Table of Contents

** **

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**Form 10-Q**

 

**(MarkOne)**

 
| ** ****x**                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                        |                                                                                                    |
| **For  the quarterly period ended September 30, 2009** |
|                                                        |                                                                                                    |
| **or**                                                      |
|                                                        |                                                                                                    |
| ** ****o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**Forthe transition period from                to               **

 

**Commissionfile number 1-12793**

 

----

 

**StarTek, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                | ** ** | **84-1370538**      |
|---------------------------------------------|------------|---------------------|
| (State or other jurisdiction of             |       | (I.R.S. employer    |
| incorporation or organization)              |       | Identification No.) |
|                                        |       |                |
| **44  Cook Street, 4****th**** Floor** | ** ** | ** **          |
| **Denver,  Colorado**                       | * *   | **80206**           |
| (Address of principal executive offices)    |       | (Zip code)          |

 

**(303)399-2400**

(Registrant’s telephone number, including areacode)

 

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

 

| **Title  of Each Class**      | ** ** | **Name of  Each Exchange on Which Registered** |
|-------------------------------|------------|------------------------------------------------|
| Common Stock, $.01 par  value |       | New York Stock Exchange, Inc.             |

 

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).   Yes o No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the 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 x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).   Yeso No x

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date. Common Stock, $0.01 Par Value – 14,868,875shares as of October 15, 2009.

 

 

 

----

Table of Contents

 

**STARTEK, INC. AND SUBSIDIARIES**

 

**FORM 10-Q**

 

**INDEX**

 
| **PART I.**  | ** ** | **FINANCIAL  INFORMATION**                                                                                             |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------------|
|              |       |                                                                                                                   |
| Item 1.           |       | Financial  Statements (unaudited):                                                                                     |
|              |       |                                                                                                                   |
|              |       | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2009 and 2008 |
|              |       |                                                                                                                   |
|              |       | Condensed  Consolidated Balance Sheets as of September 30, 2009 and  December 31, 2008                       |
|              |       |                                                                                                                   |
|              |       | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2009 and 2008           |
|              |       |                                                                                                                   |
|              |       | Notes to  Condensed Consolidated Financial Statements                                                                  |
|              |       |                                                                                                                   |
| 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 1.           |       | Legal Proceedings                                                                                                      |
|              |       |                                                                                                                   |
| Item 1A.          |       | Risk Factors                                                                                                           |
|              |       |                                                                                                                   |
| Item 6.           |       | Exhibits                                                                                                               |
|              |       |                                                                                                                   |
| SIGNATURES        |

 

2

----

Table of Contents

 

**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This QuarterlyReport contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities 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  contained herein 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  contained herein regarding matters that are not historical facts.                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

Our business and resultsof operations are subject to risks and uncertainties, many of which are beyondour ability to control or predict. Because of these risks and uncertainties,actual results may differ materially from those expressed or implied byforward-looking statements, and investors are cautioned not to place unduereliance on such statements, which speak only as of the date thereof.  Important factors that could cause actualresults to differ materially from our expectations and may adversely affect ourbusiness and results of operations, include, but are not limited to those itemsdescribed herein or set forth in Item 1A. “Risk Factors” appearing in ourAnnual Report on Form 10-K for the year ended December 31, 2008.

 

3

----

Table ofContents

 

**Part I.Financial Information**

 

**ITEM1.  FINANCIAL STATEMENTS (UNAUDITED)**

 

**STARTEK, INC. AND SUBSIDIARIES**

CondensedConsolidated Statements of Operations

(Dollars in thousands,except per share data)

(Unaudited)

 
| ** **                                                                                                                                           | ** ** | **Three Months Ended  September 30,** | ** **   | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|--------------|-------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2009**                                   | ** **   | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue                                                                                                                                              |       | $                                          |  72,462 |                                      | $          |  68,937 |   | $ |  216,463 |   | $ |  198,987 |   |
| Cost of services                                                                                                                                     |       | 58,988                                     |         | 60,728                                    |       | 179,137 |   | 173,007 |   |
| Gross profit                                                                                                                                         |       | 13,474                                     |         | 8,209                                     |       | 37,326 |   | 25,980 |   |
| Selling, general and administrative expenses                                                                                                         |       | 11,084                                     |         | 10,205                                    |       | 31,665 |   | 30,522 |   |
| Impairment losses and restructuring charges                                                                                                          |       | —                                     |         | 346                                       |       | 6,437 |   | 5,954 |   |
| Operating income (loss)                                                                                                                              |       | 2,390                                      |         | (2,342                                    | )          | (776 | ) | (10,496 | ) |
| Net interest and other (expense) income                                                                                                              |       | (38                                        | )            | (304                                      | )          | (216 | ) | 96 |   |
| Income (loss) from continuing operations before  income taxes                                                                                        |       | 2,352                                      |         | (2,646                                    | )          | (992 | ) | (10,400 | ) |
| Income tax expense (benefit)                                                                                                                         |       | 557                                        |         | (1,143                                    | )          | (126 | ) | (3,906 | ) |
| Net income (loss) from continuing operations                                                                                                         |       | 1,795                                      |         | (1,503                                    | )          | (866 | ) | (6,494 | ) |
| (Loss) income from discontinued operations, net of  tax (including gain on disposal of $6,937 during the nine months ended  September 30, 2009) |       | —                                     |         | (407                                      | )          | 4,640 |   | (266 | ) |
| Net income (loss)                                                                                                                                    |       | $                                          |  1,795  |                                      | $          |  (1,910 | ) | $ |  3,774 |   | $ |  (6,760 | ) |
|                                                                                                                                                 |       |                                       |         |                                      |       |   |   |   |   |
| Basic net income (loss) per share from:                                                                                                              |       |                                       |         |                                      |       |   |   |   |   |
| Continuing operations                                                                                                                                |       | $                                          |  0.12   |                                      | $          |  (0.10 | ) | $ |  (0.06 | ) | $ |  (0.44 | ) |
| Discontinued operations                                                                                                                              |       | —                                     |         | (0.03                                     | )          | 0.32 |   | (0.02 | ) |
| Net income (loss)                                                                                                                                    |       | $                                          |  0.12   |                                      | $          |  (0.13 | ) | $ |  0.26 |   | $ |  (0.46 | ) |
|                                                                                                                                                 |       |                                       |         |                                      |       |   |   |   |   |
| Diluted net income (loss) per share from:                                                                                                            |       |                                       |         |                                      |       |   |   |   |   |
| Continuing operations                                                                                                                                |       | $                                          |  0.12   |                                      | $          |  (0.10 | ) | $ |  (0.06 | ) | $ |  (0.44 | ) |
| Discontinued operations                                                                                                                              |       | —                                     |         | (0.03                                     | )          | 0.32 |   | (0.02 | ) |
| Net income (loss)                                                                                                                                    |       | $                                          |  0.12   |                                      | $          |  (0.13 | ) | $ |  0.26 |   | $ |  (0.46 | ) |

 

*See notes to condensedconsolidated financial statements.*

 

4

----

Table of Contents

 

**STARTEK, INC. AND SUBSIDIARIES**

CondensedConsolidated Balance Sheets

(Dollars in thousands,except share and per share data)

 
| ** **                                                                                                                                                                                  | ** ** | **As of**                   | ** **    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|
| ** **                                                                                                                                                                                  | ** ** | **September 30, 2009** | ** **    | **December 31, 2008** | ** ** |
| ** **                                                                                                                                                                                  | ** ** | **(Unaudited)**             | ** **    | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |                        |          |   |   |
| Current assets:                                                                                                                                                                             |       |                        |          |   |   |
| Cash and cash equivalents                                                                                                                                                                   |       | $                           |  20,463  |   | $ |  9,580 |   |
| Investments                                                                                                                                                                                 |       | 499                         |          | 8,437 |   |
| Trade accounts receivable, less allowance for doubtful  accounts of $0 and $32, respectively                                                                                                |       | 53,604                      |          | 51,510 |   |
| Income tax receivable                                                                                                                                                                       |       | 2,134                       |          | 2,675 |   |
| Deferred income tax assets                                                                                                                                                                  |       | 1,435                       |          | 2,185 |   |
| Derivative asset                                                                                                                                                                            |       | 1,477                       |          | — |   |
| Prepaid expenses and other current assets                                                                                                                                                   |       | 5,026                       |          | 3,273 |   |
| Total current assets                                                                                                                                                                        |       | 84,638                      |          | 77,660 |   |
|                                                                                                                                                                                        |       |                        |          |   |   |
| Property, plant and equipment, net                                                                                                                                                          |       | 57,833                      |          | 59,608 |   |
| Long-term deferred income tax assets                                                                                                                                                        |       | 6,231                       |          | 8,946 |   |
| Other assets                                                                                                                                                                                |       | 921                         |          | 650 |   |
| Total assets                                                                                                                                                                                |       | $                           |  149,623 |   | $ |  146,864 |   |
|                                                                                                                                                                                        |       |                        |          |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                              |       |                        |          |   |   |
|                                                                                                                                                                                        |       |                        |          |   |   |
| Current liabilities:                                                                                                                                                                        |       |                        |          |   |   |
| Accounts payable                                                                                                                                                                            |       | $                           |  7,078   |   | $ |  6,193 |   |
| Derivative liability                                                                                                                                                                        |       | —                      |          | 2,323 |   |
| Accrued liabilities:                                                                                                                                                                        |       |                        |          |   |   |
| Accrued payroll                                                                                                                                                                             |       | 8,451                       |          | 9,158 |   |
| Accrued compensated absences                                                                                                                                                                |       | 4,086                       |          | 4,856 |   |
| Accrued restructuring costs                                                                                                                                                                 |       | 2,543                       |          | 995 |   |
| Other accrued liabilities                                                                                                                                                                   |       | 1,785                       |          | 2,317 |   |
| Current portion of long-term debt                                                                                                                                                           |       | —                      |          | 3,295 |   |
| Deferred revenue                                                                                                                                                                            |       | 1,683                       |          | — |   |
| Other current liabilities                                                                                                                                                                   |       | 1,171                       |          | 954 |   |
| Total current liabilities                                                                                                                                                                   |       | 26,797                      |          | 30,091 |   |
|                                                                                                                                                                                        |       |                        |          |   |   |
| Long-term debt, less current portion                                                                                                                                                        |       | —                      |          | 3,199 |   |
| Accrued restructuring costs                                                                                                                                                                 |       | 2,925                       |          | 1,714 |   |
| Deferred rent liability                                                                                                                                                                     |       | 4,160                       |          | 4,501 |   |
| Other liabilities                                                                                                                                                                           |       | 273                         |          | 340 |   |
| Total liabilities                                                                                                                                                                           |       | 34,155                      |          | 39,845 |   |
|                                                                                                                                                                                        |       |                        |          |   |   |
| Commitments and contingencies                                                                                                                                                               |       |                        |          |   |   |
|                                                                                                                                                                                        |       |                        |          |   |   |
| Stockholders’ equity:                                                                                                                                                                  |       |                        |          |   |   |
| Common stock, 32,000,000 shares, $0.01 par value,  authorized; 14,868,875 and 14,813,912 shares issued and outstanding at  September 30, 2009 and December 31, 2008, respectively |       | 149                         |          | 148 |   |
| Additional paid-in capital                                                                                                                                                                  |       | 66,068                      |          | 64,440 |   |
| Accumulated other comprehensive income (loss), net  of tax                                                                                                                                  |       | 2,631                       |          | (415 | ) |
| Retained earnings                                                                                                                                                                           |       | 46,620                      |          | 42,846 |   |
| Total stockholders’ equity                                                                                                                                                             |       | 115,468                     |          | 107,019 |   |
| Total liabilities and stockholders’ equity                                                                                                                                             |       | $                           |  149,623 |   | $ |  146,864 |   |

 

*See notes to condensedconsolidated financial statements.*

 

5

----

Table of Contents

 

**STARTEK, INC. AND SUBSIDIARIES**

CondensedConsolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 
| ** **                                                                      | ** ** | **Nine Months Ended**  | ** **   |
|---------------------------------------------------------------------------------|------------|------------------------|--------------|
| ** **                                                                      | ** ** | **September 30,** | ** **   |
| ** **                                                                      | ** ** | **2009**               | ** **   | **2008** | ** ** |
| **Operating Activities**                                                        | ** ** | ** **             | ** **   | ** ** | ** ** |
| Net income (loss)                                                               |       | $                      |  3,774  |   | $ |  (6,760 | ) |
| Income (loss) from discontinued operations                                      |       | 4,640                  |         | (266 | ) |
| Loss from continuing operations                                                 |       | (866                   | )            | (6,494 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities |       |                   |         |   |   |
| Depreciation                                                                    |       | 11,808                 |         | 13,473 |   |
| Impairment of property, plant and equipment                                     |       | 1,756                  |         | 4,070 |   |
| Non-cash compensation cost                                                      |       | 1,437                  |         | 1,054 |   |
| Deferred income taxes                                                           |       | 2,711                  |         | (3,532 | ) |
| Other, net                                                                      |       | 22                     |         | 453 |   |
| Changes in operating assets and liabilities:                                    |       |                   |         |   |   |
| Trade accounts receivable, net                                                  |       | (1,972                 | )            | 1,751 |   |
| Prepaid expenses and other assets                                               |       | (1,943                 | )            | (200 | ) |
| Accounts payable                                                                |       | 783                    |         | 4,693 |   |
| Income taxes, net                                                               |       | 620                    |         | (1,570 | ) |
| Accrued and other liabilities                                                   |       | 568                    |         | 5,416 |   |
| Net cash provided by continuing operating activities                            |       | 14,924                 |         | 19,114 |   |
| Cash used in discontinued operating activities                                  |       | (2,335                 | )            | (266 | ) |
| Net cash provided by operating activities                                       |       | 12,589                 |         | 18,848 |   |
|                                                                            |       |                   |         |   |   |
| **Investing Activities**                                                        |       |                   |         |   |   |
| Purchases of investments available for sale                                     |       | —                 |         | (11,384 | ) |
| Proceeds from disposition of investments available  for sale                    |       | 8,021                  |         | 12,229 |   |
| Purchases of property, plant and equipment                                      |       | (10,581                | )            | (22,964 | ) |
| Net cash used in continuing investing activities                                |       | (2,560                 | )            | (22,119 | ) |
| Cash provided by discontinued investing activities                              |       | 7,075                  |         | — |   |
| Net cash provided by (used in) investing activities                             |       | 4,515                  |         | (22,119 | ) |
|                                                                            |       |                   |         |   |   |
| **Financing Activities**                                                        |       |                   |         |   |   |
| Principal payments on borrowings                                                |       | (6,855                 | )            | (3,042 | ) |
| Principal payments on line of credit                                            |       | (22,236                | )            | (82,346 | ) |
| Proceeds from line of credit                                                    |       | 22,236                 |         | 82,346 |   |
| Proceeds from issuance of common stock                                          |       | 190                    |         | 101 |   |
| Principal payments on capital lease obligations                                 |       | (181                   | )            | (42 | ) |
| Net cash used in continuing financing activities                                |       | (6,846                 | )            | (2,983 | ) |
| Cash provided by discontinued financing activities                              |       | —                 |         | — |   |
| Net cash used in financing activities                                           |       | (6,846                 | )            | (2,983 | ) |
| Effect of exchange rate changes on cash                                         |       | 625                    |         | (819 | ) |
| Net increase (decrease) in cash and cash equivalents                            |       | 10,883                 |         | (7,073 | ) |
| Cash and cash equivalents at beginning of period                                |       | 9,580                  |         | 23,026 |   |
| Cash and cash equivalents at end of period                                      |       | $                      |  20,463 |   | $ |  15,953 |   |
|                                                                            |       |                   |         |   |   |
| **Supplemental Disclosure of Cash  Flow Information**                           |       |                   |         |   |   |
| Cash paid for interest                                                          |       | $                      |  148    |   | $ |  532 |   |
| Income taxes paid                                                               |       | $                      |  726    |   | $ |  1,940 |   |
| Property, plant and equipment acquired or refinanced  under long-term debt      |       | $                      |  257    |   | $ |  385 |   |

 

*See notes to condensedconsolidated financial statements.*

 

6

----

Table ofContents

 

**STARTEK, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(In thousands, except pershare data)

 

**1.  BASIS OF PRESENTATION**

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements.  Thesefinancial statements reflect all adjustments (consisting only of normalrecurring entries, except as noted) which, in the opinion of management, arenecessary for fair presentation. Operating results during the three and nine months ended September 30,2009, are not necessarily indicative of operating results that may be expectedduring any other interim period of 2009 or the year ending December 31,2009.  We have evaluated all subsequentevents through October 30, 2009, the date the financial statements wereissued.

 

The consolidated balancesheet as of December 31, 2008, was derived from audited financialstatements at that date, but does not include all information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. For further information, refer to the consolidated financial statementsand footnotes thereto included in the StarTek, Inc. Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

Certain reclassificationshave been made to 2008 information to conform to 2009 presentation due to thepresentation of discontinued operations (see Note 5).

 

Unless otherwise noted inthis report, any description of “us” refers to StarTek, Inc. and oursubsidiaries.  The assets and liabilitiesof our foreign operations that are recorded in foreign currencies aretranslated into U.S. dollars at exchange rates prevailing at the balance sheetdate.  Revenues and expenses aretranslated at the weighted-average exchange rate during the reporting period.

 

***RecentlyAdopted Accounting Pronouncements***

 

Effective July 1,2009, we adopted the Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) 105-10, “GenerallyAccepted Accounting Principles — Overall” (“ASC 105-10”).  ASC 105-10 establishes the FASB Accounting Standards Codification**(the “Codification”) as the sourceof authoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inconformity with U.S. GAAP. Rules and interpretive releases of the SECunder authority of federal securities laws are also sources of authoritativeU.S. GAAP for SEC registrants. All guidance contained in the Codificationcarries an equal level of authority. The Codification superseded all existingnon-SEC accounting and reporting standards. All other non-grandfathered,non-SEC accounting literature not included in the Codification isnon-authoritative. The FASB has indicated that it will not issue new standardsin the form of Statements, FASB Staff Positions or Emerging Issues Task ForceAbstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). TheFASB will not consider ASUs as authoritative in their own right. ASUs willserve only to update the Codification, provide background information about theguidance and provide the bases for conclusions on the change(s) in theCodification. References made to FASB guidance throughout this document havebeen updated for the equivalent references under the Codification.

 

Effective January 1,2009, we adopted FASB ASC 820-10, “Fair Value Measurements and Disclosures —Overall” (“ASC 820-10”), formerly Statement of Financial Accounting Standards No. 157,“Fair Value Measurements”, for all non-financial assets and non-financialliabilities, except for items that are recognized or disclosed at fair value ona recurring basis (at least annually) for which ASC 820-10 was previouslyadopted.  Refer to Note 9, “Fair ValueMeasurements,” of this Form 10-Q for additional information on theadoption of ASC 820-10.

 

Effective January 1,2009, we adopted FASB ASC 815-10, “Derivatives and Hedging — Overall” (“ASC815-10”), formerly Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133”.  ASC 815-10requires entities to provide greater transparency through additionaldisclosures about (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for and (c) howderivative instruments and related hedged items affect an entity’s financialposition, results of operations and cash flows. Refer to Note 8, “DerivativeInstruments,” of this Form 10-Q for additional information.

 

We adopted FASBASC 805, “Business Combinations” (“ASC 805”), formerly Statement of FinancialAccounting Standards No. 141(R), “Business Combinations”, whichsignificantly changed the accounting for and reporting of business combinationtransactions. This standard was effective for us for business combinationtransactions for which the acquisition date was on or after January 1,2009. No business combination transactions occurred during the nine monthsended September 30, 2009.

 

7

----

Table of Contents

 

Effective April 1,2009, we adopted FASB ASC 320-10-65, “Investments— Debt and Equity Securities — Overall — Transition and Open Effective DateInformation” (“ASC 320-10-65”), formerly FASB Staff Position No. 115-2and Statement of Financial Accounting Standards No. 124-2, “Recognitionand Presentation of Other-Than-Temporary Impairments”.  ASC 320-10-65 amends the other-than-temporaryimpairment guidance in U.S. GAAP for debt securities through increasedconsistency in the timing of impairment recognition and enhanced disclosuresrelated to the credit and noncredit components of impaired debt securities thatare not expected to be sold. In addition, increased disclosures are requiredfor both debt and equity securities regarding expected cash flows, creditlosses, and securities with unrealized losses. Refer to Note 7, “Investments”,of this Form 10-Q for the relevant disclosures required by adoption of ASC320-10-65.  The adoption of ASC 320-10-65did not have a material impact on our financial statements.

 

Effective April 1,2009, we adopted FASB ASC 825-10-65, “FinancialInstruments — Overall — Transition and Open Effective Date Information”(“ASC 825-10-65”), formerly FASB Staff Position No. 107-1 and APB Opinion No. 28-1,“Interim Disclosures about Fair Value of Financial Instruments” (“ASC 270-10”).  ASC 825-10-65 amends ASC 825-10 to requiredisclosures about fair value of financial instruments in interim financialstatements as well as in annual financial statements and also amends ASC 270-10to require those disclosures in all interim financial statements. The adoptionof ASC 825-10-65 did not have a material impact on our financial statements.

 

Effective April 1,2009, we adopted FASB ASC 855-10, “SubsequentEvents — Overall”**(“ASC855-10”), formerly Statement of Financial Accounting Standards No. 165, “SubsequentEvents”. ASC 855-10 establishes the accounting for and disclosure of eventsthat occur after the balance sheet date but before financial statements areissued or are available to be issued. It requires the disclosure of the datethrough which an entity has evaluated subsequent events and the basis for thatdate, that is, whether that date represents the date the financial statementswere issued or were available to be issued. Refer to this Note 1, “Basis of Presentation,” for the relateddisclosures. The adoption of ASC 855-10 did not have a material impact on ourfinancial statements.

 

**2.  SEGMENT INFORMATION**

 

We operate withinthree business segments, U.S., Canada and Offshore.  The business segments align with thoseregions in which our services are rendered. As of September 30, 2009, the U.S. segment included the operationsof our thirteen facilities in the U.S., the Canada segment included theoperations of our five facilities in Canada and the Offshore segment includedthe operations of one facility in Makati City, Philippines.  We use gross profit as our measure of profitand loss for each business segment and do not allocate selling, general andadministrative expenses to our business segments.

 

Information aboutour reportable segments, which correspond to the geographic areas in which weoperate, is as follows:

 
| ** **        | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **        | ** ** | **2009**                                          | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenue:**      |       |                                              |       |                                             |       |   |   |   |   |
| United States     |       | $                                                 | 50,490     |                                             | $          | 47,293 |   | $ | 151,887 |   | $ | 129,018 |   |
| Canada            |       | 18,799                                            |       | 21,592                                           |       | 57,212 |   | 69,917 |   |
| Offshore          |       | 3,173                                             |       | 52                                               |       | 7,364 |   | 52 |   |
| Total             |       | $                                                 | 72,462     |                                             | $          | 68,937 |   | $ | 216,463 |   | $ | 198,987 |   |
|              |       |                                              |       |                                             |       |   |   |   |   |
| **Gross profit:** |       |                                              |       |                                             |       |   |   |   |   |
| United States     |       | $                                                 | 9,848      |                                             | $          | 7,475 |   | $ | 28,730 |   | $ | 21,720 |   |
| Canada            |       | 3,400                                             |       | 1,242                                            |       | 8,414 |   | 4,768 |   |
| Offshore          |       | 226                                               |       | (508                                             | )          | 182 |   | (508 | ) |
| Total             |       | $                                                 | 13,474     |                                             | $          | 8,209 |   | $ | 37,326 |   | $ | 25,980 |   |

 

**3.  NET INCOME (LOSS) PER SHARE**

 

Basic and diluted netincome (loss) per common share is computed on the basis of our weighted averagenumber of common shares outstanding, as determined by using the calculationsoutlined below:

 

8

----

Table of Contents

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                              | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                    |       |                   |       |                   |       |   |   |   |   |
| Income (loss) from continuing operations                |       | $                      | 1,795      |                   | $          | (1,503 | ) | $ | (866 | ) | $ | (6,494 | ) |
| (Loss) income from discontinued operations, net of  tax |       | —                 |       | (407                   | )          | 4,640 |   | (266 | ) |
| Net income (loss)                                       |       | $                      | 1,795      |                   | $          | (1,910 | ) | $ | 3,774 |   | $ | (6,760 | ) |
|                                                    |       |                   |       |                   |       |   |   |   |   |
| Weighted average shares of common stock                 |       | 14,808                 |       | 14,708                 |       | 14,781 |   | 14,706 |   |
| Dilutive effect of stock options                        |       | 204                    |       | —                 |       | — |   | — |   |
| Common stock and common stock equivalents               |       | 15,012                 |       | 14,708                 |       | 14,781 |   | 14,706 |   |
|                                                    |       |                   |       |                   |       |   |   |   |   |
| Basic net income (loss) per share from:                 |       |                   |       |                   |       |   |   |   |   |
| Continuing operations                                   |       | $                      | 0.12       |                   | $          | (0.10 | ) | $ | (0.06 | ) | $ | (0.44 | ) |
| Discontinued operations                                 |       | —                 |       | (0.03                  | )          | 0.32 |   | (0.02 | ) |
| Net income (loss)                                       |       | $                      | 0.12       |                   | $          | (0.13 | ) | $ | 0.26 |   | $ | (0.46 | ) |
|                                                    |       |                   |       |                   |       |   |   |   |   |
| Diluted net income (loss) per share from:               |       |                   |       |                   |       |   |   |   |   |
| Continuing operations                                   |       | $                      | 0.12       |                   | $          | (0.10 | ) | $ | (0.06 | ) | $ | (0.44 | ) |
| Discontinued operations                                 |       | —                 |       | (0.03                  | )          | 0.32 |   | (0.02 | ) |
| Net income (loss)                                       |       | $                      | 0.12       |                   | $          | (0.13 | ) | $ | 0.26 |   | $ | (0.46 | ) |

 

Diluted earnings pershare is computed on the basis of our weighted average number of common sharesoutstanding plus the effect of dilutive outstanding stock options and non-vestedrestricted stock using the treasury stock method.  Anti-dilutive securities totaling 847 in thethree months ended September 30, 2009, were not included in ourcalculation because the stock options’ exercise prices were greater than theaverage market price of the common shares during such period, and anti-dilutivesecurities totaling 2,187 in the nine months ended September 30, 2009 werenot included in our calculation due to our net loss from continuing operationsduring such period.  Anti-dilutivesecurities totaling 1,735 and 1,735 in the three and nine months ended September 30,2008, respectively, were not included in our calculation due to our net lossfrom continuing operations during those periods.

 

**4.  IMPAIRMENT LOSSES AND RESTRUCTURING CHARGES**

 

***ImpairmentLosses***

 

During the nine monthsended September 30, 2009, we incurred $1,756 of impairment losses in ourCanadian segment, due to the impairment of certain long-lived assets for whichthe carrying value of those assets is not recoverable.  These assets are located in a facility forwhich we are uncertain about our ability to generate future cash flows tosupport the carrying value of these assets. The long-lived assets include computer and telephone equipment,furniture and fixtures, leasehold improvements and software.  Refer to Note 9, “Fair Value Measurements,”of this Form 10-Q, for additional information on the fair valuemeasurements for all assets and liabilities that are measured at fair value inthe Condensed Consolidated Financial Statements.

 

***RestructuringCharges***

 

In August 2007, August 2008, December 2008 and February 2009,we closed facilities in Hawkesbury, Ontario, Big Spring, Texas, Petersburg,Virginia and Regina, Saskatchewan, respectively.  We have recorded restructuring chargesrelated to lease costs and other expenses related to the facilityclosures.  In accordance with FASB ASC420-10, “Exit or Disposal Cost Obligations,” formerly Statement of FinancialAccounting Standards No. 146, “Accounting for Costs Associated with Exitor Disposal Activities” (“ASC 420-10”), we recognized the liability when it wasincurred, instead of upon commitment to a plan. A significant assumption used in determining the amount of estimatedliability incurred in closing a facility is the estimated liability for futurelease payments on vacant facilities.  Ifthe assumptions regarding early termination and the timing and amounts ofsublease payments prove to be inaccurate, we may be required to record additionallosses, or conversely, a future gain, in our Condensed Consolidated Statementsof Operations.

 

During the nine monthsended September 30, 2009, we entered into an agreement with therespective landlords at the facilities in Big Spring, Texas and Petersburg,Virginia to buy-out our remaining lease obligations for $184 and $813,respectively.  As of September 30,2009, these payments have been made and we do not expect to incur anyadditional charges.  In October 2009,we entered into an agreement with the landlord at the facility in Hawkesbury,Ontario to buy-out the remaining lease obligation for $1,125 Canadian dollars,which was paid in October 2009.  Wedo not expect to incur any additional charges in Hawkesbury.  The cumulative amount paid as of September 30,2009 related to the closure of the facility in Regina, Saskatchewan is $938 andwe expect to incur total

 

9

----

Table of Contents

 

restructuring charges of$5,580 (adjusted for the September 30, 2009 Canadian dollar to U.S. dollarexchange rate).  We expect completion ofthe Regina restructuring plan no later than 2013; however, it may be earlierdepending on our ability to sublease the facility or buy-out the lease.  Refer to Note 9, “Fair Value Measurements,”of this Form 10-Q, for additional information on the fair valuemeasurements for all assets and liabilities, including restructuring charges,that are measured at fair value in the Condensed Consolidated FinancialStatements.

 

A summary of the activity under the restructuring plans as of September 30,2009, and changes during the nine months ended September 30, 2009 ispresented below:

 
| ** **                              | ** ** | **Facility-Related Costs** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **Hawkesbury**             | ** ** | **Regina** | ** ** | **Canada  Total** | ** ** | **Big Spring** | ** ** | **Petersburg** | ** ** | **U.S. Total** | ** ** | **Company  Total** | ** ** |
| Balance as of January 1, 2009      |       | $                          | 1,099      |   | $ | — |   | $ | 1,099 |   | $ | 208 |   | $ | 1,402 |   | $ | 1,610 |   | $ | 2,709 |   |
| Expense                                 |       | 16                         |       | 4,436 |   | 4,452 |   | 31 |   | 198 |   | 229 |   | 4,681 |   |
| Payments                                |       | (363                       | )          | (938 | ) | (1,301 | ) | (239 | ) | (1,334 | ) | (1,573 | ) | (2,874 | ) |
| Reclassification of long-term liability |       | 175                        |       | 202 |   | 377 |   | — |   | (266 | ) | (266 | ) | 111 |   |
| Foreign currency translation adjustment |       | 125                        |       | 716 |   | 841 |   | — |   | — |   | — |   | 841 |   |
| Balance as of September 30, 2009   |       | $                          | 1,052      |   | $ | 4,416 |   | $ | 5,468 |   | $ | — |   | $ | — |   | $ | — |   | $ | 5,468 |   |

 

**5.  DISCONTINUED OPERATIONS**

 

OnFebruary 25, 2009, we entered into an agreement to sell the assets ofDomain.com, our wholly owned subsidiary, to A. Emmet Stephenson, Jr., Inc.(“Mr. Stephenson”) in exchange for cash of $7,075.  The assets of Domain.com consist of domainnames, trademarks and corporation names. We conducted an auction for the assets and received bids from multipleparties, including Mr. Stephenson.  Mr. Stephensonpresented the highest bid, which represented the selling price, of $7,075 andthe sale was completed effective February 25, 2009.  Mr. Stephenson is one of ourco-founders, has managed the Domain.com subsidiary since 2006 and ownsapproximately 20% of our common shares outstanding.  Because the transaction involved a relatedparty, the Audit Committee of our Board of Directors considered and approvedthe transaction.  The results ofoperations and cash flows of Domain.com have been reported in the CondensedConsolidated Statements of Operations as discontinued operations.

 

Duringthe three and nine months ended September 30, 2008, we recorded a lossfrom discontinued operations of $461 due to the write-off of the principal on anote receivable related to the sale of our supply chain management servicesplatform in December 2005.  We wroteoff $740 for principal balance on the note receivable, less a tax benefit of$279.

 

Thefollowing table summarizes the results of discontinued operations:

 
| ** **                                                         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Operating income from discontinued operations before  income taxes |       | $                                         | —     |                                     | $          | 86 |   | $ | 27 |   | $ | 312 |   |
| (Loss) gain on the sale of discontinued operations                 |       | —                                    |       | (740                                     | )          | 6,937 |   | (740 | ) |
| Income tax benefit (expense)                                       |       | —                                    |       | 247                                      |       | (2,324 | ) | 162 |   |
| (Loss) income from discontinued operations, net of  tax            |       | $                                         | —     |                                     | $          | (407 | ) | $ | 4,640 |   | $ | (266 | ) |

 

**6.  PRINCIPAL CLIENTS**

 

The followingtable represents revenue concentration of our principal clients.

 
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                    | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| AT&T Services, Inc. and AT&T Mobility,  LLC, subsidiaries of AT&T, Inc. |       | 62.7                   | %          | 56.5                   | %          | 63.9 | % | 52.7 | % |
| T-Mobile USA, Inc., a subsidiary of Deutsche  Telekom                                    |       | 21.9                   | %          | 26.4                   | %          | 21.6 | % | 27.6 | % |

 

The call center servicesagreement with T-Mobile USA, Inc. (see Exhibit 10.120 to our Form 10-Qfiled on November 6, 2007) is effective as of October 1, 2007 and hasan initial term of two years.  After theinitial term, the contract automatically renews for one-

 

10

----

Table of Contents

 

year periods thereafter,unless either party provides written notice of termination at least 60 daysprior to the expiration of the then-current term.  Although the initial term of the contractended on September 30, 2009, the contract automatically renewed for aone-year term which would expire on September 30, 2010.  We are currently negotiating a new contractwith T-Mobile USA, Inc. and expect to execute the agreement during the fourthquarter of 2009.  Until the new agreementis signed, our services provided to T-Mobile USA, Inc. are covered underthe existing agreement effective October 1, 2007.

 

The loss of a principalclient and/or changes in timing or termination of a principal client’s productlaunch, volume delivery or service offering would have a material adverseeffect on our business, revenue, operating results, and financialcondition.  To limit our credit risk,management from time to time will perform credit evaluations of our clients.Although we are directly impacted by the economic conditions in which ourclients operate, management does not believe substantial credit risk existed asof September 30, 2009.

 

**7.  INVESTMENTS**

 

Investmentsavailable for sale consisted of:

 
| ** **                     | ** ** | **Basis** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|--------------------------------|------------|-----------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| As of September 30, 2009: |       |      |       |                         |       |                          |       |           |       |
| Corporate debt securities      |       | $         | 493        |                         | $          | 3                             |       | $              | —     |   | $ | 499 |   |
|                           |       |      |       |                         |       |                          |       |           |       |
| As of December 31, 2008:  |       |      |       |                         |       |                          |       |           |       |
| Corporate debt securities      |       | $         | 8,513      |                         | $          | 9                             |       | $              | (85        | ) | $ | 8,437 |   |

 

As of September 30,2009, the investments in our portfolio have remaining contractual maturitieswithin one year.  There are noinvestments as of September 30, 2009 that have carried unrealized lossesfor longer than twelve months.  Refer toNote 9, “Fair Value Measurements,” of this Form 10-Q, for additionalinformation on the fair value measurements for all assets and liabilities,including investments, that are measured at fair value in the CondensedConsolidated Financial Statements. Proceeds from the sale of investment securities available for sale were$0 and $8,021 for the three and nine months ended September 30, 2009,respectively, and $2,760 and $12,229 for the three and nine months ended September 30,2008, respectively.  Gross realized gainsincluded in other income were $0 and $5 for the three and nine months ended September 30,2009, respectively, and $0 and $0 for the three and nine months ended September 30,2008, respectively.  Gross realizedlosses included in other income were $0 and $3 for the three and nine monthsended September 30, 2009, respectively, and $437 and $437 for the threeand nine months ended September 30, 2008, respectively.  The loss recorded in the three and ninemonths ended September 30, 2008 was on Lehman Brothers corporate debtsecurities that were determined to be other-than-temporarily impaired aftertheir bankruptcy announcement.  Originalcost of investments available for sale is based on the specific identificationmethod.

 

The following table summarizes the aggregate fair value of thoseinvestments in a gross unrealized loss position:

 
| ** **                                                                       | ** ** | **As of**                   | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                       | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
| Investments in a continuous unrealized loss position  for less than 12 months    |       |                        |       |   |   |
| Aggregate unrealized losses on corporate debt  securities                        |       | $                           | —     |   | $ | (38 | ) |
| Aggregate fair value of corporate debt securities                                |       | —                      |       | 1,996 |   |
|                                                                             |       |                        |       |   |   |
| Investments in a continuous unrealized loss position  for greater than 12 months |       |                        |       |   |   |
| Aggregate unrealized losses on corporate debt  securities                        |       | $                           | —     |   | $ | (47 | ) |
| Aggregate fair value of corporate debt securities                                |       | —                      |       | 3,447 |   |

 

**8.  DERIVATIVE INSTRUMENTS**

 

We use derivatives topartially offset our business exposure to foreign currency exchange risk. Weenter into foreign currency exchange contracts to hedge our anticipatedoperating commitments that are denominated in foreign currencies.  The contracts cover periods commensurate withexpected exposure, generally within twelve months, and are principallyunsecured foreign exchange contracts. The market risk exposure is essentially limited to risk related tocurrency rate movements.  We operate inCanada and the Philippines and the functional currencies are the Canadiandollar and the Philippine peso, respectively, which are used to pay labor andother operating costs in those countries. However, our client contractsprimarily generate revenues which are paid to us in U.S. dollars.  We have elected to follow cash flow hedgeaccounting under ASC 815-10 in order to associate the

 

11

----

Table of Contents

 

results of the hedgeswith forecasted future expenses.  Thecurrent mark-to-market gain or loss is recorded in accumulated othercomprehensive income (“AOCI”) as a component of stockholders’ equity and willbe re-classified to operations as the forecasted expenses are incurred,typically within one year.  During thethree and nine months ended September 30, 2009 and 2008, our cash flowhedges were highly effective and there were no amounts charged to the CondensedConsolidated Statements of Operations for hedge ineffectiveness.

 

During the nine monthsended September 30, 2009, we entered into Canadian dollar forwardcontracts with Wells Fargo Bank for a notional amount of $13,500 Canadiandollars to hedge our foreign currency risk with respect to labor costs inCanada.  As of September 30, 2009,we have not entered into any arrangements to hedge our exposure to fluctuationsin the Philippine peso relative to the U.S. dollar.

 

The following table shows the notional principal of our derivativeinstruments as of September 30, 2009:

 
| ** **                                    | ** ** | **Currency**    | ** ** | **Notional  Principal** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-------------------------|------------|
| Instruments  qualifying as accounting hedges: |       |            |       |                    |       |
| Foreign  exchange contracts                   |       | Canadian dollar |       | CDN$                    | 14,550     |   |
|                                               |            |                 |            |                         |            |  |

 

The above foreignexchange contracts are to be delivered periodically through December 2009at a purchase price which is no more than $17,671 and no less than$17,453.  The estimates of fair value arebased on applicable and commonly used pricing models and prevailing financialmarket information as of September 30, 2009.  Refer to Note 9, “Fair Value Measurements,”of this Form 10-Q, for additional information on the fair valuemeasurements for all assets and liabilities, including derivative assets andderivative liabilities, that are measured at fair value in the CondensedConsolidated Financial Statements.

 

The followingtable shows our derivative instruments measured at gross fair value asreflected in the Condensed Consolidated Balance Sheet as of September 30,2009:

 
| ** **                 | ** ** | **Fair Value of  Derivatives Designated  as Hedge Instruments** | ** ** | **Fair value of  derivatives not  designated as hedge  instruments** | ** ** |
|----------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Derivative assets:         |       |                                                            |       |                                                                 |       |
| Foreign exchange contracts |       | $                                                               | 1,477      |                                                                 | $          | — |   |
|                       |       |                                                            |       |                                                                 |       |
| Derivative liabilities:    |       |                                                            |       |                                                                 |       |
| Foreign exchange contracts |       | $                                                               | —     |                                                                 | $          | — |   |

 

The followingtable shows the effect of our derivative instruments designated as cash flowhedges in the Condensed Consolidated Statement of Operations for the three andnine months ended September 30, 2009:

 

12

----

Table ofContents

 
| ** **                 | ** ** | **Three Months Ended**                    | ** ** | ** **                                     | ** ** |
|----------------------------|------------|-------------------------------------------|------------|------------------------------------------------|------------|
| ** **                 | ** ** | **September 30, 2009**               | ** ** | **September 30, 2008**                    | ** ** | **Location of Gain** | ** ** |
| ** **                 | ** ** | **Gain  Recognized in  AOCI, net of tax** | ** ** | **Gain  Reclassified  from AOCI into  Income** | ** ** | **Loss  Recognized in  AOCI, net of tax** | ** ** | **Loss  Reclassified  from AOCI into  Income** | ** ** | **(Loss)  Reclassified from  AOCI into  Income** | ** ** |
| Cash flow hedges:          |       |                                      |       |                                           |       |   |   |   |   |   |   |
| Foreign exchange contracts |       | $                                         | 358        |                                           | $          | 1,125 |   | $ | (585 | ) | $ | (461 | ) | Cost of services |   |
|                            |            |                                           |            |                                                |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                 | ** ** | **Nine Months Ended**                     | ** ** | ** **                                     | ** ** |
|----------------------------|------------|-------------------------------------------|------------|------------------------------------------------|------------|
| ** **                 | ** ** | **September 30, 2009**               | ** ** | **September 30, 2008**                    | ** ** | **Location of Gain** | ** ** |
| ** **                 | ** ** | **Gain  Recognized in  AOCI, net of tax** | ** ** | **Loss  Reclassified  from AOCI into  Income** | ** ** | **Loss  Recognized in  AOCI, net of tax** | ** ** | **Loss  Reclassified  from AOCI into  Income** | ** ** | **(Loss)  Reclassified from  AOCI into   Income** | ** ** |
| Cash flow hedges:          |       |                                      |       |                                           |       |   |   |   |   |   |   |
| Foreign exchange contracts |       | $                                         | 2,365      |                                           | $          | (506 | ) | $ | (626 | ) | $ | (752 | ) | Cost of services |   |
|                            |            |                                           |            |                                                |            |  |  |  |  |  |  |  |  |  |  |

 

**9.  FAIR VALUE MEASUREMENTS**

 

As of January 1,2009, we adopted ASC 820-10 for all non-financial assets and liabilities thatare recognized or disclosed at fair value in the financial statements. We hadpreviously adopted ASC 820-10 for all financial assets and liabilities.  ASC 820-10 defines fair value as the pricethat would be received from selling an asset or paid to transfer a liability inan orderly transaction between market participants at the measurement date.When determining the fair value measurements for assets and liabilities, whichare required to be recorded at fair value, we consider the principal or mostadvantageous market in which we would transact and the market-based riskmeasurements or assumptions that market participants would use in pricing theasset or liability, such as inherent risk, transfer restrictions, and creditrisk.

 

ASC 820-10 establishes afair value hierarchy that prioritizes the inputs to valuation techniques usedto measure fair value.  The hierarchygives the highest priority to unadjusted quoted prices in active markets foridentical assets or liabilities (level 1 measurements) and the lowest priorityto unobservable inputs (level 3 measurements). The levels of the fair value hierarchy under ASC 820-10 are describedbelow:

 

Level1                   Valuation is based upon quoted prices for identicalinstruments traded in active markets.

 

Level2                   Valuation is based upon quoted prices for similarinstruments in active markets, quoted prices for identical or similarinstruments in markets that are not active, and model-based valuationtechniques for which all significant assumptions are observable in the market.

 

Level3                   Valuation is generated from model-based techniquesthat use significant assumptions not observable in the market.  These unobservable assumptions reflect ourown estimates of assumptions that market participants would use in pricing theasset or liability.  Valuation techniquesinclude use of option pricing models, discounted cash flow models and similartechniques.

 

***Investments***

 

As of September 30,2009 and December 31, 2008, our investments consisted entirely ofcorporate debt securities.  Our corporatedebt securities are valued using third-party broker statements, which isderived from quoted market information. The inputs to the valuation are generally classified as Level 1 giventhe active market for these securities, however, if an active market does notexist, the inputs are recorded at a lower level in the fair value hierarchy.

 

***Derivative Instruments and Hedging Activities***

 

Our derivativeinstruments are valued using third-party broker or counterparty statements,derived from pricing models using inputs based upon market information,including contractual terms, market prices and yield curves.  The inputs to the valuation pricing modelsare observable in the market, and as such are generally classified as Level 2in the fair value hierarchy.

 

13

----

Table ofContents

 

***Restructuring Charges***

 

ASC 420-10specifies that a liability for a cost associated with an exit or disposalactivity be recognized when the liability is incurred, instead of uponcommitment to an exit plan.  On anongoing basis, management assesses the profitability and utilization of ourfacilities and in some cases management has chosen to close facilities.  Accrued restructuring costs were valued usinga discounted cash flow model. Significant assumptions used in determining the amount of the estimatedliability for closing a facility are the estimated liability for future leasepayments on vacant facilities, which we determine based on a third-party broker’sassessment of our ability to successfully negotiate early terminationagreements with landlords and/or to sublease the facility, and the discountrate utilized to determine the present value of the future expected cash flows.If the assumptions regarding early termination and the timing and amounts ofsublease payments prove to be inaccurate, we may be required to recordadditional losses, or conversely, a future gain, in the Condensed ConsolidatedStatements of Operations.

 

As described in Note 4, “ImpairmentLosses and Restructuring Charges,” during the nine months ended September 30,2009, we closed our facility in Regina, Saskatchewan, which resulted in $0 and$4,436 of accrued restructuring costs during the three and nine months ended September 30,2009.  These costs were valued using adiscounted cash flow model.  The cashflows consist of the future lease payment obligations required under the leaseagreement.  We assumed that we could notsublease the vacant facility for the remainder of the lease term based on ourknowledge of the Regina marketplace, as well as our historical inability tosublease our facilities in other locations in which we operate.  In the future, if we are able to sublease thefacility, we may be required to record a gain in the Condensed ConsolidatedStatements of Operations.  Future cashflows also include estimated property taxes through the remainder of the leaseterm, which are valued based upon historical tax payments.  The future cash flows were discounted using arate of 3%.  Given that the restructuringcharges were valued using our internal estimates using a discounted cash flowmodel, we have classified the accrued restructuring costs as Level 3 in thefair value hierarchy.

 

***Impairmentof Long-Lived Assets***

 

As described in Note 4, “ImpairmentLosses and Restructuring Charges,” during the three and nine months ended September 30,2009, we recorded approximately $0 and $1,756 of impairment losses in ourCanadian segment, due to the impairment of certain long-lived assets for whichthe carrying value of those assets is not recoverable.  These assets are located in a facility forwhich we do not have long-term customer commitments and therefore, we areuncertain about our ability to generate future cash flows to support thecarrying value of these assets.  Thelong-lived assets include computer and telephone equipment, furniture andfixtures, leasehold improvements and software. For assets which were not recoverable through future cash flows or couldnot be used in another facility, we reduced the carrying value to fairvalue.  The fair value of theselong-lived assets after the impairment charge was $228.  Given that the impairment losses were valuedusing internal estimates, we have classified the remaining fair value oflong-lived assets as Level 3 in the fair value hierarchy.

 

***FairValue Hierarchy***

 

The following tables setforth our assets and liabilities measured at fair value on a recurring basisand a non-recurring basis by level within the fair value hierarchy.  As required by ASC 820-10, assets andliabilities are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement.

 
| ** **                                                | ** ** | **Assets Measured at Fair Value**                      | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                | ** ** | **on a Recurring Basis as of September 30, 2009** | ** ** |
| ** **                                                | ** ** | **Level 1**                                            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                   | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate debt securities                                 |       | $                                                      | 499        |   | $ | — |   | $ | — |   | $ | 499 |   |
| Derivative instruments                                    |       | —                                                 |       | 1,477 |   | — |   | 1,477 |   |
| Total fair value of assets measured on a recurring  basis |       | $                                                      | 499        |   | $ | 1,477 |   | $ | — |   | $ | 1,976 |   |

 

14

----

Table ofContents

 
| ** **                                                         | ** ** | **Assets  and Liabilities Measured at Fair Value on a**                       | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Non-Recurring  Basis During the Nine Months ended September 30, 2009** | ** ** |
| ** **                                                         | ** ** | **Level 1**                                                                   | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                            |       |                                                                          |       |   |   |   |   |   |   |
| Property, plant and equipment, net                                 |       | $                                                                             | —     |   | $ | — |   | $ | 228 |   | $ | 228 |   |
| Total fair value of assets measured on a  non-recurring basis      |       | $                                                                             | —     |   | $ | — |   | $ | 228 |   | $ | 228 |   |
|                                                               |       |                                                                          |       |   |   |   |   |   |   |
| Liabilities:                                                       |       |                                                                          |       |   |   |   |   |   |   |
| Accrued restructuring costs                                        |       | $                                                                             | —     |   | $ | — |   | $ | 4,436 |   | $ | 4,436 |   |
| Total fair value of liabilities measured on a  non-recurring basis |       | $                                                                             | —     |   | $ | — |   | $ | 4,436 |   | $ | 4,436 |   |

 

**10.  DEBT**

 

OnJune 26, 2009, we entered into a business loan agreement, promissory noteand three commercial security agreements (together the “Agreement”) with UMBBank Colorado, N.A. (“UMB Bank”) for a $15 million secured revolving line ofcredit.  The Agreement is effective July 1,2009 through August 1, 2010.  ThisAgreement replaced our $10 million secured revolving line of credit with WellsFargo Bank N.A., which expired by its terms on June 30, 2009.  There was no balance outstanding on the line of creditwith UMB Bank as of September 30, 2009.

 

Borrowingsunder the Agreement bear interest, at our option at the time of the borrowing,of the thirty, sixty or ninety day LIBOR index, plus 1.75%.  The interest rate shall never be less than3.25% per annum.  Under the Agreement, wegranted UMB Bank a security interest in all of our present and future accountsreceivable, general intangibles, and owned real property.   In addition, under the Agreement, we aresubject to certain financial covenants, which include maintaining 1) a ratio oftotal liabilities to tangible net worth of less than 1.0 to 1.0, 2) a tangiblenet worth of at least $105 million, 3) unencumbered liquid assets, defined ascash, certificate of deposits and marketable securities, of at least $10million measured on the last day of each fiscal quarter and 4) a cash flow coverageratio, as defined in the Agreement, of greater than 1.50 to 1.0 measured on thelast day of each fiscal quarter for the previous twelve months.

 

Inaddition, during the nine months ended September 30, 2009, we paid off theremaining principal balance on the Secured Equipment Promissory Note betweenWells Fargo Equipment Finance, Inc. and StarTek USA, Inc., our whollyowned subsidiary, and the Canadian Dollar Secured Equipment Loan between WellsFargo Equipment Finance Company, Inc. and StarTek Canada Services, Ltd.,our wholly owned subsidiary.  The loanshad original maturities in November 2010. The total payoff on these loans, including pre-payment penalties, was$5,688.

 

**11.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**

 

FASB ASC 220-10, “ComprehensiveIncome”, formerly Statement of Financial Accounting Standards No. 130, “ReportingComprehensive Income,” establishes standards for reporting and display ofcomprehensive income. Comprehensive income is defined essentially as allchanges in stockholders’ equity, exclusive of transactions with owners. Thefollowing represents the components of other comprehensive income (loss):

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                           | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income (loss)                                                    |       | $                      | 1,795      |                   | $          | (1,910 | ) | $ | 3,774 |   | $ | (6,760 | ) |
| Other comprehensive income (loss):                                   |       |                   |       |                   |       |   |   |   |   |
| Foreign currency translation adjustments, net of tax                 |       | 495                    |       | (374                   | )          | 631 |   | (825 | ) |
| Change in fair value of derivative instruments, net  of tax          |       | 358                    |       | (585                   | )          | 2,365 |   | (626 | ) |
| Unrealized (loss) gain on available for sale  securities, net of tax |       | (1                     | )          | (138                   | )          | 50 |   | (205 | ) |
| Comprehensive income (loss)                                          |       | $                      | 2,647      |                   | $          | (3,007 | ) | $ | 6,820 |   | $ | (8,416 | ) |

 

15

----

Table of Contents

 

Accumulated othercomprehensive income (loss) consisted of the following items:

 
| ** **                                                         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Accumulated foreign currency translation  adjustments:             |       |                                      |       |                                     |       |   |   |   |   |
| Beginning balance                                                  |       | $                                         | 1,226      |                                     | $          | 2,102 |   | $ | 1,090 |   | $ | 2,553 |   |
| Translation adjustments, net of tax                                |       | 495                                       |       | (374                                     | )          | 631 |   | (825 | ) |
| Ending balance                                                     |       | $                                         | 1,721      |                                     | $          | 1,728 |   | $ | 1,721 |   | $ | 1,728 |   |
| Accumulated unrealized derivative gains (losses):                  |       |                                      |       |                                     |       |   |   |   |   |
| Beginning balance                                                  |       | $                                         | 563        |                                     | $          | (21 | ) | $ | (1,444 | ) | $ | 20 |   |
| Gain (loss) reclassified to earnings, net of tax                   |       | 703                                       |       | (288                                     | )          | (316 | ) | (470 | ) |
| Change in fair value of cash flow hedges, net of tax               |       | (345                                      | )          | (297                                     | )          | 2,681 |   | (156 | ) |
| Ending balance                                                     |       | $                                         | 921        |                                     | $          | (606 | ) | $ | 921 |   | $ | (606 | ) |
| Accumulated unrealized losses on available for sale  securities:   |       |                                      |       |                                     |       |   |   |   |   |
| Beginning balance                                                  |       | $                                         | (10        | )                                        | $          | (96 | ) | $ | (61 | ) | $ | (29 | ) |
| (Loss) gain reclassified to earnings, net of tax                   |       | —                                    |       | (273                                     | )          | (1 | ) | (273 | ) |
| Change in fair value of available for sale  securities, net of tax |       | (1                                        | )          | 135                                      |       | 51 |   | 68 |   |
| Ending balance                                                     |       | $                                         | (11        | )                                        | $          | (234 | ) | $ | (11 | ) | $ | (234 | ) |

 

**12.  SHARE-BASED COMPENSATION**

 

Compensation cost thathas been charged against income related to share-based compensation for thethree months ended September 30, 2009 and 2008 was $498 and $440,respectively, and is included in selling, general and administrativeexpense.  The compensation cost that hasbeen charged for the nine months ended September 30, 2009 and 2008 was$1,437 and $1,054, respectively.  Asummary of activity during the nine months ended September 30, 2009related to our equity awards is presented below.

 

***StockOptions***

 

A summary of optionactivity as of September 30, 2009, and changes during the nine months thenended is presented below:

 
| ** **                                | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                                | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** |
| Outstanding as of January 1, 2009    |       | 1,629      |       | $                    | 11.45      |   |
| Granted                                   |       | 726        |       | 4.60                 |       |
| Exercised                                 |       | —     |       | —               |       |
| Forfeited                                 |       | (138       | )          | 7.95                 |       |
| Expired                                   |       | (77        | )          | 15.90                |       |
| Outstanding as of September 30, 2009 |       | 2,140      |       | $                    | 9.20       |   |

 

***RestrictedShares***

 

Restricted share activityduring the nine months ended September 30, 2009 was as follows:

 
| ** **                                       | ** ** | **2007**              | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **Number of**         | ** ** | **Weighted-Average** | ** ** |
| ** **                                       | ** ** | **Restricted Shares** | ** ** | **Grant Date Fair Value** | ** ** |
| Non-vested balance as of January 1, 2009    |       | 62                    |       | $ | 10.45 |   |
| Granted                                          |       | 7                     |       | 4.76 |   |
| Vested                                           |       | (19                   | )          | 8.79 |   |
| Forfeited                                        |       | (3                    | )          | 9.01 |   |
| Non-vested balance as of September 30, 2009 |       | 47                    |       | $ | 10.14 |   |

 

**13.  INCOME TAXES**

 

The year-to-date effective tax rate for continuing operations decreasedfrom 37.6% during the nine months ended September 30, 2008 to 12.7% duringthe nine months ended September 30, 2009. The primary reasons for the decrease in the rate between periods is 1) alarger impact from the change in the Canadian statutory tax rates in2009 compared to 2008, 2) state income tax expense in 2009 compared to stateincome tax benefit in 2008 (due to pre-tax book income in the U.S. during 2009compared to a pre-tax book loss in the U.S. in 2008) and 3) meals andentertainment deductions.  The decrease inthe rate, and the corresponding decrease in the income tax benefit, were partiallyoffset by an increase in the rate and tax benefit from work opportunitycredits.

 

16

----

Table of Contents

 

Differences between U.S.statutory income tax rates and our effective tax rates for continuingoperations for the nine months ended September 30, 2009 and 2008 were:

 
| ** **                                           | ** ** | **Nine  Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| U.S. statutory tax rate                              |       | 35.0                                      | %          | 35.0 | % |
| Effect of state taxes (net of Federal benefit)       |       | (10.0                                     | )%         | 2.3 | % |
| Work opportunity credits                             |       | 34.2                                      | %          | 7.1 | % |
| Effect of change in Canadian tax rate                |       | (27.0                                     | )%         | (4.2 | )% |
| Other permanent items (i.e. meals and entertainment) |       | (16.8                                     | )%         | (1.9 | )% |
| Other, net                                           |       | (2.7                                      | )%         | (0.7 | )% |
| Total                                                |       | 12.7                                      | %          | 37.6 | % |

 

**14.  LITIGATION**

 

In our Annual Report on Form 10-Kfiled March 3, 2009, we described a federal securities class-actionlawsuit,*West Palm Beach Firefighters’Pension Fund v. StarTek, Inc.*, Civil Action No. 05-cv-01265-WDM-MEH(the “Litigation”).

 

On July 20, 2009, weexecuted a Stipulation of Settlement (“Stipulation”) with lead plaintiffs tosettle the Litigation.  Under the termsof the Stipulation, defendants will pay $7,500 to completely resolve theLitigation, in exchange for a release of all claims by lead plaintiffs andclass members and a dismissal of the Litigation with prejudice.  Our primary insurance carrier has contributed$6,900 and we contributed $600 to the Settlement Fund (as defined in the Stipulation).  The United States District Court for theDistrict of Colorado (the “Court”) granted preliminary approval for thesettlement on October 8, 2009.  Thecompletion of the settlement as set forth in the Stipulation remains subject tovarious conditions, including notice to the class members, a final hearing, andfinal approval by the Court.  Our portion of the settlement due, or $600,was recorded in our Condensed Consolidated Statement of Operations during thenine months ended September 30, 2009 and was paid in October 2009.

 

We are involved from timeto time in other litigation arising in the normal course of business, none ofwhich is expected by management to have a material adverse effect on ourbusiness, financial condition or results of operations.

 

**SUBSEQUENT EVENT**

 

In October 2009, weentered into an agreement with the landlord at our closed facility inHawkesbury, Ontario to buy-out the remaining lease obligation.  We closed the facility in August 2007and recorded restructuring costs associated with the remaining leaseobligations at the facility.  Theoriginal lease was due to expire in 2012. The buy-out was $1,125 Canadian dollars, which was paid in October 2009.  There was no impact on our consolidatedstatements of operations during the three or nine months ended September 30,2009 related to the buy-out.  We do notexpect to incur any additional charges related to the Hawkesbury closure.

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussion and analysis should be read in conjunction with our UnauditedConsolidated Financial Statements and related Notes included elsewhere in thisQuarterly Report on Form 10-Q and in our Annual Report on Form 10-Kfor the year ended December 31, 2008, and with the information under theheading “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in our Annual Report on Form 10-K for the yearended December 31, 2008.

 

Unlessotherwise noted in this report, any description of “us” or “we” refers toStarTek, Inc. and our subsidiaries. Financial information in this report is presented in U.S. dollars.

 

**BUSINESSDESCRIPTION AND OVERVIEW**

 

StarTek is aprovider of business process outsourcing services to the communicationsindustry.  We partner with our clients tomeet their business objectives and improve customer retention, increaserevenues and reduce costs through an improved customer experience.  Our solutions leverage industry knowledge,best business practices, skilled agents, proven operational excellence andflexible technology.  The StarTekcomprehensive service suite includes customer care, sales support, complexorder processing, accounts receivable management, technical support and otherindustry-specific processes.  We operateour business within three reportable segments, based on the geographic regionsin which our services are rendered: (1) the U.S., (2) Canada and (3) Offshore.  As of September 30, 2009, our U.S.segment included the operations of our thirteen facilities in the U.S.; ourCanada segment 

 

17

----

Table of Contents

 

included theoperations of our five facilities in Canada; and our Offshore segment includedthe operations of a facility in Makati City, Philippines.  As of September 30, 2008, there werefourteen, six and one operating centers in the U.S., Canada and Offshoresegments, respectively.  We use grossprofit as our measure of profit and loss for each business segment and do notallocate selling, general and administrative expenses to our business segments.

 

We endeavor toachieve site optimization at all of our locations by routinely evaluating siteperformance.  If local economicconditions, prevailing wage rates, local labor pool availability and quality,or other factors, negatively impact the long-term financial viability of alocation, management will from time to time make the decision to close afacility.  As a result, we may incurimpairment losses or restructuring charges in connection with the closure.  Likewise, management is continually inpursuit of opportunities to open new locations in economically viable geographicmarkets, subject to client demand, in order to improve profitability and growthe business.

 

**SIGNIFICANTDEVELOPMENTS DURING THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009**

 

In February 2009, weclosed our facility in Regina, Saskatchewan. The closure of our Regina facility was driven by market conditions,namely recruiting challenges in this location, which impacted the profitabilityof the site and management determined it was in our long-term interest to closethe location.   This closure resulted inapproximately $2.5 million and $7.8 million less revenue during the three andnine months ended September 30, 2009, respectively, and increased grossprofit by $0.3 million and $0.4 million during the three and nine months ended September 30,2009, respectively, compared to the comparable periods ended September 30,2008 due to negative gross profit at this facility in 2008.  We also incurred restructuring charges ofapproximately $4.4 million during the nine months ended September 30, 2009related to the closure, which is discussed in further detail below.

 

OnFebruary 25, 2009, we entered into an agreement to sell the assets ofDomain.com, our wholly owned subsidiary, to A. Emmet Stephenson, Jr., Inc.(“Mr. Stephenson”) in exchange for cash of $7.075 million.  The assets of Domain.com consist of domainnames, trademarks and corporation names. We conducted an auction for the assets and received bids from multipleparties, including Mr. Stephenson.  Mr. Stephensonpresented the highest bid, which represented the selling price, of $7.075million and the sale was completed effective February 25, 2009.  Mr. Stephenson is one of ourco-founders, has managed the Domain.com subsidiary since 2006 and ownsapproximately 20% of our common shares outstanding.  Because the transaction involves a related party,the Audit Committee of our Board of Directors considered and approved thetransaction.  The results of operationsand cash flows of Domain.com have been reported as discontinued operations.

 

In July 2009,we entered into a lease agreement for the rental of a facility in Heredia,Costa Rica.  The lease has an initialterm of five years with a tenant option for an additional five years.  The facility is approximately 37,000 squarefeet and we expect to open the facility for operations during the first quarterof 2010.  Total lease commitments for therental of this facility are approximately $4.5 million over the term of thelease.

 

InAugust 2009, weentered into an agreement with the landlord at our closed facility inPetersburg, Virginia to buy-out the remaining lease obligation.  We closed the facility in December 2008and recorded restructuring costs associated with the remaining leaseobligations at the facility.  Theoriginal lease was due to expire in 2013. The buy-out was $0.8 million dollars, which was paid in August 2009.  There was no impact on our condensedconsolidated statements of operations during the period related to the buy-outand we do not expect to incur any additional charges related to the Petersburgclosure.

 

**SUBSEQUENT EVENT**

 

In October 2009, weentered into an agreement with the landlord at our closed facility inHawkesbury, Ontario to buy-out the remaining lease obligation.  We closed the facility in August 2007and recorded restructuring costs associated with the remaining leaseobligations at the facility.  Theoriginal lease was due to expire in 2012. The buy-out was $1.125 million Canadian dollars, which was paid in October 2009.  There was no impact on our condensedconsolidated statements of operations during the three or nine months endedSeptember 30, 2009 related to the buy-out. We do not expect to incur any additional charges related to theHawkesbury closure.

 

18

----

Table of Contents

 

**RESULTS OF OPERATIONS — THREEMONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008**

 

The following tablepresents selected items from our Condensed Consolidated Statements ofOperations in thousands of dollars and as a percentage of revenue for theperiods indicated.

 
| ** **                                                    | ** ** | **Three Months Ended  September 30, 2009** | ** ** | **% of   Revenue** | ** ** | **Three Months Ended  September 30, 2008** | ** ** | **% of  Revenue** | ** ** | **% Change  Q3 2008 to  Q3 2009** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------|------------|-------------------------------------------------|------------|-------------------|------------|-----------------------------------|------------|
| Revenue                                                       |       | $                                               | 72,462     |               | 100.0      | %                                               | $          | 68,937            |       | 100.0                             | %          | 5.1 | % |
| Cost of services                                              |       | 58,988                                          |       | 81.4               | %          | 60,728                                          |       | 88.1              | %          | -2.9                              | %          |
| Gross profit                                                  |       | 13,474                                          |       | 18.6               | %          | 8,209                                           |       | 11.9              | %          | 64.1                              | %          |
| Selling, general and administrative expenses                  |       | 11,084                                          |       | 15.3               | %          | 10,205                                          |       | 14.8              | %          | 8.6                               | %          |
| Impairment losses and restructuring charges                   |       | —                                          |       | 0.0                | %          | 346                                             |       | 0.5               | %          | -100.0                            | %          |
| Operating income (loss)                                       |       | 2,390                                           |       | 3.3                | %          | (2,342                                          | )          | -3.4              | %          | NM                                |       |
| Net interest and other (expense) income                       |       | (38                                             | )          | -0.1               | %          | (304                                            | )          | -0.4              | %          | NM                                |       |
| Income (loss) from continuing operations before  income taxes |       | 2,352                                           |       | 3.2                | %          | (2,646                                          | )          | -3.8              | %          | NM                                |       |
| Income tax expense (benefit)                                  |       | 557                                             |       | 0.7                | %          | (1,143                                          | )          | -1.6              | %          | NM                                |       |
| Net income (loss) from continuing operations                  |       | 1,795                                           |       | 2.5                | %          | (1,503                                          | )          | -2.2              | %          | NM                                |       |
| Income from discontinued operations, net of tax               |       | —                                          |       | 0.0                | %          | (407                                            | )          | -0.6              | %          | -100.0                            | %          |
| Net income (loss)                                             |       | $                                               | 1,795      |               | 2.5        | %                                               | $          | (1,910            | )          | -2.8                              | %          | NM |   |

 

The following tablesummarizes our revenues and gross profit for the periods indicated, byreporting segment:

 
| ** **          | ** ** | **For the Three Months Ended September 30,** | ** ** |
|---------------------|------------|---------------------------------------------------|------------|
| ** **          | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| ** **          | ** ** | **(in 000s)**                                     | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United  States:** |       |                                              |       |   |   |   |   |   |   |
| Revenue             |       | $                                                 | 50,490     |   | 69.7 | % | $ | 47,293 |   | 68.6 | % |
| Cost of services    |       | 40,642                                            |       | 68.9 | % | 39,818 |   | 65.6 | % |
| Gross profit        |       | $                                                 | 9,848      |   | 73.1 | % | $ | 7,475 |   | 91.1 | % |
| *Gross  profit %*   | * *   | *19.5*                                            | *%*        | * * | * * | *15.8* | *%* | * * | * * |
|                |       |                                              |       |   |   |   |   |   |   |
| **Canada:**         |       |                                              |       |   |   |   |   |   |   |
| Revenue             |       | $                                                 | 18,799     |   | 25.9 | % | $ | 21,592 |   | 31.3 | % |
| Cost of services    |       | 15,399                                            |       | 26.1 | % | 20,350 |   | 33.5 | % |
| Gross profit        |       | $                                                 | 3,400      |   | 25.2 | % | $ | 1,242 |   | 15.1 | % |
| *Gross  profit %*   | * *   | *18.1*                                            | *%*        | * * | * * | *5.8* | *%* | * * | * * |
|                |       |                                              |       |   |   |   |   |   |   |
| **Offshore:**       |       |                                              |       |   |   |   |   |   |   |
| Revenue             |       | $                                                 | 3,173      |   | 4.4 | % | $ | 52 |   | 0.1 | % |
| Cost of services    |       | 2,947                                             |       | 5.0 | % | 560 |   | 0.9 | % |
| Gross profit        |       | $                                                 | 226        |   | 1.7 | % | $ | (508 | ) | -6.2 | % |
| *Gross  profit %*   | * *   | *7.1*                                             | *%*        | * * | * * | *-976.9* | *%* | * * | * * |

 

***Revenue***

 

Revenue increased by $3.5 million, or 5.1%, from $68.9 million in thethird quarter of 2008 to $72.5 million in the third quarter of 2009.  The increase was driven by a $3.2 million increase inrevenue in our U.S. segment. Of this increase, $5.6 million was from two newsites that were opened in mid-2008 (Mansfield, Ohio and Jonesboro,Arkansas).  In addition, a site thattransitioned to a new customer during 2009 contributed approximately $1.7million of additional revenue in the third quarter of 2009 compared to thethird quarter of 2008.  These increaseswere partially offset by $3.2 million less revenue from site closures in BigSpring, Texas and Petersburg, Virginia in August 2008 and December 2008,respectively.  The remainder of theoffset was driven by decreases in the number of average full-time equivalentagents and utilization at other U.S. locations. In the third quarter of 2009, average full-time equivalent agentsdecreased by 4.8% from the third quarter of 2008 due to layoffs and hiringfreezes in certain locations in order to address certain discrepancies in ourhiring practices.  The  hiring freezes have since been lifted.  Revenues in our Canadian segment declined by$2.8 million in the third quarter of 2009 compared to the same period in2008.  Of this decrease, $2.5 million wasdue to the site closure in Regina, Saskatchewan.  The remainder was due to a decline of 6.8% inaverage full-time equivalent agents at our other Canadian locations.  Revenue from our Offshore segment increasedfrom $0.1 million in the third quarter of 2008 to $3.2 million in the thirdquarter of 2009 from our site in Makati City, Philippines which opened in September 2008and continues to ramp.

 

19

----

Table ofContents

 

***Costof Services and Gross Profit***

 

Cost of servicesdecreased by $1.7 million, or 2.9%, from $60.7 million in the third quarter of2008 to $59.0 million in the third quarter of 2009.  Cost of services in the U.S. increased byapproximately $0.8 million, of which $0.2 million was related to the netaddition of new sites year over year, as discussed above.  Gross profit as a percentage of revenue inthe U.S. increased from 15.8% in the third quarter of 2008 to 19.5% in thethird quarter of 2009.  This increase wasdriven by higher utilization, which we define as average full-time equivalentagents divided by available seat capacity, which increased from 65% in the thirdquarter of 2008 to 77% in the third quarter of 2009.  Cost of services in Canada declined by $5.0million in the third quarter of 2009 from the third quarter of 2008, of which$2.8 million was due to the closure of the facility in Regina, Saskatchewan and$1.9 million was due to improvements in the Canadian to U.S. dollar exchangerate.  The remaining decrease in theCanadian segment was due to fewer agents, as described above.  Cost of services for our Offshore segmentincreased by approximately $2.4 million due to the opening of our Makati City,Philippines location.

 

***Selling,General and Administrative Expenses***

 

Selling, generaland administrative expenses increased by $0.9 million, or 8.6%, from $10.2million in the third quarter of 2008 to $11.1 million in the third quarter of2009.  As a percentage of revenue, selling, general and administrative expensesincreased from 14.8% to 15.3%.  Theincrease was driven by an increase of $0.5 million in salary expense and $0.4million in hiring expense in the third quarter of 2009 compared to the thirdquarter of 2008 due to investments in personnel in support of growth efforts.

 

***ImpairmentLosses and Restructuring Charges***

 

Impairment losses andrestructuring charges declined from $0.3 million in the third quarter of 2008to $0 in the third quarter of 2009.  Inthe third quarter of 2008, we recorded $0.3 million in restructuring chargesrelated to the closure of our Big Spring, Texas location in August 2008.  We did not incur any impairment losses orrestructuring charges during the third quarter of 2009.

 

***OperatingIncome (Loss)***

 

We had operating incomeof $2.4 million during the three months ended September 30, 2009 and anoperating loss of $2.3 million during the three months ended September 30,2008.  Operating income (loss) as apercentage of revenue was 3.3% for the three months ended September 30,2009 compared to (3.4%) for the three months ended September 30,2008.  The increase was a result ofhigher revenue, lower cost of services and lower impairment and restructuringcharges, partially offset by an increase in selling, general and administrativeexpenses, as discussed previously.

 

***NetInterest and Other (Expense) Income***

 

Net interest and otherexpense declined to approximately $0.04 million during the third quarter of2009 from $0.3 million in the third quarter of 2008.  The decrease was primarily due to $0.4million recorded in 2008 for an other-than-temporary impairment of aninvestment.  No such impairments wererecorded during the third quarter of 2009. This decrease was partially offset by lower interest and investmentincome in the third quarter of 2009, compared to the third quarter of 2008, dueto fewer investments held during the period.

 

***IncomeTax***

 

The quarterly effective tax rate for continuing operations changedfrom an income tax benefit of $1.1 million, or an effective rate of 43.2%,during the three months ended September 30, 2008, to income tax expense of$0.6 million, or an effective rate of 23.7%, during the three months ended September 30,2009.  The change was due primarily to theeffects of work opportunity credits, depending on the amount of income or lossfor the respective quarter, which reduced the rate and associated tax expensein 2009 and increased the rate and associated tax benefit in 2008.

 

***Lossfrom Discontinued Operations, net of tax***

 

Loss from discontinuedoperations was $0 during the third quarter of 2009 and approximately $0.4million during the third quarter of 2008. The loss in 2008 was due to the write-off of the principal on a notereceivable related to the sale of our supply chain management services platformin December 2005 for which approximately $0.7 million related to theprincipal of the note receivable, less an associated tax benefit ofapproximately $0.2 million.  This waspartially offset by the removal of income from discontinued operations relatedto the sale of our Domain.com subsidiary in February 2009.

 

20

----

Table ofContents

 

***NetIncome (Loss)***

 

Net income was $1.8million for the third quarter of 2009 compared to a net loss of approximately$1.9 million during the third quarter of 2008. The increase in net income was primarily due to higher revenue, lowercost of services, the absence of impairment and restructuring charges and aloss from discontinued operations, partially offset by higher selling, generaland administrative expenses, as discussed previously.

 

**RESULTS OF OPERATIONS — NINEMONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008**

 
| ** **                                              | ** ** | **Nine Months  Ended September  30, 2009** | ** ** | **% of  Revenue** | ** ** | **Nine Months  Ended September  30, 2008** | ** ** | **% of  Revenue** | ** ** | **% change  YTD Sept.  30, 2008 to  2009** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|-------------------|------------|--------------------------------------------|------------|-------------------|------------|--------------------------------------------|------------|
| Revenue                                                 |       | $                                          | 216,463    |              | 100.0      | %                                          | $          | 198,987           |       | 100.0                                      | %          | 8.8 | % |
| Cost of services                                        |       | 179,137                                    |       | 82.8              | %          | 173,007                                    |       | 86.9              | %          | 3.5                                        | %          |
| Gross profit                                            |       | 37,326                                     |       | 17.2              | %          | 25,980                                     |       | 13.1              | %          | 43.7                                       | %          |
| Selling, general and administrative expenses            |       | 31,665                                     |       | 14.6              | %          | 30,522                                     |       | 15.3              | %          | 3.7                                        | %          |
| Impairment losses and restructuring charges             |       | 6,437                                      |       | 3.0               | %          | 5,954                                      |       | 3.0               | %          | 8.1                                        | %          |
| Operating loss                                          |       | (776                                       | )          | -0.4              | %          | (10,496                                    | )          | -5.2              | %          | NM                                         |       |
| Net interest and other (expense) income                 |       | (216                                       | )          | -0.1              | %          | 96                                         |       | 0.0               | %          | NM                                         |       |
| Loss from continuing operations before income taxes     |       | (992                                       | )          | -0.5              | %          | (10,400                                    | )          | -5.2              | %          | NM                                         |       |
| Income tax benefit                                      |       | (126                                       | )          | -0.1              | %          | (3,906                                     | )          | -2.1              | %          | NM                                         |       |
| Net loss from continuing operations                     |       | (866                                       | )          | -0.4              | %          | (6,494                                     | )          | -3.3              | %          | NM                                         |       |
| Income (loss) from discontinued operations, net of  tax |       | 4,640                                      |       | 2.1               | %          | (266                                       | )          | -0.1              | %          | NM                                         |       |
| Net income (loss)                                       |       | $                                          | 3,774      |              | 1.7        | %                                          | $          | (6,760            | )          | -3.4                                       | %          | NM |   |

 

The following tablesummarizes our revenues and gross profit for the periods indicated, byreporting segment:

 
| ** **          | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|
| ** **          | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **          | ** ** | **(in 000s)**                                    | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United  States:** |       |                                             |       |   |   |   |   |   |   |
| Revenue             |       | $                                                | 151,887    |   | 70.2 | % | $ | 129,018 |   | 64.9 | % |
| Cost of services    |       | 123,157                                          |       | 68.8 | % | 107,298 |   | 62.0 | % |
| Gross profit        |       | $                                                | 28,730     |   | 77.0 | % | $ | 21,720 |   | 83.6 | % |
| *Gross  profit %*   | * *   | *18.9*                                           | *%*        | * * | * * | *16.8* | *%* | * * | * * |
|                |       |                                             |       |   |   |   |   |   |   |
| **Canada:**         |       |                                             |       |   |   |   |   |   |   |
| Revenue             |       | $                                                | 57,212     |   | 26.4 | % | $ | 69,917 |   | 35.1 | % |
| Cost of services    |       | 48,798                                           |       | 27.2 | % | 65,149 |   | 37.7 | % |
| Gross profit        |       | $                                                | 8,414      |   | 22.5 | % | $ | 4,768 |   | 18.4 | % |
| *Gross  profit %*   | * *   | *14.7*                                           | *%*        | * * | * * | *6.8* | *%* | * * | * * |
|                |       |                                             |       |   |   |   |   |   |   |
| **Offshore:**       |       |                                             |       |   |   |   |   |   |   |
| Revenue             |       | $                                                | 7,364      |   | 3.4 | % | $ | 52 |   | 0.0 | % |
| Cost of services    |       | 7,182                                            |       | 4.0 | % | 560 |   | 0.3 | % |
| Gross profit        |       | $                                                | 182        |   | 0.5 | % | $ | (508 | ) | -2.0 | % |
| *Gross  profit %*   | * *   | *2.5*                                            | *%*        | * * | * * | * * | * * | * * | * * |

 

***Revenue***

 

Revenue increased by$17.5 million, or 8.8%, from $199.0 million in the nine months ended September 30,2008 to $216.5 million in the nine months ended September 30, 2009.  The increase was driven by revenues from theU.S. segment and the Offshore segment which increased by $22.9 million and $7.3million, respectively.  The increase inU.S. revenue was due to three new U.S. facilities added in 2008, partiallyoffset by the closure of two U.S. facilities. The net impact of these openings and closures was $14.0 million inadditional revenue.  U.S. revenue alsoincreased due to the full ramp of a site which transitioned to a new customerand contributed $5.2 million of additional revenue in the nine months ended September 30,2009 compared to the nine months ended September 30, 2008.  The remaining increase of $3.7 million at theremaining U.S. facilities was driven by an increase in the number of averagefull-time equivalent agents.  Theoffshore facility in Makati City, Philippines opened in September 2008,and as such contributed minimal 

 

21

----

Table of Contents

 

revenue during the firstnine months of 2008 and contributed $7.4 million in the first nine months of2009.  Revenue from Canada decreased by$12.7 million in the first nine months of 2009 compared to the same period in2008 due primarily to the closure of our Regina, Saskatchewan facility in February 2009,which had approximately $7.8 million less revenue in the nine months ended September 30,2009, compared to the same period in 2008. In addition, revenue decreased by approximately $0.9 million due tochanges in the foreign exchange rate between the U.S. dollar and Canadiandollar.  The remainder of the decrease inthe Canadian segment was due to a decrease in the number of average full-timeequivalent agents.

 

***Costof Services and Gross Profit***

 

Cost of servicesincreased by $6.2 million, or 3.6%, from $173.0 million in the nine monthsended September 30, 2008 to $179.2 million in the nine months ended September 30,2009.  Cost of services in the U.S.increased by approximately $15.6 million, of which $8.0 million related to thenet addition of new sites year over year, as discussed above.  Cost of services at our other U.S. facilitiesalso increased during the first nine months of 2009 compared to the first ninemonths of 2008 due to a greater number of agents, as described above.  In addition, cost of services increased byapproximately $6.9 million due to the opening of the Makati City, Philippineslocation.  These increases to cost ofservices were offset by lower cost of services in Canada due in part to theclosure of the Regina location, which accounted for $8.2 million of thedecrease.  Additionally, cost of servicesdecreased by $5.8 million in the first nine months of 2009 compared to thefirst nine months of 2008 due to a stronger U.S. to Canadian dollar exchangerate.  The remaining decrease in theCanadian segment was due to fewer agents, as described above.

 

***Selling,General and Administrative Expenses***

 

Selling, generaland administrative expenses increased by $1.1 million, or 3.6%, from $30.5million in the first nine months of 2008 to $31.6 million in the first ninemonths of 2009.  The increaseyear-over-year was primarily due to $0.6 million in expense associated with thesettlement of the federal securities class action lawsuit, $0.9 million inpayroll expense, $0.2 million in other legal expense and $0.2 million in rentexpense.  These increases were partiallyoffset by declines in depreciation expense of $0.6 million and training expenseof $0.2 million.

 

***ImpairmentLosses and Restructuring Charges***

 

Impairment losses andrestructuring charges were $6.4 million and $6.0 million for the nine monthsended September 30, 2009 and 2008, respectively.  Restructuring charges were $4.7 millionduring the nine months ended September 30, 2009, related primarily to theclosure of our Regina, Saskatchewan facility in February 2009 for which weincurred approximately $4.4 million of charges. The costs relate primarily to the building lease costs through theremainder of the lease term, or July 2013. Accrued restructuring costs were valued using a discounted cash flowmodel and the cash flows consist of the future lease payment obligationsrequired under the lease agreements and property taxes through the remainder ofthe lease term.  We assumed that we couldnot sublease the vacant facilities for the remainder of the lease term.  In the future, if we are able to sublease thefacilities, we may be required to record a gain in the Condensed ConsolidatedStatements of Operations.  The remainderof the restructuring charges during the first nine months of 2009 were due toadjustments in our estimated liability for our other restructuring plans.  We recorded $1.9 million in restructuringcharges in the first nine months of 2008 related to the closure of ourHawkesbury, Ontario facility in 2007 and our Big Spring, Texas facility in August 2008.

 

We recorded approximately$1.7 million in impairment losses during the first nine months of 2009 due tothe impairment of certain long-lived assets for which the carrying value ofthose assets is not recoverable.  Theseassets are located in a facility for which we are uncertain about our abilityto generate future cash flows to support the carrying value of theseassets.  The long-lived assets includecomputer and telephone equipment, furniture and fixtures, leaseholdimprovements and software.  We recorded$4.1 million in impairment losses in the first nine months of 2008 due toimpairment of certain long-lived assets ($2.3 million in the U.S. segment and $1.8million in the Canadian segment).

 

***OperatingLoss***

 

We incurred operatinglosses of approximately $0.8 million and $10.5 million for the nine monthsended September 30, 2009 and 2008, respectively.  Operating loss as a percentage of revenue was(0.4%) for the nine months ended September 30, 2009 compared to (5.2%) forthe nine months ended September 30, 2008. The decline in the loss period over period was driven by an increase inrevenue in the nine months ended September 30, 2009, partially offset byhigher impairment and restructuring charges, cost of services and selling,general and administrative costs, as discussed previously.

 

***NetInterest and Other (Expense) Income***

 

Net interest and otherexpense was approximately $0.2 million during the first nine months of 2009,compared to net interest and other income of approximately $0.1 million in thefirst nine months of 2008.  The changewas due primarily to a decrease in interest and 

 

22

----

Table of Contents

 

investment income ofapproximately $0.9 million in the first nine months of 2009 compared to thefirst nine months of 2008 due to a decline in our investment balance duringthese periods, partially offset by less interest expense, which declined byapproximately $0.3 million in the first nine months of 2009 compared to thefirst nine months of 2008.  In addition,we recorded approximately $0.4 million related to an other-than-temporaryimpairment on investments during the first nine months of 2008.

 

***IncomeTax***

 

The year-to-date effective tax rate for continuing operations decreasedfrom 37.6% during the nine months ended September 30, 2008 to 12.7% duringthe nine months ended September 30, 2009. The primary reasons for the decrease to the rate between periods is 1) alarger impact from the change in the Canadian statutory tax rates in2009 compared to 2008, 2) state income tax expense in 2009 compared to stateincome tax benefit in 2008 (due to pre-tax book income in the U.S. during 2009compared to a pre-tax book loss in the U.S. in 2008) and 3) meals andentertainment deductions.  Thesedecreases were offset by an increase in work opportunity credits.

 

***Income(Loss) from Discontinued Operations, net of tax***

 

Income from discontinuedoperations was approximately $4.6 million during the nine months ended September 30,2009 and loss from discontinued operations was approximately $0.3 millionduring the nine months ended September 30, 2008.  In February 2009, we sold Domain.com, awholly owned subsidiary, for cash of approximately $7.1 million.  We had a gain on the sale of approximately$6.9 million, less taxes of approximately $2.3 million, resulting in the incomeof $4.6 million.  The loss in 2008 wasdue to the write-off of the principal on a note receivable related to the saleof our supply chain management services platform in December 2005,partially offset by the removal of income from discontinued operations relatedto the sale of Domain.com.

 

***NetIncome (Loss)***

 

Net income was $3.8million during the nine months ended September 30, 2009 and net loss wasapproximately $6.8 million during the nine months ended September 30,2008.  The increase in net income wasprimarily due to higher revenue and income from discontinued operations,partially offset by higher cost of services, selling, general andadministrative expenses and impairment and restructuring charges, as discussedpreviously.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of September 30,2009, working capital totaled $57.8 million and our current ratio was 3.16:1,compared to working capital of $47.6 million and a current ratio of 2.58:1 at December 31,2008.  We have historically financed ouroperations, liquidity requirements, capital expenditures, and capacity expansionprimarily through cash flows from operations, and to a lesser degree, throughvarious forms of debt and leasing arrangements. In addition to funding basicoperations, our primary uses of cash typically relate to capital expendituresto upgrade our existing information technologies and service offerings,investments in our facilities.  Webelieve that cash flows from operations and cash provided by short-termborrowings, when necessary, will adequately meet our ongoing operatingrequirements.  Any significant futureexpansion of our business may require us to secure additional cashresources.  Our liquidity could besignificantly impacted by large cash requirements to expand our business or adecrease in demand for our services, particularly from any of our principalclients, which could arise from a number of factors, including, but not limitedto, competitive pressures, deterioration of economic conditions, adverse trendsin the business process outsourcing market, industry consolidation, adversecircumstances with respect to the industries we service, and any of the otherfactors we describe more fully in the “Risk Factors” sections in this Form 10-Qand in our Annual Report on Form 10-K for the year ended December 31,2008.

 
| ** **                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(in thousands)**                       | ** ** |
| Net cash provided by (used in):           | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Operating activities                      |       | $                                        | 12,589     |   | $ | 18,848 |   |
| Investing activities                      |       | 4,515                                    |       | (22,119 | ) |
| Financing activities                      |       | (6,846                                   | )          | (2,983 | ) |
| Effect of foreign exchange rates on cash  |       | 625                                      |       | (819 | ) |
| Net increase in cash and cash equivalents |       | $                                        | 10,883     |   | $ | (7,073 | ) |

 

Our balance of cash andcash equivalents was $20.5 million at September 30, 2009, compared to abalance of $9.6 million at December 31, 2008.

 

***OperatingActivities. ***Net cash provided by operating activitiesdecreased by $6.2 million from $18.8 million for the nine months ended September 30,2008 to $12.6 million for the nine months ended September 30, 2009.  Net cash provided by operating activities 

 

23

----

Table of Contents

 

from continuingoperations for the nine months ended September 30, 2009 was $14.9 million,representing a decrease of $4.2 million from the nine months ended September30, 2008.  The decline of $4.2 million incash provided by operating activities from continuing operations was driven bythe following decreases:  1) $4.8 milliongreater decline in accrued liabilities over the nine months ended September 30,2009 compared to 2008 primarily due to lower accrued payroll resulting from thetiming of facility openings and closings, 2) $3.9 million in less accountspayable due to fewer capital expenditures in 2009, and 3) $3.7 million of lowercollections of accounts receivable period over period due to the timing ofcollections of large billings. These decreases to cash provided by operatingactivities from continuing operations were partially offset by the followingincreases:  1) $6.2 million in deferredincome taxes, whereby the deferred income tax asset declined by $2.7 million inthe first nine months of 2009 compared to an increase of $3.5 million in thesame period of 2008 because of the utilization of net operating loss carryforwards, and 2) $1.6 million higher income from continuing operations afterimpairment losses and depreciation expense (net loss from continuing operationsimproved by $5.6 million, offset by $4.0 million less impairment anddepreciation expense).

 

***InvestingActivities. ***Net cash provided by investing activitieswas $4.5 million in the first nine months of 2009 compared to cash used ininvesting activities of $22.1 million in the first nine months of 2008.  The increase was due to 1) proceeds from thesale of Domain.com of $7.1 million, 2) a $12.4 million decrease in purchases ofproperty, plant and equipment due to no new site openings in the first ninemonths of 2009 compared to the opening of four new sites in the first ninemonths of 2008 and 3) an increase in net proceeds from the sale of investments,net of purchases, of $7.2 million which was a result of a shift towards moreconservative holdings of cash and cash equivalents.

 

***FinancingActivities. ***Net cash used in financing activitiesincreased by $3.8 million, from $3.0 million, in the nine months ended September 30,2008 to $6.8 million for the nine months ended September 30, 2009.  The increase was due primarily to an increasein payments on long-term debt of $3.8 million resulting from the pay-off of ourtwo equipment loans in the second quarter of 2009, partially offset by savingson principal payments since the pay-off. Refer to “Liquidity and Capital Resources — Contractual Obligations”below for further information on the pay-off of these loans.

 

***Contractual******Obligations.***** **Other thanoperating and capital leases for certain equipment, real estate and leases andcommitments to purchase goods and services in the future, we have nooff-balance sheet transactions, unconditional purchase obligations or similarinstruments and we are not a guarantor of any other entities’ debt or otherfinancial obligations.

 

OnJune 26, 2009, we entered into a business loan agreement, promissory noteand three commercial security agreements (together the “Agreement”) with UMBBank Colorado, N.A. (“UMB Bank”) for a $15 million secured revolving line ofcredit.  The Agreement is effective July 1,2009 through August 1, 2010.  ThisAgreement replaced our $10 million secured revolving line of credit with WellsFargo Bank N.A., which expired by its terms on June 30, 2009.  We use this line of credit to finance regular,short-term operating expenses.  There wasno balance outstanding on the line of credit with UMB Bank as of September 30,2009.  As of September 30, 2009, wewere in compliance with our debt covenants.

 

Borrowingsunder the Agreement bear interest, at our option at the time of the borrowing,of the thirty, sixty or ninety-day LIBOR index, plus 1.75%.  The interest rate shall never be less than3.25% per annum.  Under the Agreement, wegranted UMB Bank a security interest in all of our present and future accountsreceivable, general intangibles, and owned real property.   In addition, under the Agreement, we aresubject to certain financial covenants, which include maintaining 1) a ratio oftotal liabilities to tangible net worth of less than 1.0 to 1.0, 2) a tangiblenet worth of at least $105 million, 3) unencumbered liquid assets, defined ascash, certificate of deposits and marketable securities, of at least $10million measured on the last day of each fiscal quarter and 4) a cash flowcoverage ratio, as defined in the Agreement, of greater than 1.50 to 1.0measured on the last day of each fiscal quarter for the previous twelve months.

 

Inaddition, during the nine months ended September 30, 2009, we paid off theremaining principal balance on the Secured Equipment Promissory Note betweenWells Fargo Equipment Finance, Inc. and StarTek USA, Inc., our whollyowned subsidiary, and the Canadian Dollar Secured Equipment Loan between WellsFargo Equipment Finance Company, Inc. and StarTek Canada Services, Ltd.,our wholly owned subsidiary.  The loanshad original maturities in November 2010. The total payoff on these loans, including pre-payment penalties, wasapproximately $5.7 million.

 

In July 2009,we entered into a lease agreement for the rental of a facility in Heredia,Costa Rica.  The lease has an initialterm of five years with a tenant option for an additional five years.  The facility is approximately 37,000 squarefeet and we expect to open the facility for operations during the first quarterof 2010.  Total lease commitments for therental of this facility are approximately $4.5 million over the term of thelease.

 

***OtherFactors Impacting Liquidity.*** Effective November 4, 2004, our board ofdirectors authorized purchases of up to $25.0 million of our common stock.  The repurchase program will remain in effectuntil terminated by the board of directors and allows us to repurchase sharesof our common stock from time to time on the open market, in block trades andin privately-negotiated transactions. Repurchases will be implemented by the Chief Financial Officerconsistent with the guidelines adopted by the board of directors and 

 

24

----

Table of Contents

 

will depend on marketconditions and other factors.  Anyrepurchases of shares will be made in accordance with Securities and ExchangeCommission rules.  We have not yetrepurchased any shares pursuant to this board authorization.

 

Our business currentlyhas a high concentration of a few principal clients.  The loss of a principal client and/or changesin timing or termination of a principal client’s product launch or serviceoffering would have a material adverse effect on our business, liquidity,operating results, and financial condition. These client relationships are further discussed in Note 6, “PrincipalClients,” to our Condensed Consolidated Financial Statements, which areincluded at Item 1, “Financial Statements,” of this Form 10-Q.  To limit our credit risk, management fromtime to time will perform credit evaluations of our clients. Although we aredirectly impacted by the economic conditions in which our clients operate,management does not believe substantial credit risk existed as of September 30,2009. Refer to Item 1A. “Risk Factors” appearing in our Annual Report on Form 10-Kfor the year ended December 31, 2008 for further information regardingthese risks.

 

As of September 30,2009, we had approximately $0.5 million invested in corporate debtsecurities.  There is a risk that ifthose companies in which we are invested suffer due to economic conditions orother reasons, we could realize losses on these investments which could impactour liquidity.

 

There is a risk that thecounterparties to our hedging instruments could suffer financial difficultiesdue to economic conditions or other reasons and we could realize losses onthese arrangements which could impact our liquidity.  However, we do not believe we are exposed to more thana nominal amount of credit risk in our derivative hedging activities, as thecounterparties are established, well-capitalized financial institutions.

 

Because we service relativelyfew, large clients, the availability of cash is highly dependent on the timingof cash receipts from accounts receivable. As a result, from time to time, we borrow cash from our line of creditto cover short-term cash needs.  Theseborrowings are typically outstanding for a short period of time before they arerepaid.  However, our debt balance canfluctuate significantly during any given quarter as part of our ordinary courseof business.  Accordingly, our debtbalance at the end of any given quarter is not necessarily indicative of thedebt balance at any other time during that period.

 

Although managementcannot accurately anticipate the effects of domestic and foreign inflation onour operations, we have experienced rising wages in several of our markets,particularly in Canada.  Rising wageshave had a negative impact on our results of operations, and if such trendscontinue to persist, our future results of operations may be adverselyaffected.

 

**VARIABILITY OF OPERATING RESULTS**

 

Our business has beenseasonal only to the extent that our clients’ marketing programs and productlaunches are geared toward the winter holiday buying season.  We have experienced and expect to continue toexperience some quarterly variations in revenue and operating results due to avariety of factors, many of which are outside our control, including: (i) timingand amount of costs incurred to expand capacity in order to provide for volumegrowth from existing and future clients; (ii) changes in the volume ofservices provided to principal clients; (iii) expiration or termination ofclient projects or contracts; (iv) timing of existing and future clientproduct launches or service offerings; (v) seasonal nature of certainclients’ businesses; and (vi) variability in demand for our services byour clients depending on demand for their products or services and/or dependingon our performance.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

In preparing ourcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America, management mustundertake decisions that impact the reported amounts and relateddisclosures.  Such decisions include theselection of the appropriate accounting principles to be applied and assumptionsupon which accounting estimates are based. Management applies its best judgment based on its understanding andanalysis of the relevant circumstances to reach these decisions.  By their nature, these judgments are subjectto an inherent degree of uncertainty. Accordingly, actual results may vary significantly from the estimates wehave applied.

 

Our critical accountingpolicies and estimates are consistent with those disclosed in our Annual Reporton Form 10-K for the year ended December 31, 2008.  Please refer to Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” inour Annual Report on Form 10-K for the year ended December 31, 2008,for a complete description of our Critical Accounting Policies and Estimates.

 

***RecentlyAdopted Accounting Pronouncements***

 

Effective July 1,2009, we adopted the Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) 105-10, “GenerallyAccepted Accounting Principles — Overall” (“ASC 105-10”).  ASC 105-10 establishes the FASB Accounting Standards Codification**(the “Codification”) as the sourceof authoritative accounting principles recognized by the FASB to be applied 

 

25

----

Table of Contents

 

by nongovernmentalentities in the preparation of financial statements in conformity with U.S.GAAP. Rules and interpretive releases of the SEC under authority offederal securities laws are also sources of authoritative U.S. GAAP for SECregistrants. All guidance contained in the Codification carries an equal levelof authority. The Codification superseded all existing non-SEC accounting andreporting standards. All other non-grandfathered, non-SEC accounting literaturenot included in the Codification is non-authoritative. The FASB will not issuenew standards in the form of Statements, FASB Staff Positions or EmergingIssues Task Force Abstracts. Instead, it will issue Accounting StandardsUpdates (“ASUs”). The FASB will not consider ASUs as authoritative in their ownright. ASUs will serve only to update the Codification, provide backgroundinformation about the guidance and provide the bases for conclusions on thechange(s) in the Codification. References made to FASB guidance throughoutthis document have been updated for the Codification.

 

Effective January 1,2009, we adopted FASB ASC 820-10, “Fair Value Measurements and Disclosures —Overall” (“ASC 820-10”), formerly Statement of Financial Accounting Standards No. 157,“Fair Value Measurements”, for all non-financial assets and non-financialliabilities, except for items that are recognized or disclosed at fair value ona recurring basis (at least annually) for which ASC 820-10 was previouslyadopted.  Refer to Note 9, “Fair ValueMeasurements,” of this Form 10-Q for additional information on theadoption of ASC 820-10.

 

Effective January 1,2009, we adopted FASB ASC 815-10, “Derivatives and Hedging — Overall” (“ASC815-10”), formerly Statement of Financial Accounting Standards  No. 161, “Disclosures about DerivativeInstruments and Hedging Activities, an amendment of FASB Statement No. 133”.  ASC 815-10 requires entities to providegreater transparency through additional disclosures about (a) how and whyan entity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for and (c) how derivative instrumentsand related hedged items affect an entity’s financial position, results ofoperations and cash flows. Refer to Note 8, “Derivative Instruments,” of this Form 10-Qfor additional information.

 

We adopted FASBASC Topic 805, “Business Combinations” (“ASC 805”), formerly Statement ofFinancial Accounting Standards  No. 141(R),“Business Combinations”, which significantly changed the accounting for andreporting of business combination transactions. This standard was effective forus for business combination transactions for which the acquisition date was onor after January 1, 2009. No business combination transactions occurredduring the nine months ended September 30, 2009.

 

Effective April 1,2009, we adopted FASB ASC 320-10-65, “Investments— Debt and Equity Securities — Overall — Transition and Open Effective DateInformation” (“ASC 320-10-65”), formerly FASB Staff Position No. 115-2and SFAS No. 124-2, “Recognition and Presentation of Other-Than-TemporaryImpairments”.  ASC 320-10-65 amends theother-than-temporary impairment (“OTTI”) guidance in U.S. GAAP for debtsecurities through increased consistency in the timing of impairmentrecognition and enhanced disclosures related to the credit and noncreditcomponents of impaired debt securities that are not expected to be sold. Inaddition, increased disclosures are required for both debt and equitysecurities regarding expected cash flows, credit losses, and securities withunrealized losses. Refer to Note 7, “Investments”, of this Form 10-Q forthe relevant disclosures required by adoption of ASC 320-10-65.  The adoption of ASC 320-10-65 did not have amaterial impact on our financial statements.

 

Effective April 1,2009, we adopted FASB ASC 825-10-65, “FinancialInstruments — Overall — Transition and Open Effective Date Information”(“ASC 825-10-65”), formerly FASB Staff Position No. 107-1 and APB Opinion No. 28-1,“Interim Disclosures about Fair Value of Financial Instruments”.  ASC 825-10-65 amends ASC 825-10 to requiredisclosures about fair value of financial instruments in interim financialstatements as well as in annual financial statements and also amends ASC 270-10to require those disclosures in all interim financial statements. The adoptionof ASC 825-10-65 did not have a material impact on our financial statements.

 

Effective April 1,2009, we adopted FASB ASC 855-10, “SubsequentEvents — Overall”**(“ASC855-10”), formerly Statement of Financial Accounting Standards  No. 165, “Subsequent Events”. ASC 855-10establishes the accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. It requires the disclosure of the date through which an entityhas evaluated subsequent events and the basis for that date, that is, whetherthat date represents the date the financial statements were issued or wereavailable to be issued.  Refer to Note 1,“Basis of Presentation,” for the related disclosures. The adoption of ASC855-10 did not have a material impact on our financial statements.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

In the normal course ofbusiness, we are exposed to certain market risks related to changes in interestrates and other general market risks, and foreign currency exchange rates.  This information should be read in conjunctionwith information set forth in Part II, Item 7A in our Annual Reporton Form 10-K for the year ended December 31, 2008, in addition to theinterim unaudited consolidated financial statements, accompanying notes andmanagement’s discussion and analysis of financial condition and results ofoperations presented in Items 1 and 2 of this Quarterly Report on Form 10-Q.

 

26

----

Table of Contents

 

***Interest Rate Risk***

 

We are exposed to interest rate risk with respect toour cash and cash equivalents, investments and debt obligations.  Cash and cash equivalents are notrestricted.  We consider cash equivalentsto be short-term, highly liquid investments readily convertible to knownamounts of cash, and so near their maturity they present insignificant risk ofchanges in value because of changes in interest rates.  At September 30, 2009, investmentsavailable for sale consisted of corporate debt securities.  Our investment portfolio is subject tointerest and inflation rate risks and will fall in value if market interestand/or inflation rates or market expectations relating to these ratesincrease.  Management believes we havethe ability to hold the foregoing investments until maturity, and therefore, ifheld to maturity, we would not expect the future proceeds from theseinvestments to be affected, to any significant degree, by any sudden changes inmarket interest rates. Declines in interest rates over time will, however,reduce our interest income derived from future investments.  In addition, our investments in corporatedebt securities could be adversely affected by declines in the economiccondition of those companies in which we are invested.

 

***Foreign Currency Exchange Risks***

 

We enter into foreign currency exchange contracts tohedge our anticipated operating commitments that are denominated in foreign currencies.  The contracts cover periods commensurate withexpected exposure, generally within twelve months, and are principallyunsecured foreign exchange contracts. The market risk exposure is essentially limited to risk related tocurrency rate movements.  We operate inCanada and the Philippines and are initiating operations in Costa Rica, and thefunctional currencies in those countries are the Canadian dollar, thePhilippine peso, and the Costa Rica Colon, respectively, which are used to paylabor and other operating costs in those countries. However, our clientcontracts generate revenues which are paid to us in U.S. dollars.  During the third quarter of 2009, we did notenter into any new Canadian dollar forward contracts to hedge our foreigncurrency risk with respect to labor costs in Canada.  As of September 30, 2009, we have notentered into any arrangements to hedge our exposure to fluctuations in thePhilippine peso or Costa Rican Colon relative to the U.S. dollar.  As of September 30, 2009, we hadcontracted to purchase $14.6 million Canadian dollars to be deliveredperiodically through December 2009 at a purchase price which is no morethan $17.7 million and no less than $17.5 million.

 

During the three and nine months ended September 30,2009, there were no other material changes in our market risk exposure.  For a complete discussion of our market riskassociated with foreign currency and interest rate risk as of December 31,2008, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk”in our Annual Report on Form 10-K for the year ended December 31,2008.  Also, refer to Part II, ItemIA. “Risk Factors” in this Form 10-Q and Part I. Item 1A. “RiskFactors” appearing in our Annual Report on Form 10-K for the year ended December 31,2008 for further information regarding these risks.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

***Evaluationof disclosure controls and procedures.**** *As of September 30,2009, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rules  13a-15(e) and15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of September 30, 2009, our disclosurecontrols and procedures were effective and were designed to ensure that allinformation required to be disclosed by us in our reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the SEC, andaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, to allow timely decisionsregarding required disclosure.

 

***Changes in internal controls overfinancial reporting.**** *During the three months ended September 30, 2009,we implemented a new accounting system, however, this implementation did nothave a material effect on our internal control over financial reporting andthere were no changes in our internal control over financial reporting thatoccurred during the quarter ended September 30, 2009, that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**Part II.  Other Information**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

In our Annual Report on Form 10-K filed March 3,2009, we described a federal securities class-action lawsuit,*West Palm Beach Firefighters’ Pension Fund v.StarTek, Inc.*, Civil Action No. 05-cv-01265-WDM-MEH (the “Litigation”).

 

On July 20, 2009, we executed a Stipulation ofSettlement (“Stipulation”) with lead plaintiffs to settle the Litigation.  Under the terms of the Stipulation,defendants will pay $7.5 million to completely resolve the Litigation, inexchange for a release of all claims by lead plaintiffs and class members and adismissal of the Litigation with prejudice. Our primary insurance carrier has contributed $6.9 million and wecontributed $0.6 million to the Settlement Fund (as defined in theStipulation).  The United States DistrictCourt for the 

 

27

----

Table of Contents

 

District of Colorado (the “Court”) granted preliminaryapproval for the settlement on October 8, 2009.  The completion of the settlement as set forthin the Stipulation remains subject to various conditions, including notice tothe class members, a final hearing, and final approval by the Court.  Ourportion of the settlement due, or $0.6 million, was recorded in our CondensedConsolidated Statement of Operations during the nine months ended September 30,2009 and was paid in October 2009.

 

**ITEM1A.  RISK FACTORS**

 

There have been no materialchanges in our risk factors from those disclosed in our 2008 Annual Report on Form 10-K,except for the additions and modifications reflected in the risk factors below.

 

***We and some of our formermanagement employees are the subject of a class action lawsuit.  We have executed a Stipulation of Settlement(“Stipulation”) to settle the litigation, however, completion of the settlementis subject to certain conditions.***

 

In our Annual Report on Form 10-K filed March 3,2009, we described a federal securities class-action lawsuit,*West Palm Beach Firefighters’ Pension Fund v.StarTek, Inc.*, Civil Action No. 05-cv-01265-WDM-MEH (the “Litigation”).

 

On July 20, 2009, we executed a Stipulation ofSettlement (“Stipulation”) with lead plaintiffs to settle the Litigation.  Under the terms of the Stipulation,defendants will pay $7.5 million to completely resolve the Litigation, inexchange for a release of all claims by lead plaintiffs and class members and adismissal of the Litigation with prejudice. Our primary insurance carrier has contributed $6.9 million and wecontributed $0.6 million to the Settlement Fund (as defined in the Stipulation).  The United States District Court for theDistrict of Colorado (the “Court”) granted preliminary approval for thesettlement on October 8, 2009.  Thecompletion of the settlement as set forth in the Stipulation remains subject tovarious conditions, including notice to the class members, a final hearing, andfinal approval by the Court.  In the event that such conditions are notsatisfied, the court case would be reinstated as an active litigationmatter.  Our portion of the settlementdue, or $0.6 million, was recorded in our Condensed Consolidated Statement ofOperations during the nine months ended September 30, 2009 and was paid inOctober 2009.

 

We have beeninvolved from time to time in other litigation arising in the normal course ofbusiness, none of which is expected by management to have a material adverseeffect on our business, financial condition or results of operations.

 

***Our operations inCanada, the Philippines and Costa Rica subject us to the risk of currencyexchange******fluctuations.***

 

Because we conduct a material portion of our businessin Canada, we are exposed to market risk from changes in the value of theCanadian dollar. For the smaller portion of our business that we conduct in thePhilippines and will be conducting in Costa Rica, we are exposed to market riskfrom changes in the value of the Philippine peso and Costa Rican colon.  Material fluctuations in exchange ratesimpact our results through translation and consolidation of the financialresults of our foreign operations, and therefore may negatively impact ourresults of operations and financial condition. We have contracts wherein therevenue we earn is denominated in U.S. dollars, yet the costs we incur tofulfill our obligations under those contracts are denominated in Canadiandollars and Philippine pesos, and in the future Costa Rican colons.  Therefore, the fluctuations in the U.S.dollar to the Canadian dollar, Philippine peso or Costa Rican colon exchangerates can cause significant fluctuations in our results of operations.  During the nine months ended September 30,2009, we engaged in hedging activities relating to our exposure to suchfluctuations in the value of the Canadian dollar versus the U.S. dollar.  During the nine months ended September 2009,we did not enter into hedging agreements for the Philippine peso or Costa Ricancolon.  We may participate in hedgingactivities in the future as it relates to the Canadian dollar, Philippine pesoand Costa Rican colon. However, currency hedges do not, and will not, eliminateour exposure to fluctuations in the currencies. Recently the U.S. dollar has weakened against the value of the Canadiandollar, which if such trend continues would increase our costs and adverselyaffect our results from operations. Likewise, increases in the value of the Philippine peso or Costa Ricancolon, or currencies in other foreign markets in which we may operate, inrelation to the value of the U.S. dollar, would further increase our costs andadversely affect our results of operations.

 

***We face risksinherent in conducting business outside of North America.***

 

Our operations in Canada accounted for 33.4%, 39.1%,and 41.6%, of our revenue in 2008, 2007, and 2006, respectively.  Our operations in the Philippines accountedfor 0.2%, 0% and 0% of our revenue in 2008, 2007 and 2006, respectively.  We have also signed a lease on a new facilityin Costa Rica which we expect to open in the first quarter of 2010, and we areconsidering expanding in the Philippines with another facility in 2010.  An important component of our growth strategyis continued international expansion. There are risks inherent in conducting business internationally,including but not limited to:

 

·                  Competition from local businesses orestablished multinational companies, who may have firmly established operationsin particular foreign markets.  This maygive these firms an advantage regarding labor and material costs;

·                  Significant changes in U.S. government programs, policies andregulatory requirements with respect to foreign operations or multinationalcompanies;

·                  Potentially adverse U.S. or foreign tax consequences with respect toforeign operations;

·                  Potentially longer working capitalcycles;

 

28

----

Table of Contents

 

·                  Unexpected changes in foreign governmentprograms or policies;

·                  Regulatory requirements and labor laws;

·                  Difficulties in staffing and effectively managing foreign operations;

·                  Political and social instability; and

·                  Our current or potential new clients may be reluctant to have usprovide services to them from a location outside of North America.

 

One or more of these factors may have an impact on ourinternational operations. Our lack of significant international operating experiencemay result in any of these factors impacting us to a greater degree than theyimpact our competitors. To the extent one or more of these factors impact ourinternational operations it could adversely affect our business, results ofoperations, growth prospects, and financial condition as a whole.

 

Various other riskfactors described in our 2008 Annual Report on Form 10-K may beexacerbated with regard to international operations, especially in countrieswhere we do not have well-established operations.  Such risks include those related to the needto retain key management personnel, the inability to hire and retain qualifiedemployees, increases in operating costs, facility capacity utilization,management of growth and costs related to growth, geopolitical militaryconditions, interruptions to our business, and the quality and cost oftelephone and data services infrastructure.

 

***Our lack of asignificant international presence outside of North America may******adversely affect our ability to serve existing customers orlimit our ability******to obtain new customers.***

 

Although we currently conduct operations in Canada andthe Philippines and will begin operations in Costa Rica, we do not have asignificant international presence. Our lack of significant internationaloperations outside of North America could adversely affect our business if oneor more of our customers decide to move their existing business processoutsourcing services offshore. Our lack of a significant international presenceoutside of North America may also limit our ability to gain new clients who mayrequire business process service providers to have this flexibility.

 

The movement of business process outsourcing servicesto other countries has been extensively reported in the press. Most analystscontinue to believe that many outsourced services will continue to migrate toother countries with lower wages than those prevailing in the U.S. Accordingly,unless and until we develop significant international operations outside ofNorth America, we may be competitively disadvantaged compared to a number ofour competitors who have already devoted significant time and money toestablishing extensive offshore operations.

 

If we decide to open facilities in, or otherwiseexpand into, additional countries, we may not be able to successfully establishoperations in the markets that we target. There are certain risks inherent in conducting business in othercountries including, but not limited to, exposure to currency fluctuations,difficulties in complying with foreign laws, unexpected changes in governmentprograms, policies, regulatory requirements and labor laws, difficulties instaffing and managing foreign operations, political instability, andpotentially adverse tax consequences. There can be no assurance that one or more of such factors will not havea material adverse effect on our business, growth prospects, results ofoperations, and financial condition.

 

***If we experience aninterruption to our business, our results of operations may******suffer.***

 

Our operations depend on our ability to protect ourfacilities, computer equipment, telecommunications equipment, software systemsand clients’ products and confidential client information against damage fromtelecommunications interruption, power loss, fire, natural disaster, theft,unauthorized intrusion, computer viruses, internet interruption, e-commerceinterruption, bomb threats and other emergencies. Our location in thePhilippines is exposed to a higher risk of weather related interruptions(including typhoon, flood and hurricane) than our domestic operations.  We maintain procedures and contingency plansto minimize the detrimental impact of adverse events, but if such an eventoccurs, our procedures and plans may not be successful in protecting us fromlosses or interruptions. In the event we experience temporary or permanentinterruptions or other emergencies at one or more of our facilities, ourbusiness could suffer and we may be required to pay contractual damages to ourclients, or allow our clients to terminate or renegotiate their arrangementswith us. Although we maintain property and business interruption insurance,such insurance may not adequately or timely compensate us for all losses we mayincur. Further, our telecommunication systems and networks, and our ability totimely and consistently access and use telephone, internet, e-commerce, e-mail,facsimile connections, and other forms of communication, are substantiallydependent upon telephone companies, internet service providers, and varioustelecommunication infrastructures. If such communications are interrupted on ashort- or long-term basis, our services would be similarly interrupted anddelayed.

 

**ITEM 6. EXHIBITS**

 

An *Index of Exhibits*follows the signature page of this Form 10-Q.

 

29

----

Table of Contents

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Qto be signed on its behalf by the undersigned thereunto duly authorized.

 

STARTEK, INC.

(REGISTRANT)

 

 
| By:    | /s/A. LAURENCE JONES                   |   | Date: October 30,  2009 |
|--------|----------------------------------------|--------|------------------------------|
|   | A. Laurence Jones                      |   |                         |
|   | President and Chief  Executive Officer |   |                         |
|   | (Principal Executive  Officer)         |   |                         |

 

 
| By:    | /s/ DAVID G. DURHAM                                              |   | Date: October 30,  2009 |
|--------|------------------------------------------------------------------|--------|------------------------------|
|   | David G. Durham                                                  |   |                         |
|   | Executive Vice  President, Chief Financial Officer and Treasurer |   |                         |
|   | (Principal Financial  and Accounting Officer)                    |   |                         |

 

30

----

Table of Contents

 

**EXHIBITINDEX**

 
| ** **  | ** ** | ** **                                                                                                                                                                                                                 | ** ** | **Incorporated  Herein by Reference** |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                            | ** ** | **Form**                              | ** ** | **Exhibit** | ** ** | **Filing Date** |
| ** **  | ** ** | ** **                                                                                                                                                                                                                 | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** |
| 3.1         |       | Restated Certificate of  Incorporation of the Company.                                                                                                                                                                     |       | S-1                                   |   | 3.1 |   | 1/29/1997 |
|        |       |                                                                                                                                                                                                                       |       |                                  |   |   |   |   |
| 3.2         |       | Restated Bylaws of the  Company.                                                                                                                                                                                           |       | 8-K                                   |   | 3.2 |   | 8/2/2007 |
|        |       |                                                                                                                                                                                                                       |       |                                  |   |   |   |   |
| 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*&  |       | Work Order  No. 20070105.006.S.013 effective November 30, 2008 pursuant to  Master Services Agreement No. 20070105.006.C dated January 26, 2007  between StarTek, Inc. and AT&T Services Inc. |       |                                  |   |   |   |   |
|        |       |                                                                                                                                                                                                                       |       |                                  |   |   |   |   |
| 10.2*&  |       | Amendment  2007105.006.S.014.A.001 effective March 1, 2009 between  StarTek, Inc. and AT&T Services, Inc.                                                                                               |       |                                  |   |   |   |   |
|        |       |                                                                                                                                                                                                                       |       |                                  |   |   |   |   |
| 31.1*       |       | Certification of A.  Laurence Jones pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                       |       |                                  |   |   |   |   |
|        |       |                                                                                                                                                                                                                       |       |                                  |   |   |   |   |
| 31.2*       |       | Certification of David  G. Durham 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.                                                                   |       |                                  |   |   |   |   |

 

----

| *      |   | Filed with this  Form 10-Q.                                                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                               |
| &  |   | Certain portions of  this exhibit have been omitted pursuant to a request for confidential  treatment and have been filed separately with the Securities and Exchange  Commission. |

 

31

----