Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Startek, Inc.Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - Startek, Inc.srt-ex312_2014630x10q.htm
EX-32.1 - EXHIBIT 32.1 - Startek, Inc.srt-ex321_2014630x10q.htm
EX-31.1 - EXHIBIT 31.1 - Startek, Inc.srt-ex311_2014630x10q.htm
EX-10.2 - EXHIBIT - Startek, Inc.seventhamendmenttocreditan.htm


 
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 June 30, 2014
or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to                
 
Commission file number 1-12793 
 
 
StarTek, Inc.
(Exact name of registrant as specified in its charter) 
Delaware
 
84-1370538
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
Identification No.)
 
 
 
8200 E. Maplewood Ave., Suite 100
 
 
Greenwood Village, Colorado
 
80111
(Address of principal executive offices)
 
(Zip code)
 
(303) 262-4500
(Registrant’s telephone number, including area code)
 
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  x  No o 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer 
 
Smaller reporting company x
(Do not check if a smaller reporting company)
 
 
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x 
As of August 5, 2014, there were 15,399,907 shares of Common Stock outstanding.
 
 




STARTEK, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
ITEM 1.
 
FINANCIAL STATEMENTS
 
Page
 
 
Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited)
 
 
 
Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013
 
 
 
Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited)
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
ITEM 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
ITEM 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
ITEM 4.
 
Controls and Procedures
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
 
ITEM 1A.
 
Risk Factors
 
ITEM 6.
 
Exhibits
 
Signatures
 
 
 
 
 
 
 
 





NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q may contain 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:

certain statements, including possible or assumed future results of operations, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
any statements regarding the prospects for our business or any of our services;
any statements preceded by, followed by or that include the words “may,” “will,” “should,” “seeks,” “believes,” “expects,” “anticipates,” “intends,” “continue,” “estimate,” “plans,” “future,” “targets,” “predicts,” “budgeted,” “projections,” “outlooks,” “attempts,” “is scheduled,” or similar expressions; and
other statements regarding matters that are not historical facts.
 
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, which speak only as of the date thereof. 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 described herein or set forth in Item 1A. “Risk Factors” appearing in our Annual Report on Form 10-K for the year ended December 31, 2013. Unless otherwise noted in this report, any description of “us," “we,” or "our," refers to StarTek, Inc. ("STARTEK") and its subsidiaries.





PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS
 
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
61,254

 
$
55,576

 
$
124,463

 
$
109,386

Cost of services
55,562

 
49,955

 
110,554

 
99,037

Gross profit
5,692

 
5,621

 
13,909

 
10,349

Selling, general and administrative expenses
7,301

 
7,198

 
15,549

 
14,448

Impairment losses and restructuring charges, net
2,051

 
(437
)
 
2,242

 
(437
)
Operating loss
(3,660
)
 
(1,140
)
 
(3,882
)
 
(3,662
)
Interest and other income (expense), net
(17
)
 
(31
)
 
(145
)
 
66

Loss before income taxes
(3,677
)
 
(1,171
)
 
(4,027
)
 
(3,596
)
Income tax expense (benefit)
(396
)
 
101

 
(246
)
 
4

Net loss
$
(3,281
)
 
$
(1,272
)
 
$
(3,781
)
 
$
(3,600
)
Other comprehensive income (loss), net of tax:


 
1

 
 
 
1

Foreign currency translation adjustments
37

 
(500
)
 
(75
)
 
(526
)
Change in fair value of derivative instruments
776

 
(2,185
)
 
1,132

 
(2,876
)
Comprehensive loss
$
(2,468
)
 
$
(3,957
)
 
$
(2,724
)
 
$
(7,002
)
 
 
 
 
 
 
 
 
Net loss per common share - basic and diluted
$
(0.21
)
 
$
(0.08
)
 
$
(0.25
)
 
$
(0.24
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic and diluted
15,391

 
15,335

 
15,384

 
15,319

 
See Notes to Consolidated Financial Statements.


2



STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
As of June 30,
 
As of December 31,
 
2014
 (unaudited)
 
2013
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
6,037

 
$
10,989

Trade accounts receivable, net
46,067

 
43,708

Deferred income tax assets
70

 
157

Derivative asset
34

 

Prepaid expenses
1,941

 
2,939

Current portion of note receivable
326

 
645

Other current assets
1,468

 
1,626

Total current assets
55,943

 
60,064

Property, plant and equipment, net
24,566

 
22,210

Long-term deferred income tax assets
1,284

 
2,151

Intangible assets, net
773

 
1,164

Goodwill
2,002

 
1,637

Other long-term assets
2,330

 
2,491

Total assets
$
86,898

 
$
89,717

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
7,140

 
$
8,477

Accrued liabilities:
 

 
 

Accrued payroll
8,344

 
9,196

Accrued compensated absences
2,733

 
2,469

Accrued restructuring costs
1,724

 
16

Other accrued liabilities
2,230

 
1,901

Line of credit
1,000

 
1,000

Derivative liability
381

 
2,160

Deferred revenue
811

 
486

Deferred income tax liabilities
766

 
766

Other current liabilities
2,011

 
2,027

Total current liabilities
27,140

 
28,498

Deferred rent
1,313

 
1,445

Other liabilities
2,043

 
1,600

Total liabilities
30,496

 
31,543

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Common stock, 32,000,000 non-convertible shares, $0.01 par value, authorized; 15,396,915 and 15,368,356 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
154

 
154

Additional paid-in capital
75,226

 
74,273

Accumulated other comprehensive income (loss)
48

 
(1,009
)
Accumulated deficit
(19,026
)
 
(15,244
)
Total stockholders’ equity
56,402

 
58,174

Total liabilities and stockholders’ equity
$
86,898

 
$
89,717

See Notes to Consolidated Financial Statements.

3



STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
2014
 
2013
Operating Activities
 

 
 

Net loss
$
(3,781
)
 
$
(3,600
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation and amortization
4,970

 
6,184

Gains on disposal of assets
(175
)
 
(12
)
Share-based compensation expense
864

 
857

Amortization of deferred gain on sale leaseback transaction
(129
)
 
(138
)
Deferred income taxes
943

 
(180
)
Income tax benefit related to other comprehensive income
(634
)
 

Changes in operating assets and liabilities:
 

 
 

Trade accounts receivable, net
(2,370
)
 
382

Prepaid expenses and other assets
1,879

 
(651
)
Accounts payable
(1,492
)
 
(66
)
Income taxes, net
(377
)
 
245

Accrued and other liabilities
1,829

 
214

Net cash provided by operating activities
1,527

 
3,235

 
 
 
 
Investing Activities
 

 
 

Proceeds from note receivable
319

 
330

Proceeds from sale of assets
639

 

Purchases of property, plant and equipment
(6,825
)
 
(1,454
)
Cash paid for acquisitions of businesses
(400
)
 
(1,500
)
Net cash used in investing activities
(6,267
)
 
(2,624
)
 
 
 
 
Financing Activities
 

 
 

Proceeds from stock option exercises
36

 
95

Proceeds from the issuance of common stock
53

 
59

Proceeds from line of credit
75,872

 
4,346

Principal payments on line of credit
(75,872
)
 
(4,346
)
Principal payments on capital lease obligations
(70
)
 
(14
)
Net cash provided by financing activities
19

 
140

Effect of exchange rate changes on cash
(231
)
 
61

Net (decrease) increase in cash and cash equivalents
(4,952
)
 
812

Cash and cash equivalents at beginning of period
$
10,989

 
$
9,183

Cash and cash equivalents at end of period
$
6,037

 
$
9,995


See Notes to Consolidated Financial Statements.

4



STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(In thousands, except share and per share data)
(Unaudited)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") 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 GAAP for complete financial statements. These financial statements reflect all adjustments (consisting only of normal recurring entries, except as noted) which, in the opinion of management, are necessary for fair presentation. Operating results for the three and six months ended June 30, 2014, are not necessarily indicative of operating results that may be expected during any other interim period of 2014 or the year ending December 31, 2014.
The consolidated balance sheet as of December 31, 2013, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Unless otherwise noted in this report, any description of “us," “we,” or "our," refers to StarTek, Inc. and its subsidiaries. Financial information in this report is presented in U.S. dollars.

Use of Estimates
 
The preparation of our consolidated financial statements in conformity with 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.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact the adoption of ASU 2014-09 will have on our financial statements.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"), which provides guidance on the requirements for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations - that is, a major effect on the organization's operations and financial results - should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, the ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The ASU shall be applied prospectively to (a) all disposals (or classifications as held for sale) of components of an entity and (b) businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur after the effective date. Early adoption is permitted for disposals that have not been previously reported. The adoption of this ASU is not expected to have a material impact on our financial statements.



5



2.  ACQUISITION

RN's On Call

On July 24, 2013, we acquired RN's On Call, a business process outsourcing provider in the health care industry, for approximately $1,455, net of interest incurred. The company provides health care related services to patients on behalf of the professional medical community.

As of June 30, 2014, we paid approximately $1,000 of the purchase price with the remaining balance to be paid by January 2015, which is included in other accrued liabilities in the consolidated balance sheet. Minimal acquisition-related expenses were paid, which are recorded in selling, general and administrative expenses. Financial results from the date of acquisition are included in the results of operations within our Domestic segment.

We finalized our purchase price allocation during the three months ended March 31, 2014. The following summarizes the final purchase price allocation of the fair values of the assets acquired as of the acquisition date. There were no other assets or liabilities acquired.
 
 
Acquisition Date
Fair Value
Customer base
 
$
340

Goodwill
 
1,115

Total purchase price
 
$
1,455


The customer base has an estimated useful life of ten years. The goodwill recognized was attributable primarily to the acquired workforce and our ability to expand into the health care industry.

3. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The goodwill of $2,002 recognized from our acquisitions during 2013 was assigned to our Domestic segment. The tax basis of the goodwill is deductible for income tax purposes.

Intangible Assets

The following table presents our intangible assets as of June 30, 2014:
 
 
Gross Intangibles
 
Accumulated Amortization
 
Net Intangibles
 
Weighted Average Amortization Period (years)
Developed technology
 
$
390

 
$
61

 
$
329

 
3.69
Customer base
 
470

 
85

 
385

 
4.33
Trade name
 
70

 
15

 
55

 
2.89
Noncompete agreement
 
10

 
6

 
4

 
0.75
 
 
$
940

 
$
167

 
$
773

 
3.94

Expected future amortization of intangible assets as of June 30, 2014 is as follows:

6



 
 
 
Year Ending December 31,
 
Amount
Remainder of 2014
 
$
71

2015
 
139

2016
 
105

2017
 
94

2018
 
94

Thereafter
 
270



4.  IMPAIRMENT LOSSES AND RESTRUCTURING CHARGES
 
Impairment Losses

During the three and six months ended June 30, 2014 and 2013, we did not incur any impairment losses.
 
Restructuring Charges
 
A summary of the activity under the restructuring plans as of June 30, 2014 is as follows: 
 
Facility-Related/Employee-Related Costs
 
Victoria
 
Jonesboro
 
Costa Rica
 
Corporate
 
Total
Balance as of December 31, 2013
$
16

 
$

 
$

 
$

 
$
16

Expense

 
638

 
1,004

 
253

 
1,895

Payments, net of receipts for sublease

 
(152
)
 

 
(35
)
 
(187
)
Balance as of June 30, 2014
$
16

 
$
486

 
$
1,004

 
$
218

 
1,724



We entered into a sublease agreement for our Victoria, Texas facility through the remainder of its lease term in 2014. The reserves listed above are net of expected sublease rental income. We have recorded an accrual for certain property taxes we still owe in Victoria, which we expect to pay through 2014.

In February 2014, we announced the closure of our Jonesboro, Arkansas facility, which ceased operations in the second quarter of 2014 when the business transitioned to another facility. We established a restructuring reserve of $192 for employee related costs and recognized additional charges in the second quarter of 2014 of $446 when the facility closed. These costs are expected to be paid out through 2014. We also recognized a net gain of $256 related to the early termination of our lease.

In June 2014, we announced the closure of our Heredia, Costa Rica facility, included in our Latin America segment, which will cease operations in the third quarter of 2014. We established a restructuring reserve of $1,004 for employee related costs and will recognize additional charges in the third quarter of 2014 when the facility closes. The restructuring charges for those employees who continue to work after the notification date will be recognized over the service period. These costs are expected to be paid out through December 2014.
   
During the second quarter of 2014, we continued to pursue operating efficiencies through streamlining our organizational structure and leveraging our shared services centers in low-cost regions. We eliminated several positions as a result and incurred a restructuring charge of $253. The cash payments for these employees will be substantially completed by the fourth quarter of 2014.

During the second quarter of 2014, we moved forward with our initiative to outsource our data centers and move to a hosted solutions model. We recognized $604 of restructuring charges in the second quarter of 2014 of which $330 is included in other accrued liabilities for costs incurred and not yet paid as of June 30, 2014. This transition will occur throughout the remainder of 2014 and additional transition costs will be recognized as restructuring charges as incurred in operating income and are expected to be approximately $700.

7




5. NET LOSS PER SHARE
 
Basic net loss per common share is computed on the basis of our weighted average number of common shares outstanding.  Diluted earnings per share is computed on the basis of our weighted average number of common shares outstanding plus the effect of dilutive stock options and non-vested restricted stock using the treasury stock method.  Securities totaling 2,277,806 and 2,207,060 for the three and six months ended June 30, 2014 and 2013, respectively, have been excluded from loss per share because their effect would have been anti-dilutive.

6. PRINCIPAL CLIENTS

The following table represents revenue concentration of our principal clients:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
Revenue
 
Percentage
 
Revenue
 
Percentage
 
Revenue
 
Percentage
 
Revenue
 
Percentage
T-Mobile USA, Inc., a subsidiary of Deutsche Telekom (2)
 
$18,785
 
30.7%
 
$15,042
 
27.1%
 
$
37,424

 
30.1
%
 
$
28,377

 
25.9
%
AT&T Services, Inc. and AT&T Mobility, LLC, subsidiaries of AT&T, Inc. (1)
 
$13,753
 
22.5%
 
$14,599
 
26.3%
 
$
29,097

 
23.4
%
 
$
27,902

 
25.5
%
Comcast Cable Communications Management, LLC, subsidiary of Comcast Corporation (2)
 
$10,777
 
17.6%
 
$11,123
 
20.0%
 
$
21,737

 
17.5
%
 
$
22,479

 
20.6
%
    
(1) Revenue from this customer is generated through our Domestic and Asia Pacific segments.
(2) Revenue from this customer is generated through our Domestic, Asia Pacific and Latin America segments.

On July 28, 2011, we entered into a new master services agreement with T-Mobile effective July 1, 2011, which covers all services that we provide to T-Mobile. The new master services agreement with T-Mobile has an initial term of five years and will automatically renew for additional one-year periods thereafter, but may be terminated by T-Mobile upon 90 days written notice.

Our work for AT&T is covered by several contracts for a variety of different lines of AT&T business.  These contracts expire between 2014 and 2015.  Our initial master services agreement covering all AT&T work had been extended 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, but may be terminated by AT&T with written notice.

On January 4, 2014, we signed a new master services agreement with Comcast, effective June 22, 2013, which provides for the same services as the original master services agreement that was signed in 2011 and would have expired in 2014. The new master services agreement covers all services that we provide to Comcast, has an initial term of one year and will automatically renew for additional one-year periods unless either party gives notice of cancellation. Comcast may terminate the agreement upon 90 days written notice.



8



7.  DERIVATIVE INSTRUMENTS
 
We use derivatives to partially offset our business exposure to foreign currency exchange risk. We enter into foreign currency exchange contracts to hedge our anticipated operating commitments that are denominated in foreign currencies, including forward contracts and range forward contracts (a transaction where both a call option is purchased and a put option is sold).  The contracts cover periods commensurate with expected exposure, generally three to twelve months, and are principally unsecured foreign exchange contracts.  The market risk exposure is essentially limited to risk related to currency rate movements.  We operate in Canada, the Philippines, Costa Rica and Honduras.  The functional currencies in Canada and the Philippines are the Canadian dollar and the Philippine peso, which are used to pay labor and other operating costs in those countries. We provide funds for these operating costs as our client contracts generate revenues which are paid in U.S. dollars.  In Costa Rica and Honduras, our functional currency is the U.S. dollar and the majority of our costs are denominated in U.S. dollars. As of June 30, 2014, we have not entered into any arrangements to hedge our exposure to fluctuations in the Costa Rican colon or the Honduran lempira relative to the U.S. dollar.
 
We have elected to designate our derivatives as cash flow hedges in order to associate the results of the hedges with forecasted expenses. Unrealized gains and losses are recorded in accumulated other comprehensive income (“AOCI”) and will be re-classified to operations as the forecasted expenses are incurred, typically within one year. During the three and six months ended June 30, 2014 and 2013, our cash flow hedges were highly effective and hedge ineffectiveness was not material.

The following table shows the notional amount of our foreign exchange cash flow hedging instruments as of June 30, 2014:
 
 
Local Currency Notional Amount
 
U.S. Dollar Notional Amount
Canadian Dollar
8,750

 
$
8,240

Philippine Peso
1,387,880

 
32,528

 

 
$
40,768

 
Derivative assets and liabilities associated with our hedging activities are measured at gross fair value as described in Note 8 and are reflected as separate line items in our consolidated balance sheets.

8.  FAIR VALUE MEASUREMENTS
 
The carrying value of our cash and cash equivalents, accounts receivable, notes receivable, accounts payable and line of credit approximate fair value because of their short-term nature.

Derivative Instruments and Hedging Activities
 
The values of our derivative instruments are derived from pricing models using inputs based upon market information, including contractual terms, market prices and yield curves.  The significant inputs to the valuation pricing models are observable in the market, and as such the derivatives are classified as Level 2 in the fair value hierarchy.
 
Restructuring Charges
 
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. 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, in the consolidated statements of operations and comprehensive income (loss).

In the future, if we sublease for periods that differ from our assumption or if an actual buy-out of a lease differs from our estimate, 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.


9



Fair Value Hierarchy
 
The following tables set forth our assets and liabilities measured at fair value on a recurring basis and a non-recurring basis by level within the fair value hierarchy.  Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
 
Liabilities Measured at Fair Value
on a Recurring Basis as of June 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
34

 
$

 
$
34

Total fair value of assets measured on a recurring basis
$

 
$
34

 
$

 
$
34

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
381

 
$

 
$
381

Total fair value of liabilities measured on a recurring basis
$

 
$
381

 
$

 
$
381

 
Liabilities Measured at Fair Value
on a Recurring Basis as of December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
2,160

 
$

 
$
2,160

Total fair value of liabilities measured on a recurring basis
$

 
$
2,160

 
$

 
$
2,160

 
 
Liabilities Measured at Fair Value on a
Non-Recurring Basis as of June 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 

 
 

 
 

 
 

Accrued restructuring costs
$

 
$

 
$
1,724

 
$
1,724

Total fair value of liabilities measured on a non-recurring basis
$

 
$

 
$
1,724

 
$
1,724

 
Assets and Liabilities Measured at Fair Value on a
Non-Recurring Basis as of December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Property, plant and equipment, net
$

 
$

 
531

 
531

Total fair value of assets measured on a non-recurring basis
$

 
$

 
$
531

 
$
531

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Accrued restructuring costs
$

 
$

 
$
16

 
$
16

Total fair value of liabilities measured on a non-recurring basis
$

 
$

 
$
16

 
$
16



10



9. DEBT
 
Effective February 28, 2012, we entered into a secured revolving credit facility ("Credit Agreement") with Wells Fargo Bank. The Credit Agreement has a maturity date of February 28, 2016. The amount we may borrow under the Credit Agreement is the lesser of the borrowing base calculation and $15,000, and, so long as no default has occurred, we may increase the maximum availability to $20,000 in $2,500 increments.  As of June 30, 2014, we had $1,000 outstanding borrowings on our credit facility and available capacity was $13,920, net of $80 of letters of credit backed by the facility.

Under the Credit Agreement, we are subject to certain standard affirmative and negative covenants, including the following financial covenants: 1) maintaining a Minimum Adjusted EBITDA, as defined in the Credit Agreement, of no less than the cumulative month-end minimum amounts set forth in an amendment to the Credit Agreement and 2) limiting non-financed capital expenditures to no more than the cumulative month-end maximum amounts set forth in an amendment to the Credit Agreement. We were in compliance with all such covenants as of June 30, 2014.

In March 2014, the Company and Wells Fargo agreed on the financial covenants for 2014 and the first quarter of 2015, constituting the Sixth Amendment to the Credit Agreement. This amendment also amended certain definitions and fees. In June 2014, we entered into a Seventh Amendment to the Credit Agreement adjusting the financial covenants through the first quarter of 2015.

10. SHARE-BASED COMPENSATION
 
Our share-based compensation arrangements include grants of stock options, restricted stock awards and deferred stock units under the StarTek, Inc. 2008 Equity Incentive Plan, certain awards granted outside of these plans and our Employee Stock Purchase Plan. The compensation expense that has been charged against income for stock option awards and restricted stock for the three and six months ended June 30, 2014 and was $462 and $864 and for the three and six months ended June 20, 2013 was $391 and $857, respectively, and is included in selling, general and administrative expense.  As of June 30, 2014, there was $1,976 of total unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 2.0 years.

11.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
Accumulated other comprehensive income (loss) consisted of the following items:
 
 Foreign Currency Translation Adjustment
 
 Derivatives Accounted for as Cash Flow Hedges
 
 Total
 Balance at December 31, 2013
$
1,900

 
$
(2,909
)
 
$
(1,009
)
 Foreign currency translation
(120
)
 

 
(120
)
 Reclassification to operations

 
2,026

 
2,026

 Unrealized gains (losses)

 
(215
)
 
(215
)
 Tax provision (benefit)
45

 
(679
)
 
(634
)
 Balance at June 30, 2014
$
1,825

 
$
(1,777
)
 
$
48


Reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2014 and 2013 were as follows:

11



Type of Instrument
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Statement Where Net Income is Presented
 
 
Three Months Ended
 June 30,
 
Six Months Ended
June 30,
 
 
 
 
2014
 
2013
 
2014
 
2013
 
 
(Gains) losses on cash flow hedges
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
669

 
$
(227
)
 
$
1,892

 
$
174

 
Cost of services
Foreign exchange contracts
 
42

 

 
134

 

 
Selling, general and administrative expenses
 
 
$
711

 
$
(227
)
 
$
2,026

 
$
174

 
 

12.  SEGMENT INFORMATION
 
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 June 30, 2014, our Domestic segment included the operations of eight facilities in the U.S. and one facility in Canada. Our Asia Pacific segment included the operations of four facilities in the Philippines and our Latin America segment included one facility in Costa Rica and two facilities in Honduras.

We primarily evaluate segment operating performance in each reporting segment based on net sales, gross profit and working capital. Certain operating expenses are not allocated to each reporting segment; therefore, we do not present income statement information by reporting segment below the gross profit level.

Information about our reportable segments, which correspond to the geographic areas in which we operate, for the three and six months ended June 30, 2014 and 2013 is as follows:
 
 
For the Three Months Ended June 30,
 
2014
 
2013
Revenue:
 

 
 

Domestic
$
30,931

 
$
28,899

Asia Pacific
21,035

 
19,862

Latin America
9,288

 
6,815

Total
$
61,254

 
$
55,576

 
 
 
 
Gross profit:
 

 
 

Domestic
$
2,641

 
$
3,544

Asia Pacific
2,631

 
2,160

Latin America
420

 
(83
)
Total
$
5,692

 
$
5,621



12



 
For the Six Months Ended June 30,
 
2014
 
2013
Revenue:
 

 
 

Domestic
$
64,238

 
$
56,910

Asia Pacific
42,088

 
39,562

Latin America
18,137

 
12,914

Total
$
124,463

 
$
109,386

 
 
 
 
Gross profit:
 

 
 

Domestic
$
7,184

 
$
6,469

Asia Pacific
6,234

 
4,367

Latin America
491

 
(487
)
Total
$
13,909

 
$
10,349



ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this report, as well as the financial and other information included in our 2013 Annual Report on Form 10-K.

BUSINESS DESCRIPTION AND OVERVIEW
 
STARTEK is a comprehensive contact center and business process outsourcing service company with employees we call Brand Warriors who for over 25 years have been committed to making a positive impact on our clients’ business results. Our mission is to enable and empower our Brand Warriors to promote our clients’ brands every day and bring value to our stakeholders. We accomplish this by aligning with our clients’ business objectives. 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.  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.  STARTEK has delivery centers in the United States, Philippines, Canada, Costa Rica, Honduras and through its STARTEK@Home workforce.

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 clients’ customers. To become a leader in the market, our strategy is to:
 
grow our existing client base by deepening and broadening our relationships,
add new clients and continue to diversify our client base,
improve the profitability of our business through operational improvements and increased utilization,
expand our global delivery platform to meet our clients' needs,
broaden our service offerings by providing more innovative and technology-enabled solutions, and
expand into new verticals.

As of June 30, 2014, our Domestic segment included the operations of eight facilities in the U.S. and one facility in Canada. Our Asia Pacific segment included the operations of four facilities in the Philippines, and our Latin America segment included one facility in Costa Rica and two facilities in Honduras.


13



SIGNIFICANT DEVELOPMENTS DURING THE SIX MONTHS ENDED JUNE 30, 2014
 
Laramie, Wyoming
In June 2014, we sold the previously vacated owned property in Laramie, Wyoming for $0.7 million which resulted in a gain of $0.2 million.

Heredia, Costa Rica
In June 2014, we announced the closure of our Heredia site. Operations will cease in the third quarter of 2014. As a result, we recorded a restructuring reserve of $1.0 million for employee related costs and will record an additional reserve for the facility related costs upon closure. The lease terminates in December 2014.

Iloilo, Philippines
We started operations in a temporary facility in June 2014. We continued progress in the second quarter with build out of a leased permanent facility, which is expected to be completed in 2014.

Myrtle Beach, South Carolina
We started operations in a temporary facility in Myrtle Beach in February 2014 and are in the process of developing a permanent customer support center, which is expected to be complete in the third quarter of 2014. This facility will be leased.

Jonesboro, Arkansas
In February 2014, we announced the closure of our Jonesboro, Arkansas site. Operations ceased in the second quarter of 2014 and the business transitioned to another facility, resulting in a restructuring charge of $0.6 million recorded in the first half of 2014.

Colorado Springs, Colorado
In March 2014, we expanded into a new larger facility in Colorado Springs.

Tegucigalpa, Honduras
In February 2014, we opened a new contact center in Tegucigalpa, Honduras. We are currently in a temporary facility and are in the process of developing a permanent contact center, which is expected to be complete in the first quarter of 2015. This facility will be leased.

IT Platform Initiative
During the second quarter of 2014, we implemented the last phase of our IT transformation project by outsourcing our data centers.  We recognized $0.6 million in restructuring charges in the three months ended June 30, 2014 and will recognize additional restructuring charges of approximately $0.7 million throughout the remainder of 2014.



14



RESULTS OF OPERATIONS — THREE MONTHS ENDED JUNE 30, 2014 AND 2013

 The following table summarizes our revenues and gross profit for the periods indicated, by reporting segment:
 
 
For the Three Months Ended June 30,
 
2014
 
2013
 
(in 000s)
 
(% of Total)
 
(in 000s)
 
(% of Total)
Domestic:
 

 
 

 
 

 
 

Revenue
$
30,931

 
50.5
%
 
$
28,899

 
51.9
%
Cost of services
28,290

 
50.9
%
 
25,355

 
50.8
%
Gross profit
$
2,641

 
46.4
%
 
$
3,544

 
63.0
%
Gross profit %
8.5
%
 
 

 
12.3
%
 
 

Asia Pacific:
 

 
 

 
 

 
 

Revenue
$
21,035

 
34.3
%
 
$
19,862

 
35.7
%
Cost of services
18,404

 
33.1
%
 
17,702

 
35.4
%
Gross profit
$
2,631

 
46.2
%
 
$
2,160

 
38.4
%
Gross profit %
12.5
%
 
 

 
10.9
%
 
 

Latin America:
 

 
 

 
 

 
 

Revenue
$
9,288

 
15.2
%
 
$
6,815

 
12.4
%
Cost of services
8,868

 
16.0
%
 
6,898

 
13.8
%
Gross profit
$
420

 
7.4
%
 
$
(83
)
 
(1.5
)%
Gross profit %
4.5
%
 
 

 
(1.2
)%
 
 

Company Total:
 

 
 

 
 

 
 

Revenue
$
61,254

 
100.0
%
 
$
55,576

 
100.0
%
Cost of services
55,562

 
100.0
%
 
49,955

 
100.0
%
Gross profit
$
5,692

 
100.0
%
 
$
5,621

 
100.0
%
Gross profit %
9.3
%
 
 

 
10.1
%
 
 


Revenue

Revenue increased by $5.7 million, or 10.2%, from $55.6 million to $61.3 million in the second quarter of 2014,  The Domestic segment increase of $2.0 million was due to $3.7 million of new business and growth from existing programs, partially offset by $1.0 million of volume declines and $0.7 million of pricing changes versus the second quarter of 2013. Asia Pacific revenues grew $1.2 million due to $2.6 million of growth from existing clients, partially offset by volume reductions of $0.9 million and lost revenues of $0.5 million. The increase in the Latin America segment of $2.5 million was due to $4.0 million of growth from existing clients in our Honduras facilities, partially offset by $1.5 million of lost revenues in Costa Rica versus the second quarter of 2013.

Cost of Services and Gross Profit

The gross profit as a percentage of revenue decrease of 0.8% was due to a 3.8% decrease in the domestic segment margin offset by improvements in both the Asia Pacific and Latin America segments. The domestic cost of services increase of $2.9 million was the result of $3.9 million investment in new ramps and business transition costs, partially offset by $1.0 million reduction for volume declines versus second quarter of 2013. The Asia Pacific improvement of 1.6% was the result of improved utilization on existing programs and the benefit of our new Angeles location, offset by reductions in volume from a key client. Latin America gross profit as a percentage of revenue increased by 5.7% as capacity utilization continues to increase in Honduras.

15



RESULTS OF OPERATIONS — SIX MONTHS ENDED JUNE 30, 2014 AND 2013

 The following table summarizes our revenues and gross profit for the periods indicated, by reporting segment:
 
 
For the Six Months Ended June 30,
 
2014
 
2013
 
(in 000s)
 
(% of Total)
 
(in 000s)
 
(% of Total)
Domestic:
 

 
 

 
 

 
 

Revenue
$
64,238

 
51.6
%
 
$
56,910

 
51.9
%
Cost of services
57,054

 
51.6
%
 
50,441

 
50.9
%
Gross profit
$
7,184

 
51.7
%
 
$
6,469

 
62.5
%
Gross profit %
11.2
%
 
 

 
11.4
%
 
 

Asia Pacific:
 

 
 

 
 

 
 

Revenue
$
42,088

 
33.8
%
 
$
39,562

 
36.2
%
Cost of services
35,854

 
32.4
%
 
35,195

 
35.5
%
Gross profit
$
6,234

 
44.8
%
 
$
4,367

 
42.2
%
Gross profit %
14.8
%
 
 

 
11.0
%
 
 

Latin America:
 

 
 

 
 

 
 

Revenue
$
18,137

 
14.6
%
 
$
12,914

 
11.9
%
Cost of services
17,646

 
16.0
%
 
13,401

 
13.5
%
Gross profit
$
491

 
3.5
%
 
$
(487
)
 
(4.7
)%
Gross profit %
2.7
%
 
 

 
(3.8
)%
 
 

Company Total:
 

 
 

 
 

 
 

Revenue
$
124,463

 
100.0
%
 
$
109,386

 
100.0
%
Cost of services
110,554

 
100.0
%
 
99,037

 
100.0
%
Gross profit
$
13,909

 
100.0
%
 
$
10,349

 
100.0
%
Gross profit %
11.2
%
 
 

 
9.5
%
 
 


Revenue

Revenue increased by $15.1 million, or 13.8%, from $109.4 million in the first half of 2013 to $124.5 million in the first half of 2014.  The Domestic segment increase of $7.3 million was due to $9.8 million of new business and growth from existing programs, partially offset by a $1.3 million of price reductions and $1.0 million of volume reductions. Asia Pacific revenues grew $2.5 million due to $3.9 million of growth from existing clients, partially offset by volume reductions of $0.8 million and lost revenues of $0.5 million. The increase in the Latin America segment of $5.2 million was due primarily to $7.1 million in growth from existing clients in our Honduras facilities, partially offset by $1.3 million of lost revenues and $0.6 million of volume reductions.

Cost of Services and Gross Profit

Gross profit as a percentage of revenue increased by 1.7% due to operational efficiency gains and higher capacity utilization across all segments, partially offset by transition and ramp related costs and price reductions versus year to date 2013. Cost of services in the Domestic segment increased by approximately $6.6 million due to $8.6 million investment in growth and $0.5 million in site transition costs, offset by $2.5 million of reductions related to volume changes. Gross profit as a percentage of revenue decreased by 0.2% due to the dilutive effect of new business ramps and new facility openings. Cost of services in the Asia Pacific segment increased by approximately $0.7 million and gross profit as a percentage of revenue increased by approximately 3.8% due to better performance. Cost of services in Latin America increased by approximately $4.2 million and gross profit as a percentage of revenue increased by 6.5%. Both the Asia Pacific and Latin America margin improvements were due to higher capacity utilization and labor efficiencies.


16



The following paragraphs discuss other items affecting the results of our operations for the three and six months ended June 30, 2014 and 2013.

Selling, General and Administrative Expenses

As a percentage of revenue, selling, general and administrative expenses decreased in the second quarter of 2014 to 11.9% from 13.0% during the second quarter of 2013. On a year-to-date basis, such expenses as a percentage of revenue decreased from 13.2% in 2013 to 12.5% in 2014. For the three and six months ended June 30, 2014, compared to the three and six months ended June 30, 2013, selling, general and administrative expenses increased $0.1 million, or 1.4%, and $1.1 million, or 7.6%, respectively, due to variable costs associated with the revenue increase and investments in growth.
 
Impairment Losses and Restructuring Charges, Net

No impairment losses were incurred during the first half of 2014 or 2013.

Restructuring charges totaled $2.0 million and $2.2 million for the three and six months ended June 30, 2014, which consisted of the following:
$0.6 million for employee related and facility costs due to the closure of the Jonesboro, Arkansas facility, which includes $0.2 million recognized in the first quarter of 2014, offset by a gain of $0.2 million for the early termination of our lease;
$1.0 million for employee related costs due to the expected closure of the Heredia, Costa Rica facility. We will recognize additional charges in the third quarter of 2014 when the facility closes;
$0.2 million for corporate restructuring; and
$0.6 million for outsourcing our data centers. We will also recognize additional charges through 2014 related to outsourcing our data centers as we complete this transformation.

We reversed $0.4 million of restructuring charges during the three and six months ended June 30, 2013 due to expenses reimbursable under the sublease at our Victoria, Texas facility.

Interest and Other Income (Expense), Net

Interest and other income (expense), net for the six months ended June 30, 2014 of approximately $0.1 million includes a gain on disposal of assets related to the sale of our Laramie, Wyoming property of $0.2 million.

Income Tax

Income tax benefit during the first half of 2014 was $0.2 million compared to an expense of $0.1 million in the first half of 2013.  The income tax benefit is primarily due to the impact of intra period allocations from items recorded in other comprehensive income. Our operations in the Philippines, Cost Rica and Honduras have tax holidays.

LIQUIDITY AND CAPITAL RESOURCES
 
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, upgrades of information technologies and service 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 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 June 30, 2014, working capital totaled $28.8 million and our current ratio was 2.06:1, compared to working capital of $31.6 million and a current ratio of 2.11:1 at December 31, 2013.

Net cash flows provided by operating activities for the six months ended June 30, 2014 was $1.5 million compared to $3.2 million for the six months ended June 30, 2013. The $1.7 million decrease in cash provided was primarily due to a $2.8 million decrease in cash collected from accounts receivable, a $0.9 million decrease in non-cash reconciling items and $0.2 million in lower earnings. Cash flows from operating activities can vary significantly from quarter to quarter depending upon the timing of operating cash receipts and payments, especially accounts receivable and accounts payable.

17




Net cash used in investing activities for the six months ended June 30, 2014 of $6.3 million was primarily for capital expenditures of $6.8 million related to new facility build-out and expansions, partially offset by proceeds of $0.6 million from the sale of our Laramie, Wyoming property. This compares to net cash used in investing activities of $2.6 million for the six months ended June 30, 2013, which primarily consisted of $1.4 million of capital expenditures and the cash paid to acquire Ideal Dialogue Company, LLC of $1.5 million.

Net cash provided by financing activities decreased by approximately $0.1 million in the first half of 2014 compared to the first half of 2013, primarily due to decreases in stock issuances from the exercise of stock options, partially offset by increases in capital lease obligations.

Secured Revolving Credit Facility. We have a secured revolving credit facility, with a current borrowing capacity of $15.0 million, which can increase to $20.0 million at our option, to provide liquidity for working capital needs and to finance growth opportunities. After consideration of $1.0 million of borrowings outstanding under the credit facility and letters of credit outstanding thereunder of $0.08 million, our remaining borrowing capacity was $13.9 million at June 30, 2014.

Debt Covenants. Our secured revolving credit facility contains standard affirmative and negative covenants that may limit or restrict our ability to sell assets, incur additional indebtedness and engage in mergers and acquisitions. We were in compliance with all debt covenants at June 30, 2014.

CONTRACTUAL OBLIGATIONS
There were no material changes in our contractual obligations during the second quarter of 2014.
OFF-BALANCE SHEET ARRANGEMENTS
We have no 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.

VARIABILITY OF OPERATING RESULTS
 
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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
In preparing our consolidated financial statements in conformity with GAAP, management must undertake decisions that impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions upon which accounting estimates are based. Management applies its best judgment based on its understanding and analysis of the relevant circumstances to reach these decisions. By their nature, these judgments are subject to an inherent degree of uncertainty. Accordingly, actual results may vary significantly from the estimates we have applied.

Our critical accounting policies and estimates are consistent with those disclosed in our 2013 Annual Report on Form 10-K. Please refer to Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our 2013 Annual Report on Form 10-K for a complete description of our Critical Accounting Policies and Estimates.


18



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Foreign Currency Exchange Risks
 
Market risk relating to our international operations results primarily from changes in foreign exchange rates. To address this risk, we enter into foreign currency exchange contracts. The contracts cover periods commensurate with expected exposure, generally three to twelve months, and are principally unsecured. The cumulative translation effects for subsidiaries using functional currencies other than the USD are included in accumulated other comprehensive loss in stockholders’ equity. Movements in non-USD 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 U.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 U.S. dollars.

In order to hedge our exposure to foreign currency transactions and short-term intercompany transactions denominated in the CAD and PHP we had outstanding foreign currency exchange contracts as of June 30, 2014 with notional amounts totaling $40.8 million. If the USD were to weaken against the CAD and PHP by 10% from current period-end levels, we would incur a loss of approximately $2.4 million on the underlying exposures of the derivative instruments. As of June 30, 2014, we have not entered into any arrangements to hedge our exposure to fluctuations in the Costa Rican colon or the Honduran lempira relative to the USD.

Interest Rate Risk

We currently have a $15.0 million secured credit facility, which can increase to $20.0 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 unaudited consolidated financial statements.

During the three and six months ended June 30, 2014, there were no material changes in our market risk exposure.


19



ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. As of June 30, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2014, our disclosure controls and procedures were effective and were designed to ensure that all information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1A.  RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.


20



ITEM 6.  EXHIBITS 

INDEX OF EXHIBITS
Exhibit
 
 
 
Incorporated Herein by Reference
No.
 
Exhibit Description
 
Form
 
Exhibit
 
Filing Date
3.1

 
Restated Certificate of Incorporation of StarTek, Inc.
 
S-1
 
3.1
 
1/29/1997
3.2

 
Amended and Restated Bylaws of StarTek, Inc.
 
8-K
 
3.2
 
11/1/2011
3.3

 
Certificate of Amendment to the Certificate of Incorporation of StarTek, Inc. filed with the Delaware Secretary of State on May 21, 1999
 
10-K
 
3.3
 
3/8/2000
3.4

 
Certificate of Amendment to the Certificate of Incorporation of StarTek, Inc. filed with the Delaware Secretary of State on May 23, 2000
 
10-Q
 
3.4
 
8/14/2000
4.1

 
Specimen Common Stock certificate
 
10-Q
 
4.2
 
11/6/2007
10.1*

 
Seventh Amendment to Credit and Security Agreement, by and among Wells Fargo Bank, National Association, and StarTek, Inc.
 
 
 
 
 
 
10.2#

 
Master Services Agreement executed January 6, 2014 between StarTek, Inc. and Comcast Cable Communications Management, LLC effective June 22, 2013
 
10-Q/A
 
10.2
 
7/29/2014
31.1*

 
Certification of Chad A. Carlson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
31.2*

 
Certification of Lisa A. Weaver pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
32.1*

 
Written Statement of the Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
101*

 
The following materials are formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited), (ii) Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013, (iii) Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited) and (iv) Notes to Consolidated Financial Statements (Unaudited)
 
 
 
 
 
 
*
 
Filed with this Form 10-Q
#
 
The Securities and Exchange Commission has granted our request that certain material in this agreement be treated as confidential. Such material has been redacted from the exhibit as filed.

21



SIGNATURES
 
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
 
STARTEK, INC.
 
 
 
 
 
 
 
By:
/s/ CHAD A. CARLSON
Date: August 12, 2014
 
Chad A. Carlson
 
 
President and Chief Executive Officer
 
 
(principal executive officer)
 
 
 
 
 
 
 
By:
/s/ LISA A. WEAVER
Date: August 12, 2014
 
Lisa A. Weaver
 
 
Senior Vice President, Chief Financial Officer and Treasurer
 
 
(principal financial and accounting officer)
 
   




22