This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the following:

 

Our business and results of operations are subject to risks and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by forward-looking statements, and investors are cautioned not to place undue reliance on such statements.  All forward-looking statements herein speak only as of the date hereof, and we undertake no obligation to update any such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations and may adversely affect our business and results of operations include, but are not limited to those items set forth in Item 1A. “Risk Factors” appearing in this Form 10-K.

 

Unless otherwise noted in this report, any description of “us," “we” or "our" refers to StarTek, Inc. ("STARTEK") and its subsidiaries.  Financial information in this report is presented in U.S. dollars.

 

 

 

We operate our business within three reportable segments, based on the geographic regions in which our services are rendered: Domestic, Asia Pacific and Latin America.  As of December 31, 2012,2013, our Domestic segment included the operations of fiveseven facilities in the United States and two facilitiesone facility in Canada; our Asia Pacific segment included the operations of twothree facilities in the Philippines; and our Latin America segment included the operations of one facility in Costa Rica and one facility in Honduras. 

 

 

We provide customer experience management throughout the life cycle of our clients’ customers.  These service offerings include customer care, sales support, inbound sales, complex order processing, accounts receivable management, technical and product support, up-sell and cross-sell opportunities and other industry-specific processes.  We provide these services by leveraging technology, agent performance tools, analytics and self service applications to coach and enable and empower our Brand Warriors.

Technical and Product Support.  Our technical and product support service offering provides our clients’ customers with high-end technical support services by telephone, e-mail, chat, facsimile and the internet,Internet, 24 hours per day, seven days per week.

 

 

 

Our goal is to provide higher conversion rates and improve the average revenue per sale. We select managers and representatives who not only have a sales mentality, but are dedicated to helping customers. StarTekWe also employsemploy a proven sales training methodology that all our sales and service representatives employ and they are supported by dedicated management teams. By working with our clients and providing a true sales team culture, we are able to achieve superior sales results.

StarTek'sSTARTEK's Production Disposition Tools are designed to capture line of business-specific queue metrics and order data, as well as drive order entry accuracy and efficiency; document and capture new orders as a means of validation and audit; capture and assess agent level accuracy on order entry accuracy, completeness and comment field description.

In addition, our Solutions Team engages with clients to understand their specific goals and anticipate the needs of their customers.  As a part of the StarTekSTARTEK Advantage System, the Solutions Team is involved from the earliest stages of the life cycle of our client engagements through ongoing operations in order to find the right solution from existing StarTekSTARTEK tools and emerging technologies.

 

 

We have observed a few emerging trends in client requirements of our industry.  Our clients are increasingly focused on: (1)on improving the customer experience; (2) increasing up-sellengagement and cross-sell opportunities; and (3) reducing total overall cost of ownership.  We deliver a high level of customer satisfaction, as evidenced by our clients’ customer service awards and our clients’ ranking of StarTekSTARTEK relative to other outsourced partners.  We have demonstrated to our clients our success in increasing revenue per subscriber by the results of our up-sell and cross-sell methodologies during customer interactions.  Our clients value a combination of on-shore, near-shore, offshore and home agent delivery platforms to optimize their customer support costs.  In response to the demand for offshore solutions, we opened our first facility in the Philippines in 2008 and a second facility in 2010.  In response to thisthe demand for near-shore solutions, we opened a new facility in Costa Rica in 2010 and in

 

We have also observed that our clients are demanding a decrease in the number of contacts it takes for their customers to enjoy their products or services.  Process improvement has also driven further efficiencies for resolution of those contact issues. We are committed to delivering solutions through which we partner with our clients to achieve and deliver these efficiency gains. 

We believe we are positioned to benefit from this trend as we have developed a comprehensive suite of services whichthat drive continuous improvement on front and back-office transactions.

 

 

The sum total of the StarTekSTARTEK culture, the StarTekSTARTEK Operating Platform, customized solutions for every client program and our continuous improvement process is our StarTekSTARTEK Advantage System.  The StarTekSTARTEK Advantage System empowers and enables our leaders to deliver consistent execution of operational results while driving year over yearyear-over-year improvement for our clients’ critical business requirements.

 

StarTek’sSTARTEK’s culture is built on trust and servant leadership. Servant leadership puts the employees first and leads with a focus on solving problems and promoting personal development.   We are a gathering of like mindedlike-minded professionals determined to make a positive impact for our employees, our clients and our stakeholders. 

 

StarTekSTARTEK Operating Platform provides the expertise, best practices and thought leadership to move our clients’ programs toward specific, measurable goals.  It includes execution and innovation in every area of the operation from onboarding our employees, enabling our employees, executing against goals, evaluating performance, improving performance and enhancing our client’s business.

 

StarTekSTARTEK deploys solutions whichthat leverage what we have now, what we have learned from experience across a breadth of clients and industries and what we hear and understand from our client’s goals.  We will deliver the right people with the right leadership enabled by the right technology and empowered by the right tools to make a meaningful impact to our clients’ business. Our recent acquisition of Ideal Dialogue gives us the ability to offer a solution for improving customer interactions and, subsequently, customer satisfaction. Ideal Dialogue has developed a unique methodology for training and measuring how we can better engage with customers to improve the customer experience.

 

We offer a variety of customer management solutions that provide front to back-office capabilities utilizing the right delivery platform including onshore, near shore, offshore and StarTek@HomeSTARTEK@Home sourcing alternatives. We also offer multi-channel interactions across voice, chat, email and IVR channels.  We believe that we are differentiated by our client centric culture, quality of our execution and results, our flexibility and competitive pricing.

 

Our solution configuration is aligned with our clients’ unique requirements.  We are flexible in designing solutions around our clients’ strategic goals, and we provide experienced management teams that bring together a trained, productive workforce, equipped with the right tools and technology. 

 

Performance is core to the StarTekSTARTEK Operating Platform.  Our clients expect consistent performance against the fundamentals of the business no matter the location or method of the service delivery.  The operating platform sets the stage for us to drive continuous improvement and focus on the value-add aspects of our clients’ business.

 

We are confident in our ability to be cost competitive in our solutions for our clients’ needs. Through clearly understanding their needs and striving to reach goal congruency, we can assure that our collective financial goals are aligned in the most efficient way.

 

 

Successful outsourcing partnerships strike a balance by delivering our clients a better customer experience through an efficient support model while generating a fair return for our stakeholders.  Therefore, our mission is simple.  We enable and empower our Brand Warriors to fight for our clients’ brands every day in order to return value to our stakeholders. Our employees and customer service agents are called Brand Warriors because they are on the front lines protecting and promoting our clients’ brands, which creates loyalty for our clients’ products and services.  Our clients’ business objectives become our business objectives, as we seek to become their trusted partner.  Every day, we strive to better understand our clients’ market and competitive challenges so that we can play a more effective role as a trusted partner in their businesses.  We seek to build customer loyalty and reduce our customers’ costs through specific actionable continuous improvement efforts.  Management believes that empowering and enabling our Brand Warriors is the most important way we can deliver the best possible consistent customer experience.  StarTek’sSTARTEK’s leadership team is committed to driving year over yearyear-over-year continuous improvement for our clients’ businesses, not only in customer experience, but in total cost of ownership.

We seek to become a market leader in providing meaningful impact business process outsourcing ("BPO") services to our clients. Our approach is to develop relationships with our clients that are partnering and collaborative in nature where we are focused, flexible and responsive to their business needs.  In addition, we offer creative industry-based solutions to meet our clients’ ever changing business needs.  The end result is the delivery of a quality customer experience to our client’sclients’ customers. To become a leader in the market, our strategy is to:

 

 

StarTekSTARTEK was founded in 1987.  At that time, our business was centered on supply chain management services, which included packaging, fulfillment, marketing support and logistics services.  After our initial public offering on June 19, 1997, we began operating contact centers, which primarily focused on customer care, and grew to include our current suite of offerings as described in the “Business Overview” section of this Form 10-K.

 

Our business has been seasonal, only to the extent thatdependent on our clients’clients' marketing programs and product launches, which are often geared toward the end of summer and the winter holiday buying season. Our cable and satellite providers also bring a seasonal element towards special sports programming. 

 

Outsourcing of non-core activities, such as those we provide, offers companies the ability to focus on their core competencies, leverage economies of scale and control variable costs of the business while accessing new technology and trained expert personnel.  As the business environment continues to evolve, it has become more difficult and expensive for some companies to maintain the necessary personnel and service capabilities in-house to provide business process services on a cost-effective basis. Accordingly, we anticipate that outsourced customer care services will grow significantly in the coming years.  In general, we believe that industries having higher levels of customer contact and service volume, such as the communications industry, tend to be more likely to seek outsourced services as a more efficient method of managing their technical support and customer care functions. We believe that outsourced service providers, including ourselves, will continue to benefit from these outsourcing trends.

 

 

We compete with a number of companies that provide similar services on an outsourced basis, including business process outsourcing companies such as Teleperformance; Convergys Corporation; Transcom; NCO Group; Aegis PeopleSupport; Sitel Corporation; Sykes Enterprises, Incorporated; TeleTech Holdings, Inc.,; Stream Global Services, Inc. and West Corporation.  We compete with the aforementioned companies for new business and for the expansion of existing business within the clients we currently serve.  Many of these competitors are significantly larger than us in revenue, income, number of contact centers and customer service agents, number of product offerings and market capitalization.  We believe that while smaller than many of our competitors, we are able to compete because of our focus and scale as well as proven performance to add value to our

 

 

Our twothree largest customers, AT&T Inc. (“AT&T”) and, T-Mobile USA, Inc. (“T-Mobile”) (a subsidiary of Deutsche Telekom)and Comcast Cable Communications Management, LLC ("Comcast"), account for a significant percentage of our revenue. While we believe that we have good relationships with these clients, a loss of a large program from one of these clients, a significant reduction in the amount of business we receive from a principal client, renegotiation of pricing on several programs simultaneously for one of these clients, the delay or termination of a principal clients’ product launch or service offering, or the complete loss of one or more of these principal clients would adversely affect our business and our results of operations. Also, our clients may unilaterally reduce their use of our services under our contracts without penalty.

 

Our work for AT&T is covered by several statements of work (the "SOW")contracts for a variety of different lines of AT&T business.  These contracts expire over the course of 2013 throughbetween 2014 and 2015.  TheOur initial term of our master serviceservices agreement covering all AT&T work expired in January 2010, and washad been extended annually through January 31, 2013.   On January 25, 2013, we entered into a new master services agreement with AT&T Services, Inc., which expires December 31, 2015 and may be extended upon mutual agreement.agreement, but may be terminated by AT&T with written notice.

On July 28, 2011, we entered into a new master services agreement (the “MSA”) with T-Mobile effective July 1, 2011, which covers all services that we provide to T-Mobile. The MSAnew master services agreement with T-Mobile replaces the previous master services agreement dated October 1, 2007, and has an initial term of five years with automatic renewaland will automatically renew for additional one-year periods thereafter, but may be terminated by T-Mobile upon 90 days written notice.

 

We are subject to numerous federal, state, and local laws in the states and territories in which we operate, including tax, environmental and other laws that govern the way we conduct our business.  There are risks inherent in conducting business internationally, including significant changes in domestic government programs, policies, regulatory requirements, and taxation with respect to foreign operations,operations; potentially longer working capital cycles,cycles; unexpected changes in foreign government programs, policies, regulatory requirements and labor laws,laws; and difficulties in staffing and effectively managing foreign operations.

 

As of December 31, 2012,2013, we employed approximately 10,20011,600 employees. Approximately 2,3003,000 were employed in the United States and approximately 7,9008,600 were employees in foreign countries. None of our employees were members of a labor union or were covered by a collective bargaining agreement during 2012.2013. We believe our overall relations with our workforce are good.

 

 

 

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available free of charge through our website (www.startek.com) as soon as practicable after we furnish it to the Securities and Exchange Commission (“SEC”). We also make available on the “Investor Relations” page of our corporate website, the charters for the Compensation Committee, Audit Committee and Governance and Nominating Committee of our Board of Directors, as well as our Corporate Governance Guidelines and our Code of Ethics and Business Conduct.

 

None of the information on our website or any other website identified herein is part of this report. All website addresses in this report are intended to be inactive textual references only.

Revenue from our twothree largest clients, AT&T, Inc.T-Mobile and T-Mobile,Comcast, accounted for 32.3%25.3%, 27.7% and 28.2%19.8%, respectively, of our revenues for the year ended December 31, 2012. Upon exiting 2012, both clients were under 30% each.2013.

We may not be able to retain our principal clients. If we were to lose any of our principal clients, we may not be able to timely replace the revenue generated by them. Loss of a principal client could result from many factors, including consolidation or economic downturns in our clients' industries, as discussed further below. In the first quarter of 2012, we received notice from one of our largest clients of a significant reduction in volume.

The future revenue we generate from our principal clients may decline or grow at a slower rate than expected or than it has in the past. In the event we lose any of our principal clients or do not receive call volumes anticipated from these clients, we may suffer from the costs of underutilized capacity because of our inability to eliminate all of the costs associated with conducting business with that client, which could exacerbate the effect that the loss of a principal client would have on our operating results and financial condition. For example, there are no guarantees of volume under the current contract with AT&T. In addition, the current contract with AT&T provides for a tiered incentive pricing structure that provides for lower pricing at higher volumes. Additional productivity gains could be necessary to offset the negative impact that lower per-minute revenue at higher volume levels would have on our margins in future periods.

Our contracts generally do not contain minimum purchase requirements and can generally be terminated by our customers on short notice without penalty.

We enter into written agreements with each client for our services and seek to sign multi-year contracts with our clients. However these contracts generally permit termination upon 30 to 90 days notice by our clients, do not designate us as our clients' exclusive outsourced services provider, do not penalize our clients for early termination, hold us responsible for work performed that does not meet pre-definedpredefined specifications and do not contain minimum purchase requirements or volume commitments. Accordingly, we face the risk that our clients may cancel or renegotiate contracts we have with them, which may adversely affect our results. If a principal client cancelledcanceled or did not renew theirits contract with us, our results would suffer. In addition, because the amount of revenue generated from any particular client is generally dependent on the volume and activity of our clients' customers, as described above, our business depends in part on the success of our clients' products. The number of customers who are attracted to the products of our clients may not be sufficient or our clients may not continue to develop new products that will require our services, in which case it may be more likely for our clients to terminate their contracts with us. Moreover, clients who may not terminate their contacts with us without cause could generally reduce the volume of services they outsource to us, which would have an adverse effect on our revenue, results of operations and overall financial condition.

Our client base is concentrated in the communications industry and our strategy partially depends on a trend of communications companies continuing to outsource non-core services. If the communications industry suffers a downturn or the trend toward outsourcing reverses, our business will suffer.

Our current clients are almost exclusively communications companies, which include companies in the wire-line, wireless, cable and broadband lines of business. During 2012, we experienced lower call volumes from our customers in the wire-line and wireless businesses which adversely affected our results. Currently, our business is largely dependent on continued demand for our services from clients in this industry and on trends in this industry to purchase outsourced services. A significant change in this trend could have a materially adverse effect on our financial condition and results of operations.

Substantially all of our facility space can be used to support any of our business process outsourced services. We believe our existing facilities are adequate for our current operations. We intend to maintain efficient levels of excess capacity to enable us to readily provide for needs of new clients and increasing needs of existing clients.

 

 

Our common stock has been listed on the NYSE under the symbol “SRT” since the effective date of our initial public offering on June 19, 1997. The following table sets forth the quarterly high and low sales prices of our common stock as reported on the NYSE for the periods shown:

 

As of March 1, 2013,3, 2014, there were 1,824approximately 1,655 stockholders of record and 15,299,57915,376,611 shares of common stock outstanding.  See Item 1A.  “Risk Factors,” set forth in this Form 10-K for a discussion of risks related to control that may be exercised over us by our principal stockholders.

 

 

On January 22, 2007, our board of directors announced it would not declare a quarterly dividend on our common stock in the first quarter of 2007, and did not expect to declare dividends in the near future, making the dividend paid in November 2006 the last quarterly dividend that will be paid for the foreseeable future.  We plan to invest in growth initiatives in lieu of paying dividends.

 

 

Effective November 4, 2004, our board of directors authorized repurchases of up to $25 million of our common stock. The repurchase program will remain in effect until terminated by the board of directors, and will allow us to repurchase shares of our common stock from time to time on the open market, in block trades and in privately-negotiated transactions. Repurchases will be implemented by the Chief Financial Officer consistent with the guidelines adopted by the board of directors, and will depend on market conditions and other factors. Any repurchased shares will be held as treasury stock, and will be available for general corporate purposes. Any repurchases will be made in accordance with SEC rules. As of the date of this filing, no shares have been repurchased under this program.

 

The balance of the information required by Item 201 of Regulation S-K is omitted in accordance with the regulatory relief available to smaller reporting companies.

 

The following discussion analyzes our consolidated financial condition as of December 31, 20122013 and 2011,2012, and our consolidated results of operations for the years then ended. We are considered a "smaller reporting company" under applicable regulations of the SEC and are therefore eligible for relief from certain disclosure requirements. In accordance with such provisions, we have elected to provide our audited consolidated statements of operations and comprehensive income (loss), cash flows and changes in stockholders' equity for two, rather than three, years.

 

StarTek, Inc.STARTEK is a global provider ofcomprehensive contact center and business process outsourcing servicesservice company with approximately 10,200 employees whom we refer to ascall Brand Warriors thatwho for over 25 years have been committed to making a positive impact on our clients’ business results for over 25 years.results. Our mission is to enable and empower our Brand Warriors to fight forpromote our clients’ brands every day toand bring value to our stakeholders. We accomplish this by aligning with our clients’ business objectives resulting in a trusted partnership.  The StarTek Advantage System is the sum total of our culture, customized solutions and processes that enhance our clients’ customer experience.  The StarTek Advantage System is focused on improving customer experience and reducing total cost of ownership for our clients.  StarTekobjectives.

STARTEK has proven results for the multiple services we provide, including sales, order management and provisioning, customer care, technical support, receivables management, and retention programs.  We manage programs using a variety of multi-channel customer interaction capabilities, including voice, chat, email, IVR and back-office support.  StarTekSTARTEK has delivery centers in the U.S.,United States, Philippines, Canada, Costa Rica, Honduras and through its StarTek@HomeSTARTEK@Home workforce.

In February 2012, we received written customer notifications that theya client would be reducing business in our Jonesboro, Arkansas and Decatur, Illinois facilities. The reductions resulted in approximately $21.7 million less revenue during 2012 as compared to 2011, and decreased gross profit by $2.6 million, compared to 2011. In the first half of 2012, we incurred approximately $3.6 million in impairment losses and restructuring costs related to these two facilities as the carrying values of the long-lived assets were not recoverable by future cash flows.facility. We have successfully secured new business for the Jonesboro facility. However, we are not pursuing new business for the Decatur facility and consequently recorded a $0.5 million restructuring reserve in the second quarter of 2012.

DuringThe lease for this facility was due to expire July 31, 2013. We were successful in negotiating an early termination of the thirdlease; therefore, the restructuring plan was completed during the first quarter of 2012,2013 and we transitioned from one facilitydo not expect to another facility previously occupied. This move resulted in the reversal of a portion of aincur any additional restructuring reserve recorded in the fourth quarter of 2010 related to the Grand Junction, Colorado facility that has been re-opened.liabilities for this location.

In February 2013, we announced the closure of our Cornwall, Ontario facility due to an end of lifeend-of-life client program. Operations will ceaseceased during the first quarter of 2013, which was earlier than initially expected.

In the fourth quarter 2010, we classified our Laramie facility as an asset held for sale. Due to the duration of the held for sale classification, we reclassified the asset back to assets in use during the second quarter of 2013. This follows the 2011 reduction2013, resulting in a depreciation charge of business which resulted$0.1 million.

We reopened our Enid facility in the renegotiationthird quarter of 2013; therefore, we reclassified the facilityasset from assets held for sale to assets in use, resulting in a depreciation charge of $0.3 million.

In February 2014, we signed a lease for a smaller portion of the space.new contact center in Tegucigalpa, Honduras.

 The following table summarizes our revenues and gross profit for the periods indicated, by reporting segment:

 

Revenue decreasedincreased by $21.4$33.2 million, or 9.8%16.7%, from $219.5 million in 2011 to $198.1 million in 2012.2012 to $231.3 million in 2013.  The decreaseincrease was driven bydue to performance within the Domestic segment.and Latin America segments.  Revenue in the Domestic segment decreasedincreased by 36.4%21.1%, or $57.2$21.1 million, due in part to five site closures that occurred over the past year in Alexandria, Virginia, Collinsville, Virginia, Enid, Oklahoma, Decatur, Illinois and Kingston, Ontario. These closures resulted in $44.1$33.1 million less revenue in 2012 as compared to 2011.  In addition, the downsizing of our facility in Cornwall, Ontario during 2011 resulted in approximately $6.5 million less revenue in 2012 compared to 2011. The ramp-down of business in our Jonesboro, Arkansas facility resulted in $9.4 million less revenue in 2012 compared to 2011.  Other revenue increased by $2.8 million driven by new business bookings during 2012.and growth from existing programs, partially offset by a $7.7 million reduction from closed facilities, and a $4.3 million reduction for other program reductions. Asia Pacific revenue increased 45.8%1.8%, or $25.0$1.4 million, from $54.7$79.7 million in 2012 to $79.7$81.1 million in 2013 due primarily to the ramp up of new business.business of $13.4 million, partially offset by $10.7 million from lower call volumes and lost programs.  Revenue in our Latin America segment increased $10.8$10.7 million, or 137.3%57.4%, from $7.8 million in 2011 to $18.6 million in 2012 to $29.2 million in 2013 primarily due to new business in our Honduras location, which opened in the fallgrowth from existing clients of 2011, and the ramp up of additional business in our Costa Rica facility. Our client base was more diversified during 2012 as compared to 2011 as the growth in Asia Pacific and Latin America was fueled by higher call volumes from two clients who have not historically been among our largest clients, which was more than offset by lower call volumes domestically from our largest client.$12.3 million.

Included in gross profit are one-time charges of $1.5 million related to the IT transformation costs and $0.4 million for depreciation charges for the Enid and Laramie reclassifications from held for sale. Cost of services decreasedincreased by $28.2$31.8 million, or 13.9%18.2%, from $203.3 million in 2011 to $175.1 million in 2012.2012 to $206.9 million in 2013, primarily to support the 16.7% revenue growth.  Gross profit as a percentage of revenue increaseddecreased from 7.4% in 2011 to 11.6% in 2012.2012 to 10.5% in 2013 due to IT transformation costs, segment mix, and labor efficiency performance issues in Asia Pacific that more than offset improvements in the Domestic and Latin America segments.  Domestic cost of services decreasedincreased by approximately $53.5$15.2 million due primarily to the site closuresnew business and ramp-downsgrowth mentioned above. Domestic gross profit as a percentage of revenue increased to 11.0% in 2013 from 7.4% in 2012 from 7.1% in 2011 due to thelabor efficiency improvements and capacity consolidation.utilization improvements. Cost of services in the Asia Pacific segment increased by approximately $16.6$7.9 million, or 35.7%12.5%. The increase was in support of new business in both facilities. Asia Pacific gross profit as a percentage of revenue increaseddecreased from 14.8% in 2011 to 20.7% in 2012.2012 to 12.3% in 2013. The improvement wasunfavorable variances were due to the higher utilization as a result ofprogram mix changes, new business launched over the past year.site start up and ramp related costs and inefficiencies across two key programs. Cost of services in Latin America increased by approximately $8.7 million, or 80.9%44.9%. The increase was primarily due to the openingcontinued ramp of a newour Honduras facility and investment in Honduras in 2011, as well as an increase in headcountgrowth in Costa Rica mentioned above resulting from new business

 

Selling, general and administrative expenses decreased by $7.7 million, or 20.6%, from $37.3 million in 2011 to $29.6 million in 2012.2012 to $28.8 million in 2013 and decreased significantly as a percentage of revenue in 2013 compared with 2012 from 15.0% to 12.5%, respectively. The decrease in selling, generalas a percentage of revenue was the result of revenue growth and administrative expenses was primarily due to a decrease in severance expense of $3.1 million, staff related expense of $2.2 million, legal fees of $1.0 million and depreciation of $1.1 million.continued focus on cost control.

We reported an operating loss of $10.7Interest and other income (expense), net for 2013 was $1.6 million compared to $(0.3) million in 20122012. The $1.6 million includes losses on disposal of assets related to our IT transformation project of $1.0 million, loss on sale leaseback transaction of $0.5 million and $26.6 million in 2011. Operating loss as a percentageon disposal of revenue was 5.4%assets previously held for 2012 compared to 12.1% for 2011. The reduction in operating loss was due in large part to higher gross profit and lower selling, general and administrative expenses, as previously discussed.sale of $0.1 million.

Income tax expense for 20122013 was $0.1$0.2 million compared to a benefit of $0.1 million in 2011.2012.  The current period income tax expense is the tax impact of the sale of the Kingston, Ontario facility of $0.1 million in addition to the income tax provision for Canadian operations.  Our U.S. operations offset byhave a full valuation allowance recorded on our U.S. deferred tax assets and we have tax holidays in the Philippines, Costa Rica and Honduras.

As a result of the factors described above, net loss was $6.4 million for the year ended December 31, 2013, compared to $10.5 million for 2012 and $26.5 million for 2011. The decreased net loss was due to improved gross profit and lower selling, general and administrative expenses, and lower impairment and restructuring charges, partially offset by increased income tax expense.the year ended December 31, 2012.

 

 

Our primary sources of liquidity are generally cash flows generated by operating activities and from available borrowings under our revolving credit facility. We have historically utilized these resources to finance our operations and make capital expenditures associated with capacity expansion, and upgrades of information technologies and service offerings.offerings, and business acquisitions. Due to the timing of our collections of large billings with our major customers, we have historically needed to draw on our line of credit periodically for ongoing operating activities.working capital needs. Based on current expectations, we believe our cash from operations and capital resources will be sufficient to operate our business for at least the next 12 months.

As of December 31, 2012,2013, working capital totaled $36.4$31.6 million and our current ratio was 2.5:2.11:1, compared to working capital of $32.8$36.4 million and a current ratio of 2.40:2.50:1 at December 31, 2011. The increase in working capital of approximately $3.6 million was primarily due to a $3.3 million increase in accounts receivable, the result of increased revenues in the fourth quarter of 2012 as compared to the fourth quarter of 2011.  Our days sales outstanding (“DSO”) remained consistent at 68 days for both 2012 and 2011.  We compute DSO as follows:  period-end receivables, net of allowances, divided by the average daily revenue. 2012.

Net cash flows provided by operating activities for 2012in 2013 was $2.9$6.2 million compared to net cash used inprovided by operating activities of $1.3$2.9 million for 2011.2012. The $4.2$3.3 million increase in net cash flows from operating activities was due to a $16.0$1.8 million increasedecrease in net income,non-cash items such as depreciation and amortization, impairment charges, losses on asset disposals and stock-based compensation, offset by a $10.2$1.0 million net decrease in cash flows from assets and liabilities and a $1.6$4.1 million decrease in non-cash items such as depreciation and amortization, impairment charges, and stock-based compensation. The $10.2 million

  

Net cash used in investing activities in 2013 of $5.6 million primarily consisted of $8.8 million of capital expenditures and cash paid for acquisitions of $2.1 million, partially offset by the proceeds from the sale of assets of $3.4 million and proceeds from a sale leaseback transaction of $1.3 million. This compares to 2012 net cash used in investing activities of $2.8 million consistedprimarily for capital expenditures of $7.3 million, of capital expenditures,partially offset by the proceeds from the sale leaseback transaction of our Kingston, Ontario property of $3.9 million. This compares

Net cash provided by financing activities in 2013 of $1.2 million was primarily attributed to 2011 net cash used in investing activitiesborrowings from our line of $8.3 million primarily for capital expenditures.

We have no material off-balance sheet transactions, unconditional purchase obligations or similar instruments and we are not a guarantor of any other entities’ debt or other financial obligations.

 

We have experienced and expect to continue to experience some quarterly variations in revenue and operating results due to a variety of factors, many of which are outside our control, including: (i) timing and amount of costs incurred to expand capacity in order to provide for volume growth from existing and future clients; (ii) changes in the volume of services provided to principal clients; (iii) expiration or termination of client projects or contracts; (iv) timing of existing and future client product launches or service offerings; (v) seasonal nature of certain clients’ businesses; and (vi) variability in demand for our services by our clients depending on demand for their products or services and/or depending on our performance.

The preparation of consolidated financial statements requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our accounting estimates on historical experience and other factors that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

 

We periodically, on at least an annual basis, evaluate potential impairments of our long-lived assets.  In our annual evaluation or when we determine that the carrying value of a long-lived asset may not be recoverable, based upon the existence of one or more indicators of impairment, we evaluate the projected undiscounted cash flows related to the assets. If these cash flows are less than the carrying values of the assets, we measure the impairment based on the excess of the carrying value of the long-lived asset over the long-lived asset’s fair value.  Where appropriate we use a probability-weighted approach to determine our future cash flows, based upon our estimate of the likelihood of certain scenarios, primarily whether we expect to sell new business within a current location.  These estimates are consistent with our internal projections and external communications and public disclosures.  Our projections contain assumptions pertaining to anticipated levels of utilization and revenue that may or may not be under contract but are based on our experience and/or projections received from our customers.  If our estimate of the probability of different scenarios changed by 10%, the impact to our financial statements would not be material.  As described in Note 2, “Impairment Losses and Restructuring Charges,” duringDuring the year ended December 31, 2012,2013, we recordedrecognized impairment losses in our DomesticLatin America segment due toassociated with the furniture, fixtures and leasehold improvements at our site in Costa Rica after an impairment of certain long-lived assets for which the carrying value of those assets is not recoverable based upon ouranalysis indicated estimated future cash flows.flows were insufficient to support the carrying values. Given that the impairment losses were valued using

 

 

On an ongoing basis, management assesses the profitability and utilization of our facilities and in some cases management has chosen to close facilities.  Severance payments that occur from reductions in workforce are in accordance with our postemployment plans and/or statutory requirements that are communicated to all employees upon hire date; therefore, severance liabilities are recognized when they are determined to be probable and reasonably estimable.  Other liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred, instead of upon commitment to an exit plan.  A significant assumption used in determining the amount of the estimated liability for closing a facility is the estimated liability for future lease payments on vacant facilities.  We determine our estimate of sublease based on our ability to successfully negotiate early termination agreements with landlords, a third-party broker or management’s assessment of our ability to sublease the facility based upon the market conditions in which the facility is located. If the assumptions regarding early termination and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses, or conversely, a future gain.  We expect to pay approximately $0.9 million of additionaldid not incur any restructuring charges under our Victoria and Regina plans which we expect to incur induring 2013. During 2012, we recorded approximately $0.7 million for an additional accrualThe only remaining restructuring plan at December 31, 2013 is related to our ReginaVictoria facility, due to changeswhich will be completed in our estimates regarding our expected lease term. During 2012, we established an accrual of approximately $0.5 million related to our Decatur, Illinois facility due to a reduction in business. The site closed in January 2013.2014.  

Accrued restructuring costs were valued using a discounted cash flow model.  Significant assumptions used in determining the amount of the estimated liability for closing a facility are the estimated liability for future lease payments on vacant facilities and the discount rate utilized to determine the present value of the future expected cash flows. As described in Note 2, “Impairment Losses and Restructuring Charges,” during the years ended December 31, 2012 and 2011, we closed several facilities.  These costs were valued using a discounted cash flow model.  The cash flows consist of the future lease payment obligations required under the lease agreement.  We assumed that we could sublease the facility in Grand Junction for a portion of the remaining lease term based on our knowledge of the respective marketplace, as well as our historical ability to sublease our facilities in other locations in which we operate.  We assumed that we could complete a buy-out of the facility in Regina, Saskatchewan due to ongoing negotiations with the landlord of this facility.  In the future, if we sublease for periods that differ from our assumption or if our estimate of a buy-out differs from our assumption, we may be required to record a gain or loss.  Future cash flows also include estimated property taxes through the remainder of the lease term, which are valued based upon historical tax payments.  Given that the restructuring charges were valued using our internal estimates using a discounted cash flow model, we have classified the accrued restructuring costs as Level 3 in the fair value hierarchy.

 

 

We record derivative instruments as either an asset or liability measured at its fair value, with changes in the fair value of qualifying hedges recorded in other comprehensive income. As of December 31, 2012,2013, we recorded a gross derivative asset related to our unrealized gains of approximately $0.7 million and a gross derivative liability related to our unrealized losses of approximately $0.3$2.2 million.  Changes in a derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset the related results of the hedged item and requires that we must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment.

 

We are generally able to apply cash flow hedge accounting, which associates the results of the hedges with forecasted future expenses.  The current mark-to-market gain or loss is recorded in accumulated other comprehensive income and will be re-classified to operations as the forecasted expenses are incurred, typically within one year.  During 20122013 and 2011,2012, our cash flow hedges were highly effective and there were no amounts charged for hedge ineffectiveness.ineffectiveness was not material. While we expect that our derivative instruments that have been designated as hedges will continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective or if we do not believe that forecasted transactions will occur, the changes in the fair value of the derivatives used as hedges will be reflected in earnings.

 

 

Income taxes are accounted for under the asset and liability method.  Deferred income taxes reflect net effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. We are subject to foreign income taxes on our foreign operations. We are required to estimate our income taxes in each jurisdiction in which we operate. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. The tax effects of these temporary differences are recorded as deferred tax assets or deferred tax liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period during which such rates are enacted.  We record a valuation allowance when it is more likely than not that we will not realize the net deferred tax assets in a certain jurisdiction.

 

We consider all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable.  Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), and projected taxable income in assessing the realizability of deferred tax assets.  In making such judgments, significant weight is given to evidence that can be objectively verified.  Based on all available evidence, in particular our historical cumulative losses, recent operating losses and a U.S. pre-tax loss for the fiscal year ending December 31, 2012,2013, we recorded a valuation allowance against our U.S. net deferred tax assets.  The valuation allowance for deferred tax assets as of December 31, 2013 and 2012 and 2011 was $16.6$20.0 million and $20.1$16.6 million, respectively.  In order to fully realize the U.S. deferred tax assets, we will need to generate sufficient taxable income in future periods before the expiration of the deferred tax assets governed by the tax code.  As of December 31, 2012,2013, we had gross federal net operating loss carry forwards of approximately $36.5 million$34,560 expiring through 2032beginning in 2030 and gross state net operating loss carry forwards of approximately $53.1 million$60,435 expiring through 2032.beginning in 2014.

We record tax benefits when they are more likely than not to be realized. 

 

 

We are exposed to market risk from foreign currency exchange rate fluctuations when subsidiaries with functional currencies other than the U.S. Dollardollar (“USD”) are translated into our USD consolidated financial statements. To mitigate this risk, we enter into forward currency exchange contracts to reduce the effects on our operating results and cash flows caused by volatility in foreign currency exchange rates. The contracts cover periods commensurate with expected exposure, generally three to nine months, and are principally unsecured. The cumulative translation effects for subsidiaries using functional currencies other than the USD are included in “Accumulated other comprehensive income (loss)” in stockholders’ equity. Movements in non-U.S. Dollardollar currency exchange rates may negatively or positively affect our competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors.

We serve many of our U.S.-based clients in several non-U.S. locations, such as Canada, the Philippines, Costa Rica and Honduras. Our client contracts are primarily priced and invoiced in USU.S. dollars, however, the functional currencies of our Canadian and Philippine operations are the Canadian dollar ("CAD") and the Philippine peso ("PHP"), respectively. In Costa Rica and Honduras, our functional currency is the USD and the majority of our costs are denominated in USU.S. dollars.

We currently have a $10$15 million secured credit facility, which can increase to $20 million. The interest rate on our credit facility is variable based upon the LIBOR index, and, therefore, is affected by changes in market interest rates. If the LIBOR increased 100 basis points, there would not be a material impact to our Condensed Consolidated Financial Statements.

The Board of Directors and Stockholders of StarTek, Inc.

We have audited the accompanying consolidated balance sheets of StarTek, Inc. and subsidiaries as of December 31, 20122013 and 2011,2012, and the related consolidated statements of operations and comprehensive loss, cash flows, and stockholders’ equity for each of the two years in the period ended December 31, 2012.then ended. These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.misstatement. We were not engaged to perform an audit of the Company'sCompany’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of StarTek, Inc. and subsidiaries at December 31, 20122013 and 2011,2012, and the consolidated results of their operations and their cash flows for each of the two years in the periodthen ended, December 31, 2012, in conformity with U.S. generally accepted accounting principles.

Denver, Colorado

March 8, 20137, 2014

 

We are considered a "smaller reporting company" under the applicable disclosure rules of the Securities and Exchange Commission and accordingly, have elected to provide our audited statements of operations and comprehensive loss, cash flows and changes in stockholders' equity for two, rather than three, years.

 

 

Our consolidated financial statements include the accounts of all wholly-owned subsidiaries after elimination of significant intercompany balances and transactions.

 

The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period they are determined to be necessary.

 

 

We are exposed to credit risk in the normal course of business, primarily related to accounts receivable and derivative instruments.  Historically, the losses related to credit risk have been immaterial.  We regularly monitor credit risk to mitigate the possibility of current and future exposures resulting in a loss.  We evaluate the creditworthiness of clients prior to entering into an agreement to provide services and on an on-going basis as part of the processes of revenue recognition and accounts receivable.  We do not believe we are exposed to more than a nominal amount of credit risk in our derivative hedging activities, as the counter parties are established, well-capitalized financial institutions.

 

 

The assets and liabilities of our foreign operations that are recorded in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenues and expenses are translated at the weighted-average exchange rate during the reporting period. Resulting translation adjustments, net of applicable deferred income taxes, are recorded in accumulated other comprehensive income.  Foreign currency transaction gains and losses are included in the accompanying Consolidated Statementsconsolidated statements of Comprehensive Loss.operations and comprehensive loss. Such gains and losses were not material for any period presented.

 

 

contracts stipulate that we are entitled to bonuses should we meet or exceed these predetermined quality and/or performance obligations.  These bonuses are recognized as incremental revenue in the period in which they are earned.

 

As a general rule, our contracts do not include multiple elements.  We provide initial training to customer service representatives upon commencement of new contracts and recognize revenues for such training as the services are provided based upon the production rate (i.e., billable hours and rates related to the training services as stipulated in our contractual arrangements). Accordingly, the corresponding training costs, consisting primarily of labor and related expenses, are recognized as incurred.

 

 

 

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and credit risk.

 

Accounting guidance for the measurement of fair value establishes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The levels of the fair value hierarchy are described below:

 

Refer to Note 6,8, “Fair Value Measurements,” for additional information on how we determine fair value for our assets and liabilities.

 

 

We consider cash equivalents to be short-term, highly liquid investments readily convertible to known amounts of cash and so near their maturity at purchase that they present insignificant risk of changes in value because of changes in interest rates.

 

Our derivative instruments consist of foreign currency forward contracts and are recorded as either an asset or liability measured at its fair value, with changes in the fair value of qualifying hedges recorded in other comprehensive income.  Changes in a derivative’s fair value are recognized currently in the statements of operations unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset the related results of the hedged item and requires that we must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment.

 

We generally are able to apply cash flow hedge accounting which associates the results of the hedges with forecasted future expenses.  The current mark-to-market gain or loss is recorded in accumulated other comprehensive income and will be re-classified to operations as the forecasted expenses are incurred, typically within one year.  During 20122013 and 2011,2012, our cash flow hedges were highly effective and there were no amounts charged for hedge ineffectiveness.ineffectiveness was not material. While we expect that our derivative instruments that have been designated as hedges will continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective or if we do not believe that forecasted transactions will occur, the changes in the fair value of the derivatives used as hedges will be reflected in earnings.

 

 

Property, plant, and equipment are stated at depreciated cost. Additions and improvement activities are capitalized. Maintenance and repairs are expensed as incurred. Depreciation and amortization is computed using the straight-line method based on their estimated useful lives, as follows:

 

 

We depreciate leasehold improvements associated with operating leases over the shorter of the expected useful life or remaining life of the lease.  Depreciation for assets obtained under a capital lease is included in depreciation expense.

 

We periodically, on at least an annual basis, evaluate potential impairments of our long-lived assets.  In our annual evaluation or when we determine that the carrying value of a long-lived asset may not be recoverable, based upon the existence of one or more indicators of impairment, we evaluate the projected undiscounted cash flows related to the assets. If these cash flows are less than the carrying values of the assets, we measure the impairment based on the excess of the carrying value of the long-lived asset over the long-lived asset’s fair value.  Our projections contain assumptions pertaining to anticipated levels of utilization and revenue that may or may not be under contract but are based on our experience and/or projections received from our customers.

 

We classify an asset as held for sale when the facts and circumstances meet the criteria for such classification, including the following (a) we have committed to a plan to sell the asset, (b) the asset is available for immediate sale, (c) we have initiated actions to complete the sale, (d) the sale is expected to be completed within one year, (e) the asset is being actively marketed at a price that is reasonable relative to its fair value and (f) the plan to sell is unlikely to be subject to significant changes or termination.  Assets held for sale are reported at the lower of cost or fair value less costs to sell.

 

 

On an ongoing basis, management assesses the profitability and utilization of our facilities and in some cases management has chosen to close facilities.  Severance payments that occur from reductions in workforce are in accordance with our postemployment policy and/or statutory requirements that are communicated to all employees upon hire date; therefore, severance liabilities are recognized when they are determined to be probable and estimable. Other liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred, instead of upon commitment to an exit plan. A significant assumption used in determining the amount of the estimated liability for closing a facility is the estimated liability for future lease payments on vacant facilities.  We determine our estimate of sublease payments based on our ability to successfully negotiate early termination agreements with landlords, a third-party broker or management’s assessment of our ability to sublease the facility based upon the market conditions in which the facility is located. If the assumptions regarding

early termination and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses, or conversely, a future gain.

 

 

Rent holidays, landlord/tenant incentives and escalations are included in some instances in the base price of our rent payments over the term of our operating leases. We recognize rent holidays and rent escalations on a straight-line basis over the lease term. The landlord/tenant incentives are recorded as deferred rent and amortized on a straight line basis over the lease term.

Income taxes are accounted for under the asset and liability method.  Deferred income taxes reflect net effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. We are subject to foreign income taxes on our foreign operations. We are required to estimate our income taxes in each jurisdiction in which we operate. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. The tax effects of these temporary differences are recorded as deferred tax assets or deferred tax liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period during which such rates are enacted.  We record a valuation allowance when it is more likely than not that we will not realize the net deferred tax assets in a certain jurisdiction.

 

We record tax benefits when they are more likely than not to be realized.  Our policy is to reflect penalties and interest as part of income tax expense as they become applicable. 

 

We recognize expense related to all share-based payments to employees, including grants of employee stock options, based on the grant-date fair values amortized straight-line over the period during which the employees are required to provide services in exchange for the equity instruments.  We include an estimate of forfeitures when calculating compensation expense.  We use the Black-Scholes method for valuing stock-based awards.  See Note 9,11, “Share-Based Compensation and Employee Benefit Plans,” for further information regarding the assumptions used to calculate share-based payment expense.

 

During the year ended December 31, 2011,2013, we incurred $2,381implemented a plan to outsource a significant portion of impairment losses in our Domestic segment, dueIT platform.  As a result, we transferred certain IT assets to the impairmentprovider, resulting in a loss on disposal of certain long-lived assets for$966, which the carrying value of those assets is not recoverable.  During the year ended December 31, 2011, we recorded $1,053