Table of Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-Q**

 

**(Mark One)**

 

| **x**                                                                                                                                    | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                               | ** **                                                                                              |
| **For the quarterly period ended  September 30, 2010**                                                                              |
|                                                                                                                                     |                                                                                                    |
| **or**                                                                                                                                   |
|                                                                                                                                     |                                                                                                    |
| **o**                                                                                                                                    | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                               | ** **                                                                                              |
| **For the transition period from           to         ** |

 

**Commission file number 1-12793**

 

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**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)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x     No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).    Yes o  No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” inRule 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 check markwhether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).Yes o     Nox

 

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

 

Common Stock, $0.01 ParValue — 15,107,515 shares as of October 15, 2010.

 

 

 

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**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, 2010 and 2009 |       |
|              |                                                                                                                   |       |
|              | Condensed Consolidated Balance Sheets as of September 30,  2010  and December 31, 2009                       |       |
|              |                                                                                                                   |       |
|              | Condensed Consolidated Statements of Cash Flows for  the  nine months ended September 30, 2010 and 2009           |       |
|              |                                                                                                                   |       |
|              | 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        |                                                                                                                   |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGSTATEMENTS**

 

ThisQuarterly Report contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, includingthe following:

 

·                  certain statements,including possible or assumed future results of operations, in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”;

·                  any statements containedherein regarding the prospects for our business or any of our services;

·                  any statements preceded by, followedby 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 containedherein regarding matters that are not historical facts.

 

Our business and results ofoperations are subject to risks and uncertainties, many of which are beyond ourability to control or predict. Because of these risks and uncertainties, actualresults 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, thoseitems described herein or set forth in Item 1A. “Risk Factors” appearing in ourAnnual Report on Form 10-K for the year ended December 31, 2009.

 

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**Part I. FinancialInformation**

 

**ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)**

 

**STARTEK, INC.AND SUBSIDIARIES**

Condensed Consolidated Statements of Operations

(Dollarsin thousands, except per share data)

(Unaudited)

 
| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenue                                                       |       | $                                                    | 65,598     |                                                | $          | 72,462 |   | $ | 200,684 |   | $ | 216,463 |   |
| Cost of services                                              |       | 58,964                                               |       | 58,988                                              |       | 179,279 |   | 179,137 |   |
| Gross profit                                                  |       | 6,634                                                |       | 13,474                                              |       | 21,405 |   | 37,326 |   |
| Selling, general and administrative expenses                  |       | 10,327                                               |       | 11,084                                              |       | 31,485 |   | 31,665 |   |
| Impairment losses and restructuring charges                   |       | 450                                                  |       | —                                              |       | 1,214 |   | 6,437 |   |
| Operating (loss) income                                       |       | (4,143                                               | )          | 2,390                                               |       | (11,294 | ) | (776 | ) |
| Net interest and other income (expense)                       |       | 29                                                   |       | (38                                                 | )          | 243 |   | (216 | ) |
| (Loss) income from continuing operations before  income taxes |       | (4,114                                               | )          | 2,352                                               |       | (11,051 | ) | (992 | ) |
| Income tax expense (benefit)                                  |       | 368                                                  |       | 557                                                 |       | 1,770 |   | (126 | ) |
| Net (loss) income from continuing operations                  |       | (4,482                                               | )          | 1,795                                               |       | (12,821 | ) | (866 | ) |
| Income from discontinued operations, net of tax               |       | —                                               |       | —                                              |       | — |   | 4,640 |   |
| Net (loss) income                                             |       | $                                                    | (4,482     | )                                                   | $          | 1,795 |   | $ | (12,821 | ) | $ | 3,774 |   |
|                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Basic net (loss) income per share from:                       |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing operations                                         |       | $                                                    | (0.30      | )                                                   | $          | 0.12 |   | $ | (0.86 | ) | $ | (0.06 | ) |
| Discontinued operations                                       |       | —                                               |       | —                                              |       | — |   | 0.32 |   |
| Net (loss) income                                             |       | $                                                    | (0.30      | )                                                   | $          | 0.12 |   | $ | (0.86 | ) | $ | 0.26 |   |
|                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted net (loss) income per share from:                     |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing operations                                         |       | $                                                    | (0.30      | )                                                   | $          | 0.12 |   | $ | (0.86 | ) | $ | (0.06 | ) |
| Discontinued operations                                       |       | —                                               |       | —                                              |       | — |   | 0.32 |   |
| Net (loss) income                                             |       | $                                                    | (0.30      | )                                                   | $          | 0.12 |   | $ | (0.86 | ) | $ | 0.26 |   |
|                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average shares outstanding                           |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                         |       | 14,916                                               |       | 14,808                                              |       | 14,888 |   | 14,781 |   |
| Diluted                                                       |       | 14,916                                               |       | 15,012                                              |       | 14,888 |   | 14,781 |   |

 

*See notes to condensed consolidatedfinancial statements.*

 

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**STARTEK, INC.AND SUBSIDIARIES**

Condensed Consolidated Balance Sheets

(Dollarsin thousands, except share and per share data)

 
| ** **                                                                                                                                                                                                   | ** ** | **As of**                   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                                   | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
| **ASSETS**                                                                                                                                                                                                   |       |                             |       |   |   |
|                                                                                                                                                                                                         |       |                             |       |   |   |
| Current assets:                                                                                                                                                                                              |       |                             |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                    |       | $                                | 21,314     |   | $ | 19,591 |   |
| Investments                                                                                                                                                                                                  |       | —                           |       | 500 |   |
| Trade accounts receivable, net                                                                                                                                                                               |       | 46,948                           |       | 50,521 |   |
| Income tax receivable                                                                                                                                                                                        |       | —                           |       | 6,292 |   |
| Deferred income tax assets                                                                                                                                                                                   |       | 121                              |       | 511 |   |
| Derivative asset                                                                                                                                                                                             |       | 1,042                            |       | 628 |   |
| Prepaid expenses                                                                                                                                                                                             |       | 4,419                            |       | 5,979 |   |
| Assets held for sale                                                                                                                                                                                         |       | 810                              |       | — |   |
| Current portion of note receivable                                                                                                                                                                           |       | 660                              |       | — |   |
| Other current assets                                                                                                                                                                                         |       | 708                              |       | 1,384 |   |
| Total current assets                                                                                                                                                                                         |       | 76,022                           |       | 85,406 |   |
|                                                                                                                                                                                                         |       |                             |       |   |   |
| Property, plant and equipment, net                                                                                                                                                                           |       | 53,250                           |       | 58,045 |   |
| Long-term deferred income tax assets                                                                                                                                                                         |       | 4,126                            |       | 4,529 |   |
| Long-term note receivable, net of current portion                                                                                                                                                            |       | 2,145                            |       | — |   |
| Other assets                                                                                                                                                                                                 |       | 1,983                            |       | 1,088 |   |
| Total assets                                                                                                                                                                                                 |       | $                                | 137,526    |   | $ | 149,068 |   |
|                                                                                                                                                                                                         |       |                             |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                |       |                             |       |   |   |
|                                                                                                                                                                                                         |       |                             |       |   |   |
| Current liabilities:                                                                                                                                                                                         |       |                             |       |   |   |
| Accounts payable                                                                                                                                                                                             |       | $                                | 4,990      |   | $ | 4,884 |   |
| Accrued liabilities:                                                                                                                                                                                         |       |                             |       |   |   |
| Accrued payroll                                                                                                                                                                                              |       | 9,653                            |       | 9,253 |   |
| Accrued compensated absences                                                                                                                                                                                 |       | 3,326                            |       | 4,016 |   |
| Accrued restructuring costs                                                                                                                                                                                  |       | 658                              |       | 1,317 |   |
| Other accrued liabilities                                                                                                                                                                                    |       | 2,788                            |       | 1,897 |   |
| Deferred revenue                                                                                                                                                                                             |       | 1,264                            |       | 1,019 |   |
| Deferred income tax liabilities                                                                                                                                                                              |       | 2,195                            |       | 1,470 |   |
| Other current liabilities                                                                                                                                                                                    |       | 643                              |       | 1,117 |   |
| Total current liabilities                                                                                                                                                                                    |       | 25,517                           |       | 24,973 |   |
|                                                                                                                                                                                                         |       |                             |       |   |   |
| Accrued restructuring charges                                                                                                                                                                                |       | 1,358                            |       | 2,663 |   |
| Deferred rent                                                                                                                                                                                                |       | 3,123                            |       | 4,144 |   |
| Other liabilities                                                                                                                                                                                            |       | 610                              |       | 572 |   |
| Total liabilities                                                                                                                                                                                            |       | 30,608                           |       | 32,352 |   |
|                                                                                                                                                                                                         |       |                             |       |   |   |
| Commitments and contingencies                                                                                                                                                                                |       |                             |       |   |   |
|                                                                                                                                                                                                         |       |                             |       |   |   |
| Stockholders’ equity:                                                                                                                                                                                   |       |                             |       |   |   |
| Common stock, 32,000,000 non-convertible shares,  $0.01 par value, authorized; 15,086,098 and 14,882,990 shares issued and  outstanding at September 30, 2010 and December 31, 2009,  respectively |       | 151                              |       | 149 |   |
| Additional paid-in capital                                                                                                                                                                                   |       | 68,556                           |       | 66,699 |   |
| Accumulated other comprehensive income                                                                                                                                                                       |       | 3,537                            |       | 2,373 |   |
| Retained earnings                                                                                                                                                                                            |       | 34,674                           |       | 47,495 |   |
| Total stockholders’ equity                                                                                                                                                                              |       | 106,918                          |       | 116,716 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                              |       | $                                | 137,526    |   | $ | 149,068 |   |

 

*See notes to condensedconsolidated financial statements.*

 

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**STARTEK, INC.AND SUBSIDIARIES**

Condensed Consolidated Statements of Cash Flows

(Dollarsin thousands)

(Unaudited)

 
| ** **                                                                      | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**          | ** ** |
| ** **                                                                      | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| **Operating Activities**                                                        | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net (loss) income                                                               |       | $                               | (12,821    | ) | $ | 3,774 |   |
| Income from discontinued operations                                             |       | —                          |       | 4,640 |   |
| Loss from continuing operations                                                 |       | (12,821                         | )          | (866 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities |       |                            |       |   |   |
| Depreciation                                                                    |       | 12,830                          |       | 11,808 |   |
| Impairment of property, plant and equipment                                     |       | 3,063                           |       | 1,756 |   |
| Non-cash compensation cost                                                      |       | 1,585                           |       | 1,437 |   |
| Deferred income taxes                                                           |       | 1,728                           |       | 2,711 |   |
| Other, net                                                                      |       | (161                            | )          | 22 |   |
| Changes in operating assets and liabilities:                                    |       |                            |       |   |   |
| Trade accounts receivable, net                                                  |       | 4,564                           |       | (1,972 | ) |
| Prepaid expenses and other assets                                               |       | 97                              |       | (1,943 | ) |
| Accounts payable                                                                |       | 455                             |       | 783 |   |
| Income taxes, net                                                               |       | 5,831                           |       | 620 |   |
| Accrued and other liabilities                                                   |       | (2,702                          | )          | 568 |   |
| Net cash provided by continuing operating activities                            |       | 14,469                          |       | 14,924 |   |
| Cash used in discontinued operating activities                                  |       | —                          |       | (2,335 | ) |
| Net cash provided by operating activities                                       |       | 14,469                          |       | 12,589 |   |
|                                                                            |       |                            |       |   |   |
| **Investing Activities**                                                        |       |                            |       |   |   |
| Proceeds from disposition of investments available  for sale                    |       | 606                             |       | 8,021 |   |
| Proceeds from note receivable                                                   |       | 110                             |       | — |   |
| Purchases of property, plant and equipment                                      |       | (13,749                         | )          | (10,581 | ) |
| Net cash used in continuing investing activities                                |       | (13,033                         | )          | (2,560 | ) |
| Cash provided by discontinued investing activities                              |       | —                          |       | 7,075 |   |
| Net cash (used in) provided by investing  activities                            |       | (13,033                         | )          | 4,515 |   |
|                                                                            |       |                            |       |   |   |
| **Financing Activities**                                                        |       |                            |       |   |   |
| Principal payments on borrowings                                                |       | —                          |       | (6,855 | ) |
| Principal payments on line of credit                                            |       | (1,776                          | )          | (22,236 | ) |
| Proceeds from line of credit                                                    |       | 1,776                           |       | 22,236 |   |
| Proceeds from issuance of common stock                                          |       | 272                             |       | 190 |   |
| Principal payments on capital lease obligations                                 |       | (126                            | )          | (181 | ) |
| Net cash provided by (used in) continuing  financing activities                 |       | 146                             |       | (6,846 | ) |
| Cash provided by discontinued financing activities                              |       | —                          |       | — |   |
| Net cash provided by (used in) financing  activities                            |       | 146                             |       | (6,846 | ) |
| Effect of exchange rate changes on cash                                         |       | 141                             |       | 625 |   |
| Net increase in cash and cash equivalents                                       |       | 1,723                           |       | 10,883 |   |
| Cash and cash equivalents at beginning of period                                |       | 19,591                          |       | 9,580 |   |
| Cash and cash equivalents at end of period                                      |       | $                               | 21,314     |   | $ | 20,463 |   |
|                                                                            |       |                            |       |   |   |
| **Supplemental Disclosure of Cash  Flow Information**                           |       |                            |       |   |   |
| Cash paid for interest                                                          |       | $                               | 47         |   | $ | 148 |   |
| Income taxes paid                                                               |       | $                               | 233        |   | $ | 726 |   |
| Property, plant and equipment acquired or  refinanced under long-term debt      |       | $                               | —     |   | $ | 257 |   |
| Property, plant and equipment sold under a note  receivable                     |       | $                               | 2,915      |   | $ | — |   |

 

*See notes to condensedconsolidated financial statements.*

 

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**STARTEK, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Inthousands, except per share data)

 

**1.  BASIS OF PRESENTATION**

 

The accompanying UnauditedCondensed Consolidated Financial Statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information and instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  These financial statementsreflect all adjustments (consisting only of normal recurring entries, except asnoted) which, in the opinion of management, are necessary for fairpresentation.  Operating results duringthe three and nine months ended September 30, 2010, are not necessarilyindicative of operating results that may be expected during any other interimperiod of 2010 or the year ending December 31, 2010.

 

The consolidated balancesheet as of December 31, 2009 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, 2009.

 

Certain reclassificationshave been made to 2009 information to conform to the 2010 presentation.

 

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.

 

***Recently AdoptedAccounting Pronouncements***

 

*Accounting Standards Update No. 2010-06 “**ImprovingDisclosures about Fair Value Measurements**” (“ASUNo. 2010-06”)*

 

InJanuary 2010, the Financial Accounting Standards Board (“FASB”) issued ASUNo. 2010-06. This update requires additional disclosure within the rollforward of activity for assets and liabilities measured at fair value on arecurring basis, including transfers of assets and liabilities between Level 1and Level 2 of the fair value hierarchy and the separate presentation ofpurchases, sales, issuances and settlements of assets and liabilities withinLevel 3 of the fair value hierarchy. In addition, the update requires enhanceddisclosures of the valuation techniques and inputs used in the fair valuemeasurements within Levels 2 and 3. The new disclosure requirements areeffective for interim and annual periods beginning after December 15,2009, except for the disclosure of purchases, sales, issuances and settlementsof Level 3 measurements. Those disclosures are effective for fiscal yearsbeginning after December 15, 2010. We adopted ASU No. 2010-06 relatedto Levels 1 and 2 disclosures effective April 1, 2010, and the adoption ofthis guidance did not have a material effect on our Condensed ConsolidatedFinancial Statements.

 

**2.  SEGMENT INFORMATION**

 

Weoperate within three business segments: U.S., Canada and Offshore.  The business segments align with thoseregions in which our services are rendered.  As of September 30, 2010, our U.S.segment included the operations of eleven facilities in the U.S.; our Canadasegment included the operations of four facilities in Canada; and our Offshoresegment included the operations of two facilities in the Philippines and one inCosta Rica.  We use gross profit as ourmeasure of profit and loss for each business segment and do not allocateselling, general and administrative expenses to our business segments.

 

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Informationabout our reportable segments, which correspond to the geographic areas inwhich we operate, is as follows:

 
| ** **        | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **        | ** ** | **2010**                                                                   | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenue:**      |       |                                                                       |       |                                                                      |       |   |   |   |   |
| United States     |       | $                                                                          | 40,838     |                                                                      | $          | 50,490 |   | $ | 128,932 |   | $ | 151,887 |   |
| Canada            |       | 15,169                                                                     |       | 18,799                                                                    |       | 49,690 |   | 57,212 |   |
| Offshore          |       | 9,591                                                                      |       | 3,173                                                                     |       | 22,062 |   | 7,364 |   |
| Total             |       | $                                                                          | 65,598     |                                                                      | $          | 72,462 |   | $ | 200,684 |   | $ | 216,463 |   |
|              |       |                                                                       |       |                                                                      |       |   |   |   |   |
| **Gross profit:** |       |                                                                       |       |                                                                      |       |   |   |   |   |
| United States     |       | $                                                                          | 6,164      |                                                                      | $          | 9,848 |   | $ | 19,526 |   | $ | 28,730 |   |
| Canada            |       | 841                                                                        |       | 3,400                                                                     |       | 3,978 |   | 8,414 |   |
| Offshore          |       | (371                                                                       | )          | 226                                                                       |       | (2,099 | ) | 182 |   |
| Total             |       | $                                                                          | 6,634      |                                                                      | $          | 13,474 |   | $ | 21,405 |   | $ | 37,326 |   |

 

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

 

Basic and diluted net (loss)income per common share is computed on the basis of our weighted average numberof common shares outstanding, as determined by using the calculations outlinedbelow:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                      | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Loss) income from continuing operations        |       | $                                | (4,482     | )                               | $          | 1,795 |   | $ | (12,821 | ) | $ | (866 | ) |
| Income from discontinued operations, net of tax |       | —                           |       | —                          |       | — |   | 4,640 |   |
| Net (loss) income                               |       | $                                | (4,482     | )                               | $          | 1,795 |   | $ | (12,821 | ) | $ | 3,774 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares of common stock         |       | 14,916                           |       | 14,808                          |       | 14,888 |   | 14,781 |   |
| Dilutive effect of stock options                |       | —                           |       | 204                             |       | — |   | — |   |
| Common stock and common stock equivalents       |       | 14,916                           |       | 15,012                          |       | 14,888 |   | 14,781 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Basic net (loss) income per share from:         |       |                             |       |                            |       |   |   |   |   |
| Continuing operations                           |       | $                                | (0.30      | )                               | $          | 0.12 |   | $ | (0.86 | ) | $ | (0.06 | ) |
| Discontinued operations                         |       | —                           |       | —                          |       | — |   | 0.32 |   |
| Net (loss) income                               |       | $                                | (0.30      | )                               | $          | 0.12 |   | $ | (0.86 | ) | $ | 0.26 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Diluted net (loss) income per share from:       |       |                             |       |                            |       |   |   |   |   |
| Continuing operations                           |       | $                                | (0.30      | )                               | $          | 0.12 |   | $ | (0.86 | ) | $ | (0.06 | ) |
| Discontinued operations                         |       | —                           |       | —                          |       | — |   | 0.32 |   |
| Net (loss) income                               |       | $                                | (0.30      | )                               | $          | 0.12 |   | $ | (0.86 | ) | $ | 0.26 |   |

 

Diluted earnings per shareis computed on the basis of our weighted average number of common sharesoutstanding plus the effect of dilutive outstanding stock options andnon-vested restricted stock using the treasury stock method.  Anti-dilutive securities totaling 2,407 and2,407 in the three and nine months ended September 30, 2010, respectively,and 2,187 in the nine months ended September 30, 2009, were not includedin our calculation due to our net loss from continuing operations during thoseperiods, and anti-dilutive securities totaling 847 in the three months ended September 30,2009, were not included in our calculation because the stock options’ exerciseprices were greater than the average market price of our common shares duringthe period.

 

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**4.  IMPAIRMENT LOSSES AND RESTRUCTURING CHARGES**

 

***Impairment Losses***

 

During the three and ninemonths ended September 30, 2010, we recorded approximately $450 (all inour U.S. segment) and $3,063 of impairment losses ($2,655 in our U.S. segmentand $408 in our Canadian segment), due to the impairment of certain long-livedassets for which the carrying value of those assets is not recoverable.  The impairment losses recorded during thethree months ended September 30, 2010, related to certain long-livedassets including furniture, fixtures and equipment located in two sites thatare impacted by the loss of AT&T’s wireline business (described further inNote 6) whereby the future cash flows do not support the carrying value of theassets.  In the first nine months of 2010we have committed to a plan to sell the building at our closed facility inLaramie, Wyoming.  We received anestimate of the selling price, and have reduced the value of the building tofair value or approximately $810.  Wereclassified these long-lived assets as a current asset held for sale on ourCondensed Consolidated Balance Sheet.  In order for an asset to be heldfor sale, management must determine that the asset is to be held for sale inits current condition, an active plan to complete the sale of the asset hasbeen initiated and the sale of the asset is probable within one year.  We evaluated the facility during the firstnine months of 2010 and determined these assets meet all the criteria for anasset held for sale.  The remainder ofthe impairment losses recorded during the nine months ended September 30,2010 in U.S. and our Canadian segments relate to computer and telephoneequipment, furniture and fixtures, leasehold improvements and software for locationswhere the carrying value is not recoverable.

 

During the nine months endedSeptember 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 was not recoverable.

 

***Restructuring Charges***

 

Wehave closed the following facilities, and have recorded restructuring chargesrelated to lease costs and other expenses related to the facilityclosures.  We record expenses in additionto the initially recognized expense when a change in estimate occurs or toaccrete a discounted liability to the amount expected to be paid.  We recognized the liability when it wasincurred, instead of upon commitment to a plan.

 

·      Regina, Saskatchewan, Canada — February 2009

·      Victoria, Texas — January 2010

·      Laramie, Wyoming — January 2010

·      Thunder Bay, Ontario, Canada — March 2010

 

During the nine months endedSeptember 30, 2010, we entered into sublease agreements for our ThunderBay, Ontario, Canada and Victoria, Texas facilities through the remainder oftheir respective lease terms.  We assumeda sublease in our estimated restructuring liabilities for Thunder Bay andVictoria and do not expect to incur material changes to the restructuringliabilities in future periods as a result of the subleases.

 

The cumulative amount paidas of September 30, 2010 related to the above closures was $456 in ourU.S. segment and $2,333 in our Canadian segment.  We expect to incur $387 in our U.S. segmentand $4,082 in our Canadian segment in expense relating to the aboveclosures.  We expect completion of theRegina and Laramie restructuring plans no later than 2013and 2011,respectively; however, it may be earlier or later depending on our ability tosublease the facility, buy-out the lease or sell the facility.  We have made certain assumptions related toour ability to sublease these facilities. Refer to Note 8, “Fair Value Measurements,” of this Form 10-Q, foradditional information on the fair value measurements for all assets andliabilities, including restructuring charges, that are measured at fair valuein the Condensed Consolidated Financial Statements.

 

Asummary of the activity under the restructuring plans as of September 30,2010, and changes during the nine months ended September 30, 2010, ispresented below:

 

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| ** **                              | ** ** | **Facility-Related Costs** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Regina**                      | ** ** | **Thunder  Bay** | ** ** | **Canada  Total** | ** ** | **Victoria** | ** ** | **Laramie** | ** ** | **U.S. Total** | ** ** | **Company  Total** | ** ** |
| Balance as of January 1, 2010      |       | $                               | 3,980      |   | $ | — |   | $ | 3,980 |   | $ | — |   | $ | — |   | $ | — |   | $ | 3,980 |   |
| Expense                                 |       | (1,802                          | )          | (422 | ) | (2,224 | ) | 288 |   | 87 |   | 375 |   | (1,849 | ) |
| Payments, net of receipts for sublease  |       | (1,039                          | )          | (332 | ) | (1,371 | ) | (401 | ) | (55 | ) | (456 | ) | (1,827 | ) |
| Reclassification of long-term liability |       | 170                             |       | 701 |   | 871 |   | 766 |   | 3 |   | 769 |   | 1,640 |   |
| Foreign currency translation adjustment |       | 19                              |       | 53 |   | 72 |   | — |   | — |   | — |   | 72 |   |
| Balance as of September 30, 2010   |       | $                               | 1,328      |   | $ | — |   | $ | 1,328 |   | $ | 653 |   | $ | 35 |   | $ | 688 |   | $ | 2,016 |   |

 

***Note Receivable***

 

In connection with thesublease of our Victoria, Texas facility, the sublessee is making payments tous for certain furniture, fixtures, equipment and leasehold improvements in thefacility.  The payments will be made overthe remainder of the lease term, after which time the sublessee will own theassets.  As of September 30, 2010,we have recorded a total note receivable of $2.8 million for the payments dueunder this agreement.

 

**5.  DISCONTINUED OPERATIONS**

 

Duringthe nine months ended September 30, 2009, we recorded income fromdiscontinued operations, net of tax, of $4,640 due to the sale of the assets ofDomain.com, our then-wholly owned subsidiary, to A. Emmet Stephenson, Jr., Inc.(“Mr. Stephenson”).  Mr. Stephensonis one of our co-founders, managed the Domain.com subsidiary since 2006 andowns approximately 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 assets were sold inexchange for cash of $7,075, which resulted in a gain on the sale of$6,937.  Operating income from Domain.comprior to the sale was $27 and tax expense totaled $2,324, which resulted in$4,640 in income from discontinued operations, net of tax.  The results of operations and cash flows ofDomain.com have been reported in the Condensed Consolidated Statements ofOperations as discontinued operations.

 

**6.  PRINCIPAL CLIENTS**

 

The following tablerepresents revenue concentration of our principal clients.

 
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                    | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| AT&T Services, Inc. and AT&T  Mobility, LLC, subsidiaries of AT&T, Inc. |       | 66.2                             | %          | 62.7                            | %          | 67.2 | % | 63.9 | % |
| T-Mobile USA, Inc., a subsidiary of Deutsche  Telekom                                    |       | 18.3                             | %          | 21.9                            | %          | 17.8 | % | 21.6 | % |

 

The loss of a principalclient, a material reduction in the amount of business we receive from aprincipal client, renegotiation of price by a principal client, or the loss,delay or termination of a principal client’s product launch or service offeringwould adversely affect our business, revenue and operating results. We may notbe able to retain our principal clients or, if we were to lose any of ourprincipal clients, we may not be able to timely replace the revenue generatedby the lost clients. Loss of a principal client could result from many factors,including consolidation or economic downturns in our clients’ industries, asdiscussed further below.

 

In July 2010, weexecuted agreements with AT&T to ramp-down certain wireline services thatwe provide them.  Approximately 260full-time equivalent agent positions in two of our U.S. sites will beeliminated through the first half of 2011 as the business declines.  We plan to close one of the sites, which islocated in Greeley, Colorado, by the end of 2010 (except for a small number ofcorporate personnel).  Agents in thissite that work on other customers or lines of business will be relocated to ourother facility in Greeley, Colorado.

 

Our work for AT&T iscovered by several contracts for a variety of different lines of AT&Tbusiness.  Some of these contracts expirein 2011 and others in 2012.  Although wehave negotiated extended terms for several of these contracts, others may notbe extended past their initial terms. The initial term of our master services agreement covering all AT&Twork expired in January 2010.  Afterthe initial term, the agreement automatically renews month-to-monththereafter.  We are currently negotiatinga new master services agreement and expect to execute the agreement during thefourth quarter of 2010. Until the new agreement is signed, our servicesprovided to AT&T are covered under the existing master services agreement.On October 27, 2010, we entered into an agreement with AT&T for the renewalof certain services we provide to them with regard to their wireless consumer customers.During the third quarter of 2010, this business represented approximately 52%of our revenue with AT&T. The agreement is effective through September 1,2012. The agreement is filed as Exhibit 10.1 to this Form 10-Q.

 

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Our call center servicesagreement with T-Mobile became effective as of October 1, 2007 and has aninitial term of two years.  After theinitial term, the contract automatically renews thereafter, unless either partyprovides written notice of termination at least 60 days prior to the expirationof the then-current term.  Although theinitial term of the contract ended on September 30, 2009, the contractautomatically renewed through October 31, 2010.  In August 2010, T-Mobile indicated thatthey would hold a formal process for selecting vendors for approximately halfof the work that we currently service along with an additional, significantopportunity with work that we do not currently perform for T-Mobile.  We participated in the first stage of thisprocess and have been selected to submit a full formal response.  We expect a final decision to be made by theend of 2010.  We expect to beselected as a continuing vendor for T-Mobile but we can provide no assurancethat this will be the case nor that if we are selected that we will be selectedto perform work at the level that we currently provide, or that the terms ofany new agreement will be comparable to those currently provided for under ourexisting agreement.  If we are notselected as a vendor, if we are selected as a vendor but at a significantlyreduced level, or if the terms of any new agreement are less favorable than theexisting agreement, it would have a material adverse effect on our business,results of operations, and financial condition. Until the process is complete, we continue to provide services toT-Mobile under the existing agreement.

 

**7.  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 three to nine months, and are principallyunsecured foreign exchange contracts. The market risk exposure is essentially limited to risk related tocurrency rate movements.  We operate inCanada, the Philippines and Costa Rica. The functional currencies of our Canadian and Philippine operations arethe Canadian dollar and the Philippine peso, respectively, which are used topay labor and other operating costs in those countries. However, our clientcontracts primarily generate revenues which are paid to us in U.S.dollars.  In Costa Rica, our functionalcurrency is the U.S. dollar and the majority of our costs are denominated inU.S. dollars.  We have elected to followcash flow hedge accounting in order to associate the results of the hedges withforecasted future expenses.  The currentmark-to-market gain or loss is recorded in accumulated other comprehensiveincome (“AOCI”) as a component of stockholders’ equity and will bere-classified to operations as the forecasted expenses are incurred, typicallywithin one year.  During the three andnine months ended September 30, 2010 and 2009, our cash flow hedges werehighly effective and there were no amounts charged to the CondensedConsolidated Statements of Operations for hedge ineffectiveness.

 

During the three and ninemonths ended September 30, 2010, we entered into Canadian dollar forwardcontracts with UMB Bank and US Bank for a notional amount of 17,400 and 47,000Canadian dollars, respectively, to hedge our foreign currency risk with respectto labor costs in Canada.  During the threeand nine months ended September 30, 2010, we entered into non-deliverableforward contracts with respect to the Philippine peso with UMB Bank and US Bankfor a notional amount of 288,000 and 610,000 Philippine pesos, respectively, tohedge our foreign currency risk with respect to labor costs in thePhilippines.  As of September 30,2010, we have not entered into any arrangements to hedge our exposure tofluctuations in the Costa Rican colon relative to the U.S. dollar.

 

Thefollowing table shows the notional principal of our derivative instruments asof September 30, 2010:

 
| ** **                                   | ** ** | **Currency**    | ** ** | **Notional  Principal** | ** ** |
|----------------------------------------------|------------|-----------------|------------|-------------------------|------------|
| Instruments qualifying as accounting hedges: |       |            |       |                    |       |
| Foreign exchange contracts                   |       | Canadian dollar |       | CDN                     | 32,000     |   |
| Foreign exchange contracts                   |       | Philippine peso |       | PHP                     | 288,000    |   |

 

The above Canadian dollarforeign exchange contracts are to be delivered periodically through June 2011at a purchase price of approximately $30,253, and the above Philippine pesoforeign exchange contracts are to be delivered periodically through December 2010at a purchase price of approximately $6,360, and as such we expect unrealizedgains and losses reported in AOCI will be reclassified to earnings during thenext twelve months.  The estimates offair value are based on applicable and commonly used pricing models and prevailingfinancial market information as of September 30, 2010.  Refer to Note 8, “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.

 

Thefollowing table shows our derivative instruments measured at gross fair valueas reflected in the Condensed Consolidated Balance Sheets as of September 30,2010 and December 31, 2009:

 

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| ** **                 | ** ** | **As of**                   | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
| Derivative assets:         |       |                             |       |   |   |
| Foreign exchange contracts |       | $                                | 1,042      |   | $ | 628 |   |
|                            |            |                                  |            |  |  |  |  |

 

The following table shows the effect of ourderivative instruments designated as cash flow hedges in the CondensedConsolidated Statements of Operations for the three and nine months endedSeptember 30, 2010 and 2009:

 
| ** **                 | ** ** | **Three Months Ended**                          | ** ** | ** **                                               | ** ** |
|----------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                 | ** ** | **September 30, 2010**                          | ** ** | **September 30, 2009**                         | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Gain  Recognized in  AOCI, net of  tax** | ** ** | **Gain  Reclassified  from AOCI into  Income** | ** ** | **Loss  Recognized in  AOCI, net of  tax** | ** ** | **Gain  Reclassified  from AOCI into  Income** | ** ** | **Location of Gain  Reclassified from  AOCI into Income** | ** ** |
| Cash flow hedges:          |       |                                                      |       |                                                     |       |   |   |   |   |   |   |
| Foreign exchange contracts |       | $                                                         | 1,100      |                                                     | $          | 267 |   | $ | (220 | ) | $ | 1,125 |   | Cost of services |   |
|                            |            |                                                           |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                 | ** ** | **Nine Months Ended**                           | ** ** | ** **                                               | ** ** |
|----------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                 | ** ** | **September 30, 2010**                          | ** ** | **September 30, 2009**                         | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Loss  Recognized in  AOCI, net of  tax** | ** ** | **Gain  Reclassified  from AOCI into  Income** | ** ** | **Gain  Recognized in  AOCI, net of  tax** | ** ** | **Loss  Reclassified  from AOCI into  Income** | ** ** | **Location of Gain (Loss)  Reclassified from  AOCI into Income** | ** ** |
| Cash flow hedges:          |       |                                                      |       |                                                     |       |   |   |   |   |   |   |
| Foreign exchange contracts |       | $                                                         | (300       | )                                                        | $          | 1,138 |   | $ | 2,806 |   | $ | (506 | ) | Cost of services |   |
|                            |            |                                                           |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |

 

**8.  FAIR VALUE MEASUREMENTS**

 

***Derivative Instruments and Hedging Activities***

 

Ourderivative instruments are valued using third-party broker or counterpartystatements, derived from pricing models using inputs based upon marketinformation, 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.

 

***Restructuring Charges***

 

As described in Note 4, “ImpairmentLosses and Restructuring Charges,” during the first nine months of 2010 weclosed facilities in Thunder Bay, Ontario, Victoria, Texas and Laramie,Wyoming.  In February 2009, weclosed our facility in Regina, Saskatchewan. We estimated the fair value of our restructuring charges using adiscounted cash flow model.  The cashflows consist of the future lease payment obligations required under the leaseagreements.  Future cash flows alsoinclude estimated property taxes through the remainder of the lease terms,which are valued based upon historical tax payments.  The future cash flows were discounted using arate of 3%.  In the restructuring plansfor Thunder Bay, Victoria and Regina, we made an assumption that we would beable to sublease the facilities prior to the lease expiration based on athird-party broker’s assessment of our ability to successfully negotiate earlytermination agreements with landlords and/or to sublease the facility.  Given that the restructuring charges werevalued using our internal estimates using a discounted cash flow model, we haveclassified the accrued restructuring costs as Level 3 in the fair valuehierarchy.

 

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***Long-Lived Assets***

 

As described in Note 4, “ImpairmentLosses and Restructuring Charges,” during the three and nine months ended September 30,2010, we recorded approximately $450 (all in our U.S. segment) and $3,063 ofimpairment losses ($2,655 in our U.S. segment and $408 in our Canadiansegment), respectively, due to the impairment of certain long-livedassets.  The long-lived assets primarilyinclude computer and telephone equipment, furniture and fixtures, leaseholdimprovements and software.  For assetswhich were not recoverable through future cash flows or could not be used inanother facility, we reduced the carrying value to fair value.  The fair value of these long-lived assetsafter the impairment charge was $5,874 for the assets impaired during the threemonths ended September 30, 2010 and $9,029 for the assets impaired duringthe nine months ended September 30, 2010. Given that the impairment losses were valued using internal estimates,we have classified the remaining fair value of long-lived assets as Level 3 inthe fair value hierarchy.

 

Included in impairmentlosses during the nine months ended September 30, 2010, is $200 related toa change in estimated fair value of the building in our Laramie, Wyominglocation, which we have classified as held for sale.  During the nine months ended September 30,2010, we committed to a plan to sell the assets in this closed location.  The measurement of the fair value of thebuilding was based upon our third-party real estate broker’s estimate of fairvalue using the sale prices of comparable assets.  As these inputs to the determination of fairvalue are based upon non-identical assets and use significant unobservableinputs, we have classified the assets as Level 3 in the fair value hierarchy.

 

***Fair Value 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.  Assets and liabilities are classified intheir entirety based on the lowest level of input that is significant to thefair value measurement.

 
| ** **                                                | ** ** | **Assets Measured at Fair Value**                                     | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **on a Recurring Basis as of September 30, 2010** | ** ** |
| ** **                                                | ** ** | **Level 1**                                                                          | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                   | ** ** | ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Foreign exchange contracts                                |       | $                                                                                         | —     |   | $ | 1,042 |   | $ | — |   | $ | 1,042 |   |
| Total fair value of assets measured on a recurring  basis |       | $                                                                                         | —     |   | $ | 1,042 |   | $ | — |   | $ | 1,042 |   |

 
| ** **                                                         | ** ** | **Assets and Liabilities Measured at Fair Value on a**                       | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Non-Recurring Basis During the Nine Months ended September 30, 2010** | ** ** |
| ** **                                                         | ** ** | **Level 1**                                                                                                     | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                            |       |                                                                                                                 |       |   |   |   |   |   |   |
| Assets held for sale                                               |       | $                                                                                                                    | —     |   | $ | — |   | $ | 810 |   | $ | 810 |   |
| Property, plant and equipment, net                                 |       | —                                                                                                               |       | — |   | 9,029 |   | 9,029 |   |
| Total fair value of assets measured on a  non-recurring basis      |       | $                                                                                                                    | —     |   | $ | — |   | $ | 9,839 |   | $ | 9,839 |   |
|                                                               |       |                                                                                                                 |       |   |   |   |   |   |   |
| Liabilities:                                                       |       |                                                                                                                 |       |   |   |   |   |   |   |
| Accrued restructuring costs                                        |       | $                                                                                                                    | —     |   | $ | — |   | $ | 2,587 |   | $ | 2,587 |   |
| Total fair value of liabilities measured on a  non-recurring basis |       | $                                                                                                                    | —     |   | $ | — |   | $ | 2,587 |   | $ | 2,587 |   |

 

**9.  DEBT**

 

OnJuly 28, 2010, we entered into a business loan agreement and a promissorynote (together the “Agreement”) with UMB Bank Colorado, N.A. (“UMB Bank”),effective August 1, 2010, to renew our $15 million secured revolving lineof credit under a previous business loan agreement with UMB Bank that expiredby its terms on August 1, 2010.  TheAgreement is effective through August 1, 2011.  There was no balanceoutstanding on the line of credit as of September 30, 2010.

 

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

 

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securityinterest in all of our present and future accounts receivable, generalintangibles, and owned real property.  Inaddition, under the Agreement, we are subject to certain financial covenants,which include maintaining 1) a ratio of total liabilities to tangible net worthof less than 1.0 to 1.0, 2) a tangible net worth of at least $100 million, 3)unencumbered liquid assets, defined as cash, certificates of deposit andmarketable securities, of at least $10 million measured on the last day of eachfiscal quarter and 4) a cash flow coverage ratio, as defined in the Agreement,of greater than 1.50 to 1.0 measured on the last day of each fiscal quarter forthe previous twelve months.  As of September 30,2010, we were in compliance with our debt covenants.

 

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

 

The following represents thecomponents of other comprehensive (loss) income:

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                  | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net (loss) income                                           |       | $                                | (4,482     | )                               | $          | 1,795 |   | $ | (12,821 | ) | $ | 3,774 |   |
| Other comprehensive (loss) income:                          |       |                             |       |                            |       |   |   |   |   |
| Foreign currency translation adjustments, net of  tax       |       | 1,038                            |       | 495                             |       | 752 |   | 631 |   |
| Change in fair value of derivative instruments,  net of tax |       | 1,267                            |       | 358                             |       | 412 |   | 2,365 |   |
| Comprehensive (loss) income                                 |       | $                                | (2,177     | )                               | $          | 2,648 |   | $ | (11,657 | ) | $ | 6,770 |   |

 

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

** **
| ** **                                             | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Accumulated foreign currency translation  adjustments: |       |                                                     |       |                                                    |       |   |   |   |   |
| Beginning balance                                      |       | $                                                        | 1,693      |                                                    | $          | 1,226 |   | $ | 1,979 |   | $ | 1,090 |   |
| Translation adjustments                                |       | 1,032                                                    |       | 800                                                     |       | 783 |   | 1,018 |   |
| Taxes associated with translation adjustments          |       | 6                                                        |       | (305                                                    | )          | (31 | ) | (387 | ) |
| Ending balance                                         |       | $                                                        | 2,731      |                                                    | $          | 1,721 |   | $ | 2,731 |   | $ | 1,721 |   |
| Accumulated unrealized derivative gains (losses) :     |       |                                                     |       |                                                    |       |   |   |   |   |
| Beginning balance                                      |       | $                                                        | (461       | )                                                       | $          | 563 |   | $ | 394 |   | $ | (1,444 | ) |
| Gain (loss) reclassified to earnings, net of tax       |       | 167                                                      |       | 578                                                     |       | 712 |   | (441 | ) |
| Change in fair value of cash flow hedges, net of  tax  |       | 1,100                                                    |       | (220                                                    | )          | (300 | ) | 2,806 |   |
| Ending balance                                         |       | $                                                        | 806        |                                                    | $          | 921 |   | $ | 806 |   | $ | 921 |   |

 

**11.  SHARE-BASED COMPENSATION**

 

Our share-based compensationarrangements include grants of stock options and restricted stock awards underthe StarTek, Inc. 2008 Equity Incentive Plan, which replaced the StarTek, Inc.Stock Option Plan and StarTek, Inc. Directors’ Stock Option Plan, certainawards granted outside of these plans and our Employee Stock PurchasePlan.  Refer to Note 11, “Share-BasedCompensation,” in Item 8. “Financial Statements and Supplementary FinancialData” appearing in our Annual Report on Form 10-K for the year ended December 31,2009 for further information on our share-based compensation arrangements.  The compensation cost that has been chargedagainst income related to share-based compensation for the three months ended September 30,2010 and 2009 was $561 and $500, respectively, and is included in selling, generaland administrative expense in our Condensed Consolidated Statements ofOperations.  The compensation cost thathas been charged against income related to share-based compensation for thenine months ended September 30, 2010 and 2009 was $1,585 and $1,437,respectively.  As of September 30,2010, there was $2,825 of total unrecognized compensation cost related tonon-vested stock options and $586 related to non-vested restricted stockawards.  That cost is expected to berecognized over a weighted-average period of 2.4 years and 2.0 years for thestock options and restricted stock awards, respectively.

 

**12.  INCOME TAXES**

 

Incometaxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax creditcarryforwards.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered

 

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orsettled.  The effect of a change in taxrates on deferred tax assets and liabilities is recognized in income in theperiod during which such rates are enacted.

 

Weconsider all available evidence to determine whether it is more likely than notthat some portion or all of the deferred tax assets will be realized.  The ultimate realization of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become realizable.  Management considers the scheduled reversalof deferred tax liabilities (including the impact of available carryback andcarryforward periods), and projected taxable income in assessing the realizabilityof deferred tax assets.  In making suchjudgments, significant weight is given to evidence that can be objectivelyverified.  Based on all availableevidence, in particular our three-year historical cumulative losses, recentoperating losses and an expected U.S. pre-tax loss for the fiscal year ending December 31,2010, we recorded a valuation allowance against our U.S. net deferred taxassets, which increased tax expense by $6,310 during the nine months ended September 30,2010.  The valuation allowance fordeferred tax assets as of September 30, 2010 was $6,483.  No valuation allowance was recorded as of December 31,2009.  In order to fully realize the U.S.deferred tax assets, we will need to generate sufficient taxable income infuture periods before the expiration of the deferred tax assets governed by thetax code.

 

**13.  SUBSEQUENT EVENT**

 

On October 27, 2010, we entered into anagreement with AT&T Services, Inc. for the renewal of certain serviceswe provide to them with regard to their wireless consumer customers.  During the third quarter of 2010, thisbusiness represented approximately 52% of our revenue with AT&T.  The agreement is effective through September 1,2012.  The agreement is filed as Exhibit 10.1to this Form 10-Q.

 

**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing discussion and analysis should be read in conjunction with ourUnaudited Condensed Consolidated Financial Statements and related Notesincluded elsewhere in this Quarterly Report on Form 10-Q, the ConsolidatedFinancial Statements and related Notes included in our Annual Report on Form 10-Kfor the year ended December 31, 2009, 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, 2009.

 

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**

 

StarTekis a provider of business process outsourcing services.  We partner with our clients to meet theirbusiness objectives and improve customer retention, increase revenues andreduce costs through an improved customer experience.  Our solutions leverage industry knowledge,best business practices, skilled agents, proven operational excellence andflexible technology.  The StarTek comprehensiveservice suite includes customer care, sales support, complex order processing,accounts receivable management, technical and product support and otherindustry-specific processes.

 

Weseek to become a market leader in providing high-value services to clients. Ourapproach is to develop relationships with our clients that are partnering andcollaborative in nature and create industry-based solutions to meet our clients’business needs.  To be a leader in themarket, our strategy is to:

 

·                  grow our existing clientbase by deepening and broadening our relationships,

·                  add new clients and continueto diversify our client base,

·                  improve the profitability ofour business through operational improvements and securing higher marginbusiness,

·                  achieve site optimization atour facilities and close facilities that are not financially viable long-term,

·                  expand our global deliveryplatform by growing internationally in Asia and Latin America,

·                  invest in our StarTek@Homeplatform to increase our presence of home agents,

·                  broaden our serviceofferings by providing more technology solutions,

·                  enter new vertical markets,including healthcare, insurance and technology to diversify our client base and

·                  make prudent acquisitions toexpand our business scale and service offerings.

 

Weoperate within three business segments: U.S., Canada and Offshore.  The business segments align with the regionsin which our services are rendered.  Asof September 30, 2010, our U.S. segment included the operations of elevenfacilities in the U.S.; our Canada segment included the operations of fourfacilities in Canada; and our Offshore segment included the operations of twofacilities in the Philippines and one in Costa Rica.  As of September 30, 2009, there werethirteen, five and one facilities in the U.S., Canada and Offshore segments,respectively.  We use gross profit as ourmeasure of profit and loss for each business segment and do not allocateselling, general and administrative expenses to our business segments.

 

Overall economic conditionshave impacted the telecommunications industry and our clients.  We have continued to notice a downturn inthis sector which adversely affected our results in the first nine months of2010.  The growth in wireless subscribersappears to be slowing, and our clients serving traditional “wireline,” orlandline telephone services, are experiencing decreased demand.  We observed lower call volumes in our NorthAmerican facilities in the first nine months of 2010 from our two largestcustomers compared to the first nine months of 2009, which adversely affectedour results.  We expect North Americancall volumes

 

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to continue to declinethroughout the remainder of 2010. However, in the first nine months of 2010, we have seen strong demandfor our Offshore call center services, primarily in the Philippines, which weexpect to continue.

 

In response to overalleconomic conditions and the industry slowdown, we have observed a greater focuson cutting costs by our customers.  Thecost cutting by our customers impacted us during the second quarter of 2010when AT&T decided to ramp down a majority of its wireline business with us.  Approximately 260 full-time equivalent agentpositions in two of our U.S. sites will be eliminated through the first half of2011 as the business declines.  We planto close one of the sites, which is located in Greeley, Colorado, by the end of2010 (except for a small number of corporate personnel).  Agents in this site that work on othercustomers or lines of business will be relocated to our other facility inGreeley, Colorado.

 

We have observed that inorder to reduce their costs, customers are concentrated on 1) shifting a largerportion of their customer care offshore, 2) increasing their use of outsourcedproviders and 3) decreasing the number of agents handling calls.  In addition, the telecommunications spacecontinues to shift away from wireline services, to wireless services as manyconsumers disconnect their home telephone lines in favor of using wirelessdevices, leading to lower call volumes among wireline clients.  These telecommunications industry trendscould adversely impact our financial results for the remainder of 2010;however, the shift toward outsourced and offshore providers could positivelyimpact our business because of our increased presence in Costa Rica and thePhilippines.  Given that over 95% of ourrevenue is concentrated in the telecommunications industry, the speed andintensity in which these trends develop could adversely affect ourbusiness.  Our strategy includesexpanding into other vertical markets, including healthcare, insurance andtechnology, diversifying our client base in order to reduce our exposure to therisks relating to the telecommunications industry, and expanding our offshoreplatform to keep pace with the anticipated higher demand for those services.

 

**SIGNIFICANTDEVELOPMENTS DURING THE THREE MONTHS ENDED SEPTEMBER 30, 2010**

 

***Site Closures***

 

As a result of the loss of amajority of our wireline business with AT&T described above, we decided toclose our site in Greeley, Colorado by the end of 2010 (except for a smallnumber of corporate personnel).  Agentsin this site that work on other customers or lines of business will berelocated to our other facility in Greeley, Colorado.  In connection with this lost business, ourcash flows from the site in Greeley, Colorado that we expect to close and the otheraffected site do not support the carrying value of the assets, and as such werecorded approximately $0.5 million of impairment losses during the threemonths ended September 30, 2010.

 

**RESULTS OF OPERATIONS — THREEMONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009**

 

The following table presentsselected items from our Condensed Consolidated Statements of Operations inthousands of dollars and as a percentage of revenue for the periods indicated.

 
| ** **                                    | ** ** | **Three Months  Ended September  30, 2010** | ** ** | **% of  Revenue** | ** ** | **Three Months  Ended September  30, 2009** | ** ** | **% of  Revenue** | ** ** | **% Change  Q3 2009 to  Q3 2010** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|------------------------|------------|-------------------------------------------------------|------------|
| Revenue                                       |       | $                                                          | 65,598     |                   | 100.0      | %                                                          | $          | 72,462                 |       | 100.0                                                 | %          | -9.5 | % |
| Cost  of services                             |       | 58,964                                                     |       | 89.9                   | %          | 58,988                                                     |       | 81.4                   | %          | 0.0                                                   | %          |
| Gross  profit                                 |       | 6,634                                                      |       | 10.1                   | %          | 13,474                                                     |       | 18.6                   | %          | -50.8                                                 | %          |
| Selling,  general and administrative expenses |       | 10,327                                                     |       | 15.7                   | %          | 11,084                                                     |       | 15.3                   | %          | -6.8                                                  | %          |
| Impairment  losses and restructuring charges  |       | 450                                                        |       | 0.7                    | %          | —                                                     |       | 0.0                    | %          | 100.0                                                 | %          |
| Operating  (loss) income                      |       | (4,143                                                     | )          | -6.3                   | %          | 2,390                                                      |       | 3.3                    | %          | NM                                                    |       |
| Net  interest and other income (expense)      |       | 29                                                         |       | 0.0                    | %          | (38                                                        | )          | -0.1                   | %          | NM                                                    |       |
| (Loss)  income before income taxes            |       | (4,114                                                     | )          | -6.3                   | %          | 2,352                                                      |       | 3.2                    | %          | NM                                                    |       |
| Income  tax expense                           |       | 368                                                        |       | 0.5                    | %          | 557                                                        |       | 0.7                    | %          | -33.9                                                 | %          |
| Net  (loss) income                            |       | $                                                          | (4,482     | )                      | -6.8       | %                                                          | $          | 1,795                  |       | 2.5                                                   | %          | NM |   |

 

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

 
| ** **         | ** ** | **For the Three Months Ended September 30,** | ** ** |
|--------------------|------------|----------------------------------------------------------------------------|------------|
| ** **         | ** ** | **2010**                                                                   | ** ** | **2009** | ** ** |
| ** **         | ** ** | **(in 000s)**                                                         | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** |       |                                                                       |       |   |   |   |   |   |   |
| Revenue            |       | $                                                                          | 40,838     |   | 62.3 | % | $ | 50,490 |   | 69.7 | % |
| Cost of services   |       | 34,674                                                                     |       | 58.8 | % | 40,642 |   | 68.9 | % |
| Gross profit       |       | $                                                                          | 6,164      |   | 92.9 | % | $ | 9,848 |   | 73.1 | % |
| *Gross profit %*   | * *   | *15.1*                                                                     | *%*        | * * | * * | *19.5* | *%* | * * | * * |
|               |       |                                                                       |       |   |   |   |   |   |   |
| **Canada:**        |       |                                                                       |       |   |   |   |   |   |   |
| Revenue            |       | $                                                                          | 15,169     |   | 23.1 | % | $ | 18,799 |   | 25.9 | % |
| Cost of services   |       | 14,328                                                                     |       | 24.3 | % | 15,399 |   | 26.6 | % |
| Gross profit       |       | $                                                                          | 841        |   | 12.7 | % | $ | 3,400 |   | 25.2 | % |
| *Gross profit %*   | * *   | *5.5*                                                                      | *%*        | * * | * * | *18.1* | *%* | * * | * * |
|               |       |                                                                       |       |   |   |   |   |   |   |
| **Offshore:**      |       |                                                                       |       |   |   |   |   |   |   |
| Revenue            |       | $                                                                          | 9,591      |   | 14.6 | % | $ | 3,173 |   | 4.4 | % |
| Cost of services   |       | 9,962                                                                      |       | 16.9 | % | 2,947 |   | 5.0 | % |
| Gross profit       |       | $                                                                          | (371       | ) | -5.6 | % | $ | 226 |   | 1.7 | % |
| *Gross profit %*   | * *   | *-3.9*                                                                     | *%*        | * * | * * | *7.1* | *%* | * * | * * |

 

***Revenue***

 

Revenue decreased by $6.9 million, or 9.5%, from$72.5 million in the third quarter of 2009 to $65.6 million in the thirdquarter of 2010.  The decreasewas driven by a $9.7 million decline in revenue in our U.S. segment. Of thisdecrease, $2.8 million is attributable to the closure of two sites in the firstquarter of 2010 (Victoria, Texas and Laramie, Wyoming).  Revenue declined approximately $6.9 millionamong our other sites driven by a decline in call volumes from our two largestwireless clients and telecommunications clients serving the traditional “wireline”or land telephone services.  Revenue inour Canadian segment declined by $3.6 million in the third quarter of 2010compared to the third quarter of 2009. Of this decrease, $1.3 million is attributable to the closure of ourThunder Bay, Ontario facility in March 2010. Revenue in the Canadian segment also decreased approximately $2.2million from the third quarter of 2009 to the third quarter of 2010 from ourSarnia, Ontario location, which we expect to close in December 2010.  Revenue from our Offshore segment increasedby $6.4 million, from $3.2 million in the third quarter of 2009 to $9.6 millionin the third quarter of 2010.  Theincrease was due primarily to our two new sites in Ortigas, Philippines andHeredia, Costa Rica, which contributed $4.5 million in revenue.  The remainder was a result of the ramp-up ofour Makati, Philippines facility, which contributed $1.9 million in additionalrevenue in the third quarter of 2010.

 

***Cost of Services and GrossProfit***

 

Cost of services was flat at$59.0 million in the third quarter of 2010 and 2009.  Cost of services in the U.S. decreased byapproximately $6.0 million.  Gross profitas a percentage of revenue in the U.S. decreased from 19.5% in the thirdquarter of 2009 to 15.1% in the third quarter of 2010.  The decrease in cost of services in the U.S.was driven by a $3.4 million decline related to the two site closures in thefirst quarter of 2010, as discussed above, which positively affected grossprofit by $0.6 million as the sites were producing negative gross profit in2009.  Also contributing to the decreasein cost of services in the U.S. period over period was the reduction infull-time equivalent agents due to the lower call volumes from our two largestwireless clients and certain wireline telecommunications customers, describedabove.  Cost of services in Canadadeclined by $1.1 million in the third quarter of 2010 from the third quarter of2009, of which $1.4 million was due to the closure of the facility in ThunderBay, Ontario.  Cost of services for ourOffshore segment increased by approximately $7.0 million due to the opening oftwo new sites in Ortigas, Philippines and Heredia, Costa Rica, and the ramp-upof our Makati, Philippines location, which increased the number of full-timeequivalent agents in our Offshore segment from 454 in the third quarter of 2009to 1,562 in the third quarter of 2010.

 

***Selling, General andAdministrative Expenses***

 

Selling,general and administrative expenses decreased by $0.8 million, or 6.8%, from$11.1 million in the third quarter of 2009 to $10.3 million in the thirdquarter of 2010.  The decrease in selling, general and administrative expenses wasprimarily due to an approximately $0.4 million decline in hiring expense, a$0.2 million decline in bonus expense and a $0.1 million decline in personnelexpense.  As a percentage of revenue,selling, general and administrative expenses increased from 15.3% to 15.7%period over period.

 

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***Impairment Losses andRestructuring Charges***

 

During the three monthsended September 30, 2010, we recorded approximately $0.5 million of impairmentlosses related to our U.S. segment.  Theimpairment losses were recorded for certain long-lived assets includingfurniture, fixtures and equipment for which the carrying value of those assetsis not recoverable.  The assets arelocated in sites that are impacted by the loss of AT&T’s wireline businesswhereby the future cash flows do not support the carrying value of theassets.  During the three months endedSeptember 30, 2009, we did not incur any impairment losses or restructuringcharges.

 

***Operating (Loss) Income***

 

We had an operating loss of$4.1 million in the third quarter of 2010 and operating income of $2.4 millionin the third quarter of 2009.  Operating(loss) income as a percentage of revenue was (6.3%) for the third quarter of2010 compared to 3.3% for the third quarter of 2009.  The loss was primarily due to lower revenueand gross profit, partially offset by lower selling, general and administrativeexpenses, as discussed previously.

 

***Income Tax***

 

Incometax expense during the three months ended September 30, 2010 and 2009 was $0.4million and $0.6 million, respectively. We recorded income tax expense during the three months ended September30, 2010 despite our loss from continuing operations due to the establishmentof a valuation allowance for substantially all of our U.S. net deferred taxassets during the second quarter of 2010. Until we generate U.S. income from continuing operations, we will beunable to utilize the tax benefit related to our net operating losscarryforwards.  As such, we did notrecord any U.S. income tax benefit during the three months ended September 30,2010.  The expense recorded during thethree months ended September 30, 2010 was primarily related to taxable incomefrom our Canadian operations.

 

***Net (Loss) Income***

 

Netloss was $4.5 million for the third quarter of 2010 compared to net income ofapproximately $1.8 million during the third quarter of 2009.  The decrease in net income was primarily dueto lower revenue and gross profit, partially offset by lower selling, generaland administrative expenses, as discussed previously.

 

**RESULTSOF OPERATIONS — NINE MONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009**

 

Thefollowing table presents selected items from our Condensed ConsolidatedStatements of Operations in thousands of dollars and as a percentage of revenuefor the periods indicated.

 
| ** **                                           | ** ** | **Nine Months  Ended September  30, 2010** | ** ** | **% of  Revenue** | ** ** | **Nine Months  Ended September  30, 2009** | ** ** | **% of  Revenue** | ** ** | **% Change  YTD  September  30, 2009 to  2010** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|----------------------------------------------------------------|------------|
| Revenue                                              |       | $                                                         | 200,684    |                   | 100.0      | %                                                         | $          | 216,463                |       | 100.0                                                          | %          | -7.3 | % |
| Cost of services                                     |       | 179,279                                                   |       | 89.3                   | %          | 179,137                                                   |       | 82.8                   | %          | 0.1                                                            | %          |
| Gross profit                                         |       | 21,405                                                    |       | 10.7                   | %          | 37,326                                                    |       | 17.2                   | %          | -42.7                                                          | %          |
| Selling, general and administrative expenses         |       | 31,485                                                    |       | 15.7                   | %          | 31,665                                                    |       | 14.6                   | %          | -0.6                                                           | %          |
| Impairment losses and restructuring charges          |       | 1,214                                                     |       | 0.6                    | %          | 6,437                                                     |       | 3.0                    | %          | -81.1                                                          | %          |
| Operating loss                                       |       | (11,294                                                   | )          | -5.6                   | %          | (776                                                      | )          | -0.4                   | %          | NM                                                             |       |
| Net interest and other income (expense)              |       | 243                                                       |       | 0.1                    | %          | (216                                                      | )          | -0.1                   | %          | NM                                                             |       |
| Loss from continuing operations before income  taxes |       | (11,051                                                   | )          | -5.5                   | %          | (992                                                      | )          | -0.5                   | %          | NM                                                             |       |
| Income tax expense (benefit)                         |       | 1,770                                                     |       | 0.9                    | %          | (126                                                      | )          | -0.1                   | %          | NM                                                             |       |
| Net loss from continuing operations                  |       | (12,821                                                   | )          | -6.4                   | %          | (866                                                      | )          | -0.4                   | %          | NM                                                             |       |
| Income from discontinued operations, net of tax      |       | —                                                    |       | 0.0                    | %          | 4,640                                                     |       | 2.1                    | %          | NM                                                             |       |
| Net (loss) income                                    |       | $                                                         | (12,821    | )                      | -6.4       | %                                                         | $          | 3,774                  |       | 1.7                                                            | %          | NM |   |

 

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Thefollowing table summarizes our revenues and gross profit for the periodsindicated, by reporting segment:

 
| ** **         | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|--------------------|------------|---------------------------------------------------------------------------|------------|
| ** **         | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** |
| ** **         | ** ** | **(in 000s)**                                                        | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** |       |                                                                      |       |   |   |   |   |   |   |
| Revenue            |       | $                                                                         | 128,932    |   | 64.2 | % | $ | 151,887 |   | 70.2 | % |
| Cost of services   |       | 109,406                                                                   |       | 61.0 | % | 123,157 |   | 68.8 | % |
| Gross profit       |       | $                                                                         | 19,526     |   | 91.2 | % | $ | 28,730 |   | 77.0 | % |
| *Gross profit %*   | * *   | *15.1*                                                                    | *%*        | * * | * * | *18.9* | *%* | * * | * * |
|               |       |                                                                      |       |   |   |   |   |   |   |
| **Canada:**        |       |                                                                      |       |   |   |   |   |   |   |
| Revenue            |       | $                                                                         | 49,690     |   | 24.8 | % | $ | 57,212 |   | 26.4 | % |
| Cost of services   |       | 45,712                                                                    |       | 25.5 | % | 48,798 |   | 27.2 | % |
| Gross profit       |       | $                                                                         | 3,978      |   | 18.6 | % | $ | 8,414 |   | 22.5 | % |
| *Gross profit %*   | * *   | *8.0*                                                                     | *%*        | * * | * * | *14.7* | *%* | * * | * * |
|               |       |                                                                      |       |   |   |   |   |   |   |
| **Offshore:**      |       |                                                                      |       |   |   |   |   |   |   |
| Revenue            |       | $                                                                         | 22,062     |   | 11.0 | % | $ | 7,364 |   | 3.4 | % |
| Cost of services   |       | 24,161                                                                    |       | 13.5 | % | 7,182 |   | 4.0 | % |
| Gross profit       |       | $                                                                         | (2,099     | ) | -9.8 | % | $ | 182 |   | 0.5 | % |
| *Gross profit %*   | * *   | *-9.5*                                                                    | *%*        | * * | * * | *2.5* | *%* | * * | * * |

 

***Revenue***

 

Revenue decreased by $15.8 million, or 7.3%, from$216.5 million in the first nine months of 2009 to $200.7 million in the firstnine months of 2010.  The decreasewas driven by a $23.0 million decline in revenue in our U.S. segment. Of thisdecrease, $9.6 million is attributable to the closure of two sites in the firsthalf of 2010 (Victoria, Texas and Laramie, Wyoming).  Revenue declined approximately $13.4 millionamong our other U.S. sites, driven by a decline in call volumes from our twolargest wireless clients and certain telecommunications clients serving thetraditional “wireline” or land telephone services.  Revenue in our Canadian segment declined by$7.5 million in the first nine months of 2010 compared to the first nine monthsof 2009.  The decrease was driven by theclosure of our Regina, Saskatchewan facility in February 2009, which hadcontributed $0.9 million in revenue in the first nine months of 2009, and theclosure of our Thunder Bay, Ontario facility in March 2010, which caused adecline in revenue in the first nine months of 2010 of approximately $3.0million as compared to the first nine months of 2009.  Revenue from our Sarnia, Ontario locationdecreased by approximately $3.8 million in the first nine months of 2010compared to the first nine months of 2009. We expect to close this location in December 2010.  Revenue from our Offshore segment increasedby $14.7 million.  The increase was dueto our two new sites in Ortigas, Philippines and Heredia, Costa Rica, whichcontributed $7.7 million in revenue and the ramp-up of our Makati, Philippinesfacility, which contributed incremental revenue of $7.0 million in the firstnine months of 2010compared to the first nine months of 2009.

 

***Cost of Services and GrossProfit***

 

Cost of services increasedby $0.1 million, or 0.1%, from approximately $179.1 million in the first ninemonths of 2009 to $179.3 million in the first nine months of 2010.  Cost of services in the U.S. decreased byapproximately $13.8 million.  Grossprofit as a percentage of revenue in the U.S. decreased from 18.9% in the firstnine months of 2009 to 15.1% in the first nine months of 2010.  The decrease in cost of services in the U.S.was driven by a $10.2 million decline related to the two site closures in thefirst nine months of 2010, as discussed above, as well as a reduction infull-time equivalent agents due to the lower call volumes from our two largestclients and telecommunications clients serving the traditional “wireline” orland telephone services, described above. Cost of services in Canada declined by $3.1 million in the first ninemonths of 2010 from the first nine months of 2009, of which $4.5 million wasdue to the closure of the facilities in Regina, Saskatchewan and Thunder Bay,Ontario.  This was partially offset by anincrease to cost of services of $3.0 million due to declines in the Canadian toU.S. dollar exchange rate.  Cost ofservices for our Offshore segment increased by $17.0 million in the first ninemonths of 2010 compared to the first nine months of 2009 due to our two newsites in Ortigas, Philippines and Heredia, Costa Rica, and the ramp-up of ourMakati, Philippines facility.

 

***Selling, General andAdministrative Expenses***

 

Selling,general and administrative expenses decreased by $0.2 million, or 0.6%, from$31.7 million in the first nine months of 2009 to $31.5 million in the firstnine months of 2010.  As a percentage of revenue, selling, generaland administrative expenses increased from 14.6% to 15.7% period overperiod.  Selling, general andadministrative expenses were less in the first nine months of 2010 due in partto the absence of $0.6 million in expense recorded in the first nine months of2009 for the settlement of a shareholder lawsuit, 

 

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as well as a decline of $0.3 million in hiringexpense.  This was partially offset by anincrease in depreciation expense of $0.7 million period over period.

 

***Impairment Losses andRestructuring Charges***

 

During the nine months endedSeptember 30, 2010, we recorded approximately $1.2 million of impairment lossesand restructuring charges.  We recordedapproximately $3.1 million of impairment losses ($2.6 million in our U.S.segment and $0.5 million in our Canadian segment), due to the impairment ofcertain long-lived assets for which the carrying value of those assets is notrecoverable.  The impairment losses wereoffset by a $1.9 million reduction of restructuring charges due to a change inthe sublease estimate at one of our facilities. During the nine months ended September 30, 2009, we incurred $1.7million of impairment losses and $4.7 million in restructuring charges in ourCanadian segment.

 

***Operating Loss***

 

We had an operating loss of$11.3 million in the first nine months of 2010 and an operating loss of $0.8million in the first nine months of 2009. Operating loss as a percentage of revenue was 5.6% for the first ninemonths of 2010 compared to 0.4% for the first nine months of 2009.  The increase in the loss was primarily due tolower revenue and gross profit, partially offset by lower impairment andrestructuring charges, as discussed previously.

 

***Net Interest and OtherIncome (Expense)***

 

Net interest and otherincome was approximately $0.2 million during the first nine months of 2010,compared to net interest and other expense of approximately $0.2 million duringthe first nine months of 2009.  Theincrease was due to a decrease in interest expense of approximately $0.3million period over period due to the pay-off of certain notes payable in 2009,and a realized gain of approximately $0.1 million for the recovery of apreviously impaired investment.

 

***Income Tax***

 

Theprovision for income taxes of $1.8 million in the nine months ended September30, 2010 reflects the establishment of a valuation allowance for substantiallyall of our U.S. net deferred tax assets. During the first nine months of 2010,we evaluated all positive and negative evidence related to our ability toutilize our deferred tax assets and recorded a valuation allowance due to ourthree-year historical cumulative losses, recent operating losses and anexpected U.S. pre-tax loss for fiscal year ending December 31, 2010, whichincreased income tax expense by $6.3 million for the nine months endedSeptember 30, 2010, as compared to the nine months ended September 30, 2009.

 

***Income from DiscontinuedOperations, net of tax***

 

Income from discontinuedoperations was $0 during the first nine months of 2010 and approximately $4.6million during the first nine months of 2009. The income from discontinued operations in the first nine months of 2009was due to the sale of Domain.com, our then wholly-owned subsidiary, for cashof approximately $7.1 million.  We had again on the sale of approximately $6.9 million, less taxes of approximately$2.3 million.

 

***Net (Loss) Income***

 

Net loss was $12.8 millionin the first nine months of 2010 compared to net income of approximately $3.8million in the first nine months of 2009. The decrease in net income was primarily due to lower revenue and grossprofit, the absence of income from discontinued operations, and a valuationallowance taken against net deferred tax assets, partially offset by the lowerimpairment and restructuring charges, as discussed previously.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of September 30, 2010,working capital totaled $50.5 million and our current ratio was 2.98:1,compared to working capital of $60.4 million and a current ratio of 3.42:1 atDecember 31, 2009.

 

We have historicallyfinanced our operations, liquidity requirements, capital expenditures, andcapacity expansion primarily through cash flows from operations, and to alesser degree, through various forms of debt and leasing arrangements. Inaddition to funding basic operations, our primary uses of cash typically relateto capital expenditures to upgrade our existing information technologies andservice offerings and investments in our facilities.  We believe that cash flows from operationsand cash provided by our line of credit will adequately meet our ongoingoperating requirements.  Due to thetiming of our collections of large billings with our major customers, we havehistorically needed to draw on our line of credit for ongoing operatingactivities.

 

We renewed our $15 millionrevolving line of credit with UMB Bank Colorado, N.A. for one year, from August1, 2010 to August 1, 2011.  We expect touse the line of credit for regular operating activities.  Any significant future expansion of ourbusiness may require us to secure additional cash resources.  If we enter into an acquisition, it mayrequire us to use our cash, draw on our line of credit or obtain additionalfinancing, which could decrease cash available for operations.  The current poor conditions of the U.S.credit markets may adversely impact our ability to obtain financing and couldsignificantly impact our liquidity.  Inaddition, a

 

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decrease in demand for ourservices, particularly from any of our principal clients, which could arisefrom a number of factors, including, but not limited to, competitive pressures,adverse trends in the business process outsourcing market, industryconsolidation, adverse circumstances with respect to the industries we service,and any of the other factors we describe more fully herein and in the “RiskFactors” section of our Annual Report on Form 10-K for the year ended December31, 2009 could adversely affect our business. During the nine months ended September 30, 2010 and 2009 we used $1.8million and $22.2 million on the line of credit, respectively, for regularoperating activities.  During the ninemonths ended September 30, 2010 and 2009, we re-paid $1.8 million and $22.2million, respectively, on the line of credit and there was no balanceoutstanding as of September 30, 2010.

 
| ** **                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(in thousands)**                                 | ** ** |
| Net cash provided by (used in):           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Operating activities                      |       | $                                                       | 14,469     |   | $ | 12,589 |   |
| Investing activities                      |       | (13,033                                                 | )          | 4,515 |   |
| Financing activities                      |       | 146                                                     |       | (6,846 | ) |
| Effect of foreign exchange rates on cash  |       | 141                                                     |       | 625 |   |
| Net increase in cash and cash equivalents |       | $                                                       | 1,723      |   | $ | 10,883 |   |

 

Our balance of cash and cashequivalents was $21.3 million at September 30, 2010, compared to a balance of$19.6 million at December 31, 2009.

 

***Operating Activities. ***Net cash provided byoperating activities increased $1.9 million from $12.6 million for the ninemonths ended September 30, 2009 to $14.5 million for the nine months endedSeptember 30, 2010.  Net cash provided byoperating activities for continuing operations declined by $0.4 million from$14.9 million for the nine months ended September 30, 2009 to $14.5 million forthe nine months ended September 30, 2010. The decline in cash provided by operating activities from continuingoperations was driven by the $12.0 million greater loss in the nine monthsended 2010 compared to the same period in 2009, partially offset by thefollowing:  1) $6.5 million highercollections of accounts receivable period over period due to the timing ofcollections of large billings and 2) $5.2 million greater decrease in ourincome tax receivable period over period due to a large income tax refundcollected in the first quarter of 2010.

 

***Investing Activities. ***Net cash used in investingactivities was $13.0 million in the first nine months of 2010, compared to cashprovided by investing activities of $4.5 million in the first nine months of2009.  The decrease was due primarily to1) the absence of proceeds from the sale of Domain.com of $7.1 million that wasrecorded in the first nine months of 2009, 2) a $7.4 million decrease in theproceeds from the sale of investments and 3) an increase of $3.2 million inpurchases of property, plant and equipment due to new site openings in CostaRica in March 2010 and the Philippines in April 2010.

 

***Financing Activities. ***Net cash provided byfinancing activities was $0.1 million in the first nine months of 2010,compared to cash used in financing activities of $6.8 million in the first ninemonths of 2009.  The change was due tothe absence of payments on long-term debt which were $6.9 million in the firstnine months of 2009 as we paid off two equipment loans in the second quarter of2009.

 

***Contractual******Obligations.***** **Other than operating andcapital leases for certain equipment, real estate and leases and commitments topurchase goods and services in the future, we have no off-balance sheettransactions, unconditional purchase obligations or similar instruments, and weare not a guarantor of any other entities’ debt or other financialobligations.  We maintain a $15 millionrevolving line of credit with UMB Bank Colorado, N.A. which we use to financeregular, short-term operating expenses. The line of credit expires on August 1, 2011.  During the three and nine months endedSeptember 30, 2010, we used $0 and $1.8 million on the line of credit,respectively, for regular operating activities. During the three and nine months ended September 30, 2010, we re-paid $0and $1.8 million, respectively.  Duringthe three and nine months ended September 30, 2009, we used $0 and $22.2million on the line of credit, respectively, for regular operating activities.  During the three and nine months endedSeptember 30, 2009, we re-paid $0 and $22.2 million, respectively.  There was no balance outstanding on the lineof credit as of September 30, 2010.  Asof September 30, 2010, we were in compliance with our debt covenants.

 

InJanuary 2010, we entered into a lease agreement for the rental of a facility inOrtigas, Philippines.  The lease has aninitial term of five years with a tenant option for an additional fiveyears.  The first phase of the facility opened in April 2010.  In May2010, we entered into a lease for additional space in this facility.  The additional space is approximately 65,000square feet, which brings total available space to approximately 223,500 squarefeet in this location.  Total leasecommitments for the additional space are approximately $4.1 million over theinitial term of the lease, or approximately five years.

 

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During the nine months endedSeptember 30, 2010, there were no other material changes in our contractualobligations.  For a complete discussionof our contractual obligations as of December 31, 2009, see Item 7. “ContractualObligations” in our Annual Report on Form 10-K for the year ended December 31,2009.

 

***Other Factors ImpactingLiquidity.*** Effective November 4, 2004, our board of directorsauthorized 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 willdepend on market conditions and other factors. Any repurchases of shares will be made in accordance with Securities andExchange Commission rules.  We have notyet repurchased any shares pursuant to this board authorization.

 

Our business currently has ahigh concentration of a few principal clients. The loss of a principal client and/or changes in timing or terminationof a principal client’s product launch or service offering would have amaterial adverse effect on our business, liquidity, operating results, andfinancial condition.  These clientrelationships are further discussed in Note 6, “Principal Clients,” to ourCondensed Consolidated Financial Statements, which are included at Item 1, “FinancialStatements,” of this Quarterly Report on 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 30,2010.  Refer to Item 1A. “Risk Factors”appearing in our Annual Report on Form 10-K for the year ended December 31,2009 for further information regarding these risks.

 

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 servicerelatively few, large clients, the availability of cash is highly dependent onthe timing of cash receipts from accounts receivable.  As a result, from time to time, we borrowcash from our line of credit to cover short-term cash needs.  These borrowings are typically outstandingfor a short period of time before they are repaid.  However, our debt balance can fluctuatesignificantly during any given quarter as part of our ordinary course ofbusiness.  Accordingly, our debt balanceat the end of any given period is not necessarily indicative of the debtbalance at any other time during that period.

 

Although management cannotaccurately anticipate effects of domestic and foreign inflation on ouroperations, management does not believe inflation has had a material adverseeffect on our results of operations or financial condition.  However, there is a risk that inflation couldoccur in certain countries in which we operate which could have an adverseaffect on our financial results.  Weengage in hedging activities which may reduce this risk; however, currencyhedges do not, and will not, eliminate our exposure to foreign inflation.

 

**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)timing and amount of costs incurred to expand capacity in order to provide forvolume growth 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 client productlaunches or service offerings; (v) seasonal nature of certain clients’businesses; and (vi) variability in demand for our services by our clientsdepending on demand for their products or services and/or depending on ourperformance.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

In preparing our CondensedConsolidated Financial Statements in conformity with accounting principlesgenerally accepted in the United States of America, management must undertakedecisions that impact the reported amounts and related disclosures.  Such decisions include the selection of theappropriate accounting principles to be applied and assumptions upon whichaccounting 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, 2009.  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, 2009, for acomplete description of our Critical Accounting Policies and Estimates.

 

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***Recently AdoptedAccounting Pronouncements***

 

*Accounting Standards Update No. 2010-06 “**ImprovingDisclosures about Fair Value Measurements**” (“ASUNo. 2010-06”)*

 

InJanuary 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No.2010-06. This update requires additional disclosure within the roll forward ofactivity for assets and liabilities measured at fair value on a recurringbasis, including transfers of assets and liabilities between Level 1 and Level2 of the fair value hierarchy and the separate presentation of purchases,sales, issuances and settlements of assets and liabilities within Level 3 ofthe fair value hierarchy. In addition, the update requires enhanced disclosuresof the valuation techniques and inputs used in the fair value measurementswithin Levels 2 and 3. The new disclosure requirements are effective forinterim and annual periods beginning after December 15, 2009, except forthe disclosure of purchases, sales, issuances and settlements of Level 3 measurements.Those disclosures are effective for fiscal years beginning afterDecember 15, 2010. We adopted ASU No. 2010-06 related to Levels 1 and 2disclosures effective April 1, 2010, and the adoption of this guidance did nothave a material effect on our condensed consolidated financial statements.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT 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 inconjunction with the information set forth in Part II, Item 7A in ourAnnual Report on Form 10-K for the year ended December 31, 2009, inaddition to the interim Unaudited Condensed Consolidated Financial Statements,accompanying notes and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” presented in Items 1 and 2 of thisQuarterly Report on Form 10-Q.

 

***Interest Rate Risk***

 

We are exposed to interestrate risk with respect to our cash and cash equivalents and debtobligations.  Cash and cash equivalentsare not restricted.  We consider cashequivalents to be short-term, highly liquid investments readily convertible toknown amounts of cash, and so near their maturity they present insignificantrisk of changes in value because of changes in interest rates.  Management would not expect our cash and cashequivalents 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 cash and cash equivalents.  We currently have a $15 million securedrevolving line of credit.  The interestrate on our line of credit is variable based upon the LIBOR index, andtherefore, is affected by changes in market interest rates.  We drew $1.8 million on the line of creditand repaid all of such amount during the nine months ended September 30, 2010,and as of September 30, 2010, there was no amount outstanding on the line ofcredit.  If the LIBOR increased 100 basispoints, there would not be a material impact to our Condensed ConsolidatedFinancial Statements.

 

***Foreign Currency ExchangeRisks***

 

We enter into foreigncurrency exchange contracts to hedge our anticipated operating commitments thatare denominated in foreign currencies. The contracts cover periods commensurate with expected exposure,generally three to nine months, and are principally unsecured foreign exchangecontracts.  The market risk exposure isessentially limited to risk related to currency rate movements.  We operate in Canada, the Philippines andCosta Rica.  The functional currencies ofour Canadian and Philippine operations are the Canadian dollar and thePhilippine peso, respectively, which are used to pay labor and other operatingcosts in those countries. However, our client contracts primarily generaterevenues which are paid to us in U.S. dollars. In Costa Rica, our functional currency is the U.S. dollar and themajority of our costs are denominate in U.S. dollars.  During the three months ended September 30,2010, we entered into Canadian dollar forward contracts for a notional amountof 17.4 million Canadian dollars to hedge our foreign currency risk withrespect to labor costs in Canada.  Duringthe three months ended September 30, 2010, we entered into non-deliverableforward contracts with respect to the Philippine peso for a notional amount of288 million Philippine pesos to hedge our foreign currency risk with respect tolabor costs in the Philippines.  As ofSeptember 30, 2010, we have not entered into any arrangements to hedge ourexposure to fluctuations in the Costa Rican colon relative to the U.S.dollar.  As of September 30, 2010, we hadcontracted to purchase 32.0 million Canadian dollars to be deliveredperiodically through June 2011 at a purchase price of approximately $30.3million and we had contracted to purchase 288 million Philippine pesos to bedelivered periodically through December 2010 at a purchase price of approximately$6.4 million.

 

During the nine months endedSeptember 30, 2010, there were no other material changes in our market riskexposure.  For a complete discussion ofour market risks associated with foreign currency and interest rate risks as ofDecember 31, 2009, see Item 7A. “Quantitative and Qualitative Disclosures aboutMarket Risk” in our Annual Report on Form 10-K for the year ended December 31,2009.  Also, refer to Part II, Item IA. “RiskFactors” in this Quarterly Report on Form 10-Q and Part I. Item 1A. “RiskFactors” appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2009 for further information regarding these risks.

 

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**ITEM 4.  CONTROLS AND PROCEDURES**

 

***Evaluation of disclosure controls and procedures.**** *As of September 30, 2010, wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act).  Based on such evaluation,our Chief Executive Officer and Chief Financial Officer concluded that, as ofSeptember 30, 2010, our disclosure controls and procedures were effective andwere designed to ensure that all information required to be disclosed by us inour reports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC, and accumulated and communicated to our management, includingour principal executive officer and principal financial officer, to allowtimely decisions regarding required disclosure.

 

***Changes in internalcontrols over financial reporting.**** *There was no change in our internal control over financial reportingthat occurred during the quarter ended September 30, 2010, that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**Part II.  Other Information**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

We have been involved from time to time in litigationarising in the normal course of business, none of which is expected bymanagement to have a material adverse effect on our business, financialcondition or results of operations.

 

**ITEM1A.  RISK FACTORS**

 

Therehave been no material changes in our risk factors from those disclosed in ourAnnual Report on Form 10-K for the year ended December 31, 2009, except for theadditions and modifications reflected in the risk factors below.

 

***Our client base is concentrated in the communications industry and ourstrategy******partially depends on a trend of communications companies continuing tooutsource******non-coreservices. If the communications industry suffers a downturn or the trend toward******outsourcing reverses,our business will suffer.***

 

Our current clients arealmost exclusively communications companies, which include companies in thewire-line, wireless, cable and broadband lines of business.  Over 95% of our revenue in 2009 and the firstnine months of 2010 was concentrated in the telecommunications industry.  During the first nine months of 2010, weexperienced lower call volumes from our customers in the wire-line and wirelessbusinesses which adversely affected our results.  Currently, our business is largely dependenton continued demand for our services from clients in this industry and ontrends in this industry to purchase outsourced services. The continuingeconomic instability has weakened the demand for the products and servicesoffered by our clients in the telecommunications sector and could continue toaffect this demand in the future which would consequently weaken the demand forour services.  The weakened demand forour clients’ products and services could also cause a slowdown or reversal ofthe trend in the telecommunications industry to outsource the services weprovide.  These factors could adverselyaffect our business, results of operations, growth prospects, and financialcondition in the future.

 

***Over 80% of our revenue in the first nine months of 2010 and the yearsended December 31, 2009 and 2008, has been received from our******two largest clients. The loss orreduction in business from either of these******clients would adversely affect ourbusiness and results of operations.***

 

The following tablerepresents revenue concentration of our principal clients:

 
| ** **                                                                          | ** ** | **Nine Months Ended**  | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                          | ** ** | **September 30, 2010** | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| AT&T Services, Inc. and AT&T Mobility,  LLC, subsidiaries of AT&T, Inc. |       | 67.2                             | %          | 63.6                                       | %          | 55.0 | % |
| T-Mobile USA, Inc., a subsidiary of Deutsche  Telekom                               |       | 17.8                             | %          | 21.5                                       | %          | 26.8 | % |

 

The loss of a principal client,a material reduction in the amount of business we receive from a principalclient, renegotiation of price by a principal client, or the loss, delay ortermination of a principal client’s product launch or service offering wouldadversely affect our business, revenue and operating results. We may not beable to retain our principal clients or, if we were to lose any of ourprincipal clients, we may not be able to timely replace the revenue generatedby the lost clients. Loss of a principal client could result from many factors,including consolidation or economic downturns in our clients’ industries, asdiscussed further below.

 

In July 2010, we executedagreements with AT&T to ramp-down certain wireline services that we providethem.  Approximately 260 full-timeequivalent agent positions in two of our U.S. sites will be eliminated throughthe first half of 2011 as the business declines.

 

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We plan to close one of thesites, which is located in Greeley, Colorado, by the end of 2010 (except for asmall number of corporate personnel). Agents in this site that work on other customers or lines of business willbe relocated to our other facility in Greeley, Colorado.

 

Our work for AT&T iscovered by several contracts for a variety of different lines of AT&Tbusiness.  Some of these contracts expirein 2011 and others in 2012.  Although wehave negotiated extended terms for several of these contracts, others may notbe extended past their initial terms. The initial term of our master services agreement covering all AT&Twork expired in January 2010.  After theinitial term, the agreement automatically renews month-to-monththereafter.  We are currently negotiatinga new master services agreement and expect to execute the agreement during thefourth quarter of 2010. Until the new agreement is signed, our servicesprovided to AT&T are covered under the existing master services agreement. On October 27, 2010, we entered into anagreement with AT&T for the renewal of certain services we provide to themwith regard to their wireless consumer customers.  During the third quarter of 2010, thisbusiness represented approximately 52% of our revenue with AT&T.  The agreement is effective through September1, 2012.  The agreement is filed asExhibit 10.1 to this Form 10-Q.

 

Our call center servicesagreement with T-Mobile became effective as of October 1, 2007 and has aninitial term of two years.  After theinitial term, the contract automatically renews thereafter, unless either partyprovides written notice of termination at least 60 days prior to the expirationof the then-current term.  Although theinitial term of the contract ended on September 30, 2009, the contractautomatically renewed through October 1, 2011. In August 2010, T-Mobile indicated that they would hold a formal processfor selecting vendors for approximately half of the work that we currentlyservice along with an additional, significant opportunity with work that we donot currently perform for T-Mobile.  Weparticipated in the first stage of this process and have been selected tosubmit a full formal response.  We expecta final decision to be made by the end of 2010. We expect to be selected as a continuing vendor for T-Mobile but we canprovide no assurance that this will be the case nor that if we are selectedthat we will be selected to perform work at the level that we currentlyprovide, or that the terms of any new agreement will be comparable to thosecurrently provided for under our existing agreement.  If we are not selected as a vendor, if we areselected as a vendor but at a significantly reduced level, or if the terms ofany new agreement are less favorable than the existing agreement, it would havea material adverse effect on our business, results of operations, and financialcondition.  Until the process iscomplete, we continue to provide services to T-Mobile under the existingagreement.

 

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

 

**ITEM 5. OTHER INFORMATION**

 

On October 27, 2010, weentered into an agreement with AT&T Services, Inc. for the renewal ofcertain services we provide to them with regard to their wireless consumercustomers.  During the third quarter of2010, this business represented approximately 52% of our revenue withAT&T.  The agreement is effectivethrough September 1, 2012.  The agreementis filed as Exhibit 10.1 to this Form 10-Q.

 

**ITEM 6. EXHIBITS**

 

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

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisForm 10-Q to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| STARTEK,  INC. |
|----------------|
| (REGISTRANT)   |
|           |
|           |
| By:            | /s/A. LAURENCE JONES | Date:  October 29, 2010 |
|           | A. Laurence Jones |
|           | President and Chief  Executive Officer |
|           | (Principal Executive  Officer) |
|           |   |
|           |   |
| By:            | /s/ DAVID G. DURHAM | Date:  October 29, 2010 |
|           | David G. Durham |
|           | Executive Vice President,  Chief Financial Officer and Treasurer |
|           | (Principal Financial and  Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| ** **  | ** ** | ** **                                                                                                                                                                                       | ** ** | **Incorporated Herein by Reference** |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                  | ** ** | **Form**                                            | ** ** | **Exhibit** | ** ** | **Filing Date** |
|        |       |                                                                                                                                                                                             |       |                                                |   |   |   |   |
| 3.1         |       | Restated  Certificate of Incorporation of StarTek, Inc.                                                                                                                                          |       | S-1                                                 |   | 3.1 |   | 1/29/1997 |
|        |       |                                                                                                                                                                                             |       |                                                |   |   |   |   |
| 3.2         |       | Restated  Bylaws of StarTek, Inc.                                                                                                                                                                |       | 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.019 effective October 27, 2010 pursuant  to Master Services Agreement No. 20070105.006.C dated January 26, 2007  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.                                         |       |                                                |   |   |   |   |

 

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*                 Filed with thisForm 10-Q.

 

&              Certain portions of this exhibit have been omittedpursuant to a request for confidential treatment and have been filed separatelywith the Securities and Exchange Commission.

 

27

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