of Domain.com's right, title, and interest in and to the URL www.gifts.com; and (ii) an undertaking by Good Catalog Company to effect a change in its name to Gifts.com, Inc. Domain.com has the right to designate at least one member of Good Catalog Company's board of directors, which will consist of at least five directors. Effective November 1, 1999, Domain.com, Reader's Digest, and Good Catalog Company entered into a loan agreement pursuant to which Domain.com advanced an unsecured loan of $7.8 million and Reader's Digest advanced an unsecured loan of $18.4 million to Good Catalog Company ( the "Loans"). The Loans mature November 1, 2002, bear interest at a rate equal to a three month LIBO rate plus 2% per annum, and interest is payable quarterly. Currently, Good Catalog Company, doing business as Gifts.com, provides an Internet Web site accessed through the URL www.gifts.com that sells gifts on-line. The Company agreed to perform certain fulfillment services for Good Catalog Company in connection with certain products and services to be sold in connection with gifts.com. On October 14, 1999, the Company purchased an 88,000 square-foot building in Greeley, Colorado for $4.2 million in cash. The building is to be used for E-commerce support operations and telecommunications provisioning management business. On October 22, 1999, the Company, through its wholly-owned subsidiary StarTek USA, Inc., completed an equipment loan arrangement with a finance company, which matures on October 22, 2003. In connection with the equipment loan, the Company received cash of $2.0 million in exchange for providing, among other things, certain collateral which generally consisted of computer hardware and software, various forms of telecommunications equipment, and furniture and fixtures whose estimated cost was equal to the principal amount of the equipment loan. The equipment loan arrangement provides for interest at the prime rate minus 1.60% (6.65% on October 22, 1999), and forty-eight consecutive monthly payments. StarTek USA, Inc. is required, from time to time, to maintain certain operating ratios. As of the date of this Form 10-Q, StarTek USA, Inc. was in compliance with these financial covenants. INFLATION AND GENERAL ECONOMIC CONDITIONS Although the Company cannot accurately anticipate the effect of domestic and foreign inflation on its operations, the Company does not believe that inflation has had, or is likely in the foreseeable future to have, a material adverse effect on its results of operations or financial condition. RELIANCE ON PRINCIPAL CLIENT RELATIONSHIP A substantial portion of the Company's revenues is generated from its principal client and the loss of its principal client could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's largest client during the three months ended September 30, 1998 and 1999 was Microsoft Corporation ("Microsoft"). The Company provides various outsourced services to various divisions of Microsoft, which began its outsourcing relationship with the Company in April 1996. Microsoft accounted for approximately 75.5% and 80.3% of the Company's revenues during the three months ended September 30, 1998 and 1999, respectively. There can be no assurance the Company will be able to retain its principal client or, if it were to lose its principal client, it would be able to timely replace its principal client with clients which generate a comparable amount of revenues. Additionally, the amount of revenues generated from the Company's principal client in the past is not necessarily indicative of the amount revenues that may be expected from such client in the future. 14 15 VARIABILITY OF QUARTERLY OPERATING RESULTS The Company's business is highly seasonal and is at times conducted in support of product launches for new and existing clients. Historically, the Company's revenues have been substantially lower in the quarters preceding the fourth quarter due to the timing of its clients' marketing programs and product launches, which are typically geared toward the holiday buying season. However, the Company's revenues and operating results for the first nine months of 1999 are not necessarily indicative of the results that may be expected for the fourth quarter of 1999. Additionally, the Company has experienced, and expects to continue to experience, quarterly variations in operating results as a result of a variety of factors, many of which are outside the Company's control, including: (i) the timing of existing and future client product launches; (ii) the expiration or termination of existing client projects; (iii) the timing and amount of costs incurred to expand capacity in order to provide for further revenue growth from current and future clients; (iv) the seasonal nature of certain clients' businesses; (v) the cyclical nature of certain high technology clients' businesses; (vi) changes in the amount of revenues generated from the Company's principal client; and (vii) changes in the timing of the volume of services provided to the Company's clients due to year 2000 buying patterns . Revenues for the three months ended June 30, 1999 and September 30, 1999 were approximately $45.7 million and $52.3 million, respectively. Typically, the Company's revenues have been lower in the quarters preceding the fourth quarter due to the seasonal nature of its clients' businesses. The Company recognizes the likelihood that certain of the revenues generated during the three months ended September 30, 1999 were partially due to year 2000 buying patterns, which resulted in acceleration of significant revenue into the third quarter that management believes would have otherwise occurred in the fourth quarter. Additionally, the growth rate of the Company's revenues for the first three quarters of 1999 are not necessarily indicative of the growth rate in revenues that may be expected for the fourth quarter of 1999. Gross profit as a percent of revenues remained relatively consistent for each of the three month periods ended June 30, 1999 and September 30, 1999. Selling, general and administrative expenses increased from the three months ended June 30, 1999 to the three months ended September 30, 1999 as a result of increases in certain operating expenses associated with increases in revenues, and increases in personnel and related expansion costs incurred to service increasing business. As a percentage of revenues, selling, general and administrative expenses remained relatively consistent for the three months ended June 30, 1999 and September 30, 1999. Subsequent to September 30, 1999 and to date, in connection with the Company's participation in the formation of the Gifts.com, together with the purchase of an 88,000 square-foot building in Greeley, Colorado, the Company has used approximately $14.6 million of its internal funds. As a result, net interest income and other can be expected to be proportionally affected during the remainder of 1999. YEAR 2000 COMPLIANCE The year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Some of the Company's older computer programs and technologies fall into this category. As a result, those programs have time-sensitive applications that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause system failures or miscalculations causing disruption of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in other normal business activities. The Company formally created a year 2000 project team (the "Y2K Team") during the first quarter of 1998. The Y2K Team reports directly to the Company's executive committee and periodically provides the executive committee status updates of its year 2000 compliance efforts. To date, the Y2K Team has, among other things, completed its assessment of the Company's year 2000 compliance issues, identified non year 2000 compliant computer hardware and software, communicated with applicable third party vendors in order to gather information on year 2000 matters beyond the Company's internal information technologies, fixed identified problems, scheduled and completed year 2000 testing of the Company's applicable information systems, and completed development and testing of the Company's year 2000 contingency plan for applicable systems and processes. This contingency planning consists of implementing alternative work processes in the event of possible system or process failures for applicable operations. It should be pointed out that approximately 20% of the Company's revenues are dependent on year 2000 compliance by outside vendors for which there is no internal contingency plan. The total cost of the Company's year 2000 compliance efforts is estimated to be approximately $150,000. 15 16 The Company uses certain of its clients' software applications in performing its outsourced services. Such client-owned software used by the Company, if not year 2000 compliant, could cause significant interruptions and delays in the Company's services, revenues, and cash receipts. Management is unaware of any specific year 2000 issues related to client-owned software used in the Company's day to day operations. Management believes, based on its current year 2000 compliance planning, the year 2000 issue will not pose material adverse problems to the Company's business. However, if the Company's, its third party vendors', subcontractors', and/or clients' year 2000 compliance efforts are not successful, or not completed in a timely manner, the year 2000 issue could have a material adverse effect on the operations of the Company. The Company's clients' future revenues may be adversely and materially impacted due to slowing demand for their products and services caused by uncertainties surrounding the year 2000 issue. Similarly, the effect the year 2000 issue may have on the Company's revenues and gross profits is difficult to estimate but is a significant risk to be considered in evaluating the future growth of the Company, especially in the fourth quarter of 1999 and first quarter of 2000. In a recent Securities and Exchange Commission release regarding year 2000 disclosure, the Securities and Exchange Commission stated that public companies must disclose the most reasonably likely worst case year 2000 scenario. Although it is not possible to assess the likelihood of any of the following events, each must be included in a consideration of worst case scenarios: widespread failure of electrical and similar supplies serving the Company; widespread disruption of services and functions provided by the Company's telephone, software, and hardware systems; widespread disruption of the services provided by common communications carriers and power grids serving the Company's domestic and international operations; similar disruption to the means and modes of transportation for the Company and its employees, suppliers, and customers; significant disruption to the Company's ability to gain access to, and remain working in, office buildings and other facilities; the failure of the Company's customers' and its suppliers' critical computer hardware and software systems; and the failure of outside entities' systems, including systems related to banking and finance. These and other outages would cause major challenges and would significantly and negatively impact the Company's ability to generate revenues. Although management believes the Company's systems are year 2000 compliant, it cannot predict the outcome or success of its efforts to become year 2000 compliant, or that third party systems are or will be year 2000 compliant, or that the costs required to address the year 2000 issue, or that the impact of a failure to achieve substantial year 2000 compliance, will not have a material adverse effect on the Company's business, financial condition, or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The following discusses the Company's exposure to market risk related to changes in interest rates and other general market risks, equity market prices and other general market risks, and foreign currency exchange rates. All of the Company's investment decisions are supervised or managed by its Chairman of the Board. On May 19, 1999 and as amended on August 19, 1999, the Company's Board of Directors approved the Company's current investment portfolio policy which provides for, among other things, investment objectives, and investment portfolio allocation guidelines. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors, including but not limited to, changes in interest rates and other general market risks, equity market prices and other general market risks, foreign currency exchange rates, and those set forth in the "Management's Discussion and Analysis of Financial Condition and Results of Operations"--"Factors That May Affect Future Results" section of the Company's annual report on Form 10-K for the year ended December 31, 1998. Interest Rate Sensitivity and Other General Market Risks Cash and Cash Equivalents. As of September 30, 1999, the Company had cash and cash equivalents of approximately $20.7 million, none of which is restricted, and which consisted of: (i) approximately $19.3 million invested in various money market funds, overnight investments, and various commercial paper securities at a combined weighted average interest rate of approximately 4.8%; and (ii) approximately $1.4 million in various non-interest bearing accounts. Management considers cash equivalents to be short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. The Company does not expect any material loss with respect to its cash and cash equivalents as a result of interest rate changes, and the estimated fair value of its cash and cash equivalents approximates original cost. 16 17 Investments Available for Sale. As of September 30, 1999, the Company had investments available for sale of $22.6 million. These investments available for sale generally consist of corporate bonds, foreign government bonds denominated in U.S. dollars, bond mutual funds, real estate investment trusts, equity mutual funds, and publicly traded common stock of U.S. based companies. The Company's investment portfolio is subject to interest rate risk and will fall in value if interest rates increase. The fair market value of and the estimated cash flows from the Company's investments in corporate bonds are substantially dependent upon the credit worthiness of certain corporations that are expected to repay their debts, including interest, as they become due, to the Company. If such corporations' financial condition and liquidity adversely changes, the Company's investments in their debts can be expected to be materially and adversely affected. The Company's investments in foreign government bonds denominated in U.S. dollars entail special risks of global investing, these include, but are not limited to: (i) currency exchange fluctuations which could adversely affect the ability of foreign governments to repay their debts in U.S. dollars; (ii) foreign government regulations; and (iii) the potential for political and economic instability. The fair market value of such investments in foreign government bonds (denominated in U.S. dollars) can be expected to be more volatile than that of U.S. government bonds. These risks are intensified for the Company's investments in debt of foreign governments located in countries generally considered to be emerging markets. The table below provides information about maturity dates and corresponding weighted average interest rates with regard to certain of the Company's investments available for sale as of September 30, 1999.
WEIGHTED EXPECTED MATURITY DATE AVERAGE --COST-- INTEREST RATES (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------------------------- ----------- 1 year 2 years 3 years 4 years 5 years Thereafter Total FAIR VALUE ---------- ------- ------- ------- ------- ---------- ------- ----------- Corporate bonds 5.2% $ 3,664 -- -- -- -- -- $ 3,664 $ 3,597 Foreign government bonds 6.3% 1,980 -- -- -- -- -- 1,980 1,992 Corporate bonds 7.0% -- $ 6,694 -- -- -- -- 6,694 6,707 Corporate bonds 8.1% -- -- $ 1,930 -- -- -- 1,930 1,945 Corporate bonds 5.3% -- -- -- $ 781 -- -- 781 720 Corporate bonds 5.1% -- -- -- -- $ 1,829 -- 1,829 1,613 Foreign government bonds 9.1% -- -- -- -- -- 2,436 2,436 2,346 ---------- ------- ------- ------- ------- --------- -------- ----------- Total 6.7% $ 5,644 $ 6,694 $ 1,930 $ 781 $ 1,829 $ 2,436 $ 19,314 $ 18,920 ========== ======= ======= ======= ======= ========= ======== ===========
Management believes the Company currently has the ability to hold these investments until maturity, and therefore, if held to maturity, the Company would not expect the future proceeds from these investments to be affected, to any significant degree, by the effect of a sudden change in market interest rates. Declines in interest rates over time will, however, reduce the Company's interest income derived from future investments. As of September 30, 1999 and as part of its investments available for sale portfolio, the Company also was invested in: (i) various bond mutual funds which, in the aggregate, had an original cost and fair market value of approximately $1.3 million; and (ii) real estate investment trusts, equity mutual funds, and publicly traded common stock of U.S. based companies which, in the aggregate, had an original cost and fair market value of approximately $2.9 million and $2.4 million, respectively. Such bond mutual funds, as of September 30, 1999: (i) had a weighted average yield of approximately 8.9%, and a weighted average maturity of approximately 3 years; (ii) are primarily invested in investment grade bonds of U.S. and foreign issuers denominated in U.S. and foreign currencies, and interests in floating or variable rate senior collateralized loans to corporations, partnerships, and other entities in a variety of industries and geographic regions; (iii) include certain foreign currency risk hedging instruments which are intended to reduce fair market value fluctuations; (iv) are subject to interest rate risk and will fall in value if market interest rates increase; and (v) are subject to the quality of the underlying securities within the mutual funds. The Company's investments in such bond mutual funds entail special risks of global investing, including, but not limited to: (i) currency exchange fluctuations; (ii) foreign government regulations; and (iii) the potential for political and economic instability. The fair market value of the Company's investments in such bond mutual funds can be expected to be more volatile than that of a U.S.-only fund. These risks are intensified for certain investments in debt of foreign governments (included in bond mutual funds) which are located in countries generally considered to be emerging markets. Additionally, certain of the bond mutual fund investments are also subject to the effect of leverage, which in a declining market can be expected to result in a greater decrease in fair market value than if such investments were not leveraged. 17 18 Outstanding Debt of the Company. As of September 30, 1999, the Company had outstanding debt of approximately $3.4 million, approximately $3.0 million of which bears interest at an annual fixed rate of 7.0%. On October 22, 1999, the Company completed a $2.0 million equipment loan arrangement whereby the Company is expected to repay its debt at a variable rate of interest over a forty-eight month period. However, since the majority of the interest on the Company's debt is fixed, management believes that a hypothetical 10.0% decrease in interest rates would not have a material adverse effect on the Company. Increases in interest rates could, however, increase interest expense associated with the Company's existing variable rate $2.0 million equipment loan and future borrowings by the Company, if any. For example, the Company may from time to time effect borrowings under its $5.0 million line of credit for general corporate purposes, including working capital requirements, capital expenditures and other purposes related to expansion of the Company's capacity. Borrowings under the $5.0 million line of credit bear interest at the lender's prime rate. As of September 30, 1999, the Company had no outstanding line of credit obligations. The Company has not hedged against interest rate changes. Equity Price Risk and Other General Market Risks Investments Available for Sale. As of September 30, 1999, the Company held in its investments available for sale portfolio, certain equity securities with original costs and fair market values, in the aggregate, of $2.9 million and $2.4 million, respectively. The Company's investments in equity securities consist of real investment trusts, equity mutual funds, and publicly traded common stock of U.S. based companies. A substantial decline in the value of equity securities and equity prices in general could have a material adverse effect on the Company's equity investments. Also, the price of common stock held by the Company could be materially and adversely affected by poor management, shrinking product demand, and other risks that may affect single companies, as well as groups of companies. The Company has partially hedged against some equity price changes. Trading Securities. As of September 30, 1999, the Company was also invested in trading securities which, in the aggregate, had an original cost and fair market value of approximately $3.1 million and $3.3 million, respectively. Trading securities, which consist primarily of publicly traded common stock of U.S. based companies and international equity mutual funds, together with certain hedging securities, and various forms of derivative securities are held to meet short-term investment objectives. The Company enters into hedging and derivative securities in an effort to maximize its return on investments in trading securities while managing risk. As part of trading securities and as of September 30, 1999, the Company was invested in derivative securities which consist of: (i) written put options for a total of 1,200 shares of common stock of a certain U.S. based publicly traded company each with an exercise price of $30.00 per share, all of which had a contractual expiration date of October 15, 1999; (ii) written call options for a total of 1,200 shares of common stock of a certain U.S. based publicly traded company each with an exercise price of $30.00 per share, all of which had a contractual expiration date of October 15, 1999; and (iii) purchased call options for a total of 9,000 shares of a certain U.S. based publicly traded company each with an exercise price of $15.00 per share, all of which had a contractual expiration date of January 21, 2000. Management believes the risk of loss to the Company in the event of nonperformance by any party under these agreements is not substantial. Because of the potential limited liquidity of some of these instruments, the recorded values of these transactions may be different than the values that might be realized if the Company were to sell or close out the transactions. Management believes such differences are not substantial to the Company's results of operations, financial condition, or liquidity. A substantial decline and/or change in the value of equity securities, equity prices in general, international equity mutual funds, hedging securities, and derivative securities could have a material adverse effect on the Company's trading securities. Also, the price of common stock, hedging securities, and other derivative securities held by the Company as trading securities could be materially and adversely affected by poor management, shrinking product demand, and other risks that may affect single companies, as well as groups of companies. Foreign Currency Exchange Risk Approximately 14.4% of the Company's revenues during the nine months ended September 30, 1999 were derived from arrangements whereby the Company received payments from its clients in currencies other than U.S. dollars. The terms of the Company's agreements with its clients and its subcontracts are typically in U.S. dollars except for certain of its agreements related to its United Kingdom and Singapore operations. If an arrangement provides for the Company to receive payments in a foreign currency, the ultimate revenues realized from such an arrangement may be less if the value of such foreign currency declines. Similarly, if an arrangement provides for the Company to make payments in a foreign currency, the ultimate cost of services and operating expenses for such an arrangement may be more if the value of such foreign currency increases. For example, a 10% change in the relative value of such foreign currency could cause a related 10% change in the Company's previously expected revenues, cost of services and operating expenses. As the international portion of the Company's business grows, more revenues and expenses will be denominated in foreign currencies, and this will increase the Company's exposure to fluctuations in currency exchange rates. In the past, the Company has not hedged against foreign currency exchange rate changes related to its day to day operations in the United Kingdom and Singapore. 18 19 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Sales of Unregistered Securities The Company did not issue or sell any unregistered securities during the three months ended September 30, 1999, except as follows: On August 19, 1999, the Company granted options to purchase 6,600 shares of common stock, in the aggregate, to six employees pursuant to the Company's Stock Option Plan. These options vest at a rate of 20% per year beginning August 19, 2000, expire on August 19, 2009, and are exercisable at $31.00 per share, which was the market value of the Company's common stock on the date the options were granted; and On September 13, 1999, the Company granted options to purchase 93,350 shares of common stock, in the aggregate, to 169 employees pursuant to the Company's Stock Option Plan. These options vest at a rate of 20% per year beginning September 13, 2000, expire on September 13, 2009, and are exercisable at $42.75 per share, which was the market value of the Company's common stock on the date the options were granted. The foregoing stock option grants were made in reliance upon exemptions from registration provided by Section 4 (2) and 3(b) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.19 Promissory Note of StarTek USA, Inc. dated October 26, 1998 in the principal amount of $3,629,367.67 payable to the order of Norwest Equipment Finance, Inc., Security Agreement dated October 26, 1998 by and between StarTek USA, Inc. and Norwest Equipment Finance, Inc., and Security Agreement dated October 26, 1998 by and between StarTek USA, Inc. and Norwest Equipment Finance, Inc. 10.20 Contribution Agreement dated September 15, 1999 among Good Catalog Company, The Reader's Digest Association, Inc., and Domain.com, Inc. 10.21 Stockholders Agreement dated September 15, 1999 by and among Good Catalog Company, The Reader's Digest Association, Inc., and Domain.com, Inc. 10.22 Loan Agreement dated November 1, 1999 with respect to loans to be extended by The Reader's Digest Association, Inc. and Domain.com, Inc. to Good Catalog Company. 10.23 Promissory Note of Good Catalog Company dated November 1, 1999 in the principal amount of $7,816,875.00 payable to the order of Domain.com, Inc. 10.24 Promissory Note of StarTek USA, Inc. dated October 22, 1999 in the principal amount of $2,030,565.67 payable to the order of KeyCorp Leasing, a division of Key Corporate Capital, Inc., Security Agreement dated October 13, 1999 by and between StarTek USA, Inc. and KeyCorp Leasing, and Amendment No. 1 to Security Agreement dated October 13, 1999. 27.1 Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the three months ended September 30, 1999. 19 20 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STARTEK, INC. -------------------------------------------- (Registrant) Date: November 15, 1999 /s/ MICHAEL W. MORGAN --------------------- -------------------------------------------- Michael W. Morgan President and Chief Executive Officer Date: November 15, 1999 /s/ DENNIS M. SWENSON --------------------- -------------------------------------------- Dennis M. Swenson Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 20 21 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.19 Promissory Note of StarTek USA, Inc. dated October 26, 1998 in the principal amount of $3,629,367.67 payable to the order of Norwest Equipment Finance, Inc., Security Agreement dated October 26, 1998 by and between StarTek USA, Inc. and Norwest Equipment Finance, Inc., and Security Agreement dated October 26, 1998 by and between StarTek USA, Inc. and Norwest Equipment Finance, Inc. 10.20 Contribution Agreement dated September 15, 1999 among Good Catalog Company, The Reader's Digest Association, Inc., and Domain.com, Inc. 10.21 Stockholders Agreement dated September 15, 1999 by and among Good Catalog Company, The Reader's Digest Association, Inc., and Domain.com, Inc. 10.22 Loan Agreement dated November 1, 1999 with respect to loans to be extended by The Reader's Digest Association, Inc. and Domain.com, Inc. to Good Catalog Company. 10.23 Promissory Note of Good Catalog Company dated November 1, 1999 in the principal amount of $7,816,875.00 payable to the order of Domain.com, Inc. 10.24 Promissory Note of StarTek USA, Inc. dated October 22, 1999 in the principal amount of $2,030,565.67 payable to the order of KeyCorp Leasing, a division of Key Corporate Capital, Inc., Security Agreement dated October 13, 1999 by and between StarTek USA, Inc. and KeyCorp Leasing, and Amendment No. 1 to Security Agreement dated October 13, 1999. 27.1 Financial Data Schedule.
EX-10.19 2 PROMISSORY NOTE DATED 11/26/99 1 EXHIBIT 10.19 - -------------------------------------------------------------------------------- Norwest Equipment Finance, Inc. PROMISSORY NOTE NORWEST EQUIPMENT Investors Building, Suite 300 FINANCE 733 Marquette Avenue Minneapolis, MN 55479-2048 - -------------------------------------------------------------------------------- Dated as of October 26, 1998 Contract Number 17657-709 For value received, the undersigned, hereby promises to pay to the order of Norwest Equipment Finance, Inc. (the "Lender") at its office in Minneapolis, Minnesota, or at such other place as may be designated from time to time by the holder hereof, the sum of $4,171,667.04 in installments according to the schedule set forth below; provided, however, that the undersigned and the Lender may agree to any other payment schedule, in which case only variations shall be set forth in the space provided for additional provisions. The first payment period shall begin on the 15th day of the month in which Lender disburses the loan proceeds if disbursement is made on or before the 15th day of such month, and the first payment period shall begin on the last day of such month if disbursement is made during the balance of such month. The first installment shall be payable on the first payment due date set forth below (which may be the same as the date the first payment period begins). Subsequent installments shall be payable on the first day of each payment period beginning after the first payment period. The undersigned agrees that the date the first payment period begins may be left blank when this Note is executed and hereby authorizes Lender to insert such date based upon the date the loan proceeds are disbursed. PAYMENT SCHEDULE: - ------------------------------------------------------------------------------------------------------------------------- Date first payment period begins: November 30, 1998 First payment due: December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------- Number of installments: 48 Amount of each installment: $86,909.73 - ------------------------------------------------------------------------------------------------------------------------- Payment period: MONTHLY Annual interest rate used in computing payment schedule: 7.00% - ------------------------------------------------------------------------------------------------------------------------- Principal amount of loan proceeds disbursed: $3,629,367.67 - -------------------------------------------------------------------------------------------------------------------------
In addition to installment payments as set forth above, the undersigned agrees to pay Lender interim interest on the loan proceeds disbursed hereunder from the date of disbursement to the date the first payment period begins at the annual interest rate set forth above used in computing the payment schedule. Interim interest shall be due and payable on the date the first payment period begins. If any installment is not paid when due, then in addition to any other remedy Lender may have hereunder, Lender may impose and, if imposed, the undersigned shall pay a late charge of 5% of the amount of the delinquent installment but in any event not more than permitted by applicable law. Payments thereafter received shall be applied first to delinquent installments and then to current installments. This Note may be prepaid in whole or in part at anytime and from time to time but only if accompanied by a prepayment premium of 2% of the principal amount prepaid if prepaid during months 1 - 12, 1% during months 13 - 24 and 0% thereafter. Any partial prepayment shall be applied to the last maturing installment or installments. Upon any prepayment in full, the unearned portion of the interest will be refunded using the simple interest method. The following shall constitute an Event of Default hereunder: (a) failure to pay any installment hereunder when due; (b) the occurrence of an event of default as defined in any security agreement or mortgage securing this Note; (c) the commencement of any bankruptcy or insolvency proceedings by or against the undersigned or any guarantor of this Note; and (d) any indebtedness the undersigned may now or hereafter owe to Norwest Bank Minnesota, National Association or any affiliate thereof shall be accelerated following a default thereunder or, if any such indebtedness is payable on demand, payment thereof shall be demanded. Upon the occurrence of an Event of Default, Lender may do any one or more of the following as it may elect: (i) upon written notice to the undersigned, declare the entire unpaid balance of the Note to be immediately due and payable, and the same (less unearned interest computed using the simple interest method as if this Note had been paid in full on the date it became due and payable) shall thereupon be and become immediately due and payable; (ii) exercise any one or more of the rights and remedies available to it under any security agreement or mortgage securing this Note or under any other agreement or by law. The undersigned hereby waives presentment, notice of dishonor, and protest. The undersigned agrees to pay all costs of collection of this Note, including reasonable attorneys' fees. The holder hereof may change the terms of payment of the Note by extension, renewal or otherwise, and release any security for, or party to, this Note and such action shall not release any accommodation maker, endorser, or guarantor from liability on this Note. Notwithstanding anything to the contrary contained herein, if the rate of interest, late payment fee, prepayment premium or any other charges or fees due hereunder are determined by a court of competent jurisdiction to be usurious, then said interest rate, fees and/or charges shall be reduced to the maximum amount permissible under applicable law and any such excess amounts shall be applied towards the reduction of the principal balance of this Note. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Minnesota without regard to conflicts of law rules. If this Note is signed by more than one person as Debtor, then the term "Debtor" shall refer to each of them separately and to all of them jointly, and each such person shall be liable hereunder individually in full and jointly with the others. IN WITNESS WHEREOF the Debtor has signed this Agreement as of the date first above written. StarTek USA, Inc. - --------------------------------- Debtor /s/ DENNIS M.SWENSON - --------------------------------- By Executive Vice President - --------------------------------- Title Exhibits and Schedules not filed 2 - -------------------------------------------------------------------------------- Norwest Equipment Finance, Inc. SECURITY AGREEMENT NORWEST EQUIPMENT Investors Building, Suite 300 FINANCE 733 Marquette Avenue Minneapolis, MN 55479-2048 - -------------------------------------------------------------------------------- Dated as of October 26, 1998 Contract Number 17657-709 Name and Address of Debtor: StarTek USA, Inc. 111 Havana Street Denver, CO 80010 1. SECURITY INTEREST AND COLLATERAL. TO SECURE THE PAYMENT AND PERFORMANCE OF EACH AND EVERY DEBT, LIABILITY AND OBLIGATION OF EVERY TYPE AND DESCRIPTION WHICH Debtor may now or at any time hereafter owe to Norwest Equipment Finance, Inc. ("Secured Party") (whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it is currently contemplated by the Debtor and Secured Party, whether any documents evidencing it refer to the Security Agreement, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several; all such debts, liabilities and obligations being herein collectively referred to as the "Obligations"), Debtor hereby grants Secured Party a security interest (herein call the "Security Interest") in the following property (herein called the "Collateral"): SEE ATTACHED SCHEDULE A together with all substitutions and replacements for and products of the Collateral, all proceeds, accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with the Collateral. 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants and agrees that: (A) AUTHORIZATION. If Debtor is a corporation, a partnership or a limited liability company, the execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of the Debtor and will not violate any provision of the Debtor's articles of incorporation or bylaws, partnership agreement or articles of organization or management agreement, as the case may be. (B) OFFICE LOCATION. Debtor's chief executive office (if Debtor is a corporation, a partnership or a limited liability company) is located at the address for Debtor shown above. Debtor will not change the location of its chief executive office or his/her residence, as the case may be, without first giving Secured Party at least 10 days prior written notice of the new location. (C) BUSINESS PURPOSE, LAWFUL USE. The Equipment will be used primarily for business purposes as opposed to personal, family or household purposes. Debtor will comply with all laws and regulations applicable to the Equipment and its use. 3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants and agrees that: (a) Debtor has (or will have at the time Debtor acquires rights in Collateral hereafter arising) absolute title to each item of Collateral free and clear of all security interests, liens and encumbrances, except the Security Interest and will defend the Collateral against all claims or demands of all persons other than Secured Party. Debtor will not sell or otherwise dispose of the Collateral or any interest therein without the prior written consent of Secured Party. If Debtor is a corporation, this Agreement has been duly and validly authorized by all necessary corporate action, and, if Debtor is a partnership or a limited liability company, the partner(s) or manager(s) executing this Agreement has (have) authority to act for the partnership or the limited liability company. (b) Debtor will not permit any Collateral to be located in any state (and, if county filing is required, in any county) in which the financing statement covering such Collateral is required to be, but has not in fact been, filed in order to perfect the Security Interest. (c) Debtor will (i) keep all Collateral in good repair, working order and condition, normal depreciation excepted, and will, from time to time, replace any worn, broken or defective parts thereof; (ii) promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral or upon or against the creation, perfection or continuance of the Security Interest; (iii) keep all Collateral free and clear of all security interests, liens and encumbrances except the Security Interest; (iv) at all reasonable times, permit Secured Party or its representatives to examine or inspect any Collateral, wherever located, and to examine, inspect and copy Debtor's books and records pertaining to the Collateral and its business and financial condition; (v) keep accurate and complete records pertaining to Debtor's business and financial condition and submit to Secured Party such periodic reports concerning Debtor's business and financial condition as Secured Party may from time to time reasonably request; (vi) promptly notify Secured Party of any loss of or material damage to any Collateral; (vii) at all times keep all Collateral insured against risks of fire (including so-called extended coverage), theft, collision (in case of Collateral consisting of motor vehicles) and such other risks and in such amounts as Secured Party may reasonably request, with any loss payable to Secured Party to the extent of its interest, (viii) from time to time execute such financing statements as Secured Party may reasonably require in order to perfect the Security Interest and, if any Collateral consists of a motor vehicle, execute such documents as may be required to have the Security Interest properly noted on a certificate of title; (ix) pay when due or reimburse Secured Party on demand for all costs of collection of any of the Obligations and all other out-of-pocket expenses (including in each case all reasonable attorneys' fees) incurred by Secured Party in connection with the creation, perfection, satisfaction, protection, defense or enforcement of the Security Interest or the creation, continuance, protection, defense or enforcement of this Agreement or any or all of the Obligations, including expenses incurred in any litigation or bankruptcy or insolvency proceedings; (x) execute, deliver or endorse any and all instruments, documents, assignments, security agreements and other agreements and writings which Secured Party may at any time reasonably request in order to secure, protect, perfect or enforce the Security Interest and Secured Party's rights under this Agreement; (xi) not use or keep any Collateral, or permit it to be used or kept, for any unlawful purpose or in violation of any federal, state or local law, statute or ordinance; and (xii) not permit any Collateral to become part of or to be affixed to any real property without first assuring to the reasonable satisfaction of Secured Party that the Security Interest will be prior and senior to an interest or lien then held or thereafter acquired by any mortgagee of such real property or the owner or purchaser of any interest therein. If Debtor at any time fails to perform or observe any agreement contained in this Section 3(c), and if such failure shall continue for a period of ten calendar days after Secured Party gives Debtor written notice thereof (or, in the case of the agreements contained in clauses (vii) and (viii) of this Section 3(c), immediately upon the occurrence of such failure, without notice or lapse of time), Secured Party may (but need not) perform or observe such agreement on behalf and in the name, place and stead of Debtor (or, at Secured Party's option, in Secured Party may (but need not) perform or observe such agreement on behalf and in the name place and stead of Debtor (or, at Secured Party's option, in Secured Party's own name) and may (but need not) take any and all other actions which Secured Party may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens, or encumbrances, the procurement and maintenance of insurance, the execution of financing statements, the endorsement of instruments, and the procurement of 3 repairs, transportation or insurance); and except to the extent that the effect of such payment would be to render any loan or forbearance of money usurious or otherwise illegal under any applicable law Debtor shall thereupon pay Secured Party on demand the amount of all moneys expended and all costs and expenses (including reasonable attorneys' fees) incurred by Secured Party in connection with or as a result of Secured Party's performing or observing such agreement or taking such actions, together with interest thereon from the date expended or incurred by Secured Party at the highest rate then applicable to any of the Obligations. To facilitate the performance or observance by Secured Party of such agreements of Debtor, Debtor hereby irrevocably appoints (which appointment is coupled with an interest) Secured Party, or its delegate, as the attorney-in-fact of Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of Debtor, any and all instruments, documents, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by Debtor under this Section 3. 4. ASSIGNMENT OF INSURANCE. Debtor hereby assigns to Secured Party, as additional security for the payment of the Obligations, any and all moneys (including but not limited to proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of Debtor under or with respect to, any and all policies of insurance covering the Collateral, and Debtor hereby directs the issuer of any such policy to pay any such moneys directly to Secured Party. Both before and after the occurrence of an Event of default, Secured Party may (but need not), in its own name or in Debtor's name, execute and deliver proofs of claim, receive all such moneys, endorse checks and other instruments representing payment of such moneys, and adjust, litigate, compromise or release any claim against the issuer of any such policy. 5. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an event of default under this Agreement (herein called "Event of Default"): (i) Debtor shall fail to pay any or all of the Obligations when due or (if payable on demand) on demand, or shall fail to observe or perform any covenant or agreement herein binding on it; (ii) any representation or warranty by Debtor set forth in the Agreement or made to Secured Party in any financial statements or reports submitted to Secured Party by or on behalf of Debtor shall prove materially false or misleading; (iii) a garnishment, summons or a writ of attachment shall be issued against or served upon the Secured Party for the attachment of any property of Debtor or any indebtedness owing to Debtor; (iv) Debtor or any guarantor of any Obligation shall (A) be or become insolvent (however defined); or (B) voluntarily file, or have filed against it involuntarily, a petition under the United States Bankruptcy Code; or (C) if a corporation, partnership, or organization, be dissolved or liquidated or, if a partnership, suffer the death of a partner or,i f an individual, die; or (D) go out of business; (v) if Debtor is a corporation, more than 50% of the shares of voting stock of Debtor shall become owned by a shareholder or shareholders who were not owners of voting stock of Debtor on the date of this Agreement or, if Debtor is a partnership, more than 50% of the partnership interests in the Debtor shall become owned by a partner or partners who were not partners of Debtor on the date of this Agreement; or (vi) Debtor shall consolidate with or merge into, or sell all or substantially all of its assets to, any individual, corporation, or other entity. 6. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default under Section 5 and at any time thereafter, Secured Party may exercise any one or more of the following rights and remedies: (i) declare all unmatured Obligations to be immediately due and payable, and the same shall thereupon be immediately due and payable, without presentment or other notice or demand; (ii) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including but not limited to the right to take possession of any Collateral, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which Debtor hereby expressly waives), and the right to sell, lease or otherwise dispose of any or all of the Collateral, and in connection therewith, Secured Party may require Debtor to make the Collateral available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties, and if notice to Debtor of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 7) at least 10 calendar days prior to the date of intended disposition or other action; (iii) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against the Collateral, against Debtor or against any other person or property. Upon the occurrence of the Event of Default described in Section 5(iv)(B), all Obligations shall be immediately due and payable without demand or notice thereof. 7. MISCELLANEOUS. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by Secured Party. A waiver signed by Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Debtor shall be deemed sufficiently given if delivered or mailed by registered or certified mail, postage prepaid, to Debtor at its address set forth above or at the most recent address shown on Secured Party's records. Secured Party's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if Secured Party exercised reasonable care in physically safekeeping such Collateral or, in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and Secured Party need not otherwise preserve, protect, insure or care for any Collateral. Secured Party shall not be obligated to reserve any rights Debtor may have against prior parties, to realize on the Collateral at all or in any particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their respective heirs, representatives, successors and assigns and shall take effect when signed by Debtor and delivered to Secured Party, and Debtor waives notice of Secured Party's acceptance hereof. Secured Party may execute this Agreement if appropriate for the purpose of filing, but the failure of Secured Party to execute this Agreement shall not affect or impair the validity or effectiveness of this Agreement. A carbon, photographic or other reproduction of this Agreement or of any financing statement signed by the Debtor shall have the same force and effects as the original for all purposes of a financing statement. Except to the extent otherwise required by law, this Agreement shall be governed by the internal laws of the State of Minnesota. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the obligations. If this Agreement is signed by more than one person as Debtor, the term "Debtor" shall refer to each of them separately and to both or all of them jointly; all such persons shall be bound both severally and jointly with other(s); and the Obligations shall include all debts, liabilities and obligations owned to Secured Party by any Debtor solely or by both or several or all Debtors jointly or jointly and severally, and all property described in Section 1 shall be included as part of the Collateral, whether it is owned jointly by both or all Debtors or is owned in whole or in part by one (or more) of them. There shall be (1) counterpart of this Agreement and it will be market "Original." To the extent that this Agreement constitutes chattel paper (as that terms is defined by the Uniform Commercial Code), a security interest only may be created in the Agreement marked "Original." StarTek USA, Inc. - --------------------------------- Debtor /s/ DENNIS M.SWENSON - --------------------------------- By Executive Vice President - --------------------------------- Title Exhibits and Schedules not filed 4 - -------------------------------------------------------------------------------- Norwest Equipment Finance, Inc. SECURITY AGREEMENT NORWEST EQUIPMENT Investors Building, Suite 300 FINANCE 733 Marquette Avenue Minneapolis, MN 55479-2048 - -------------------------------------------------------------------------------- Dated as of October 26, 1998 Name and Address of Debtor: StarTek USA, Inc. 111 Havana Street Denver, CO 80010 1. SECURITY INTEREST AND COLLATERAL. To secure the payment and performance of each and every debt, liability and obligation of every type and description which Debtor may now or at any time hereafter owe to Norwest Equipment Finance, Inc. ("Secured Party") (whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it is currently contemplated by the Debtor and Secured Party, whether any documents evidencing it refer to the Security Agreement, and whether it arises with our without any documents (e.g. obligations to Secured Party created by checking overdrafts), and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several; all such debts, liabilities and obligations being herein collectively referred to as the "Obligations"), Debtor hereby grants Secured Party a security interest (herein call the "Security Interest") in the following property (herein called the "Collateral"): ACCOUNTS AND OTHER RIGHTS TO PAYMENT: Each and every right of Debtor to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property by Debtor, out of a rendering of services by Debtor, out of a loan by Debtor, out of the overpayment of taxes or other liabilities of Debtor, or otherwise arises under any contract or agreement, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which Debtor may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any of the property of such account debtor or other obligor; all, including but not limited to, present and future debt instruments, chattel papers, accounts, loans and obligations receivable and tax refunds together with all substitutions and replacements for and products of the foregoing property not constituting consumer gods and together with proceeds of any and all of the foregoing property and, in the case of all tangible Collateral, together with all accessions and, except in the case of consumer goods, together with (i) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any such goods, and (ii) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods. 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants and agrees that: A) AUTHORIZATION. If Debtor is a corporation, a partnership or a limited or a limited liability company, the execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of the Debtor and will not violate any provision of the Debtor's articles of incorporation or bylaws, partnership agreement or articles of organization or management agreement, as the case may be. B) OFFICE LOCATION. Debtor's chief executive office (if Debtor is a corporation, a partnership or a limited liability company) is located at the address for Debtor shown above. Debtor will not change the location of its chief executive office or his/her residence, as the case may be, without first giving Secured Party at least 10 days prior written notice of the new location. C) BUSINESS PURPOSE, LAWFUL USE. The Equipment will be used primarily for business purposes as opposed to personal, family or household purposes. Debtor will comply with all laws and regulations applicable to the Equipment and its use. 3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants and agrees that: a) Debt has (or will have at the time Debtor acquires rights in Collateral hereafter arising) absolute title to each item of Collateral free and clear of all security interests, liens and encumbrances, except the Security Interest and will defend the Collateral against all claims or demands of all persons other than Secured Party. Debtor will not sell or otherwise dispose of the Collateral or any interest therein without the prior written consent of Secured Party, except that until the occurrence of an Event of Default and the revocation by Secured Party of Debtor's right to do so, Debtor may sell any inventory constituting Collateral to buyers in the ordinary course of business and use and consume any farm products constituting Collateral in Debtor's farming operation. If Debtor is a corporation, this Agreement has been duly and validly authorized by all necessary corporate action, and, if Debtor is a partnership or a limited liability company, the partner(s) or manager(s) executing this Agreement has (have) authority to act for the partnership or the limited liability company. b) Debtor will not permit any tangible Collateral to be located in any state (and, if county filing is required, in any county) in which the financing statement covering such Collateral is required to be, but has not in fact been, filed in order to perfect the Security Interest. c) Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral is (or will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, set-off or counterclaim (other than those arising in the ordinary course of business) of the account debtor or other obligor named therein or in Debtor's records pertaining thereto as being obligated to pay such obligation. Debtor will neither agree to any material modification or amendment nor agree to any cancellation of any such obligation without Secured Party's prior written consent, and will not subordinate any such right to payment to claims of other creditors of such account debtor or other obligor. d) Debt will (i) keep all tangible Collateral in good repair, working order and condition, normal depreciation excepted, and will, from time to time, replace any worn, broken or defective parts thereof; (ii) promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral or upon or against the creation, perfection or continuance of the Security Interest; (iii) keep all Collateral free and clear of all security interests, liens and encumbrances except the Security Interest; (iv) at all reasonable times, permit Secured Party or its representatives to examine or inspect any Collateral, where ever located, and to examine, inspect and copy Debtor's books and records pertaining to the Collateral and its business and financial condition and to discuss with account debtors and other obligors requests for verifications of amounts owed to Debtor; (v) keep accurate and complete records pertaining to the Collateral and pertaining to Debtor's business and financial condition and submit to Secured Party such periodic reports concerning the Collateral and Debtor's business and financial condition as Secured Party may from time to time reasonably request; (vi) promptly notify Secured Party of any loss of or material damage to any Collateral; (vii) if Secured Party at any time so requests (whether the request is made before or after the occurrence of an Event of Default), promptly deliver to Secured Party any instrument, document or chattle paper constituting Collateral, duly endorsed or assigned by debtor; (viii) at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (in case of Collateral consisting of motor vehicles) and such other risks and in such amounts as Secured Party may reasonably request, with any loss payable to Secured Party to the extent of its interest, (ix) from time to time execute such financing statements as Secured Party may reasonably require in order to perfect the Security Interest and, if any Collateral consists of a motor vehicle, execute such documents as may be required to have the Security Interest properly noted on a certificate of title; (x) pay when due or reimburse Secured Party on demand for all costs of collection of any of the Obligations and all other out-of-pocket expenses (including in each case all reasonable attorneys' fees) incurred by Secured Party in connection with the creation, perfection, satisfaction, protection, defense or enforcement of the Security Interest or the creation, continuance, protection, defense or enforcement of this Agreement or any or all of the Obligations, including expenses incurred in any litigation or bankruptcy or insolvency proceedings; (xi) execute, deliver or endorse any and all instruments, documents, assignments, security agreements and other agreements and writings which Secured Party may at any time reasonably request in order to secure, protect, perfect or enforce the Security Interest and Secured Party's rights under this Agreement; (xii) not use or keep any Collateral, or permit it to be used or kept, for any unlawful purpose or in violation of any federal, state or local law, statute or ordinance; (xiii) permit Secured Party at any time and from time to time to send requests (both before and after the occurrence of an Event of Default) to account debtors or other obligors for verification of amounts owed to Debtor; and (xiv) not permit any Collateral to become part of or to be affixed to any real property without first assuring to the reasonable satisfaction of Secured Party that the Security Interest will be prior and senior to an interest or lien then held or thereafter acquired by any mortgagee of such real property or the owner or purchaser of any interest therein. If Debtor at any time fails to perform or observe any agreement contained in this Section 3(d), and if such failure shall continue for a period of ten calendar days after Secured Party gives Debtor written notice thereof (or, in the case of the agreements contained in clauses (viii) and (ix) of this Section 3(d), immediately upon the occurrence of such failure, without notice or lapse of time), Secured Party may (but need not) perform or observe such agreement on behalf and in the name, place and stead of Debtor (or, at Secured Party's option, in Secured Party's own name) and may (but need not) take any and all other actions which Secured Party may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens, or encumbrances, the performance of obligations under contracts or agreements with account debtors or other obligors, the procurement and maintenance of insurance, the execution of financing statements, the endorsement of instruments, and the procurement of repairs, transportation or insurance); and, except to the extent that the effect of such payment would be to render any loan or forbearance of money usurious or otherwise illegal under any applicable law Debtor shall thereupon pay Secured Party on demand the amount of all moneys expended and all costs and expenses (including reasonable attorneys' fees) incurred by Secured Party in connection with or as a result of Secured Party's performing or observing such agreement or taking such actions, together with interest thereon from the date expended or incurred by Secured Party at the highest rate then applicable to any of the Obligations. To facilitate the performance or 5 observance by Secured Party of such agreements of Debtor, Debtor hereby irrevocably appoints (which appointment is coupled with an interest) Secured Party, or its delegate, as the attorney-in-fact of Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of Debtor, any and all instruments, documents, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by Debtor under this Section 3 and Section 4. 4. LOCKBOX, COLLATERAL ACCOUNT. If Secured Party so requests at any time (whether before or after the occurrence of an Event of Default), Debtor will direct each of its account debtors to make payments due under the relevant account or chattel paper directly to a special lock box to be under the control of Secured Party. Debtor hereby authorizes and directs Secured Party to deposit into a special collateral account to be established and maintained with Secured Party all checks, drafts and cash payments, received in said lock box. All deposits in said collateral account shall constitute proceeds of Collateral and shall not constitute payment of any Obligation. At its option, Secured Party may, at any time, apply finally collected funds on deposit in said collateral account to the payment of the Obligations in such order of application as Secured Party may determine, or permit Debtor to withdraw all or any part of the balance on deposit in said collateral account. If a collateral account is so established, Debtor agrees that it will promptly deliver to Secured Party, for deposit into said collateral account, all payments on accounts and chattel paper received by it. All such payments shall be delivered to Secured Party in the form received (except for Debtor's endorsement where necessary). Until so deposited, all payments on accounts and chattel paper received by Debtor shall be held in trust by Debtor for and as the property of Secured Party and shall not be commingled with any funds or property of Debtor. 5. COLLECTION RIGHTS OF SECURED PARTY. Notwithstanding Secured Party's rights under Section 4 with respect to any and all debt instruments, chattel papers, accounts, and other rights to payment constituting Collateral (including proceeds), Secured Party may, at any time (both before and after the occurrence of an Event of Default) notify any account debtor, or any other person obligated to pay any amount due, that such chattel paper, account, or other right to payment has been assigned or transferred to Secured Party for security and shall be paid directly to Secured Party. If Secured Party so requests at any time. Debtor will so notify such account debtors and other obligors in writing and will indicate on all invoices to such account debtors or other obligors that the amount due is payable directly to Secured Party. At any time after Secured Party or Debtor gives such notice to an account debtor or other obligor, Secured Party may (but need not), in its own name or in Debtor's name, demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or in securing, any such chattel paper, account, or other right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor. 6. ASSIGNMENT OF INSURANCE. Debtor hereby assigns to Secured Party, as additional security for the payment of the Obligations, any and all moneys (including but not limited to proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of Debtor under or with respect to, any and all policies of insurance covering the Collateral, and Debtor hereby directs the issuer of any such policy to pay any such moneys directly to Secured Party. Both before and after the occurrence of an Event of default, Secured Party may (but need not), in its own name or in Debtor's name, execute and deliver proofs of claim, receive all such moneys, endorse checks and other instruments representing payment of such moneys, and adjust, litigate, compromise or release any claim against the issuer of any such policy. 7. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an event of default under this Agreement (herein called "Event of Default"): (i) Debtor shall fail to pay any or all of the Obligations when due or (if payable on demand) on demand, or shall fail to observe or perform any covenant or agreement herein binding on it; (ii) any representation or warranty by Debtor set forth in the Agreement or made to Secured Party in any financial statements or reports submitted to Secured Party by or on behalf of Debtor shall prove materially false or misleading; (iii) a garnishment, summons or a writ of attachment shall be issued against or served upon the Secured Party for the attachment of any property of Debtor or any indebtedness owing to Debtor; (iv) Debtor or any guarantor of any Obligation shall (A) be or become insolvent (however defined); or (B) voluntarily file, or have filed against it involuntarily, a petition under the United States Bankruptcy Code; or (C) if a corporation, partnership, or organization, be dissolved or liquidated or, if a partnership, suffer the death of a partner or, if an individual, die; or (D) go out of business; (v) if Debtor is a corporation, more than 50% of the shares of voting stock of Debtor shall become owned by a shareholder or shareholders who were not owners of voting stock of Debtor on the date of this Agreement or, if Debtor is a partnership, more than 50% of the partnership interests in the Debtor shall become owned by a partner or partners who were not partners of Debtor on the date of this Agreement; or (vi) Debtor shall consolidate with or merge into, or sell all or substantially all of its assets to, any individual, corporation, or other entity. 8. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default under Section 7 and at any time thereafter, Secured Party may exercise any one or more of the following rights and remedies: (i) declare all unmatured Obligations to be immediately due and payable, and the same shall thereupon be immediately due and payable, without presentment or other notice or demand; (ii) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including but not limited to the right to take possession of any Collateral, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which Debtor hereby expressly waives), and the right to sell, lease or otherwise dispose of any or all of the Collateral, and in connection therewith, Secured Party may require Debtor to make the Collateral available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties, and if notice to Debtor of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 10) at least 10 calendar days prior to the date of intended disposition or other action; (iii) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against the Collateral, against Debtor or against any other person or property. Upon the occurrence of the Event of Default described in Section 7(iv)(B), all Obligations shall be immediately due and payable without demand or notice thereof. Secured Party is hereby granted a nonexclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, trade secrets, franchises, copyrights and patents of Debtor that Secured Party deems necessary or appropriate to the disposition of any Collateral. 9. OTHER PERSONAL PROPERTY. Unless at the time Secured party takes possession of any tangible Collateral, or within seven days thereafter, Debtor gives written notice to Secured Party of the existence of any goods, papers or other property of Debtor, not affixed to or constituting a part of such Collateral, but which are located or found upon or within such Collateral, describing such property, Secured Party shall not be responsible or liable to Debtor for any action taken or omitted by or on behalf of Secured Party with respect to such property without actual knowledge of the existence of any such property or without actual knowledge that it was located or to be found upon or within such Collateral. 10. MISCELLANEOUS. This Agreement does not contemplate a sale of accounts, or chattel paper. Debtor agrees that each provision whose box is checked is part of this Agreement. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by Secured Party. A waiver signed by Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Debtor shall be deemed sufficiently given if delivered or mailed by registered or certified mail, postage prepaid, to Debtor at its address set forth above or at the most recent address shown on Secured Party's records. Secured Party's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if Secured Party exercised reasonable care in physically safekeeping such Collateral or, in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and Secured Party need not otherwise preserve, protect, insure or care for any Collateral. Secured Party shall not be obligated to reserve any rights Debtor may have against prior parties, to realize on the Collateral at all or in any particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their respective heirs, representatives, successors and assigns and shall take effect when signed by Debtor and delivered to Secured Party, and Debtor waives notice of Secured Party's acceptance hereof. Secured Party may execute this Agreement if appropriate for the purpose of filing, but the failure of Secured Party to execute this Agreement shall not affect or impair the validity or effectiveness of this Agreement. A carbon, photographic or other reproduction of this Agreement or of any financing statement signed by the Debtor shall have the same force and effects as the original for all purposes of a financing statement. Except to the extent otherwise required by law, this Agreement shall be governed by the internal laws of the State of Minnesota. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. If this Agreement is signed by more than one person as Debtor, the term "Debtor" shall refer to each of them separately and to both or all of them jointly; all such persons shall be bound both severally and jointly with the other(s); and the Obligations shall include all debts, liabilities and obligations owed to Secured Party by any Debtor solely or by both or several or all Debtors jointly or jointly and severally, and all property described in Section 1 shall be included as part of the Collateral, whether it is owned jointly by both or all Debtors or is owned in whole or in part by one (or more) of them. There shall be (1) counterpart of this Agreement and it will be market "Original." To the extent that this Agreement constitutes chattel paper (as defined by the Uniform Commercial Code), a security interest only may be created in the Agreement marked "Original." StarTek USA, Inc. - --------------------------------- Debtor /s/ DENNIS M.SWENSON - --------------------------------- By Executive Vice President - --------------------------------- Title Exhibits and Schedules not filed EX-10.20 3 CONTRIBUTION AGREEMENT 1 EXHIBIT 10.20 CONTRIBUTION AGREEMENT AGREEMENT, dated as of September 15, 1999 (the "Agreement"), among GOOD CATALOG COMPANY, a Delaware corporation (the "Company") THE READER'S DIGEST ASSOCIATION, INC., a Delaware corporation ("RDA"), and DOMAIN.COM, INC., a Delaware corporation ("Domain"). W I T N E S S E T H: WHEREAS, RDA and StarTek, Inc., the parent company of Domain, have entered into a letter agreement, dated August 12, 1999, pursuant to which RDA has agreed to cause the Company, its wholly-owned subsidiary, to sell and issue shares of its Common Stock, $1.00 par value (the "Common Stock") to StarTek or its subsidiary, in return for certain cash investments and the contribution of the domain name and URL www.gifts.com; and WHEREAS, Domain owns all right, title and interest in and to the domain name and URL www.gifts.com; NOW, THEREFORE, in consideration of the foregoing premises and the agreements and covenants herein set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. CONTRIBUTION OF STOCK 1.1 Contribution by Domain. On the terms and subject to the conditions of this Agreement, Domain agrees at the Closing (as defined in Section 1.4) to contribute or cause to be contributed to the Company all of Domain's and all of its affiliates' right, title and interest in and to the domain name and URL www.gifts.com, the name "gifts.com," including all trademarks related thereto, all trademark applications therefore and all goodwill associated therewith (the "Gifts.com Rights"). 1.2 Cash Investment. On the terms and subject to the conditions of this Agreement, Domain agrees at the Closing to invest in the Company cash in the amount of $2,605,625. 1.3 Consideration. In consideration of Domain's contribution to the Company described in Section 1.1 and 1.2 above, Domain shall receive at the Closing 199 shares of Company Common Stock. 1.4 The Closing. The contribution of assets described in Sections 1.1 and 1.2, and the exchange of consideration therefor pursuant to this Article 1 shall be held at the offices of Loeb & Loeb LLP, 345 Park Avenue, New York, New York on November 1, 1999 or at such other place and time as the parties shall mutually agree (the "Closing" Date). 2 1.5 Deliveries by Domain. At the Closing, Domain shall deliver the following: (a) An instrument of assignment substantially in the form of Exhibit A hereto, assigning all of Domain's right, title and interest in and to the Gifts.com Rights to the Company, duly executed, by Domain (the "Assignment"); (b) The Stockholders Agreement, among Domain, RDA and the Company substantially in the form of Exhibit B hereto (the "Stockholders Agreement"), duly executed by Domain; (c) A Fulfillment Services Agreement between StarTek and the Company, substantially in the form of Exhibit C hereto (the "Fulfillment Agreement"), duly executed by StarTek; (d) UCC financing statements in accordance with Section 4.B. of the Fulfillment Agreement; (e) $2,605,625 cash contribution pursuant to Section 1.2, by wire transfer of immediately available funds to a bank account of the Company designated to Domain as set forth in Exhibit A to the Loan Agreement (as defined herein); (f) The Loan Agreement among Domain and RDA, as lenders, and the Company, as borrower, substantially in the form of Exhibit D hereto duly completed (the "Loan Agreement") duly executed by Domain; (g) A loan to the Company pursuant to the Loan Agreement in the aggregate principal amount of $7,816,875; (h) A certificate of a duly authorized officer of Domain and StarTek as to the satisfaction of the conditions to the Closing set forth in Sections 3.2(a) and (b) hereof; and (i) An opinion of Otten, Johnson, Robinson, Neff & Ragonetti, P.C., counsel to StarTek and Domain, substantially in the form of Exhibit E. 1.6 Deliveries by the Company and RDA. The Company and RDA shall deliver the following: (a) a certificate representing 199 shares of Company Common Stock, registered in the name of Domain; (b) The Services Agreement between RDA and the Company, substantially in the form of Exhibit F hereto (the "Services Agreement"), duly executed by the Company and RDA; (c) The Stockholders Agreement, duly executed by the Company and RDA; 2 3 (d) The Fulfillment Services Agreement, duly executed by the Company; (e) The Loan Agreement, duly executed by RDA and the Company; (f) A loan by RDA in the aggregate principal amount of $18,433,125, as reduced by all amounts previously loaned by RDA to the Company as contemplated in the Loan Agreement; (g) Promissory notes payable to Domain and RDA, in substantially the form provided in the Loan Agreement (the "Notes"), duly completed and executed by the Company; (h) A certificate of a duly authorized officer of RDA and the Company as to the satisfaction of the conditions to the Closing set forth in Sections 3.1(a) and (b) hereof; and (i) Opinion of Loeb & Loeb LLP, counsel to the Company and RDA, substantially in the form of Exhibit G hereto. 1.7 Transaction Documents. As used herein, "Transaction Documents" shall mean the Assignment, the Stockholders Agreement, the Guarantee, the Services Agreement, the Fulfillment Agreement, the Loan Agreement, the Notes and any other ancillary or related documents. 2. REPRESENTATIONS AND WARRANTIES 2.1 RDA. RDA represents and warrants that, as of the date hereof: (a) Business Plan. RDA has contributed to the Company all of RDA's right title and interest in and to the FY: '00 Business Plan of Gifts.com dated May 14, 1999, free and clear of all liens, security interests, pledges, charges, encumbrances or restrictions of any kind whatsoever ("Encumbrances"). (b) Cash Contributions and Prepaid Expenses. RDA has contributed to the equity capital of the Company cash and prepaid expenses in the amount of $6,144,375, representing costs incurred or committed by, or cash funding of the development by the Company of, an Internet Web site to sell gifts on-line. RDA has contributed to the Company all right, title and interest in and to all property acquired or developed by RDA on behalf of the Company with such prepaid expenses free and clear of all Encumbrances. (c) Authorization, Execution and Delivery. The execution, delivery and performance by RDA of this Agreement and the Transaction Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of RDA. This Agreement constitutes and, effective upon execution and delivery by RDA, each Transaction Document to which it is a party will constitute, legal, valid and binding obligations of RDA, enforceable 3 4 against RDA in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity regardless of whether considered in a proceeding in equity or at law. (d) No Violation. Neither the execution or delivery by RDA of this Agreement or any of the Transaction Documents to which RDA is a party nor the consummation of the transactions contemplated herein or therein will: (i) violate any provision of the Certificate of Incorporation or bylaws of RDA; (ii) violate, or constitute a default under, permit the termination or acceleration of the maturity of or cause the loss of any rights or options under, any material contract to which RDA is a party; (iii) require any authorization, consent or approval of, exemption or other action by, or notice to, any party to any material contract to which RDA is a party; or (iv) violate any law to which RDA is subject. (e) Regulatory Approvals. No consent, approval, authorization, notice, filing, exemption or other requirement of RDA must be obtained from any governmental authority in order for (i) the execution or delivery by RDA of this Agreement or any of the Transaction Documents or (ii) the consummation by RDA or the Company of the transactions contemplated herein or therein. (f) Company. To the knowledge of RDA, without investigation, the representations and warranties of the Company in Section 2.3 are true and correct as of the dated deemed made. 2.2 Domain and A. Emmet Stephenson, Jr. Domain represents and warrants and, with respect to Sections 2.2(a) and 2.2(b), Domain and A. Emmet Stephenson, Jr., to his knowledge without investigation, jointly and severally represent and warrant, as of the date hereof and the Closing Date: (a) Ownership of Gifts.com Rights. Domain has the sole right in and to the URL www.gifts.com registered with InterNIC, free and clear of all Encumbrances, and to Domain's and A. Emmet Stephenson, Jr.'s knowledge, without investigation, Domain is the owner of the other Gifts.com Rights, free and clear of all Encumbrances, except rights which the corporation formed in Delaware (or any other state) under the name "gifts.com" may have acquired and any rights J.C. Penney may have acquired by registering and using the domain name "gift.com" (collectively, the "Known Conflicts"). (b) Non-Infringement. To the knowledge of Domain and A. Emmet Stephenson, Jr., without investigation, the use by the Company of the Gifts.com Rights following the Closing will not infringe any trademark, service mark, trade or business name or other right of any other Person, except to the extent any of the Gifts.com Rights are found to infringe on any of the Known Conflicts. (c) Authorization, Execution and Delivery. The execution, delivery and performance by Domain of this Agreement and the Transaction Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of Domain. This 4 5 Agreement constitutes and, effective upon execution and delivery by Domain, each Transaction Document to which it is a party will constitute, legal, valid and binding obligations of such party, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity regardless of whether considered in a proceeding in equity or at law. (d) No Violation. Neither the execution or delivery by StarTek or Domain of this Agreement or any of the Transaction Documents to which either is a party nor the consummation of the transactions contemplated herein or therein will: (i) violate any provision of the Certificate of Incorporation or bylaws of StarTek or Domain; (ii) violate, or constitute a default under, permit the termination or acceleration of the maturity of or cause the loss of any rights or options under, any material contract to which StarTek or Domain is a party; (iii) require any authorization, consent or approval of, exemption or other action by, or notice to, any party to any material contract to which StarTek or Domain is a party; or (iv) violate any law to which StarTek or Domain is subject. (e) Regulatory Approvals. No consent, approval, authorization, notice, filing, exemption or other requirement must be obtained from any governmental authority in order for (i) the execution or delivery by StarTek or Domain of this Agreement or any of the Transaction Documents and (ii) the consummation by StarTek or Domain of the transactions contemplated herein or therein. (f) Obtaining Shares Entirely for Own Account. Domain is acquiring the Common Stock for investment for Domain's own account, not as a nominee or agent, and not with a view to, or for the resale or distribution of any part thereof. Domain has no present intention of selling, granting any participation in, or otherwise distributing the Common Stock. Domain further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the shares of the Common Stock, except as set forth in the Stockholders Agreement. (g) Disclosure Information. Domain has received from the Company and RDA all information which it and its representatives have requested and consider necessary or appropriate in deciding whether to make its contribution to the Company in consideration of Common Stock as described in Article 1. The foregoing does not limit or modify the representations and warranties in Sections 2.1 and 2.3 or the right of Domain to rely thereon. (h) Investment Experience. Domain (i) fully understands that an investment in the Company is highly speculative and that it may lose its entire investment, (ii) is experienced in evaluating and investing in companies such as the Company and businesses such as an on-line gifts business, (iii) is capable of evaluating the merits and risks of its investment; (iv) is able to bear the economic risk of a loss of the entire amount of its investment; and (v) is prepared to hold the Common Stock received pursuant hereto for an indefinite period of time. 5 6 (i) Accredited Investor. Domain is an "accredited investor" within the meaning of Securities and Exchange Commission Rule 501 of Regulation D, as presently in effect. (j) Restricted Shares. Domain acknowledges that, because the Common Stock issued in connection with this Agreement has not been registered under the Securities Act of 1933, as amended (the "Securities Act"), the Common Stock must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Domain is aware of the provisions of Rule 144 promulgated under the Securities Act which permits limited resale of shares purchased in a private transaction subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one (1) year after a party has purchased and paid for the security to be sold, the sale being through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of shares being sold during any three (3) month period not exceeding specified limitations (unless the sale is within the requirements of Rule 144(k)). 2.3 The Company. The Company represents and warrants that, as of the date hereof and the Closing Date: (a) Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; has all requisite power to own, lease and operate its assets, properties and business and to carry on its business as presently conducted; and is duly qualified or licensed to do business as a foreign corporation and is in good standing in every jurisdiction in which the nature of its business or the location of its properties requires such qualification or licensing, except for such jurisdictions where the failure to so qualify or be licensed would not have a material adverse effect on the Company. (b) Capitalization. The authorized capital stock of the Company consists solely of 5000 shares of common stock, $1.00 par value per share, of which 801 shares are issued and outstanding and owned by RDA. Upon issuance of the Common Stock issuable to Domain on the Closing Date, such shares shall be validly issued, fully paid and non-assessable. Except as contemplated in this Agreement, there are no outstanding options, warrants, rights or agreements for the purchase or acquisition from the Company of any shares of capital stock. (c) Authorization, Execution and Delivery. The execution, delivery and performance by the Company of this Agreement and the Transaction Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of the Company. This Agreement constitutes and, effective upon execution and delivery by the Company, each Transaction Document to which it is a party will constitute, legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity regardless of whether considered in a proceeding in equity or at law. 6 7 (d) No Violation. Neither the execution or delivery by the Company of this Agreement or any of the Transaction Documents to which the Company is a party nor the consummation of the transactions contemplated herein or therein will: (i) violate any provision of the Certificate of Incorporation or bylaws of the Company; (ii) violate, or constitute a default under, permit the termination or acceleration of the maturity of or cause the loss of any rights or options under, any material contract to which the Company is a party; (iii) require any authorization, consent or approval of, exemption or other action by, or notice to, any party to any material contract to which the Company is a party; or (iv) violate any law to which the Company is subject. (e) Regulatory Approvals. No consent, approval, authorization, notice, filing, exemption or other requirement of the Company must be obtained from any governmental authority in order for the execution or delivery by the Company of this Agreement or any of the Transaction Documents. (f) Subsidiaries. The Company does not own any interest in any other corporation, limited liability company, partnership or other entity. (g) Financial Statements. Attached hereto as Exhibit H are the unaudited balance sheets (the "Most Recent Balance Sheet") and the related statements of income, changes in stockholders' equity, and cash flow (collectively, the "Financial Statements") as of and for the nine months ended June 30, 1999 (the "Most Recent Fiscal Month End") for the Company. The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby and present fairly the financial condition of the Company as of such dates and the results of operations of the Company for such period, subject to normal year-end adjustments (which will not be material individually or in the aggregate) and lack footnotes and other presentation items. Since the Most Recent Fiscal Month End, there has not been any material adverse change in the business, financial condition, operations, results of operations, or future prospects of the Company. (h) Undisclosed Liabilities. The Company does not have any material liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for taxes), except for (i) liabilities set forth on the face of the Most Recent Balance Sheet (rather than in any notes thereto) and (ii) liabilities which have arisen after the Most Recent Fiscal Month End in the ordinary course of business. (i) Legal Compliance. The Company has complied with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder) of federal, state, local and foreign governments (and all agencies thereof), and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed or, to the knowledge of the Company, commenced against it alleging any failure so to comply, except where the failure to comply would not have a material adverse effect on the business, financial condition, operations, results of operations, or future prospects of the Company. 7 8 (j) Tax Matters. (i) The Company has filed all Tax Returns that it was required to file. All such Tax Returns were correct and complete in all material respects. All Taxes owed by the Company (whether or not shown on any Tax Return) have been paid. The Company is not the beneficiary of any extension of time within which to file any Tax Return. (ii) For purposes of this agreement, "Tax" or "Taxes" means federal, state, county, local, foreign or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not. "Tax Return" means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. (k) Litigation. The Company (i) is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge, and (ii) there is no material claim, action, proceeding or investigation pending or, to the knowledge of the Company, threatened against or relating to the Company before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator. (l) Year 2000 Compliance. To the Company's knowledge, none of the computer software, computer firmware, computer hardware (whether general or special purposes) or other similar or related items of automated, computerized or software systems that are used or relied on directly by the Company in the conduct of its business will malfunction, will cease to function, will generate incorrect data or will produce incorrect results when processing, providing or receiving (a) date-related data from, into and between the twentieth and twenty-first centuries or (b) date-related data in connection with any valid date in the twentieth and twenty-first centuries ("Year 2000 Compliance"), in each instance in such a manner as to cause material adverse harm to the Company and the Company will not be required to incur any further material expense in order to become Year 2000 Compliant. The Company believes that it will not be subject to any material liability or claims by its customers or employees due to its failure to be Year 2000 Compliant. The Company has developed reasonable contingency plans to deal with the possibility that some of its customers and suppliers may not be Year 2000 Compliant. (m) Acquisition of Assets. To the best of the Company's knowledge, no material breach of any representation, warranty or covenant exists under that certain Asset Purchase Agreement by and between the Company (f/k/a Reader's Digest Sub Six, Inc.), as buyer, and Good Catalog Company, an Oregon corporation, as seller and since the closing of such agreement there has not been any adverse change in the Company's assets, liabilities or the Company's relationship with its employees which change could be reasonably expected to have a material adverse effect on the Company's business or property. 8 9 (n) Neither this Agreement nor any of the documents or other information made available to Domain or its Affiliates, attorneys, accountants, agents or representatives pursuant hereto in connection with Domain's due diligence review of the Company or the transactions contemplated by this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained therein not misleading; provided that information as of a later date shall be deemed to modify information as of an earlier date. 3. CONDITIONS TO CLOSING 3.1 Conditions to the Obligations of Domain. The obligations of Domain under Section 1.5 of this Agreement are subject to the fulfillment, or written waiver by Domain party, on or before the Closing, of each of the following conditions: (a) Representations and Warranties. The representations and warranties of RDA and the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing Date. (b) Authorizations. All authorizations, permits and approvals (including Board of Directors and stockholder approvals) required for RDA's and the Company's consummation of the transactions contemplated hereby as of the date of the Closing shall have been received. RDA and the Company shall have performed and complied in all material respects with all agreements, covenants and conditions contained herein and in all other documents contemplated hereby that are required to be performed or complied with by such party on or before the Closing. (c) Consents; No Restrictions. RDA and the Company shall have received all consents, approvals, waivers and authorizations required from any government authority for any party to consummate the transactions contemplated hereby, and such consents, approvals, waivers and authorization shall be in full force and effect. No injunction or other order issued by any government authority, nor any statute, rule, regulation or decree which declares any Transaction Document invalid in any respect or prevents the consummation of the transactions contemplated hereby or thereby shall be in effect. (d) Deliveries. RDA and the Company shall have made all deliveries required by Section 1.6. 3.2 Conditions to the Obligations of RDA and the Company. The obligations of each of RDA and the Company under Section 1.6 of this Agreement are subject to the fulfillment, or written waiver by such party, on or before the Closing, of each of the following conditions: (a) Representations and Warranties. The representations and warranties of Domain and A. Emmet Stephenson, Jr., contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing Date. 9 10 (b) Authorizations. All authorizations, permits and approvals (including Board of Directors and stockholder approvals) required for StarTek's and Domain's consummation of the transactions contemplated hereby as of the date of the Closing shall have been received. Domain shall have performed and complied in all material respects with all agreements, covenants and conditions contained herein and in all other documents contemplated hereby that are required to be performed or complied with by such party on or before the Closing. (c) Consents; No Restrictions. StarTek and Domain shall have received all consents, approvals, waivers and authorizations required from any government authority for any party to consummate the transactions contemplated hereby, and such consents, approvals, waivers and authorization shall be in full force and effect. No injunction or other order issued by any government authority, nor any statute, rule, regulation or decree which declares any Transaction Document invalid in any respect or prevents the consummation of the transactions contemplated hereby or thereby shall be in effect. (d) Deliveries. StarTek and Domain shall have made all Deliveries required by Section 1.5. 4. COVENANTS 4.1 Transfer of URL with NSI. The Company agrees that it shall take no action to amend, transfer or change the registration of the URL www.gifts.com with Network Solutions, Inc. until the Company has completed the name change provided for in Section 4.2. 4.2 Name Change, Etc. RDA and the Company agree that they shall use their reasonable commercial efforts as promptly as practicable to effect a change of the name of the Company to "Gifts.com, Inc." or "Gifts.com." Such name change may be effected by amendment to the Certificate of Incorporation of the Company or merger of the Company with and into another corporation (including a corporation organized in another jurisdiction), with the surviving corporation having the name "Gifts.com, Inc." or "Gifts.com." 5. MISCELLANEOUS PROVISIONS 5.1 Survival of Representations and Warranties. All of the representations and warranties of the Company, RDA, Domain and with respect to Section 2.2(a) and 2.2(b) A. Emmet Stephenson, Jr., contained in this Agreement shall survive the Closing for a period of one year. 5.2 Confidentiality. Each party (the "receiving party") agrees to keep in confidence all information about the other party (the "disclosing party") obtained in connection with the transactions proposed hereby ("Confidential Information") except for Confidential Information which (i) is public knowledge, (ii) is required to be disclosed by law or under the rules of the New York Stock Exchange, (iii) was independently developed by the receiving party, or (iv) was already in the receiving party's possession from a source which the receiving party reasonably believed, after due inquiry, owed no duty of confidentiality to the disclosing party. In addition, the receiving party agrees that it will not use the Confidential Information for any purpose other than for the purpose of performing its obligations under this 10 11 Agreement or the Transaction Documents, as applicable. The parties agree that, in view of the unique nature of the confidential Information to be disclosed hereunder, irreparable loss could be sustained by the disclosing party in the event of an unauthorized disclosure of Confidential Information and the disclosing party would not have an adequate remedy at law in such event. Therefore, the parties agree that each party hereto shall be entitled to injunctive relief, including specific enforcement, to enforce the provisions of this Section 5.2, in addition to any remedy to which a disclosing party may be entitled to at law, and the receiving party against whom injunctive relief is sought agrees not to raise the defense that there is an adequate remedy at law. 5.3 Communications. Unless otherwise provided therein, all notices and other communications or designations required or permitted by this Agreement shall be in writing, and, If to RDA, to: The Reader's Digest Association, Inc. Reader's Digest Road Pleasantville, NY 10570-7000 Attention: Thomas D. Gardner, Senior Vice President Facsimile: 914-244-6832 With a copy to: The Reader's Digest Association, Inc. Reader's Digest Road Pleasantville, NY 10570-7000 Attention: General Counsel Facsimile: 914-244-5644 or at such other address as RDA may designate in a written notice to Domain. If to the Company, to: Good Catalog Company c/o The Reader's Digest Association, Inc. Reader's Digest Road Pleasantville, NY 10570-7000 Attention: Senior Vice President, Business Planning and Development Facsimile: 914-238-6932 11 12 With a copy to: The Reader's Digest Association, Inc. Reader's Digest Road Pleasantville, NY 10570-7000 Attention: General Counsel Facsimile: 914-244-5644 or to such other address as the Company may designate in a written notice to Domain. If to Domain, to: Domain.com, Inc. c/o StarTek, Inc.. 100 Garfield Street, 4th Floor Denver, CO 80206 Attention: Chairman Facsimile: (303) 329-9107 With a copy to: StarTek, Inc. 1250 H Street Greeley, CO 80631 Attention: President and Chief Executive Officer Facsimile: (970) 346-5401 and a copy to: Otten, Johnson, Robinson, Neff & Ragonetti, P.C. 950 Seventeenth Street, Suite 1600 Denver, Colorado 80202 Attention: Karen Barsch, Esq. Facsimile: (303) 825-6525 or to such other address as Domain may designate in a written notice to RDA and the Company. All notices and other communications required or permitted by this Agreement shall be deemed to have been duly given if personally delivered to the intended recipient at the proper address determined pursuant to this Section 5.3 or sent to such recipient at such address by air courier, facsimile transmission, followed by delivery by overnight courier, or by hand and will be deemed given, unless earlier received: (a) if sent by courier when recorded on the records of the courier as received by the receiving party; (b) if sent by facsimile, upon transmission if on a Business Day and during business hours in the country of receipt, otherwise, at 9:00 a.m. on the 12 13 next Business Day in the location of receipt, subject to receipt of a facsimile machine generated confirmation, and (c) if delivered by hand, on the date of receipt. 5.4 References. (a) Except as otherwise specified in this Agreement, all references in this Agreement (i) to any Person shall be deemed to include such Person's permitted heirs, personal representatives, successors and assigns; (ii) to any agreement, document or other written instrument shall be a reference to such agreement, document or instrument together with all exhibits, schedules, attachments and appendices, thereto, in each case as amended, restated, supplemented or otherwise modified from time to time in accordance with the terms thereof and hereof; and (iii) to any law, statute or regulation specifically defined or referred to in this Agreement shall be deemed references to such law, statute or regulation as the same may be supplemented, amended, consolidated, superseded or modified from time to time. (b) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." The words "herein," "hereof" and "hereunder" and words of similar import, when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and references to "Article," "Section," "Exhibit," "Schedule," and "Appendix" are references to this Agreement unless otherwise specified. Whenever the context so requires, words importing any gender include the other gender. Any of the terms defined in this Agreement may, unless the context otherwise requires, be used in the singular or the plural depending on the reference; the singular includes the plural and the plural includes the singular. 5.5 StarTek's Indemnification. StarTek shall indemnify the Company and RDA from and against any losses, costs, damages, claims or liabilities, including costs of defense and fees and expenses of counsel (each a "Loss") (but not any punitive, exemplary, expectancy or consequential damages) actually incurred by the Company and/or RDA directly arising out of any breach of the representations and warranties made by Domain in Section 2.2 of this Agreement, up to a maximum aggregate indemnification liability of $5,000,000. The Company and/or RDA shall notify StarTek of any loss, liability, claim or damage incurred, threatened or commenced by or against such party which is covered by this Agreement with reasonable promptness. StarTek shall have, at its election made on a timely basis, the right to compromise, defend or cure with regard to any such claim, suit or proceeding involving an actual or potential Loss (a "Claim") through counsel of its own choosing at StarTek's sole expense if the reasonably foreseeable liability is less than $5,000,000; provided, however, StarTek shall not be entitled to settle or compromise any Loss, without the prior written consent of the Company, unless such settlement provides for a complete release of any and all claims by the third-party to the URL www.gifts.com. On any Claim involving a potential loss in which StarTek has the right and chooses to defend an indemnified party hereunder, the indemnified party shall have the right to engage separate counsel of its choosing and to participate in the prosecution, defense, compromise or settlement thereof or to conduct its own defense. In the event StarTek undertakes to compromise, defend or cure a Claim, StarTek shall so notify the Company and RDA on or before fifteen (15) days after the receipt of the above 13 14 notice furnished by the Company and/or RDA setting forth its intention to do so and the Company and RDA shall reasonably cooperate in all respects with StarTek in defending or curing any such Claim. 5.6 Consent to Jurisdiction; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in that State. The Company, Domain and RDA irrevocably and unconditionally (i) agree that any suit, action or proceeding against such party arising out of this Agreement may be brought in any New York State or Federal court sitting in New York, New York or Westchester County, New York, or in any Colorado State or Federal court sitting in the City and County of Denver, Colorado, (ii) waive, to the fullest extent such party may effectively do so, any objection which such party may have to laying of venue of any such suit, action or proceeding and (iii) submit to the non-exclusive jurisdiction of such courts in any suit, action or proceeding and agree that any process or notice of motion or other application to any court may be served on such party within or outside such court's territorial jurisdiction by registered or certified mail or by personal service at such party's address set forth above. 5.7 Binding Effect; Successors and Assigns; Entire Agreement. Except as expressly provided in this Agreement, nothing in this Agreement, express or implied, is intended or shall be construed to confer upon or give any Person (including creditors and affiliates of any party) other than the parties hereto any remedy or claim under or by reason of this Agreement or any term, covenant or condition hereof, all of which shall be for the sole and exclusive benefit of the parties. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors, legal representatives and permitted assigns; provided, however, that, except as otherwise specifically permitted by this Agreement, neither this Agreement nor any of the rights, interests or obligations of any party hereunder shall be assigned or delegated without the prior written consent of the party which is the non-assigning or non-delegating party, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, any party shall have the right to assign its rights and obligations hereunder without the other parties' consent to a wholly-owned subsidiary or in the event of a merger or sale of all or substantially all of the assets of such party, including the merger contemplated pursuant to Section 4.2. This Agreement sets forth the entire agreement and understanding among the parties hereto as to the subject matter hereof and merges and supersedes all prior discussions and agreements between the parties. 5.8 Amendments and Waivers. This Agreement may not be amended, modified or supplemented unless approved in writing by each party to this Agreement. No waiver of any right or remedy or of compliance with any provisions hereof, and no consent provided for herein, shall be effective unless evidenced by an instrument in writing executed by the party sought to be charged with such waiver or consent. The rights and remedies herein expressly provided are cumulative and not exclusive of any other rights or remedies which any party hereto would otherwise have at law, in equity, by statute or otherwise. 5.9 Headings. The headings of the Sections contained in this Agreement are solely for convenience of reference, are not part of the agreement of the parties and shall not affect the meaning or interpretation of this Agreement. 14 15 5.10 No Implied Waivers. No action taken pursuant to this Agreement, including, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, agreements, covenants, obligations or commitments contained herein or made pursuant hereto. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by any party to exercise any right, privilege or remedy hereunder shall be deemed a waiver of such party's rights, privileges or remedies hereunder or shall be deemed a waiver of such party's rights to exercise the same at any subsequent time or times hereunder. 5.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original of the party or parties executing the same and all of which together shall be deemed to constitute one and the same agreement. A facsimile signature of a counterpart executed copy of this Agreement shall be treated as an original. 5.12 Further Assurances. Each party shall cooperate and take such actions as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. 5.13 Construction. RDA, the Company and Domain have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by RDA, the Company and Domain and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 5.14 Expenses. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation execution, and performance of this Agreement and the Transaction Documents, including all fees and expenses of agents, representatives, counsel and accountants. In the event of breach of this Agreement, the obligation of each party to pay its own expenses will be subject to any rights of such party arising from the breach of this Agreement by another party and in such case the expenses, including reasonable attorneys fees and costs, of the enforcement of this Agreement shall be borne by the unsuccessful party. 15 16 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. GOOD CATALOG COMPANY By:/s/ James P. Steffensen -------------------------------------------------- Name: James P. Steffensen Title: President THE READER'S DIGEST ASSOCIATION, INC. By: /s/ Thomas D. Gardner ------------------------------------------------- Name: Thomas D. Gardner Title: Senior Vice President, Business Planning and Development DOMAIN.COM, INC. By: /s/ A. Emmet Stephenson, Jr. ------------------------------------------------- Name: A. Emmet Stephenson, Jr. Title: Chairman and Vice President The undersigned, A. Emmet Stephenson, Jr., hereby executes this Agreement in connection with his representation and warranty in Sections 2.2 (a) and 2.2(b) of this Agreement. - ------------------------------------ A. Emmet Stephenson, Jr. 16 17 The undersigned, A. StarTek, Inc., hereby executes this Agreement in connection with its indemnification in Section 5.5 of this Agreement. STARTEK, INC. By: /s/ A. Emmet Stephenson, Jr ------------------------------------------ Name: A. Emmet Stephenson, Jr. Title: Chairman 17 Exhibits and Schedules not filed EX-10.21 4 STOCKHOLDER AGREEMENT 1 EXHIBIT 10.21 GOOD CATALOG COMPANY STOCKHOLDERS AGREEMENT This Stockholders Agreement ("Agreement") is made and entered into as of this 15th day of September, 1999, by and among GOOD CATALOG COMPANY, a Delaware corporation (the "Company"), THE READER'S DIGEST ASSOCIATION, a Delaware corporation ("RDA"), and DOMAIN.COM, INC., a Delaware corporation ("Domain"). In consideration of the mutual benefits to be derived herefrom and of the mutual agreements hereinafter set forth, the parties hereto agree as follows: ARTICLE I Definitions Certain defined terms used in this Agreement have the following meanings: Agreement. The "Agreement" shall mean this Stockholders Agreement, as the same may be amended or restated from time to time hereafter. Affiliate. An "Affiliate" of a Person shall mean a Person directly or indirectly controlling, controlled by or under common Control with such Person. Board of Directors. The "Board of Directors" shall mean the Board of Directors of the Company as the same may be constituted from time to time hereafter pursuant to applicable law, the Certificate of Incorporation and the By-Laws. Board Termination Event. "Board Termination Event" shall mean the first to occur of an Initial Public Offering, a merger or consolidation of the Company, or a sale of all or substantially all of the Company's business and assets in which the stockholders of the Company immediately prior to such merger or consolidation or sale do not own a majority of the outstanding shares of the surviving entity or the entity to which such sale is made. Bona Fide Offer. A "Bona Fide Offer" shall mean an offer in writing to RDA, offering to purchase all or any part of the Shares owned by RDA and setting forth all the relevant terms and conditions of the proposed purchase, from an offeror who is ready, willing and able to consummate the purchase and who is not a permissible transferee pursuant to Section 3.3. By-Laws. The "By-Laws" shall mean the By-Laws of the Company in effect as of the date hereof and as the same may be modified from time to time hereafter pursuant to applicable law and the Certificate of Incorporation. Certificate of Incorporation. The "Certificate of Incorporation" shall mean the Certificate of Incorporation of the Company in effect as of the date hereof and as the same may 2 be modified, amended or replaced from time to time hereafter in compliance with applicable law and the Company's other obligations with respect thereto. Commission. The "Commission" shall mean the Securities and Exchange Commission and any successor commission or agency having similar powers. Common Stock. The "Common Stock" shall mean the Company's Common Stock, $1.00 par value per share. Company. The "Company" shall mean Good Catalog Company, a Delaware corporation. Control. "Control" shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities, by contract or otherwise. GAAP. "GAAP" shall mean generally accepted United States accounting principles, applied on a basis consistent with the basis on which the balance sheet and other financial statements are prepared. Initial Public Offering. "Initial Public Offering" shall mean an initial public offering by the Company or any Stockholder of Shares pursuant to the Securities Act of 1933, as amended. Outstanding Common Stock. "Outstanding Common Stock" shall mean the then issued and outstanding shares of the Company's Common Stock, on an undiluted basis, without regard to outstanding convertible securities or any options, warrants and rights to acquire Common Stock. Person. A "Person" shall mean any entity, corporation, company, association, joint venture, joint stock company, partnership, limited liability company, trust, organization, individual (including personal representatives, executors and heirs of a deceased individual), nation, state, government (including agencies, departments, bureaus, boards, divisions and instrumentalities thereof), trustee, receiver or liquidator. Securities Act. The "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations thereunder. Shares. The "Shares" shall mean the shares of the Common Stock and other securities (including, without limitation, options, warrants and other rights to acquire capital stock) of the Company held by the Stockholders, together with any other shares of the Common Stock of the Company hereafter acquired by any Stockholder (whether by purchase, exercise of options or warrants, or otherwise) and any other shares or securities thereafter issued in respect of such shares in any reorganization, recapitalization, reclassification, readjustment or other change in a capital structure of the Company. Stockholder. A "Stockholder" shall mean RDA and Domain. 2 3 Transfer. A "Transfer" of Shares or any interest of a Stockholder therein shall mean any sale, assignment, transfer, disposition, pledge, hypothecation or encumbrance, whether direct or indirect, voluntary, involuntary or by operation of law, and whether or not for value, of such Shares or such interest of a Stockholder therein. ARTICLE II Corporate Governance 2.1. Board of Directors. (a) From and after the date hereof, until the occurrence of a Board Termination Event, each Stockholder shall take all actions necessary to cause the Board of Directors to consist of at least five (5) directors. (i) Prior to the occurrence of a Board Termination Event, representation of RDA and Domain on the Board of Directors shall be, and each of the Stockholders shall vote all its Shares to elect members of the Board of Directors of the Company proportionate to each party's ownership of Shares; provided, however, that, as long as Domain maintains ownership of at least 2% of the voting equity of the Company, Domain will have the right to designate at least one member of the Board of Directors. (ii) The initial Chairman of the Board of Directors shall be Thomas O. Ryder and the initial Vice Chairman of the Board of Directors shall be A. Emmet Stephenson, Jr. (b) On the date hereof, the following directors have been elected: Thomas O. Ryder (designated by RDA) A. Emmet Stephenson, Jr. (designated by Domain) Thomas D. Gardner (designated by RDA) George S. Scimare (designated by RDA) Robert E. Raymond (designated by RDA) 2.2. Voting Following an Initial Public Offering. Following an Initial Public Offering, each Stockholder shall vote all Outstanding Common Stock owned by such Stockholder for election to the Board of Directors of the number of Directors designated by the other Stockholder which represent the percentage of the total number of Board of Directors as the shares of Outstanding Common Stock owned by such other Stockholder represents of the total Outstanding Common Stock. Neither RDA nor Domain shall be obligated to vote its Shares in favor of the other Stockholder's designee at any time after such Other Stockholder's ownership of Outstanding Common Stock falls below five percent (5%) of the then Outstanding Common Stock. At any time after a Stockholder is no longer entitled to elect at least one director under this Section 2.2, and until such time as such Stockholder owns less than one percent (1%) of the Outstanding Common Stock, the Company shall grant such Stockholder Board of Directors observer status. 3 4 2.3. Removal of Directors; Vacancies. No Stockholder shall vote to remove any director, except (i) for bad faith or willful misconduct or (ii) with or without cause at the written instruction of the Person(s) entitled to designate such director. Upon receipt of such written instruction, each Stockholder shall take any necessary action to cause the removal of the director so designated for removal. In the event any director is so removed, or if a vacancy is created by the death, disability, retirement, resignation or removal of any director, the vacancy so created shall be filled in accordance with Section 2.1 hereof by a designee selected by the Person(s) entitled to designate the director whose position shall have become vacant. 2.4. Covenant to Vote. Prior to a Board Termination Event, each Stockholder shall take all actions necessary to call, or cause the Company and the appropriate officers and directors of the Company to call, a special or annual meeting of stockholders of the Company and, at all times during the term of this Agreement, to vote all Shares owned or held of record by such Stockholder at any such annual or special meeting in favor of, or take all actions by written consent in lieu of any such meeting necessary to cause, the election as members of the Board of Directors of those individuals so designated in accordance with, and otherwise to effect the intent of, this Article II. At all times during the term of this Agreement, each Stockholder shall vote the Shares owned or held of record by such Stockholder upon any other matter arising under this Agreement submitted to a vote of the stockholders of the Company in a manner so as to implement the terms of this Agreement. Except as provided herein, each Stockholder may vote his Shares on any and all matters presented to the stockholders of the Company as he may, in his sole discretion, determine. Nothing herein shall be deemed to create any ownership interest on the part of any party in any Shares held by any of the other parties. 2.5. Officers. Until the occurrence of a Board Termination Event, RDA shall have the right to propose the President and Chief Executive Officer for election to the Company's Board of Directors. RDA will consult with Domain prior to making such proposal. 2.6. Minority Stockholder Rights. (a) Domain shall have the right to veto any proposed sale by the Company of the right, title and interest in and to the domain name and URL www.gifts.com if such sale is to take place without the concomitant sale of the online business of the Company related thereto at the time. (b) Unless the Company first obtains the written consent of Domain, the Company shall not enter into a transaction in which RDA, in its capacity as a Stockholder, is granted rights by the new investor and/or the Company that are not granted to Domain including, without limitation, rights of first refusal, co-sale rights, first offer rights, registration rights or put rights. The foregoing shall not limit the grant to RDA, in its capacity as a Stockholder, of any additional rights, preferences, privileges, priorities or agreements in connection with any purchase by RDA of Offered Securities (as defined in Section 5.2(b)) in a transaction governed by Article V hereof. In addition, the Company must obtain written consent of Domain in order to effect any amendment to the Company's certificate of incorporation, recapitalization, merger, sale or consolidation of the Company, unless such transaction provides rights for Domain as a Stockholder which are identical to those granted to RDA as a Stockholder. 4 5 2.7. Corporate Opportunities. (a) The parties hereto agree to the provisions of Section 2.7(b) and further agree that, at the time the Company changes its name in accordance with Section 4.2 of the Contribution Agreement, dated as of September 15, 1999, among RDA, Domain, StarTek, Inc. and the Company, they shall amend the Certificate of Incorporation of the Company (or its successor as contemplated in such Section) to insert in such Certificate of Incorporation the provisions set forth in Section 2.7(b). (b) For purposes of this Section 2.7(b) "Applicable Stockholder" shall mean each of RDA and Domain, and each of their respective successors, by way of merger, consolidation or sale of all or substantially all its assets, and all corporations, partnerships, joint ventures, associations and other entities (each a "Subsidiary Entity") in which such Person owns, directly or indirectly, fifty percent (50%) or more of the outstanding voting stock, voting power or similar voting interests ("Voting "Interest"), but shall not include the Company or any Subsidiary Entity in which the Company beneficially owns, directly or indirectly, fifty percent (50%) or more of the outstanding Voting Interest. (i) In anticipation that: (w) Each Applicable Stockholder will remain, for some period of time, a stockholder of the Company; (x) the Company and each Applicable Stockholder may engage in the same or similar activities or lines of business and may have an interest in the same or similar areas of corporate opportunities; (y) there will be benefits derived by the Company through its continued contractual, corporate and business relations with either Applicable Stockholder (including, without limitation, service of officers and employees of either Applicable Stockholder as directors, officers or employees of the Company); and (z) there will be benefits in providing guidelines for directors, officers and employees of each Applicable Stockholder and the Company with respect to the allocation of corporate opportunities and other matters; The provisions of this Section 2.7(b) are set forth to regulate, define and guide the conduct of certain affairs of the Company as they may involve each Applicable Stockholder and its officers and directors, and the powers, rights, duties and liabilities of the Company and its directors, officers and employees, and stockholders in connection therewith. (ii) Except as an Applicable Stockholder may otherwise agree in writing, each Applicable Stockholder shall have the right to, and shall have no duty not to, (1) engage in the same or similar business activities or lines of business as the Company, (2) do business with any potential or actual customer or supplier of the Company, or (3) employ or otherwise engage any officer or employee of the Company. Neither Applicable Stockholder shall be liable to the Company or its stockholders for breach of any fiduciary duty by reason of 5 6 any such activities (set forth in the preceding sentence) or of the participation therein of such Applicable Stockholder. In the event either Applicable Stockholder acquires knowledge of a potential transaction or matter that may be a corporate opportunity for such party and the Company, such Applicable Stockholder shall have no duty to communicate or present such corporate opportunity to the Company nor shall such Applicable Stockholder be liable to the Company or its stockholders for breach of any fiduciary duty as a stockholder of the Company by reason of the fact that such Applicable Stockholder pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another Person, or does not present such corporate opportunity to the Company. (iii) In the event that a director, officer or employee of the Company who is also a director, officer or employee of an Applicable Stockholder acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both the Company and such Applicable Stockholder, such director, officer or employee of the Company (1) shall have fully satisfied and fulfilled the fiduciary duties of such director, officer or employee to the Company and its stockholders with respect to such corporate opportunity, (2) shall not be liable to the Company or its stockholders for breach of any fiduciary duty by reason of the fact that it pursues or acquires such corporate opportunity for such Applicable Stockholder or directs such corporate opportunity to another Person or does not communicate information regarding such corporate opportunity to the Company, (3) shall be deemed to have acted in good faith and in a manner such Person reasonably believes to be in and not opposed to the best interests of the Company, and (4) shall be deemed not to have breached his or her duty of loyalty to the Company or its stockholders and not to have derived an improper benefit therefrom, if such director, officer or employee acts in a manner consistent with the following policy: (x) a corporate opportunity available to any Person who is a director but not an officer or employee of the Company and who is also an officer or employee (whether or not a director) of an Applicable Stockholder shall belong to such Applicable Stockholder unless such opportunity is expressly offered in writing to such Person solely in his or her capacity as a director of the Company, in which case such opportunity shall belong to the Company; (y) a corporate opportunity available to any Person who is an officer or employee (whether or not a director) of the Company and who is also a director but not an officer or employee of an Applicable Stockholder shall belong to the Company, unless such opportunity is expressly offered in writing to such Person solely in his or her capacity as a director of such Applicable Stockholder, in which case such opportunity shall belong to such party; and (z) a corporate opportunity available to any other Person who is an officer, employee or director of the Company and an Applicable Stockholder shall belong to such Applicable Stockholder or to the Company if such opportunity is expressly offered in writing to such Person solely in his or her capacity as an officer, employee or director of such Applicable Stockholder or of the Company, respectively; otherwise, such opportunity shall belong to such Applicable Stockholder. 6 7 (iv) Any corporate opportunity that belongs to an Applicable Stockholder or the Company pursuant to the foregoing policy shall not be pursued by the other, or directed by the other to another Person, unless and until such Applicable Stockholder or the Company, as the case may be, determines not to pursue the opportunity. Notwithstanding the preceding sentence, if the Person to whom the corporate opportunity belongs does not within a reasonable period of time begin to pursue, or thereafter continue to pursue, such opportunity diligently and in good faith, the other affected Person may then pursue such opportunity or direct it to another Person. (v) For purposes of this Section 2.7(b), "corporate opportunities" shall consist of business opportunities which (1) the Company is financially able to undertake, (2) are, from their nature, in the line or lines of the Company's business and are of practical advantage to it, and (3) are ones in which the Company has an interest or reasonable expectancy. In addition, "corporate opportunities" shall not include any transaction in which the Company or an Applicable Stockholder is permitted to participate pursuant to (a) any agreement between the Company and such Applicable Stockholder in effect as of the time any equity security of the Company is held of record by any Person other than such Applicable Stockholder, as may be amended thereafter with the approval of a majority of disinterested directors or (b) any subsequent agreement between the Company and such Applicable Stockholder approved by a majority of disinterested directors, it being acknowledged that the rights of the Company under any such agreement shall be deemed to be contractual rights and shall not be corporate opportunities of the Company for any purpose; provided, however, that no presumption or implication as to corporate opportunities relating to any transaction not explicitly covered by such an agreement shall arise from the existence or absence of any such agreement. (vi) Any person purchasing or otherwise acquiring any interest in any shares of stock of the Company shall be deemed to have notice of and consented to the provisions of this Section 2.7(b). (vii) For purposes of this Section 2.7(b), the "Company" shall mean Good Catalog Company and its successors by way of merger, consolidation or sale of all or substantially all of its assets, and all corporations, partnerships, joint ventures, associations and other entities in which the Company beneficially owns, directly or indirectly, fifty percent (50%) or more of the outstanding voting stock, voting power or similar voting interests. (viii) If any contract, agreement, arrangement or transaction between the Company and an Applicable Stockholder involves a corporate opportunity and satisfies the criteria set forth in this Section 2.7(b) hereof, then such Applicable Stockholder and its officers and directors shall also, for the purposes of this Section 2.7(b) and the other provisions of this Agreement, be deemed to have fully satisfied and fulfilled any fiduciary duties they may have to the Company and its stockholders. Any such contract, agreement, arrangement or transaction involving a corporate opportunity not so approved shall not by reason thereof result in any such breach of any fiduciary duty, but shall be governed by the other provisions of this Section 2.7(b), this Agreement, the Bylaws, the applicable corporation law of the jurisdiction of incorporation of the Company and other applicable law. 7 8 (ix) For purposes of this Section 2.7(b), a Director of the Company who is Chairman of the Board of Directors of the Company, Vice Chairman of the Board of Directors of the Company or the Chief Executive Officer of the Company shall not be deemed to be an officer of the Company by reason of holding such position (regardless of whether such position is deemed an office of the Company under the Bylaws of the Company), unless such Person is a full-time employee of the Company. ARTICLE III Restriction on Transfer of Shares 3.1. No Transfer of Shares. No Shares and no interest of a Stockholder in any Shares may be Transferred except in accordance with the terms of this Agreement. Any such attempted Transfer in violation of this Agreement shall be null and void ab initio, and neither the Company nor any transfer agent of the Company shall give effect to any such attempted Transfer in its stock records or for any other purpose. 3.2. Restrictions Under Securities Laws. The Shares have been issued in a non-public offering pursuant to the private offering exemptions under Section 4(2) of the Securities Act and various exemptions from registration requirements under applicable state securities laws. Accordingly, the Shares have not been qualified or registered with any federal or state securities regulatory authority. Notwithstanding anything to the contrary stated in this Agreement, no Shares may be Transferred unless and until (i) counsel for the Company shall have determined, or the transferring Stockholder shall have delivered to the Company an opinion of such Stockholder's counsel reasonably satisfactory to the Company, that the intended Transfer does not violate the Securities Act or the rules and regulations of the Commission thereunder, and any applicable state securities laws; or (ii) the intended Transfer is the subject of a "no-action" letter from the staff of the Commission and any applicable state securities regulatory agency to the effect that the intended Transfer without registration or qualification will not result in a recommendation by the staff of the Commission or applicable state securities regulatory agency that civil or criminal action be taken with respect thereto; or (iii) the Shares have been validly registered under the Securities Act and all applicable state securities laws. All costs and expenses of counsel to the Company in reviewing the foregoing matters with respect to an intended Transfer of any Shares shall be borne by the Stockholder owning such Shares. 3.3. Permissible Transfers. Notwithstanding anything to the contrary set forth in this Agreement, provided that the Stockholder has first given the Company written notice of any such Transfer, the restrictions on Transfer specified herein (other than as set forth in Section 3.2) shall not apply to any Transfer (a) in connection with a merger, reorganization or the sale of all or substantially all of the assets of a Stockholder, or (b) to an Affiliate of any Stockholder. Any permitted transferee shall, prior to such transfer, execute an instrument in form reasonably satisfactory to the Company, agreeing to be bound by the terms of this Agreement, with such modifications hereto as the remaining Stockholder and the Company deem necessary to continue to effectuate the purposes hereof. In addition, any permitted transferee who is a married natural person shall also deliver to the Company, prior to transfer, a Spousal Consent executed by his or her spouse, in the form of Exhibit 1 hereto. 8 9 3.4. Right of First Refusal. Except as provided in Section 3.3, if either Stockholder ("Selling Stockholder") shall decide to Transfer all or any part of his Shares or any interest therein ("Offered Shares") for value pursuant to a bona fide offer from a third party (an "Offer"), the Selling Stockholder shall first deliver to the Company and the other Stockholder a written notice (the "Stockholder Sale Notice") of the Selling Stockholder's Offer, together with all material terms for the Offer and copies of all related agreements and documents prepared to effect the Offer. Upon receipt of the Stockholder Sale Notice, the other Stockholder (the "Remaining Stockholder") shall then have the right and opportunity (the "Right of First Refusal"), for a period ending thirty (30) days following delivery of the Stockholder Sale Notice, to accept the Offer. The Right of First Refusal shall be exercised, if at all, by delivery of written notice to the Selling Stockholder within such thirty (30) day period (an "Exercise Notice"). The Exercise Notice shall constitute the irrevocable obligation of the exercising Remaining Stockholder and the Selling Stockholder to complete the purchase and sale of the Offered Shares in accordance with the terms of the Offer. The closing of the Transfer of the Offered Shares pursuant to the terms hereof shall take place not later than the later of the date of closing set forth in the Stockholder Sale Notice (if any) and sixty (60) days after the date of delivery of the Stockholder Sale Notice, except as extended by mutual agreement of the parties thereto. Notwithstanding the foregoing, however, if the Remaining Stockholder does not deliver an Exercise Notice within the period required herein, then the Selling Stockholder shall have the right, for a period of one hundred eighty (180) days after the date of the Stockholder Sale Notice, to Transfer all of the Offered Shares to one or more Persons on terms and conditions no less favorable to the Selling Stockholder than those set forth in the Offer; provided, however, that any such transferee(s) of the Offered Shares shall take and hold the Offered Shares subject to this Agreement and to all of the obligations and restrictions arising hereunder upon the Selling Stockholder and no such Transfer to a transferee not already a party hereto shall be effective until such transferee has executed and delivered to the Company an instrument in the form prescribed by the Company agreeing to be bound by this Agreement, with such modifications hereto as the remaining Stockholder and the Company deem necessary to continue to effectuate the purposes hereof. If such transferee is a married natural person, such transferee shall also deliver a duly executed Spousal Consent in the form of Exhibit 1 hereto. If no such Transfer is effected within said one hundred eighty (180) day period, the Offered Shares shall once again be subject to the provisions of this Section 3.4. ARTICLE IV Co-Sale Rights If RDA proposes to sell any of its Shares pursuant to a Bona Fide Offer, in a single transaction or a series of related transactions, it shall comply with the following provisions. 4.1. Notice of Sale. RDA shall deliver or cause to be delivered a written notice (the "Notice of Sale") to Domain at least thirty (30) days prior to making any such sale. The Notice of Sale shall state (i) RDA's bona fide intention to sell, (ii) the name and address of the prospective transferee(s) (the "Purchase Offeror"), (iii) the number of Shares to be sold, (iv) the 9 10 terms and conditions (including price) of the contemplated sale and (v) the expected closing date of the transaction. 4.2. Option to Participate. Domain may elect to participate in the contemplated sale by delivering a written notice (an "Election Notice") to RDA within twenty (20) days after receipt of such Notice of Sale, and Domain may elect to sell in the contemplated transaction up to that number of Shares owned by it as is equal to the number of Shares which RDA proposes to sell multiplied by a fraction, the numerator of which shall be the number of Shares owned by Domain, and the denominator of which shall be the aggregate number of Shares held by Domain and RDA (determined on a fully-diluted, as converted basis). If Domain fails to timely deliver an Election Notice to RDA, it shall be deemed to have waived any right to participate in the sale. To the extent that Domain exercises such right of co-sale in accordance with the terms and conditions hereof, the number of Shares that RDA may sell shall be correspondingly reduced. 4.3. Consummation of Sale. Any sale made pursuant to this Article IV shall be consummated within ninety (90) days of the date of the Notice of Sale given pursuant to Section 4.1. Notwithstanding anything to the contrary set forth herein, RDA shall have no liability to Domain if any sale proposed to be made pursuant to this Article IV is not consummated. Nothing contained in this Article IV shall affect the Right of First Refusal afforded to Domain pursuant to Section 3.4. ARTICLE V First Offer 5.1. First Offer. (a) In the event the Company proposes to sell any Offered Securities (as hereinafter defined) in a private financing, each Stockholder shall have a right of first offer (the "Right of First Offer") to purchase, on the same terms and conditions as are being offered to other investors, any number of such Offered Securities up to its Pro Rata Share (as hereinafter defined) of such Offered Securities. (b) The Company shall give notice (the "First Offer Notice") to the Stockholders of the Company's proposed sale of Offered Securities pursuant to this Section 5.1 specifying the number of such Offered Securities the Company intends to sell and range of prices, terms and conditions of the proposed sale. Each Stockholder may exercise its Right of First Offer by delivering notice of irrevocable acceptance of the proposed sale on the terms specified in the First Offer Notice to the Company within fifteen (15) business days of receipt of the First Offer Notice (the "Initial Exercise Period"). The Company shall deliver the First Offer Notice to the Stockholders as promptly as practicable following its determination of the terms of such private financing, but in no event shall the Company deliver the First Offer Notice less than fifteen (15) business days prior to the completion of the sale of the Offered Securities subject to this Section 5.1. In the event there is a material change in the terms of any such private financing following delivery of the First Offer Notice, the Company will issue a new First Offer Notice and the Stockholders each will have the longer of (i) the remainder of the Initial Exercise 10 11 Period or (ii) five (5) business days from the date of issuance of the new First Offer Notice to deliver a new notice of irrevocable acceptance to purchase the Offered Securities on the new terms specified in such new First Offer Notice. 5.2. Definitions. (a) "Pro Rata Share" shall mean, with respect to any Stockholder, a number of Offered Securities determined by multiplying the total number of Offered Securities offered pursuant to Section 5.1 by a fraction, the numerator of which is the total number of shares of Outstanding Common Stock owned by such Stockholder and the denominator of which is the total number of shares of Outstanding Common Stock at the time, prior to giving effect to the issuance and sale of such Offered Securities, and rounding such product to the nearest whole number. (b) "Offered Securities" shall mean any equity securities of the Company or any securities, convertible into or exchangeable for equity securities in the Company, provided, however, that Offered Securities shall not include (i) options, warrants, rights or shares of Common Stock exercisable therefor, issued to employees, consultants, vendors or service providers as compensation for services provided or as incentives to employees or consultants; (ii) shares of Common Stock issuable upon exercise of options, rights or warrants which were Offered Securities subject to Section 5.1 at the time of original issuance; (iii) shares of Common Stock issuable upon the conversion or exchange of convertible or exchangeable securities which were Offered Securities subject to Section 5.1 at the time of original issuance or are outstanding as of the date hereof; and (iv) shares of Common Stock issued as consideration, whether in whole or in part, for the acquisition of assets or capital stock of any other Person. ARTICLE VI Termination of Agreement 6.1. Termination of Entire Agreement. This Agreement shall terminate, and the certificates representing the Shares shall be released from the terms of this Agreement upon the first to occur of the following events: (a) Liquidation. The liquidation and dissolution of the Company; or (b) Bankruptcy. The commencement of proceedings in bankruptcy or receivership of the Company. 6.2. Termination of Certain Provisions. The provisions of Article III-VII shall terminate upon the completion of an Initial Public Offering of the Company's Common Stock pursuant to the Securities Act. 11 12 ARTICLE VII Legends On Share Certificates Each of the certificates representing the Shares issued on or after the date hereof shall bear the following legends: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act") or under any state securities laws. No transfer, sale, assignment, or other disposition of the shares represented by this certificate or any interest therein may be made except (a) pursuant to an effective registration statement under the Securities Act and compliance with applicable state securities laws or (b) if the Company has been furnished with an opinion of counsel for the holder, satisfactory to the Company, to the effect that no registration is required because of the availability of an exemption from registration under the Securities Act and applicable state securities laws." "None of the Shares represented by this certificate may be sold, assigned, transferred, pledged, hypothecated or in any other way disposed of or encumbered, voluntarily or involuntarily, by gift, bankruptcy, operation of law, winding up of a corporation or otherwise, except in accordance with the provisions of a Stockholders Agreement, dated as of September 15, 1999, as amended or restated from time to time, a copy of which may be inspected at the principal office of this Company. All of the provisions of such Stockholders Agreement are incorporated herein by this reference." A copy of this Agreement shall be delivered to the Secretary of the Company and shall be shown by the Secretary to any Person making inquiry concerning it. ARTICLE VIII Recapitalizations In the event the Company is a party to any reorganization, recapitalization, reclassification, readjustment or other change in its capital structure wherein any other shares or securities of the Company are issued in respect of all or part of the Shares, then such other shares or securities shall likewise be subject to all of the terms and provisions of this Agreement. ARTICLE IX Notices All notices, requests and other communications hereunder shall be in writing and shall be deemed effectively given (a) upon personal delivery to the party to be notified, (b) three (3) days after deposit with the United States Post Office, by registered or certified mail, postage prepaid, or (c) when received if given by telecopier addressed to the party to be notified at the 12 13 address indicated on Schedule A, or at such other address or number as such party may designate by ten (10) days' advance written notice to the other parties. ARTICLE X Financial Statements Until an Initial Public Offering, the Company shall deliver to each Stockholder as soon as available but in no event later than forty-five (45) days after the end of each month, an unaudited balance sheet as of such month end and statements of income and of cash flows for such month, prepared in accordance with GAAP (subject to the absence of period end accruals and footnotes). ARTICLE XI General Provisions 11.1. Effectiveness. This Agreement shall become effective only at such time as it has been executed by the Company and each Stockholder. 11.2. Press Releases. (a) Neither Stockholder will, nor will it permit any of its Affiliates (other than the Company) to, issue any press release or make any public announcement relating in any way whatsoever to this Agreement, the Contribution Agreement, dated as of September 15, 1999, among the parties hereto (the "Contribution Agreement") or any transactions contemplated in the Contribution Agreement without the consent of the other Stockholder and the Company (which consent shall not be unreasonably withheld or delayed), unless required by law or the rules of an applicable stock exchange or over-the-counter market. If a press release or announcement of this Agreement, the Contribution Agreement or such transaction is required as aforesaid, the Stockholder issuing such release will consult with the other Stockholder in advance as to the contents and timing thereof. (b) The Company will use its best efforts to not issue any press release without consulting with the Stockholders in advance as to the contents thereof. 11.3. Waiver. No waiver of any provision of this Agreement in any instance shall be, or for any purpose be deemed to be, a waiver of the right of any party hereto to enforce strict compliance with the provisions hereof in any subsequent instance. 11.4. Agreement to Perform Necessary Acts. Each party hereto and the heirs, executors or administrators of the Stockholders shall perform any further acts and execute and deliver any documents or procure any court orders that may reasonably be necessary or appropriate to carry out the provisions of this Agreement. 11.5. Attorneys' Fees. In the event of any litigation or other proceeding between the parties hereto to enforce any provision or right hereunder, the unsuccessful party to 13 14 such proceeding shall pay to the prevailing party therein all costs and expenses actually incurred therein, including, but not limited to, reasonable attorneys' fees and court costs. 11.6. Modification. Except as otherwise provided herein, this Agreement may not be modified or amended except by a writing signed by each Stockholder and by an officer duly authorized to act on behalf of the Company. In the event of the amendment or modification of this Agreement in accordance with its terms, the Stockholders shall cause the Board of Directors to meet as soon as practicable following such amendment or modification for the purpose of adopting any amendment to the Certificate of Incorporation and By-Laws that may be required as a result of such amendment or modification to this Agreement, and, if required, proposing such amendments to the Stockholders entitled to vote thereon. 11.7. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original of the party or parties who executed such counterpart but all of which together shall constitute one and the same instrument. A facsimile signature of a counterpart executed copy of this Agreement shall be treated as an original. In making proof of this Agreement, it shall not be necessary to produce or account for more than one counterpart or more than a facsimile signature evidencing execution by each party hereto. 11.8. Severability. Each provision and part thereof of this Agreement is intended to be severable and if any term or all or part of any provision hereof is held by judicial decision to be invalid, such invalidity shall not affect the validity of the remainder of this Agreement, unless the effect thereof would be to alter materially the effect of this Agreement on the parties hereto. 11.9. Entire Agreement; Termination of Prior Arrangements. This Agreement is intended by the parties hereto as a final expression of their agreement and understanding with respect to the subject matter hereof and as a complete and exclusive statement of the terms thereof and supersedes any and all prior and contemporary agreements and understandings. 11.10. Governing Law; Jurisdiction and Venue. This Agreement shall be construed and interpreted in accordance with the laws of the State of New York. The parties irrevocably and unconditionally (i) agree that any suit, action or proceeding against such party arising out of this Agreement may be brought in any New York State or Federal court sitting in New York, New York or Westchester County, New York, or any Colorado State or Federal court sitting in the City and County of Denver, Colorado, (ii) waive, to the fullest extent such party may effectively do so, any objection that such party may have to laying of venue of any such suit, action or proceeding and (iii) submit to the non-exclusive jurisdiction of such courts in any suit, action or proceeding and agree that any process or notice of motion or other application to any court may be served on such party within or outside such court's territorial jurisdiction by registered or certified mail or by personal service at such party's address set forth above. 11.11. Injunctive Relief. The parties acknowledge and agree that a violation of any of the terms of Articles II, III, IV, V or X of this Agreement will cause the parties irreparable injury for which adequate remedy at law is not available. Therefore, the parties agree that each party shall be entitled to an injunction, restraining order or other equitable relief from any court 14 15 of competent jurisdiction, restraining any party from committing any violations of the provisions of such Articles of this Agreement. 11.12. Section Headings. The headings of the several sections of this Agreement are inserted solely for convenience of reference and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 11.13. Construction. When necessary, the masculine shall include the feminine or neuter and vice versa, and the singular shall include the plural and vice versa. 11.14. Binding Effect. Subject to the restrictions on Transfer contained herein, this Agreement shall be binding on and shall inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns. In accordance with the provisions of Section 11.7 hereof, this Agreement shall be binding upon all of the Stockholders at the time specified in Section 11.1 hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first hereinabove written. THE COMPANY GOOD CATALOG COMPANY By: /s/ James P. Steffensen ------------------------------- Name: James P. Steffensen Title: President 15 16 THE STOCKHOLDERS THE READER'S DIGEST ASSOCIATION, INC. By: /s/ Thomas D. Gardner ------------------------------- Name: Thomas D. Gardner Title: Senior Vice President, Business Planning and Development DOMAIN.COM, INC. By: /s/ A. Emmet Stephenson, Jr. ------------------------------- Name: A. Emmet Stephenson, Jr. Title: Chairman 16 Exhibits and Schedules not filed EX-10.22 5 LOAN AGREEMENT 1 EXHIBIT 10.22 As of November 1, 1999 Good Catalog Company c/o The Reader's Digest Association, Inc. Reader's Digest Road Pleasantville, New York 10570 Re: Loan Agreement Gentlemen: This letter sets forth our agreement (the "Agreement") with respect to loans to be extended by The Reader's Digest Association, Inc. ("RDA") and Domain.com, Inc. ("Domain"; together with RDA, the "Lenders") to Good Catalog Company, a Delaware corporation ("Borrower"). 1. THE LOANS. On the terms and subject to the conditions hereof, the Lenders severally agree to make loans (each, a "Loan"; collectively, the "Loans") to Borrower in an aggregate amount not to exceed Twenty Six Million Two Hundred Fifty Thousand Dollars ($26,250,000). Loans may be borrowed at any time on or prior to November 1, 1999. The parties acknowledge that, prior to the date hereof, RDA has made loans to Borrower ("Pre-Closing Loans") in the aggregate principal amount of approximately $1,430,625. Pre-Closing Loans shall constitute Loans hereunder from their respective dates made. RDA will make a final determination within thirty (30) days after the date hereof of all Pre-Closing Loans made to Borrower and shall specify to Borrower in reasonable detail the basis for its determination. Upon Borrower's agreement as to the amount of Pre-Closing Loans advanced prior to the date hereof, any difference between the estimated amount of Pre-Closing Loans specified in this Section 1 and the actual amount of Pre-Closing Loans determined by agreement of RDA and Borrower shall be addressed as follows: (i) the Schedule to the Note (as hereinafter defined) in favor of RDA will be revised to reflect any adjustments to the amount of Pre-Closing Loans, (ii) if the actual amount of Pre-Closing Loans exceeds the estimated amount of Pre-Closing Loans set forth in this Section 1, Borrower shall immediately repay such excess amount and (iii) if the actual amount of Pre-Closing Loans is less than the estimated amount of Pre-Closing Loans set forth in this Section 1, RDA shall immediately disburse a Loan in the amount of such shortfall and shall change Borrower interest on such additional Loan only from the date of disbursement (and such additional Loan shall be so reflected on the revised Schedule to the Note in favor of RDA). (a) DISBURSEMENTS. The Lenders will make available on the date of execution and delivery of this Agreement, the full amount of all Loans not disbursed prior to the date hereof. Disbursements will be made by each Lender as follows: Domain shall advance a loan of $7,816,875; RDA shall advance a Loan which, when added to Loans previously outstanding on the date hereof, equals $18,433,125. Proceeds of all Loan disbursements will be deposited in the account number specified in Exhibit A hereto or, at RDA's option, RDA may advance its Loan in accordance with the provisions of the Services Agreement, dated as of September 15, 1999, between RDA and Borrower. 2 (b) INTEREST. Each Loan shall bear interest at a rate equal to the rate applicable to a three month LIBO rate loan plus 2% per annum computed on the basis of a 360-day year or, if lower, the maximum rate permitted by law. Interest on each Loan shall be calculated from the date such loan is first advanced, including Loans advanced prior to the date hereof, and shall be payable quarterly commencing September 30, 1999. (c) PAYMENTS. Each Loan shall mature on November 1, 2002. (d) PREPAYMENTS. Borrower, may at any time or from time to time, prepay all or any portion of the outstanding Loans in minimum amounts of the lesser of $100,000 or the outstanding principal amount of the Loans, together with interest thereon accrued and unpaid to the date of prepayment without premium or penalty. (e) PRO RATA APPLICATION. All payments and prepayments of Loans hereunder shall be applied to repay the Loans of each Lender pro rata based on the total amount of outstanding Loans made by each Lender. (f) ACCELERATED MATURITY UPON AN INITIAL PUBLIC OFFERING. At the option of the Lenders, all Loans shall immediately become due upon the receipt by the Borrower of proceeds of an initial public offering of its common stock pursuant to the Securities Act of 1933, as amended. (g) NO REBORROWING. Loans may not be reborrowed. (h) NOTE. The obligation of the Borrower to repay the Loans to the Lenders shall be evidenced by promissory notes to each Lender in the form of Exhibit B-1 and Exhibit B-2 hereto (the "Notes"). Each Lender is authorized to complete the grid of the Note issued to it upon any borrowing of a Loan or payment or prepayment of the principal thereof. Such grid shall, absent manifest error, be conclusive evidence of the Loan indicated thereon and the other facts stated therein. (i) USE OF PROCEEDS. The proceeds of Loans will be used for the development and operation of the Company's Internet Web site located at the URL www.gifts.com and related on-line gifts business. (j) PARI PASSU OBLIGATIONS. The Loans and the obligations of the Borrower to each Lender under this Agreement and the Notes shall be pari passu obligations of the Borrower. If and to the extent either Lender receives funds in payment of Loans in excess of its pro rata share of any payment, such Lender shall immediately upon becoming aware of such overpayment pay the other Lender its portion of the overpayment. 2. EVENTS OF DEFAULT. If one or more of the following events shall occur: (a) Default in the punctual payment in full when due of any principal amount of the loans; or (b) Default in the punctual payment in full when due of any amount of interest; or 2 3 (c) Borrower shall be insolvent or generally cease paying, or be unable to pay, its debts as they become due or shall make any admission in writing to the foregoing effect; or the occurrence of any default or event of default (after giving effect to any applicable grace or cure periods) under any instrument or agreement evidencing debt; or a substantial part of the operations of Borrower shall be suspended; or Borrower shall make an assignment for the benefit of creditors; or Borrower shall commence, as debtor, a case under the Federal Bankruptcy Code as now or hereinafter in effect; or shall commence any proceeding with respect to itself or a substantial portion of its property under any other insolvency, bankruptcy arrangement, reorganization, liquidation, dissolution or similar law; or a court of competent jurisdiction shall enter an order of relief against the Borrower as debtor in a case under the Federal Bankruptcy Code; or a case under the Federal Bankruptcy Code shall be commenced against Borrower or any proceeding under any other insolvency, bankruptcy, reorganization, arrangement, liquidation, dissolution or similar law of the United States shall be commenced against the Borrower or Borrower shall consent to or admit the material allegations against it in any such case or proceeding; or a trustee, receiver or similar officer shall be appointed for all or a substantial part of the property of Borrower and Borrower shall consent thereto; (1) Then, upon the happening of any of the foregoing events and at any time thereafter so long as such events shall be continuing, the Lenders, by vote of a majority of the principal amount of the Loans advanced by the Lenders, may by declaration delivered to the Borrower, demand the immediate payment of the Notes, the Loans and all fees and other amounts payable by Borrower hereunder, whereupon the same shall become immediately due and payable; provided that, upon the happening of any event specified in clause (c) above and all obligations under the Notes, the Loans or otherwise shall be immediately due and payable, all without declaration or notice to Borrower. Borrower hereby waives, to the fullest extent permitted by law, (A) all presentations, demands for performance, notices of non-performance, protests, notices of protests, notices of intent to accelerate, notice of dishonor in connection with the Notes or any of the Loans, (B) any requirement of diligence or promptness on the part of the Lenders, (C) any and all notices of every kind or description that may be required by statute or law and any defense of any kind that it may now or hereafter have, and (D) any defense of any kind (except payment) that it may now or hereafter have with respect to its liability under this Agreement or the Notes. 3. RELATING TO THE LENDERS. All decisions made and all actions taken by the Lenders hereunder shall be taken by decision of the Lenders holding the majority of the unpaid principal amount of the Loans outstanding at the time; provided that, no amendment, waiver or consent by the Lenders shall be made, unless in writing and signed by all of the Lenders, to: (1) increase the commitments of the Lenders to make Loans or subject the Lenders to any additional obligations or (2) reduce the principal amount of or interest on the Notes or any fees due such Lender hereunder. Lenders holding the majority of the unpaid principal amount of Loans may elect to extend the Maturity Date of the Loans to any date they shall determine in their sole discretion; provided that the Maturity Date of the Loans may not be extended beyond the date specified in Section 1(f) without the consent of both Lenders. (a) APPOINTMENT OF AGENT. In order to expedite and facilitate the making of Loans of the administration of this Agreement, RDA is hereby appointed to act as Agent on behalf of the Lenders as hereinafter specified. Domain irrevocably authorizes and 3 4 directs RDA, as Agent, to take such action on its behalf under the terms and provisions of this Agreement and the Notes and to exercise such powers hereunder and thereunder as are specifically delegated to or required of RDA, as Agent, by the terms and provisions of this Agreement, together with such powers as may be reasonably incidental thereto. Domain shall have no authority to take any action with respect to its Notes; all such action shall be taken by RDA as Agent pursuant to this Section 3. (b) NATURE OF AGENT'S DUTIES. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement. Neither the Agent nor any of its officers, directors, employees or Agents shall be liable for any action taken or permitted to be taken by it hereunder or in connection herewith except to the extent of its or their own gross negligence or willful misconduct. The duties of the Agent shall be mechanical and administrative in nature and the Agent shall not, by reason of this Agreement or the Notes, have a fiduciary relationship or responsibility to Domain or the Borrower and nothing in this Agreement, expressed or implied, is intended to impose on such Agent any obligations except as expressly set forth herein. The Agent shall be entitled to rely on any note, notice, consent, certificate, affidavit, letter, telegram, telecopy, email, statement, order or other document reasonably believed by it to be genuine and correct and to have been signed or sent by the proper person or persons and, with respect to legal matters, upon the opinion of counsel selected by Agent (including counsel to Borrower). Without limiting the generality of the foregoing, the Agent shall, in the absence of knowledge to the contrary, be entitled to accept any certificate furnished pursuant to this Agreement or the Notes as conclusive evidence of the facts stated therein. (c) AGENT IN ITS INDIVIDUAL CAPACITY. RDA, in its individual capacity, shall have the same rights and powers hereunder and under its Note as Domain and shall be entitled to exercise the same as though it were not the Agent. (d) DEALINGS WITH BORROWER AND ITS AFFILIATE. Nothing herein shall in any way limit or impair any other relationship of RDA to Borrower, including any affiliation by ownership of a majority of Borrower's outstanding voting stock or otherwise. 4. MISCELLANEOUS. (a) NOTICES. All notices and other communications required or permitted by this Agreement shall be in writing and shall be sent: If to Domain to: Domain.com, Inc. c/o StarTek, Inc. 100 Garfield Street, 4th Floor Denver, CO 80206 Attn: Chairman Facsimile: (303)-329-9107 4 5 with a copy to: StarTek, Inc. 1250 H Street Greeley, Co. 80631 Attention: President and Chief Executive Officer Facsimile: (970) 346-5401 and a copy to: Otten, Johnson, Robinson, Neff & Ragonetti, P.C. 950 Seventeenth Street, Suite 1600 Denver, Colorado 80202 Attention: Karen Barsch, Esq. Facsimile: (303) 825-6525 If to RDA to: The Reader's Digest Association Reader's Digest Road Pleasantville, New York 10570-7000 Attn: Senior Vice President, Business Planning and Development Facsimile: (914) 238-6932 with a copy to: The Reader's Digest Association, Inc. Reader's Digest Road Pleasantville, New York 10570-7000 Attn: General Counsel Facsimile: (914) 244-5644 If to Borrower, to: Good Catalog Company c/o The Reader's Digest Association, Inc. Reader's Digest Road Pleasantville, New York 10570 Attn: Senior Vice President, Business Planning and Development Facsimile: (914) 238-6932 with a copy to: The Reader's Digest Association, Inc. Reader's Digest Road Pleasantville, New York 10570 Attn: General Counsel Facsimile: (914) 244-5644 5 6 If to RDA in its capacity as Agent to: The Reader's Digest Association Reader's Digest Road Pleasantville, New York 10570-7000 Attn: Senior Vice President, Business Planning and Development Facsimile: (914) 238-6932 with a copy to: The Reader's Digest Association, Inc. Reader's Digest Road Pleasantville, New York 10570-7000 Attn: General Counsel Facsimile: (914) 244-5644 or, in each case, to such other address as any party may from time to time specify in writing to the other parties hereto. All notices and other communications required or permitted by this Agreement shall be deemed to have been duly given if sent to the intended recipient at the proper address determined pursuant to this Section by courier, facsimile transmission or by hand and will be deemed given, unless earlier received, (1) if sent by courier, when recorded on the records of the courier as received by the intended party, (2) if sent by facsimile, upon transmission if transmitted on a business day of the intended recipient during business hours and in all other cases, on the next business day, and (3) if delivered by hand, on the date of receipt. (b) AMENDMENTS AND MODIFICATIONS. This Agreement and the Notes may not be modified or amended except by an instrument in writing signed by the Borrower and each Lender. (c) WAIVERS. No failure on the part of the Lenders to exercise and no delay in exercising any right, power or remedy hereunder or under any Note shall operate as a waiver thereof or as any default, nor shall any single or partial exercise by either Lender of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any right, power or remedy. This Agreement and the obligations of the Borrower hereunder are in addition to and not in substitution of any other obligations held by either Lender and shall not effect the rights, remedies or powers of either Lender in respect of any obligations or interest of either Lender. The remedies herein provided are cumulative and are not exclusive of any remedy provided at law. (d) BENEFITS. This Agreement shall inure to the benefit of and shall be binding upon the respective successors and assigns to the parties hereto. (e) GOVERNING LAW. This Agreement and the Notes shall be governed and construed in accordance with the laws of the State of New York without reference to any conflicts of law principles which would have the substantive law of any other jurisdiction apply to the subject matter hereof. The Lenders and the Borrower irrevocably and unconditionally (i) agree that any suit, action or proceeding against such party arising out of this agreement may be 6 7 brought in any New York State or Federal court sitting in New York, New York or Westchester County, New York, or any Colorado State or Federal court sitting in City and County of Denver, Colorado, (ii) waive, to the fullest extent such party may effectively do so, any objection which such party may have to laying of venue of any such suit, action or proceeding and (iii) submit to the non-exclusive jurisdiction of such courts in any suit, action or proceeding and agree that any process or notice of motion or other application to any court may be served on such party within or outside such court's territorial jurisdiction by registered or certified mail or by personal service at such party's address set forth above. (f) COUNTERPARTS. This Agreement may be simultaneously executed in several counterparts each of which shall be an original and all of which shall constitute but one and the same instrument. A facsimile signature of a counterpart executed copy of this Agreement shall be treated as an original. (g) COSTS, ETC. The Borrower shall pay all expenses, including reasonable attorneys fees and costs, in connection with the enforcement of this Agreement and the Notes. 7 8 Please confirm your agreement to the terms and conditions of this Agreement by causing a duly authorized officer of the Borrower to execute a counterpart hereof. Very truly yours, THE READER'S DIGEST ASSOCIATION, INC. By: /s/ Thomas D. Gardner --------------------------------------- Name: Thomas D. Gardner Title: Senior Vice President, Business Planning and Development DOMAIN.COM, INC. By: /s/ A. Emmet Stephenson, Jr. --------------------------------------- Name: A. Emmet Stephenson, Jr. Title: Chairman and Vice President AGREED TO THIS 1st DAY OF NOVEMBER, 1999 GOOD CATALOG COMPANY By: /s/ James P. Steffensen --------------------------------------- Name: James P. Steffensen Title: President 8 Exhibits and Schedules not filed EX-10.23 6 PROMISSORY NOTE DATED 11/1/99 1 EXHIBIT 10.23 PROMISSORY NOTE $7,816,875.00 November 1, 1999 FOR VALUE RECEIVED, the undersigned, Good Catalog Company, a Delaware corporation (the "Borrower"), hereby promises to pay to the order of Domain.com, Inc. ("Lender"), on the earlier of November 1, 2002 or the date specified in the Loan Agreement hereinafter described, at the office of the Lender, c/o StarTek, Inc., 100 Garfield Street, 4th Floor, Denver, Colorado 80206 (or at such other place as the holder hereof shall designate by a notice in writing to the Borrower), the principal sum of SEVEN MILLION EIGHT HUNDRED SIXTEEN THOUSAND EIGHT HUNDRED AND SEVENTY FIVE DOLLARS ($7,816,875.00) in lawful money of the United States of America and in immediately available funds, and to pay interest on the unpaid principal amount of such Loans, at such office, in like money and funds, from the date of each Loan and until such Loan shall be paid in full, at the rate per annum provided in the Loan Agreement. The Lender is hereby authorized by the Borrower to endorse on the schedule attached to this Note (or any continuation thereof) the amount of each Loan made by the Lender to the Borrower under the Loan Agreement, the date such Loan is made and the amount of each payment or prepayment of the principal of such Loan received by the Lender; provided that any failure by the Lender to make any such endorsement shall not affect the obligations of the Borrower hereunder or under the Loan Agreement in respect of such Loan. Each such endorsement by the Lender shall constitute evidence of the accuracy thereof, absent manifest error. This Note is one of the Notes referred to in the Loan Agreement dated as of November 1, 1999 (said Agreement, as amended from time to time, herein called the "Loan Agreement"), among the Borrower, The Reader's Digest Association, Inc. and the Lender. This Note evidences Loans made by the Lender to the Borrower under the Loan Agreement issued by Lender. Capitalized terms used in this Note and not defined herein have the respective meanings assigned to them in the Loan Agreement. This Note is a pari passu obligation of the Borrower with the other Note referred to in the Loan Agreement and all payments made hereunder shall be made on a pari passu basis with such other Note based on the aggregate principal amount outstanding under this Note and such other Note at the time. Upon the occurrence of any Event of Default under the Loan Agreement, the principal hereof and accrued interest hereon shall become, or may be declared by the Agent under the Loan Agreement to be, forthwith due and payable in the manner, upon the conditions and with the effect provided in the Loan Agreement. The Borrower may at its option prepay all or part of the principal of this Note before maturity upon the terms provided in the Loan Agreement. 2 This Note shall be governed by, and shall be construed in accordance with, the laws of the State of New York. GOOD CATALOG COMPANY By: /s/ James P. Steffensen ---------------------------- Name: James P. Steffensen Title: President 2 EX-10.24 7 PROMISSORY NOTE DATED 10/22/99 1 EXHIBIT 10.24 PROMISSORY NOTE $2,030,565.67 Funding Date: October 22, 1999(year) FOR VALUE RECEIVED, STARTEK USA, INC., a a Colorado corporation ("Maker"), promises to pay to the order of KEYCORP LEASING, A DIVISION OF KEY CORPORATE CAPITAL INC. ("Holder"), the sum of TWO MILLION THIRTY THOUSAND FIVE HUNDRED SIXTY FIVE DOLLARS AND SIXTY SEVEN CENTS ($2,030,565.67) in lawful money of the United States of America (the "Principal"), with interest thereon as hereafter provided ("Interest"), to be paid in the manner set forth herein. This Note is executed pursuant to that certain security agreement (the "Security Agreement") dated as of October 13, 1999 between Maker and Holder. Capitalized terms used herein without definition shall have the meaning given them in the Security Agreement. 1. Interest Rate; Place of Payment. Interest on the balance of the Principal outstanding on this Note shall accrue from the Funding Date of this Note and shall be due and payable at a fixed rate of six and sixty five hundredths percent (6.65%) per annum (the "Interest Rate") which rate shall be immediately and correspondingly adjusted (pursuant to 2(b) hereof) with each change in the Actual Index (as hereinafter defined). Interest shall be calculated on the basis of a 360-day year consisting of twelve 30-day months. Payment of the Principal and Interest hereunder shall be made to Holder at P.O. Box 1865, Albany, New York 12201-1865, or at such other place as Holder may designate from time to time in writing. Holder reserves the right to require payment on this Note to be made by wired federal funds or other immediately available funds. 2. Repayment Terms. (a) The Principal and Interest shall be due and payable in forty-eight (48) consecutive monthly installments payable in arrears, each in an amount equal to $48,295.38, commencing and payable on the the date which is one (1) month after the Funding Date and on the same day of each month thereafter (each, a "Note Payment Date"). In addition, Maker will pay a late payment charge of five percent (5%) of any payment due hereunder that is not paid on or before the date due hereunder. (b) Make and Holder agree that each Note payment hereunder shall be increased or decreased (but not below zero), as the case may be, by the Rate Differential (as hereinafter defined) as follows: if, as of any Note Payment Date, (i) the Rate Differential is greater than zero, the amount due on such Note Payment Date shall be increased by such Rate Differential, and (ii) the Rate Differential is less than zero, the amount of the Note Payment due on such Note Payment Date shall be decreased by such Rate Differential. (c) As used herein, the following terms shall have the respective meanings indicated below: (1) "Assumed Index" shall mean eight and twenty five hundredths percent (8.25%). (2) "Actual Index" shall mean, as of the date of determination, the "prime rate" announced in The Wall Street Journal, published on such day, or if The Wall Street Journal is not published on such day, then the "prime rate" announced in the most recently published edition of The Wall Street Journal. If the Actual Index is no longer available, Holder will choose a new index which is based upon comparable information and will give Maker notice of such new "Actual Index." (3) "Daily Equivalent" shall mean, as of the date of determination, the product of the following formula: Daily Equivalent = Actual Index - Assumed Index X Net Investment Balance ---------------------------- 360 (4) "Net Investment Balance" shall mean, as of the date of determination, the outstanding balance (initially calculated using the Assumed Index minus 160 basis points) reflected on Holder's lease Form No: R96-500.999 Page 1 of 4 2 accounting system (which assumes a 360 day year consisting of twelve 30 day months), for the Note Payment Date immediately preceding such day or, if such day is a Note Payment Date, for such Note Payment Date. (5) "Rate Differential" shall mean, with respect to any Note Payment Date, the sum of all Daily Equivalents (calculated on the basis of a 360 day year consisting of twelve 30 day months) for the 30 day month to which such Note Payment Date relates. 3. Security. Payment of the Principal and Interest hereunder, and the performance and observance by Maker of all agreements, covenants and provisions contained herein, is secured by a first priority security interest in the Collateral. 4. Prepayment. Except as contemplated by clause (3) of section 10 of the Security Agreement, Maker may not prepay, in whole or in part, the principal outstanding hereunder; provided, however, that commencing on the date following the twelve month anniversary of the Funding Date, Maker may prepay, in whole but not in part, the principal outstanding hereunder by paying to Holder such outstanding principal, together with all accrued and unpaid interest thereon at the Interest Rate in effect on the Funding Date, plus a prepayment premium ("Prepayment Premium") equal to a percentage of the outstanding principal calculated as follows:
Months Prepayment Premium ------ ------------------ 1-12 2% 13-24 1/2%** 25-48 0%
** Notwithstanding the foregoing, in the event Maker prepays this Note in months 13-24, and the source of the proceeds for such prepayment is a secondary public offering, Makers Prepayment Premium for such prepayment shall be 0%. 5. Transfer or Assignment. Holder may at any time assign or otherwise transfer or negotiate this Note in whole or in part, without any notice to Maker. The rights and obligations of Maker may not be assigned or delegated. 6. Application of Payments. Prior to an Event of Default, each payment received on this Note shall be applied first to all costs of collection, then to unpaid late payment charges (if any) and Prepayment Premium (if any) hereunder, then to Interest as of the payment due date and the balance, if any, to the outstanding Principal as of the date received. Upon the occurrence, and during the continuance, of an Event of Default, any payments in respect of the Secured Obligations and any proceeds of the Collateral when received by Holder in cash or its equivalent, will be applied first to costs of collection and, thereafter, in reduction of the Secured Obligations in such order and manner as Holder may direct in its sole discretion, and Maker irrevocably waives the right to direct the application of such payments and proceeds and acknowledges and agrees that Holder shall have the continuing and exclusive right to apply any and all such payments and proceeds in the Holder's sole discretion, notwithstanding any entry to the contrary upon any of its books and records. 7. Events of Default. (a) Maker shall be in default if any of the following happens (an "Event of Default"): (1) Maker fails to make any installment of the Principal or Interest, or any other payment due and owing, under this Note within ten (10) days after the same becomes due and payable; or (2) Maker fails to perform any other obligation required to be performed by Maker under this Note, the Security Agreement or any of the other Loan Documents for thirty (30) days after written notice from Holder of such failure; or (3) any representation, warranty or other statement by or on behalf of Maker in connection with this Note is false or misleading in any material respect; or (4) an Event of Default has occurred and is continuing under the Security Agreement. (b) Notwithstanding anything to the contrary contained herein, upon the occurrence of an Event of Default: (i) Holder may declare the entire outstanding balance of the Principal, together with all accrued and Form No: R96-500.999 Page 2 of 4 3 unpaid Interest thereon, immediately due and payable without notice or demand which amounts shall, together with all other sums due hereunder, accrue interest from such acceleration until the date of actual payment at the Default Rate (provided, however, that should there occur an Event of Default, and if a voluntary or involuntary petition under the United States Bankruptcy Code is filed by or against Maker while such default remains uncured, the entire outstanding balance of the Principal automatically shall be accelerated and due and payable with interest thereon at the Default Rate), and Holder may exercise any and all of its remedies hereunder, under the other Loan Documents and under Applicable Law. The remedies of Holder provided herein, in the Security Agreement and under Applicable Law shall be cumulative and concurrent and may be pursued singly, successively or concurrently at the sole discretion of Holder and may be exercised as often as occasion therefor shall occur. The failure to exercise, or any delay in the exercise of, any right or remedy shall in no event be construed as a waiver, release or exhaustion of any such remedies. 8. Collection Costs. In addition to the Principal, Interest, Prepayment Premium (if any), and late payment charges (if any), Maker shall pay Holder on demand, and Holder shall be entitled to collect all costs and expenses of collection, including, without limitation, reasonable attorneys' fees, incurred in connection with enforcement of its rights and remedies hereunder and under the other Loan Documents, the protection or realization of the Collateral or in connection with Holder's collection efforts, or in connection with any bankruptcy or other judicial proceeding, whether or not suit on this Note or any foreclosure proceeding is filed. All such costs and expenses shall be payable on demand and, until paid, shall be Secured Obligations secured by the security interest granted under the Security Agreement and all other collateral, if any, held by Holder as security for Maker's obligations under this Note. 9. Governing Law; Binding Agreement. The provisions of this Note shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. THIS NOTE IS BEING DELIVERED IN THE STATE OF NEW YORK AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAWS PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. 10. More than One Signer. If more than one person or entity signs this Note as a Maker, the obligations contained herein shall be deemed joint and several and all references to "Maker" shall apply both jointly and severally. 11. General. Maker represents and warrants that this Note evidences a loan for business or commercial purposes. Prior to signing this Note, Maker read and understood the provisions hereof, and agrees to all terms and conditions contained herein. 12. Waiver. MAKER AND ALL ENDORSERS, SURETIES, AND GUARANTORS HEREOF HEREBY JOINTLY AND SEVERALLY WAIVE PRESENTMENT FOR PAYMENT, DEMAND, NOTICE OF NON-PAYMENT OR DISHONOR, NOTICE OF INTENTION TO ACCELERATE THE MATURITY, NOTICE OF PROTEST AND PROTEST OF THIS NOTE. HOLDER AND MAKER HEREBY EACH WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS NOTE, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION OR PROCEEDING TO WHICH HOLDER OR MAKER MAY BE PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE, INCLUDING WITHOUT LIMITATION ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY, OF THIS NOTE OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER IS MADE KNOWINGLY, WILLINGLY AND VOLUNTARILY BY HOLDER AND THE MAKER WHO EACH ACKNOWLEDGE THAT NO REPRESENTATIONS HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL Form No: R96-500.999 Page 3 of 4 4 BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE AND THE OTHER LOAN DOCUMENTS. 13. Usury; Partial Invalidity. (a) At no time shall the Interest Rate (or the Default Rate or other amounts paid or collected hereunder) exceed the highest rate allowed by applicable law for this type of loan. Should Holder ever collect interest at a rate that exceeds such applicable legal limit, such excess will be credited to the Principal. (b) Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under the laws of any applicable jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Note in any other jurisdiction. 14. Notices. All notices and other communications under this Note shall be in writing and shall be addressed: (i) if to Maker, 111 Havana Street, Denver, CO 80010; and (ii) if to Holder, KeyCorp Leasing, a Division of Key Corporate Capital Inc., 54 State Street, Albany, New York 12207, Attention: Account Manager, or such other address as either party hereto shall communicate to the other party at its address specified above. All such notices and other communications shall be deemed to have been duly given if delivered by hand, overnight courier or if sent by certified mail, return receipt requested, to the party to whom such notice is intended to be given, and shall be effective upon receipt. 15. Funding Date. The Funding Date for this Note shall be the date on which Holder disburses funds hereunder. TO THE EXTENT THE FUNDING DATE IS LEFT BLANK ABOVE, OR DOES NOT REFLECT THE ACTUAL DATE THAT HOLDER DISBURSES FUNDS HEREUNDER, MAKER HEREBY AUTHORIZES HOLDER TO WRITE IN THE CORRECT DATE AT THE TIME OF DISBURSEMENT. IN WITNESS WHEREOF, Maker, intending to be legally bound, has caused this Note to be duly executed on the day and year first above written. MAKER: STARTEK USA, INC. By: /s/ Dennis M. Swenson --------------------------------- Name: Dennis M. Swenson Title: Executive Vice President STATE OF ) ) ss. COUNTY OF ) On this 21 (Day) day of Oct (Month), 99 (Year), before me the subscriber personally appeared Dennis M. Swenson who being by me duly sworn, did depose and say that (s)he resides at _____ County, State of Colo: that (s)he is an officer of StarTek USA, Inc., the corporation described in and which executed the foregoing instrument; and that (s)he signed his/her name thereto by order of the Board of Directors of said corporation. /s/ Deborah Hickson - -------------------------------------- NOTARY PUBLIC SEAL My Commission Expires: 1-12-2002 Form No: R96-500.999 Page 4 of 4 Exhibits and Schedules not filed 5 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement" or "Security Agreement") dated as of October 13, 1999 is made by and between STARTEK USA, INC., a a Colorado corporation having its chief executive office at 111 Havana Street, Denver, CO 80010 (the "Borrower"), and KEYCORP LEASING, A DIVISION OF KEY CORPORATE CAPITAL INC. and assigns, having an office at 54 State Street, Albany, New York 12207 ("KCL"). W I T N E S S E T H: 1. Grant of Security Interest in the Equipment. In consideration of one or more loans, advances or other financial accommodations at any time before, at or after the date hereof, made or extended by KCL to or for the account of the Borrower, directly or indirectly, as principal, guarantor or otherwise and to secure the prompt payment and performance in full when due, whether by lapse of time, acceleration or otherwise, of the Secured Obligations, the Borrower hereby pledges, assigns, transfers hypothecates to KCL and grants to KCL a security interest in, and acknowledges and agrees that this Agreement shall create a continuing security interest in, all of Borrower's rights, title and interest in and to the Collateral. The Secured Obligations of the Borrower are absolute, irrevocable and unconditional under any and all circumstances whatsoever and shall not be subject to any right of set-off, counterclaim, deduction, defense or other right which the Borrower may have for any reason against any vendor, supplier, manufacturer, KCL or any other party. All obligations of Borrower hereunder shall survive the expiration, cancellation or other termination of this Agreement. 2. Definitions. Unless the context otherwise requires, as used in this Agreement, the following terms shall have the respective meanings indicated below and shall be equally applicable to both the singular and the plural forms thereof: "Alteration" shall have the meaning specified in Section 6 hereof. "Applicable Law" shall mean all applicable Federal, state, local and foreign laws, ordinances, judgments, decrees, injunctions, writs, rules, regulations, orders, licenses and permits of any Governmental Authority. "Authorized Signer" shall mean any officer of Borrower, set forth on an incumbency certificate (in form and substance satisfactory to KCL) delivered by Borrower to KCL, who is authorized and empowered to execute the Loan Documents. "Certificate of Acceptance" shall mean a certificate of acceptance, in form and substance satisfactory to KCL, executed and delivered by Borrower in accordance with Section 3 hereof. "Collateral" shall mean the Equipment and any and all substitutions, replacements or exchanges therefor, and any and all proceeds (both cash and non-cash) receivable or received from the sale, lease, license, collection, use, exchange or other disposition of the Collateral, including insurance proceeds, thereof (including, without limitation, claims of the Borrower against third parties for Loss or Damage to any such collateral). "Collateral Schedule" shall mean each collateral schedule now or hereafter attached hereto and made a part hereof, in substantially the form of Schedule 1 hereto. "Default" shall mean any event or condition which, with the passage of time or the giving of notice or both, would constitute an Event of Default. "Default Rate" shall mean an annual interest rate equal to the lesser of 18% or the maximum interest rate permitted by Applicable Law. "Equipment" shall mean an item or items of personal property which are described on the Collateral Schedule, together with all replacement parts, additions and accessories incorporated therein or affixed thereto including, without limitation, any software that is a component or integral part of, or is included or used in connection with, any Item of Equipment, but with respect to such software, only to the extent of Borrower's interest therein, if any. "Equipment Location" shall mean the location of the Equipment, as set forth on Schedule 1, or such other location (approved in writing by KCL) as Borrower shall from time to time specify in writing. "Event of Default" shall have the meaning specified in Section 16 hereof. Form No: 96-501.999 Page 1 of 11 6 "GAAP" shall have the meaning specified in Section 2(g) hereof. "Governmental Action" shall mean all authorizations, consents, approvals, waivers, filings and declarations of any Governmental Authority, including, without limitation, those environmental and operating permits required for the ownership, lease, use and operation of the Equipment. "Governmental Authority" shall mean any foreign, Federal, state, county, municipal or other governmental authority, agency, board or court. "Guarantor" shall mean any guarantor of the Secured Obligations. "Installment(s)" shall mean the periodic payments due to repay the Note, and, where the context hereof requires, all such additional amounts as may from time to time be payable under any provision of the Loan Documents. "Item of Equipment" shall mean each item of the Equipment. "Liability" shall have the meaning set forth in Section 18 hereof. "Loan Documents" shall mean, collectively, this Agreement, the Note, and all other documents prepared by KCL and now or hereafter executed in connection therewith. "Lien" shall mean all mortgages, pledges, security interests, liens, encumbrances, claims or other charges of any kind whatsoever, except the security interest of KCL crated by this Agreement. "Loss or Damage" shall mean any loss, theft, destruction, disappearance or any condemnation, expropriation or requisition of or damage to any Item of Equipment. "Note" shall mean that certain Promissory Note in the original principal amount of $2,030,565.67 executed in connection herewith, together with any extensions, modifications, renewals, refinancings or other restructurings thereof. "Secured Obligations" means all of the following obligations of Borrower, whether direct or indirect, absolute or contingent, matured or unmatured, originally contracted with KCL or another party, and now or hereafter owing to or acquired in any manner partially or totally by KCL or in which KCL may have acquired a participation, contracted by Borrower alone or jointly or severally: (1) any and all indebtedness, obligations, liabilities, contracts, indentures, agreements, warranties, covenants, guaranties, representations, provisions, terms, and conditions of whatever kind, now existing or hereafter arising, and however evidenced, that are now or hereafter owed, incurred or executed by Borrower to, in favor of, or with KCL (including, without limitation, those as are set forth or contained in, referred to, evidenced by, or executed with reference to the Loan Documents, any letter of credit agreements, advance agreements, indemnity agreements, guaranties, lines of credit, mortgage deeds, security agreements, assignments, pledge agreements, hypothecation agreements, instruments, and acceptance financing agreements), and including any partial or total extension, restatement, renewal, amendment, and substitution thereof or therefor; (2) any and all claims of whatever kind of KCL against Borrower, now existing or hereafter arising, including, without limitation, any arising out or in any way connected with warranties made by Borrower to KCL in connection with any instrument purchased by KCL; and (3) any and all of KCL's fees, costs and expenses related to the foregoing. "Supplier" shall mean the manufacturer or the vendor of the Equipment, as set forth on each Collateral Schedule. "Term" shall mean the term of the Note. "UCC" shall have the meaning set forth in Section 16(b)(ii) hereof. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meaning assigned to them in the UCC. "Upgrade" shall have the meaning specified in Section 8 hereof. 3. Delivery and Acceptance. Concurrently with execution of the Collateral Schedule hereunder, Borrower shall execute and deliver to KCL a Certificate of Acceptance for the Equipment described on such Collateral Schedule. KCL SHALL HAVE NO OBLIGATION TO ADVANCE ANY FUNDS TO BORROWER UNLESS AND UNTIL KCL SHALL HAVE RECEIVED A CERTIFICATE OF ACCEPTANCE RELATING TO THE EQUIPMENT EXECUTED BY BORROWER. Such Certificate of Acceptance shall constitute Borrower's acknowledgment that such Equipment (a) was received by Borrower, (b) is satisfactory to Borrower in all respects, (c) is suitable for Borrower's purposes, (d) is in good order, repair and condition, (e) has been installed and operates properly, and (f) is subject to all of the terms and conditions of the Loan Documents. Borrower's execution and delivery of a Certificate of Acceptance shall be conclusive evidence as between KCL and Borrower that the Items of Equipment described therein are in all of the foregoing respects satisfactory to Borrower, and Borrower shall not assert any claim of any nature whatsoever against KCL based on any of the foregoing matters; Form No: 96-501.999 Page 2 of 11 7 provided, however, that nothing contained herein shall in any way bar, reduce or defeat any claim that Borrower may have against the Supplier or any other person (other than KCL). 4. Payments. Borrower shall pay the Note on the terms set forth therein. All Installments shall be payable when due whether or not Borrower has received any additional notice that such Installments are due. All Installments shall be paid to KCL at P.O. Box 1865, Albany, New York 12201-1865, or as otherwise directed by KCL in writing. 5. Location; Inspection. The Equipment shall be delivered to the Equipment Location and shall not be removed therefrom without KCL's prior written consent. Borrower shall maintain possession and control of the Equipment at all times. KCL shall have the right to enter upon the Equipment Location and inspect the Equipment at any reasonable time. Borrower will promptly give written notice to KCL of any change in the identity or location of any Item of Equipment which might require new filings or other action to assure continued perfection of the security interest of KCL granted hereby. The Borrower owns, and will continue to own, all Equipment Locations except as otherwise indicated on Schedule 1. 6. Use; Alterations. Borrower shall use the Equipment only in the course of its business for commercial purposes (and shall not permanently discontinue use of the Equipment), and in compliance with Applicable law and the requirements of any applicable insurance policies, and only in the manner for which it was designed and intended and so as to subject it only to ordinary wear and tear. Borrower shall comply with all Applicable Law with respect to the Equipment. Borrower shall immediately notify KCL in writing of any existing or threatened investigation, claim or action by any Governmental Authority in connection with any Applicable Law or Governmental Action which could adversely affect the value of the Equipment or the perfection or priority of the security interest of KCL in the Collateral. Borrower shall not make any material alterations, additions, modifications or improvements (each, an "Alteration") to the Equipment without KCL's prior written consent; provided that Borrower, at its own expense, shall make Alterations as may be required from time to time to meet the requirements of Applicable Law or Governmental Action. All such Alterations immediately, and without further act, shall be deemed to constitute Items of Equipment and fully be subject to the security interest granted to KCL hereunder. 7. Repairs and Maintenance. Borrower, at Borrower's own cost and expense, shall (a) keep the Equipment in good repair, operating condition and working order and in compliance with the manufacturer's specifications and Borrower's standard practices (but with respect to the latter, in no event less than industry practices) and (b) enter into and keep in full force and effect during the Term hereof a maintenance agreement with the manufacturer of the Equipment, or a manufacturer-approved maintenance organization, to maintain, service and repair the Equipment as otherwise required herein. Upon KCL's request, Borrower shall furnish KCL with an executed copy of any such maintenance agreement. An alternate source of maintenance may be used by Borrower with KCL's prior written consent. Borrower, at its own cost and expense and within a reasonable period of time, shall replace any part of any Item of Equipment that is unfit or unavailable for use from any cause (whether or not such replacement is covered by the aforesaid maintenance agreement) with a replacement part of the same manufacture, value, remaining useful life and utility as the replaced part immediately preceding the replacement (assuming that such replaced part was in the condition required by this Agreement). Such replacement part shall be free and clear of all Liens and upon installation, attachment or incorporation in, on or into such Item of Equipment, such replacement part immediately, and without further act, shall be deemed to constitute an Item of Equipment and fully be subject to the security interest granted to KCL hereunder. If KCL repossesses the Equipment pursuant to its rights under this Agreement and at the time, in the opinion of KCL, any Item of Equipment fails to meet the standards set forth above, Borrower agrees to pay on demand all costs and expenses incurred in connection with repairing or restoring such Item of Equipment so as to meet such standards and/or assembling and delivering such Item of Equipment. 8. Equipment Upgrades/Attachments. In addition to the requirements of Section 6 hereof, Borrower, at its own expense, may from time to time add or install upgrades or attachments (each, an "Upgrade") to the Form No: 96-501.999 Page 3 of 11 8 Equipment; provided, that such Upgrades are readily removable without causing material damage to the Equipment, and do not materially adversely affect the fair market value of the Equipment. Any such Upgrades shall be owned by Borrower, shall become subject to the security interest crated by this Agreement and shall be kept free and clear of all Liens so long as attached to the Equipment. 9. Lease and Assignments. (a) WITHOUT KCL'S PRIOR WRITTEN CONSENT, BORROWER SHALL NOT (i) ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF, THE EQUIPMENT OR ANY INTEREST THEREIN, OR ASSIGN OR DELEGATE ITS RIGHTS OR OBLIGATIONS UNDER THE LOAN DOCUMENTS, OR (ii) LEASE OR LEND THE EQUIPMENT TO, OR PERMIT THE EQUIPMENT TO BE USED BY, ANYONE OTHER THAN BORROWER. (b) KCL, at any time with or without notice to Borrower, may sell, transfer, grant participations in, assign and/or grant a security interest in any or all of KCL's right, title and interest in and to the Loan Documents, or in KCL's security interest in any Item of Equipment. In any such event, any such purchaser, transferee, assignee or secured party shall have and may exercise all of KCL's rights hereunder or thereunder, and BORROWER SHALL NOT ASSERT AGAINST ANY SUCH PURCHASER, TRANSFEREE, ASSIGNEE OR SECURED PARTY ANY DEFENSE, COUNTERCLAIM OR OFFSET THAT BORROWER MAY HAVE AGAINST KCL. Borrower agrees that upon written notice to Borrower of any such sale, transfer, assignment and/or security interest, Borrower shall acknowledge receipt thereof in writing and shall comply with the reasonable directions and demands of such purchaser, transferee, assignee or secured party. (c) Subject to the foregoing, all covenants and agreements contained herein shall be binding upon, and inure to the benefit of, KCL and its successors and permitted assigns and Borrower and its successors and permitted assigns. 10. Loss of or Damage to Equipment. In the event of Loss or Damage to any Item of Equipment, Borrower shall immediately notify KCL of same and, at the option of KCL, as specified in a notice from KCL to Borrower, Borrower shall within thirty (30) days following such Loss or Damage: (1) place such Item of Equipment in good condition and repair, in accordance with the terms hereof; (2) replace such Item of Equipment with replacement equipment (acceptable to KC) in as good condition and repair, and with the same or better fair market value as such replaced Item of Equipment immediately preceding the Loss or Damage (assuming that such replaced Item of Equipment was in the condition required by this Agreement), which replacement equipment shall immediately, and without further act, be deemed to constitute Items of Equipment and be fully subject to this Agreement as if originally pledged as Collateral hereunder and shall be free and clear of all Liens; or (3) pay to KCL any unpaid Installments and other charges due prior to the payment date specified in such notice plus an amount, with respect to an Item of Equipment, equal to the pro rata portion of the Installments attributable to such item of Equipment under the Loan Documents after discounting such Installments to present worth as of the payment date specified in such notice on the basis of a per annum rate of discount equal to three percent (3%) from the respective dates upon which such Installments would have been paid but for the operation of this clause, together with interest on such amount at the Default Rate from the payment date specified in such notice to the date of actual payment. Upon KCL's receipt of the payment required under clause (3) above, KCL shall release its security interest in such Item of Equipment. If Borrower replaces the Item of Equipment pursuant to clause (2) above, such replacement shall be deemed to constitute an Item of Equipment and be fully subject to this Agreement and the security interest granted to KCL hereunder, as if originally pledged hereunder. If Borrower fails to either restore or replace the Item of Equipment pursuant to clauses (1) or (2) above, respectively, Borrower shall make the payment under clause (3) above. 11. Insurance. (a) Borrower, at Borrower's own cost and expense, shall maintain (1) insurance against all risks of physical loss or damage to the Equipment (which shall include theft and collision for Equipment consisting of motor vehicles, and shall not exclude loss resulting from flood or earthquake) in any amount not less Form No: 96-501.999 Page 4 of 11 9 than the full replacement value thereof and (2) comprehensive public liability insurance including blanket contractual liability for personal and bodily injury and property damage in an amount satisfactory to KCL. (b) All insurance policies required hereunder shall (1) require 30 days' prior written notice to KCL of cancellation or material change in coverage (any such cancellation or change, as applicable, not being effective until the thirtieth (30th) day after the giving of such notice); (2) name "KeyCorp and its subsidiaries and affiliated companies, including KeyCorp Leasing, a Division of Key Corporate Capital Inc., their successors and assigns" as sole loss payee under the property insurance policies; (3) not require contributions from other policies held by KCL; (4) waive any right of subrogation against KCL; (5) in respect of any liability of KCL, except for the insurers' salvage rights in the event of a Loss or Damage, waive the right of such insurers to set-off, to counterclaim or to any other deduction, whether by attachment or otherwise, to the extent of any monies due KCL under such policies; (6) not require that KCL pay or be liable for any premiums with respect to such insurance covered thereby; (7) be in full force and effect throughout any geographical areas at any time traversed by any Item of Equipment; and (8) contain breach of warranty provisions providing that, in respect of the interests of KCL in such policies, the insurance shall not be invalidated by any action or inaction of Borrower or any other person (other than KCL) and shall insure KCL regardless of any breach or violation of any warranty, declaration or condition contained in such policies by Borrower or by any other person (other than KCL). Prior to funding the Note, and thereafter not less than 15 days prior to the expiration dates of the expiring policies theretofore delivered pursuant to this Section, Borrower shall deliver to KCL a duplicate original of all policies (or in the case of blanket policies, certificates thereof issued by the insurers thereunder) for the insurance maintained pursuant to this Section. (c) Proceeds of insurance with respect to physical loss or damage to the Equipment shall be applied, at the option of KCL, to repair or replace the Equipment or to reduce or satisfy (as applicable) the Secured Obligations. 12. Taxes. Borrower shall pay when due any and all taxes, fees, levies, imposts, duties, assessments and public and private charges levied or assessed on or with respect to the Equipment, on the use thereof, or on this Agreement or any of the other Loan Documents. 13. KCL's Right to Perform for Borrower. If Borrower fails to perform any of its obligations contained in the Loan Documents, KCL may (but shall not be obligated to) itself perform such obligations, and the amount of the reasonable costs and expenses of KCL incurred in connection with such performance, together with interest on such amount from the date paid by KCL until the date repaid by Borrower to KCL, at the Default Rate, shall be payable by Borrower to KCL upon demand. No such performance by KCL shall be deemed a waiver of any rights or remedies of KCL, or be deemed to cure the default of Borrower hereunder. All such sums and amounts so expended by KCL shall be repayable by the Borrower immediately without notice or demand, shall constitute additional Secured Obligations and shall bear interest from the date said amounts are expended at the Default Rate. 14. Delinquent Payments; Interest. If Borrower fails to pay any of the Installments on the date when the same becomes due, Borrower shall pay to KCL a late charge equal to five percent (5%) of such delinquent amount. Such late charge shall be payable by Borrower upon demand by KCL and shall be deemed part of the Secured Obligations. In no event shall such late charge exceed the maximum amounts permitted under Applicable Law. 15. Personal Property; Liens; Warrant of Title. The Borrower is, and will continue to be, the sole owner of the Equipment, free from any Lien. KCL and Borrower hereby agree that the Equipment is, and shall at all times remain, personal property notwithstanding the fact that any Item of Equipment may now be, or hereafter become, in any manner affixed or attached to real property or any improvements thereon. Borrower shall at all times keep the Equipment free and clear from all Liens, and the Borrower shall obtain and deliver to KCL (to be recorded at the Borrower's expense) from each person having a Lien on any Equipment Location waivers of any Lien which such person might have or hereafter obtain or claim with respect to the Equipment. Borrower shall (i) give KCL Form No: 96-501.999 Page 5 of 11 10 immediate written notice of any Lien on the Collateral, (ii) promptly, at Borrower's sole cost and expense, take such action as may be necessary to discharge any such Lien, and (iii) indemnify and hold KCL, on an after-tax basis, harmless from and against any loss or damage caused by any such Lien. Borrower warrants that it has good, valid and marketable title to the Equipment, and that (i) the security interest in the Collateral granted to KCL hereunder, when properly perfected by filing, shall constitute a valid and perfected first priority security interest in the Collateral and, (ii) the Collateral is not subject to, and Borrower will not grant or permit to exist, any Liens or claims on or against the Collateral, whether senior, superior, junior, subordinate or equal to the security interest granted to KCL hereby, or otherwise. 16. Events of Default; Remedies. (a) As used herein, the term "Event of Default" shall mean any of the following events: (1) Borrower fails to pay any Installment within ten (10) days after the same becomes due and payable; (2) Borrower breaches any of its other obligations under any of the Loan Documents and fails to cure the same within thirty (30) days after written notice thereof; (3) any dissolution, termination of existence, merger, consolidation, change in controlling ownership of Borrower or Guarantor, or if Borrower or Guarantor is a natural person, the death or incompetence of Borrower or Guarantor; (4) Borrower or any Guarantor fails to pay its debts generally as they become due or becomes insolvent or makes an assignment for the benefit of its creditors; (5) a receiver, trustee, conservator or liquidator of Borrower or any Guarantor or of all or a substantial part of Borrower's or such Guarantor's assets is appointed with or without the application or consent of Borrower or such Guarantor, respectively; (6) a petition is filed by or against Borrower or any Guarantor under any bankruptcy, insolvency or similar legislation; (7) Borrower or any Guarantor violates or fails to perform any provision of either the Loan Documents or any other loan, lease or credit agreement or any acquisition or purchase agreement with KCL or any other party; (8) Borrower violates or fails to perform any covenant or representation made by Borrower in the Loan Documents; (9) any representation or warranty made herein or in any of the Loan Documents, certificates, financial statements or other statements furnished to KCL (or KCL's parent, subsidiaries or affiliates) shall prove to be false or misleading in any material respect as of the date on which the same was made; (10) there is a material adverse change in Borrower's or any Guarantor's financial condition; (11) Borrower shall fail to satisfy any final judgment rendered against the Borrower by any court of competent jurisdiction where the judgment is material in amount as to the Borrower or materially impairs the financial or business condition of the Borrower; (12) any of the liens created or granted hereby, or intended to be granted or created hereby, to KCL shall fail to be valid, first priority perfected liens subject to no prior or equal lien; or (13) the receipt by KCL of a notice to creditors with regard to a bulk transfer by the Borrower pursuant to Article 6 of the Uniform Commercial Code; or (14) an additional Lien attaches to the Equipment or the Equipment becomes subject to risk of seizure or forfeiture. (b) (i) Upon the occurrence of an Event of Default, KCL, at its option, may declare any or all of the Secured Obligations, including, without limitation, the Note, to be immediately due and payable, without demand or notice to Borrower or any Guarantor. The obligations and liabilities accelerated thereby shall bear interest (both before and after any judgment) until paid in full at the Default Rate. Should there occur a Default and if a voluntary or involuntary petition under the United States Bankruptcy Code is filed by or against Borrower while such Default remains uncured, the Secured Obligations automatically shall be accelerated and due and payable and interest thereon at the Default Rate automatically shall apply as of the date of the first occurrence of the Default, without any notice, demand or action of any type on the part of KCL (including any action evidencing the acceleration or imposition of the Default Rate). The fact the KCL has, prior to the filing of the voluntary or involuntary petition under the United States Bankruptcy Code, acted in a manner which is inconsistent with the acceleration and imposition of the Default Rate shall not constitute a waiver of this provision or estop KCL from asserting or enforcing KCL's rights hereunder. (ii) Furthermore, upon the occurrence of an Event of Default, KCL shall have, in addition to the rights and remedies provided herein, in the other Loan Documents or bylaw, the rights and remedies of a secured party under the Uniform Commercial Code under the laws of the State of New York (the "UCC") (regardless of whether the UCC is the law of the jurisdiction where the rights and remedies are asserted and regardless of whether the UCC applies to the affected Collateral), and further KCL may do any one or more of the following as KCL in its Form No: 96-501.999 Page 6 of 11 11 sole discretion may elect, with or without judicial process or the aid and assistance of others: (i) enter and remain on any premises on which any of the Equipment may be located and, without resistance or interference by the Borrower, without liability to KCL by reason of such entry or taking possession, take possession of the Equipment, (ii) prepare for sale and sell or otherwise dispose of any Equipment on any such premises, (iii) require the Borrower to assemble and make available to KCL at Borrower's expense any Equipment at any place and time designated by KCL, (iv) remove any Equipment from any such premises for the purpose of effecting sale or other disposition thereof, (v) without demand and without advertisement, notice, hearing or process of law, all of which the Borrower hereby waives, at any place and time or times, sell and deliver any or all Equipment held by or for it at public or private sale, by one or more contracts, in one or more parcels, for cash, upon credit or otherwise, at such prices and upon such terms as KCL deems advisable, in its sole discretion, or (vi) lease all or any portion of the Equipment on such terms and conditions as KCL in it sole discretion may determine. In addition to all other sums due KCL hereunder, the Borrower shall pay KCL all reasonable costs and expenses incurred by KCL, including reasonable attorneys' fees and court costs, in obtaining or liquidating the Collateral, in enforcing payment of Secured Obligations, or in the prosecution or defense of any action or proceeding by or against KCL or the Borrower concerning any matter arising out of or connected with the Loan Documents, the Collateral or the Secured Obligations, including without limitation any of the foregoing arising in, arising under or related to a case under the United States Bankruptcy Code. (iii) Borrower's waivers regarding disposition of the equipment. IF AN EVENT OF DEFAULT OCCURS, BORROWER HEREBY WAIVES ANY DEFENSES, RIGHTS, OFFSETS OR CLAIMS AGAINST KCL ARISING OUT OF THE REPOSSESSION, RETENTION, SALE, MANNER OR METHOD OF SALE OR DISPOSITION OF ANY ITEMS OF EQUIPMENT. THE BORROWER AGREES THAT ANY REQUIREMENT OF REASONABLE NOTICE SHALL BE MET IF SUCH NOTICE IS PERSONALLY SERVED ON OR MAILED, POSTAGE PREPAID, TO THE BORROWER IN ACCORDANCE WITH THE NOTICE PROVISIONS HEREOF AT LEAST 10 DAYS BEFORE THE TIME OF SALE OR OTHER EVENT GIVING RISE TO THE REQUIREMENT OF SUCH NOTICE. KCL SHALL NOT BE OBLIGATED TO MAKE ANY SALE OR OTHER DISPOSITION OF THE EQUIPMENT REGARDLESS OF NOTICE HAVING BEEN GIVEN. KCL MAY BE THE PURCHASER AT ANY SUCH SALE. THE BORROWER HEREBY WAIVES ALL OF ITS RIGHTS OF REDEMPTION FROM ANY SUCH SALE. KCL MAY POSTPONE OR CAUSE THE POSTPONEMENT OF THE SALE OF ALL OR ANY PORTION OF THE EQUIPMENT BY ANNOUNCEMENT AT THE TIME AND PLACE OF SUCH SALE, AND SUCH SALE MAY, WITHOUT FURTHER NOTICE, BE MADE AT THE TIME AND PLACE TO WHICH THE SALE WAS SCHEDULED. NONE OF KCL'S RIGHTS OR REMEDIES HEREUNDER ARE INTENDED TO BE EXCLUSIVE OF, BUT EACH SHALL BE CUMULATIVE AND IN ADDITION TO, ANY OTHER RIGHT OR REMEDY REFERRED TO HEREUNDER OR OTHERWISE AVAILABLE TO KCL OR ITS ASSIGNS AT LAW OR IN EQUITY, AND MAY BE PURSUED SINGLY, SUCCESSIVELY OR CONCURRENTLY AT THE SOLE DISCRETION OF LENDER AND MAY BE EXERCISED AS OFTEN AS OCCASION THEREFOR SHALL OCCUR. THE FAILURE TO EXERCISE, OR ANY DELAY IN THE EXERCISE OF, ANY RIGHT OR REMEDY SHALL IN NO EVENT BE CONSTRUED AS A WAIVER, RELEASE OR EXHAUSTION OF ANY SUCH REMEDIES. NO EXPRESS OR IMPLIED WAIVER BY KCL OF ANY EVENT OF DEFAULT SHALL CONSTITUTE A WAVER OF ANY OTHER EVENT OF DEFAULT OR A WAIVER OF ANY OF KCL'S RIGHTS UPON THE REOCCURRENCE OF ANY SUCH EVENT OF DEFAULT. (c) The Borrower hereby authorizes KCL, upon the occurrence and during the continuation of any Event of Default hereunder, at KCL's option to adjust, compromise and settle any losses under any insurance afforded, and the Borrower does hereby irrevocably constitute KCL and each of its designees, as its attorney-in-fact, with full power and authority, upon the occurrence and during the continuation of any Event of Default hereunder, to effect such adjustment, compromise and/or settlement and to endorse any drafts drawn by an insurer of the Equipment or any part thereof and to do everything necessary to carry out such purposes and to receive and receipt for any unearned premiums due under policies of such insurance; but unless or until KCL elects to adjust, compromise or settle losses as aforesaid, such insurance proceeds shall be subject to the lien and security interest of KCL hereunder. Form No: 96-501.999 Page 7 of 11 12 (d) Upon the occurrence, and during the continuance, of an Event of Default hereunder, any payments in respect of the Secured Obligations and any proceeds of the Collateral, when received by KCL in cash or its equivalent, will be applied first to costs of collection and, thereafter, in reduction of the Secured Obligations in such order and manner as KCL may direct in it sole discretion, and the Borrower irrevocably waives the right to direct the application of such payments and proceeds and acknowledges and agrees that KCL shall have the continuing and exclusive right to apply any and all such payments and proceeds in KCL's sole discretion, notwithstanding any entry to the contrary upon any of its books and records. The Borrower shall remain liable to KCL for any deficiency. Any surplus remaining after the full payment and satisfaction of the Secured Obligations shall be returned to the Borrower or to whomsoever a court of competent jurisdiction shall determine to be entitled thereto. (e) To the extent that any of the Secured Obligations are now or hereafter secured by property other than the Collateral, or by a guarantee, endorsement or property of any other person, then KCL also shall have the right to proceed against such other property, guarantee or endorsement upon the occurrence of a default hereunder, and KCL shall have the right, in its sole discretion, to determine which rights, lines, security interests or remedies KCL shall at any time pursue, relinquish, subordinate or modify, without in any way affecting the Secured Obligations or any of KCL's rights under this Agreement. 17. Notices. All notices and other communications hereunder shall be in writing and shall be transmitted by hand, overnight courier or certified mail (return receipt requested), postage prepaid. Such notices and other communications shall be addressed to the respective party at the address set forth above or at such other address as any party may from time to time designate by notice duly given in accordance with this Section. Such notices and other communications shall be effective upon the earlier of receipt or three (3) days after mailing if mailed in accordance with the terms of this section. 18. General Indemnification. Borrower shall pay, and shall indemnify and hold KCL and its directors, officers, employees, counsel, agents and advisors harmless on an after-tax basis from and against, any and all liabilities, causes of action, claims, suits, penalties, damages, losses, costs or expenses (including attorneys' fees), obligations, liabilities, demands and judgments, and Liens, of any nature whatsoever (collectively, a "Liability") arising out of or in any way related to: (a) the Loan Documents (b) a failure to comply fully with Applicable Law and (c) Borrower's failure to perform any covenant, or breach of any representation or warranty under the Loan Documents; provided, that the foregoing indemnity shall not extend to the Liabilities to the extent resulting solely from the gross negligence or willful misconduct of KCL. Borrower shall promptly deliver to KCL (i) copies of any documents received from the United States Environmental Protection Agency or to any state, county or municipal environmental or health agency concerning the Equipment or its operation and (ii) copies of any documents submitted by Borrower or any of its subsidiaries to the United States Environmental Protection Agency or any state, county or municipal environmental or health agency concerning the Equipment or its operation. Borrower further agrees to indemnify KCL against and hold it harmless from all present and future stamp, transfer, documentary and other such taxes, levies, fees, assessments or other charges made by any jurisdiction by reason of the execution, delivery, performance and enforcement of the Loan Documents. 19. Severability; Captions. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under Applicable Law. If, however, any provision of this Agreement or any of the Loan Documents shall be prohibited or unenforceable in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law, or if for any reason it is not deemed so modified, it shall be ineffective only to the extent of such prohibition or unenforceability without affecting the remaining provisions hereof, and any such prohibition or unenforceability shall not invalidate or render unenforceable such provision in any other jurisdiction. Captions are intended for convenience or reference only, and shall not be construed to define, limit or describe the scope or intent of any provisions hereof. 20. Financial and Other Data. During the Term hereof, Borrower shall furnish KCL, as soon as available and in any event within 120 days after the last day of each fiscal year, financial statements of Borrower and each Form No: 96-501.999 Page 8 of 11 13 Guarantor, in each case compiled, reviewed or audited by an independent certified public accountant as required by KCL. Borrower shall also furnish such other financial reports, information or data (including federal and state income tax returns and quarterly or interim financial statements compiled, reviewed or audited by an independent certified public accountant if required by KCL) as KCL may reasonably request from time to time. 21. [RESERVED] 22. Representations and Warranties of Borrower. Borrower represents and warrants that: (a) Borrower is a corporation duly organized and validly existing in good standing under the laws of the state of its incorporation; (b) the execution, delivery and performance of this Agreement and all related instruments and documents: (1) have been duly authorized by all necessary corporate action on the part of Borrower, (2) do not require the approval of any stockholder, partner, trustee or holder of any obligations of Borrower except such as have been duly obtained, and (3) do not and will not contravene any law, governmental rule, regulation or order now binding on Borrower, or the charter or by-laws of Borrower, or contravene the provisions of, or constitute a default under, or result in the creation of any lien or encumbrance upon the property of Borrower under, any indenture, mortgage, contract or other agreement to which Borrower is a party or by which it or its property is bound; (c) the Loan Documents, when entered into, will constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with the terms thereof; (d) there are no pending actions or proceedings to which Borrower is a party, and there are no other pending or threatened actions or proceedings of which Borrower has knowledge, before any court, arbitrator or administrative agency, which, either individually or in the aggregate, would adversely affect the financial condition of Borrower, or the ability of Borrower to perform its obligations under the Loan Documents; (e) Borrower is not in default under any obligation for the payment of borrowed money, for the deferred purchase price of property or for the payment of any installments under any lease agreement which, either individually or in the aggregate, would have the same such effect; (f) under the laws of the state(s) in which the Equipment is to be located, the Equipment consists solely of personal property and not fixtures; (g) the financial statements of Borrower (copies of which have been furnished to KCL) have been prepared in accordance with generally accepted accounting principles consistently applied ("GAAP"), and fairly present Borrower's financial condition and the results of its operations as of the date of and for the period covered by such statements, and since the date of such statements there has been no material adverse change in such conditions or operations; (h) the address stated above is the chief place of business and chief executive office, or in the case of individuals, the primary residence, of Borrower; (i) Borrower does not conduct business under a trade, assumed or fictitious name, except as set forth in Schedule 1; (j) this Agreement creates a valid first priority security interest in the Collateral securing payment and performance of the Secured Obligations and all filings and other action necessary to perfect such security interest have been taken or shall be promptly taken; (k) Borrower has filed or has caused to have been filed all Federal, state and local tax returns which, to the knowledge of Borrower, are required to be filed, and has paid or caused to have been paid all taxes as shown on such returns or on any assessment received by it, to the extent that such taxes have become due, unless and to the extent only that such taxes, assessments and governmental charges are currently contested in good faith and by appropriate proceedings by Borrower and adequate reserves therefor have been established as required under GAAP and, to the extent Borrower believes it advisable to do so, Borrower has set up reserves which are believed by Borrower to be adequate for the payment of additional taxes for years which have not been audited by the respective tax authorities; (l) except as previously disclosed in writing to KCL, neither Borrower nor any of its officers or directors (if a corporation), partners (if a partnership) or members or managers (if a limited liability corporation) has, directly or indirectly, any financial interest in the Supplier; and (m) Borrower has conducted comprehensive review and assessment of the Borrower's computer applications and made inquiry of the Borrower's key suppliers, vendors and customers with respect to the "year 2000 problem" (that is, the risk that computer applications may not be able to properly perform date-sensitive functions after December 31, 1999) and based on that review and inquiry, the Borrower does not believe the year 2000 problem will result in a material adverse change in the Borrower's business condition (financial or otherwise), operations, properties or prospects, or ability to perform the obligations of Borrower under this Agreement; (n) Borrower is not in violation of any Applicable Law, the violation of which would have a material adverse effect on the conduct of its business, and Borrower has obtained any and all licenses, permits, franchises or other governmental authorizations Form No: 96-501.999 Page 9 of 11 14 necessary for the ownership of its properties and the conduct of its business; and (o) none of the proceeds of the loan made by KCL will be used, directly or indirectly, by Borrower for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any "margin stock" within the meaning of Regulation U (12 CFR Part 221), of the Board of Governors of the Federal Reserve System (herein called "margin stock") or for any other purpose which might make the transactions contemplated herein a "purpose credit" within the earning of Regulation U or cause this Agreement to violate any other regulation of the Board of Governors of the Federal Reserve System or the Securities Exchange Act of 1934 or the Small Business Investment Act of 1958, as amended, or any rules or regulations promulgated under any of such statutes. 23. Further Covenants of Borrower. The Borrower further covenants and agrees that it will not change its legal name, be a party to a merger, consolidation or other change in structure or use a trade name in its business without at least 30 days' prior written notice to KCL; and shall execute and deliver to KCL (to by filed at Borrower's expense) all UCC statements as may be required by KCL in connection with such event. 24. Miscellaneous. Time is of the essence with respect to this Agreement. ANY FAILURE OF KCL TO REQUIRE STRICT PERFORMANCE BY BORROWER OR ANY WAIVER BY KCL OF ANY PROVISION HEREIN SHALL NOT BE CONSTRUED AS A CONSENT OR WAIVER OF ANY PROVISION OF THIS AGREEMENT. None of the Loan Documents may be amended except by a writing signed by KCL and Borrower. This Agreement will be binding upon KCL only if executed by a duly authorized officer or representative of KCL at KCL's principal place of business as set forth above. This Agreement and all other Loan Documents shall be executed on Borrower's behalf by Authorized Signers of Borrower. The Borrower hereby waives presentment, notice of dishonor and protest of all instruments included in or evidencing any Secured Obligations, and all other notices and demands whatsoever (except as expressly provided herein). THIS AGREEMENT IS BEING DELIVERED IN THE STATE OF NEW YORK AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAWS PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. 25. Jury Trial Waiver. KCL AND BORROWERS HEREBY EACH WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION OR PROCEEDING TO WHICH KCL OR BORROWER MAY BE PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE INCLUDING WITHOUT LIMITATION ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY, OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER IS MADE KNOWINGLY, WILLINGLY AND VOLUNTARILY BY KCL AND THE BORROWER WHO EACH ACKNOWLEDGE THAT NO REPRESENTATIONS HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 26. More than One Borrower. If more than one person or entity executes this Agreement, each of the other Loan Documents, and all addenda or other documents executed in connection herewith or therewith, as "Borrower," the obligations of "Borrower" contained herein and therein shall be deemed joint and several and all references to "Borrower" shall apply both individually and jointly. 27. Entire Agreement. This Agreement together with the other Loan Documents, collectively constitute the entire understanding or agreement between KCL and Borrower with respect to the financing of the Equipment, Form No: 96-501.999 Page 10 of 11 15 and there is no understanding or agreement, oral or written, which is not set forth herein or therein. This Agreement shall not be modified except by the written agreement of KCL and Borrower. 28. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 29. Power of Attorney; UCC Filings. BORROWER SHALL EXECUTE AND DELIVER TO KCL CONCURRENTLY WITH THE EXECUTION OF THIS AGREEMENT, AND AT ANY TIME FROM TIME TO TIME THEREAFTER, ALL FINANCING STATEMENTS, AMENDMENTS TO FINANCING STATEMENTS, CHATTEL MORTGAGES, ASSIGNMENTS, AND ALL OTHER INSTRUMENTS, IN FORM SATISFACTORY TO KCL, AND TAKE ALL OTHER ACTION AS KCL MAY REASONABLY REQUIRED, TO PERFECT AND CONTINUE PERFECTED, MAINTAIN THE PRIORITY OF OR PROVIDE NOTICE OF KCL'S SECURITY IN THE COLLATERAL BORROWER HEREBY APPOINTS KCL, OR ITS ASSIGNEE, AND ANY OF KCL'S OR ASSIGNEE'S OFFICERS OR EMPLOYEES AS ITS TRUE AND LAWFUL ATTORNEY IN FACT, IRREVOCABLY AND COUPLED WITH AN INTEREST, TO EXECUTE AND FILE ON BEHALF OF BORROWER ALL UCC FINANCING STATEMENTS WHICH IN KCL'S SOLE DISCRETION ARE NECESSARY OR PROPER TO SECURE KCL'S INTEREST IN THE EQUIPMENT IN ALL APPLICABLE JURISDICTIONS. Borrower hereby ratifies, to the extent permitted by law, all that KCL shall lawfully and in good faith do or cause to be done by reason of and in compliance with this paragraph. Lender: Borrower: KEYCORP LEASING, STARTEK USA, INC. A DIVISION OF KEY CORPORATE CAPITAL INC. By: /s/ KRISTA L. SPADA By: /s/ DENNIS M. SWENSON -------------------------------- ------------------------------- Name: Krista L. Spada Name: Dennis M. Swenson Title: Regional Business Title: Executive Vice President Unit Manager Form No: 96-501.999 Page 11 of 11 Exhibits and Schedules not filed 16 AMENDMENT NO. 01 TO SECURITY AGREEMENT THIS AMENDMENT dated as of October 13, 1999 amends that certain Security Agreement dated as of October 13, 1999 (the "Agreement") between KEYCORP LEASING, A DIVISION OF KEY CORPORATE CAPITAL INC., a lender, and STARTEK USA, INC., as Borrower. Unless otherwise specified herein, all capitalized terms shall have the meanings ascribed to them in the Agreement. BORROWER'S FINANCIAL COVENANTS. Borrower hereby covenants with Lender as follows: On a continuing basis, from the date of the Promissory Note and Security Agreement until the date on which Lessee's obligations thereunder are fully paid and performed, Lessee hereby covenants and agrees that: 1. Current Ratio: Lessee shall maintain a ratio of current assets to current liabilities in excess of 1.25 to 1.00; calculated at end of each June and December. Current Ratio is defined as Current Assets less all intercompany transactions, with the exception of StarTek, Inc. transactions less prepaid expenses divided by Current Liabilities. 2. Operating Cash Flow to Fixed Charge Ratio: Lessee shall maintain either of the following: Option A: A ratio of Operating Cash Flow to Total Fixed Charges of not less than 3.00 to 1.00; calculated semi-annually on a rolling four quarters basis with NO proforma or other income tax (actual) subtraction. Operating Cash flow defined as net income BEFORE taxes, and exclusive of extraordinary gains, gains on asset sales, and other income, plus depreciation and amortization plus interest expense, plus lease expense less dividends, and distributions. Option B: A ratio of Operating Cash flow to Total Fixed Charges of not less than 2.00 to 1.00; calculated semi-annually on a rolling four quarter basis with a proforma or other income tax (actual) subtraction. Operating Cash flow defined as net income AFTER taxes, and exclusive of extraordinary gains, gains on asset sales, and other income, plus depreciation and amortization plus interest expense, plus lease expense less dividends, and distributions. 17 EXCEPT AS EXPRESSLY MODIFIED HEREBY, ALL OF THE TERMS, COVENANTS AND CONDITIONS OF THE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT AND ARE IN ALL RESPECTS HEREBY RATIFIED AND AFFIRMED. IN WITNESS WHEREOF, Lender and Borrower have executed this Amendment as of the date first written above. LENDER: BORROWER: KEYCORP LEASING, STARTEK USA, INC. A DIVISION OF KEY CORPORATE CAPITAL INC. By: /s/ KRISTA L. SPADA By: /s/ DENNIS M. SWENSON ----------------------------- ---------------------------- Name: Krista L. Spada Name: Dennis M. Swenson Title: Regional Business Title: Executive Vice President Unit Manager Form No.: 96-508.999 Page 2 of 2 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARTEK, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF SEPTEMBER 30, 1999 AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 INCLUDED IN STARTEK, INC.'S FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 US 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 20,745 25,936 19,009 774 2,592 69,527 32,412 10,752 101,782 33,928 2,539 0 0 139 64,556 101,782 0 138,852 0 0 112,969 385 214 12,698 4,745 7,953 0 0 0 7,953 0.57 0.57
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