UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission file number 1-12793

StarTek, Inc.

(303) 399-2400
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
None

     Indicate by check mark 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 þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

STARTEK, INC.

FORM 10-Q

INDEX

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Part I. FINANCIAL INFORMATION

     Item 1. Financial Statements (Unaudited)

STARTEK, INC. AND SUBSIDIARIES

See notes to condensed consolidated financial statements.

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STARTEK, INC. AND SUBSIDIARIES

See notes to condensed consolidated financial statements.

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STARTEK, INC. AND SUBSIDIARIES

See notes to condensed consolidated financial statements.

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STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In management’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results during the three months ended March 31, 2005, are not necessarily indicative of operating results that may be expected during any other interim period of 2005 or the year ending December 31, 2005.

The consolidated balance sheet as of December 31, 2004, was derived from audited financial statements at that date, but does not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to consolidated financial statements and footnotes thereto included in StarTek, Inc. Annual Report on Form 10-K for the year ended December 31, 2004.

Unless otherwise noted in this report, any description of “us” refers to StarTek, Inc. and our subsidiaries. Unless otherwise indicated, currency translations into U.S. dollars are calculated using prevailing foreign currency exchange rates as of March 31, 2005.

Stock Option Plans

We account for stock-based awards to employees and non-employee directors under the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Non-employee directors are treated as employees for purposes of determining stock-based compensation expense. As the exercise price of all options granted to employees and non-employee directors under our stock option plans was equal to the market price of the underlying stock on the grant date, no stock-based employee compensation cost was recognized in net income. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to all awards.

For purposes of this pro forma disclosure, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting periods.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees, “ (APB 25) and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values over the period during which the employees are required to provide services in exchange for the equity instruments. Pro forma disclosure is no longer an alternative. Under the provisions of this statement, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method of compensation cost and the transition method to be used at the date of adoption. The transition alternatives include retrospective and prospective adoption methods. Under the retrospective method, prior periods may be restated based on the amounts previously recognized under SFAS No. 123 for the purposes of proforma disclosures (see above) either for all periods presented or as of the beginning of the year of adoption. The prospective method requires that compensation expense be recognized beginning with the effective date for all share-based payments granted after the effective date, and for all awards granted to employees prior to the effective date of this statement that remain unvested on the effective date. The provisions of this statement are effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005, under FASB rules, however the Securities and Exchange Commission has deferred implementation until the first annual period beginning after December 15, 2005. We are currently evaluating the requirements of this revision and have not determined its method of adoption.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 clarifies that a conditional asset retirement obligation, as used in SFAS 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of the settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN 47 is effective January 1, 2006, with early adoption allowed. We have not yet determined the impact, if any, FIN 47 will have on our Condensed Consolidated Financial Statements.

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2. Net Income Per Share

Basic and diluted net income per common share is computed on the basis of our weighted average number of common shares outstanding, as determined by using the calculations outlined below:

Diluted earnings per share is computed on the basis of our weighted average number of common shares outstanding plus the effect of dilutive outstanding stock options using the treasury stock method. Anti-dilutive securities totaling approximately 522,327 and 74,978 in the three months ended March 31, 2005, and 2004, respectively, were not included in our calculation because the stock options’ exercise prices were greater than the average market price of the common shares during the periods presented.

3. Investments

As of March 31, 2005, investments available for sale consisted of:

As of December 31, 2004, investments available for sale consisted of:

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As of March 31, 2005, amortized costs and estimated fair values of investments available for sale by contractual maturity were:

As of March 31, 2005, equity securities primarily consisted of publicly traded common stock of domestic companies and equity mutual funds. We had no investments at March 31, 2005, or December 31, 2004, that had carried unrealized losses for longer than twelve months.

We were invested in trading securities which, in the aggregate, had an original cost and fair market value at March 31, 2005, of $(5.8) and $(5.0) respectively. At March 31, 2005, trading securities consisted of one option contract sold. As of December 31, 2004, we were invested in trading securities, which, in the aggregate, had an original cost and fair market value of $2,054 and $2,929, respectively. Trading securities were historically held to meet short-term investment objectives and consisted of alternative investment partnerships and option contracts. At March 31, 2005, we had sold put options for a total of 4,500 shares of US equity securities and classified these option contracts as trading securities. These options expired on April 16, 2005 with no material impact on our condensed consolidated financial statements. Historically, options have been an immaterial part of our overall investment portfolio. We expect options will continue to be an immaterial part of our overall risk management approach in the future.

From time to time, we purchase or write option contracts to partially hedge against fluctuations in the value of our investment portfolio. All such options are publicly-traded with standard market terms. Such options are classified as trading securities and are recorded at fair value with changes in fair value recognized in current period earnings. We do not designate such options as hedging instruments pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.

Our risk of loss in the event of nonperformance by any party is not considered substantial. A substantial decline and/or change in value of equity securities, equity prices in general, international equity mutual funds, investment limited partnerships, and/or call and put options, if held in our investment portfolio, could have a material adverse effect on our portfolio of trading securities. Also, trading securities could be materially and adversely affected by increasing interest and/or inflation rates or market expectations thereon, poor management, shrinking product demand, and other risks that may affect single companies, as well as groups of companies.

4. Principal Clients

The following table represents revenue concentrations of our principal clients:

The loss of a principal client and/or changes in timing or termination of a principal client’s product launch or service offering would have a material adverse effect on our business, revenue, operating results, and financial condition. AT&T Wireless Services, Inc. has been acquired by Cingular Wireless, LLC. The term of our agreement with Cingular Wireless, LLC has been extended to December 2006.

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In the three months ended March 31, 2004, revenue from Microsoft accounted for 10.2% of our total revenue. For the three months ended March 31, 2005, Microsoft was an insignificant portion of our total revenue. We anticipate that the supply chain management services we provide to Microsoft will continue to decline in 2005 and remain an insignificant portion of our overall revenue in subsequent years.

To limit our credit risk, management performs ongoing credit evaluations of its clients. Although we are directly impacted by the economic conditions in which our clients operate, management does not believe substantial credit risk existed as of March 31, 2005.

5. Comprehensive Income

SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income. Comprehensive income is defined essentially as all changes in stockholders’ equity, exclusive of transactions with owners. Comprehensive income for the three months ended March 31, 2005, and 2004, was:

6. Discontinued Operations

On September 30, 2004, we sold StarTek Europe, Ltd. (“StarTek Europe”), our operating subsidiary in the United Kingdom (“U.K.”) which provided business process management services from two facilities in Hartlepool, England. The sale was completed pursuant to a Share Purchase Agreement among us, StarTek Europe and Taelus Limited, a U.K. company. Pursuant to the terms of the Share Purchase Agreement, we made a capital contribution to StarTek Europe immediately prior to completion of the transaction, in the form of a cash payment of $450, a contribution of intercompany debt of $2,824 owed to us by StarTek Europe and additional cash of $200 contributed to fund operations, which offset a negative investment in StarTek Europe of $1,608. Following these transactions, we conveyed all of the issued and outstanding capital stock of StarTek Europe to Taelus Limited, together with another cash payment of $450.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise noted in this report, any description of “us” refers to StarTek, Inc. and our subsidiaries. Unless otherwise indicated, currency translations into U.S. dollars are calculated as of March 31, 2005.

All statements contained in this Form 10-Q that are not statements of historical facts are forward-looking statements that involve substantial risks and uncertainties. Forward-looking statements are preceded by terms such as “may,” “will,” “should,” “anticipates,” “expects,” “believes,” “plans,” “future,” “estimate,” “continue,” “intends,” “budgeted,” “projections,” “outlook” and similar expressions. The following are important factors that could cau