Table of Contents

 

 

 

**UNITED STATES 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 June 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  No x

 

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 — 15,071,468 shares as of July 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 six months ended June 30, 2010 and 2009 |       |
|              |                                                                                                            |       |
|              | Condensed Consolidated Balance Sheets as of  June 30, 2010 and December 31, 2009                      |       |
|              |                                                                                                            |       |
|              | Condensed Consolidated Statements of Cash Flows for  the six months ended June 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 5.           | Other Information                                                                                               |       |
|              |                                                                                                            |       |
| 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,followed by or that include the words “may”, “will”, “should”, “seeks”, “believes”,“expects,” “anticipates,” “intends,” “continue,” “estimate,” “plans,” “future,”“targets,” “predicts,” “budgeted,” “projections”, “outlooks”, “attempts”, “isscheduled”, 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 those itemsdescribed herein or set forth in Item 1A. “Risk Factors” appearing in ourAnnual Report on Form 10-K for the year ended December 31, 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 June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                    | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenue                                                       |       | $                                    | 67,676     |                               | $          | 73,290 |   | $ | 135,086 |   | $ | 144,001 |   |
| Cost of services                                              |       | 60,041                               |       | 60,161                             |       | 120,315 |   | 120,149 |   |
| Gross profit                                                  |       | 7,635                                |       | 13,129                             |       | 14,771 |   | 23,852 |   |
| Selling, general and administrative expenses                  |       | 10,268                               |       | 10,889                             |       | 21,158 |   | 20,581 |   |
| Impairment losses and restructuring charges                   |       | 764                                  |       | —                             |       | 764 |   | 6,437 |   |
| Operating (loss) income                                       |       | (3,397                               | )          | 2,240                              |       | (7,151 | ) | (3,166 | ) |
| Net interest and other income (expense)                       |       | 211                                  |       | (103                               | )          | 214 |   | (178 | ) |
| (Loss) income from continuing operations before  income taxes |       | (3,186                               | )          | 2,137                              |       | (6,937 | ) | (3,344 | ) |
| Income tax expense (benefit)                                  |       | 2,037                                |       | 810                                |       | 1,402 |   | (683 | ) |
| Net (loss) income from continuing operations                  |       | (5,223                               | )          | 1,327                              |       | (8,339 | ) | (2,661 | ) |
| Income from discontinued operations, net of tax               |       | —                               |       | —                             |       | — |   | 4,640 |   |
| Net (loss) income                                             |       | $                                    | (5,223     | )                                  | $          | 1,327 |   | $ | (8,339 | ) | $ | 1,979 |   |
|                                                          |       |                                 |       |                               |       |   |   |   |   |
| Basic net (loss) income per share from:                       |       |                                 |       |                               |       |   |   |   |   |
| Continuing operations                                         |       | $                                    | (0.35      | )                                  | $          | 0.09 |   | $ | (0.56 | ) | $ | (0.18 | ) |
| Discontinued operations                                       |       | —                               |       | —                             |       | — |   | 0.31 |   |
| Net (loss) income                                             |       | $                                    | (0.35      | )                                  | $          | 0.09 |   | $ | (0.56 | ) | $ | 0.13 |   |
|                                                          |       |                                 |       |                               |       |   |   |   |   |
| Diluted net (loss) income per share from:                     |       |                                 |       |                               |       |   |   |   |   |
| Continuing operations                                         |       | $                                    | (0.35      | )                                  | $          | 0.09 |   | $ | (0.56 | ) | $ | (0.18 | ) |
| Discontinued operations                                       |       | —                               |       | —                             |       | — |   | 0.31 |   |
| Net (loss) income                                             |       | $                                    | (0.35      | )                                  | $          | 0.09 |   | $ | (0.56 | ) | $ | 0.13 |   |
|                                                          |       |                                 |       |                               |       |   |   |   |   |
| Weighted average shares outstanding                           |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                         |       | 14,886                               |       | 14,782                             |       | 14,866 |   | 14,768 |   |
| Diluted                                                       |       | 14,886                               |       | 14,812                             |       | 14,866 |   | 14,779 |   |

 

*See notes to condensedconsolidated financial statements.*

 

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**STARTEK, INC.AND SUBSIDIARIES**

Condensed Consolidated Balance Sheets

(Dollarsin thousands, except share and per share data)

 
| ** **                                                                                                                                                                                              | ** ** | **As of**              | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
| **ASSETS**                                                                                                                                                                                              |       |                   |       |   |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| Current  assets:                                                                                                                                                                                        |       |                   |       |   |   |
| Cash  and cash equivalents                                                                                                                                                                              |       | $                      | 21,680     |   | $ | 19,591 |   |
| Investments                                                                                                                                                                                             |       | —                 |       | 500 |   |
| Trade  accounts receivable, net                                                                                                                                                                         |       | 47,015                 |       | 50,521 |   |
| Income  tax receivable                                                                                                                                                                                  |       | 780                    |       | 6,292 |   |
| Deferred  income tax assets                                                                                                                                                                             |       | 163                    |       | 511 |   |
| Derivative  asset                                                                                                                                                                                       |       | 74                     |       | 628 |   |
| Prepaid  expenses                                                                                                                                                                                       |       | 4,925                  |       | 5,979 |   |
| Assets  held for sale                                                                                                                                                                                   |       | 810                    |       | — |   |
| Other  current assets                                                                                                                                                                                   |       | 599                    |       | 1,384 |   |
| Total  current assets                                                                                                                                                                                   |       | 76,046                 |       | 85,406 |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| Property,  plant and equipment, net                                                                                                                                                                     |       | 56,456                 |       | 58,045 |   |
| Long-term  deferred income tax assets                                                                                                                                                                   |       | 3,022                  |       | 4,529 |   |
| Other  assets                                                                                                                                                                                           |       | 1,641                  |       | 1,088 |   |
| Total  assets                                                                                                                                                                                           |       | $                      | 137,165    |   | $ | 149,068 |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                           |       |                   |       |   |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| Current  liabilities:                                                                                                                                                                                   |       |                   |       |   |   |
| Accounts  payable                                                                                                                                                                                       |       | $                      | 4,222      |   | $ | 4,884 |   |
| Accrued  liabilities:                                                                                                                                                                                   |       |                   |       |   |   |
| Accrued  payroll                                                                                                                                                                                        |       | 9,192                  |       | 9,253 |   |
| Accrued  compensated absences                                                                                                                                                                           |       | 4,480                  |       | 4,016 |   |
| Accrued  restructuring costs                                                                                                                                                                            |       | 934                    |       | 1,317 |   |
| Derivative  liability                                                                                                                                                                                   |       | 299                    |       | — |   |
| Other  accrued liabilities                                                                                                                                                                              |       | 1,899                  |       | 1,897 |   |
| Deferred  revenue                                                                                                                                                                                       |       | 1,025                  |       | 1,019 |   |
| Deferred  income tax liabilities                                                                                                                                                                        |       | 1,023                  |       | 1,470 |   |
| Other  current liabilities                                                                                                                                                                              |       | 638                    |       | 1,117 |   |
| Total  current liabilities                                                                                                                                                                              |       | 23,712                 |       | 24,973 |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| Accrued  restructuring charges                                                                                                                                                                          |       | 1,485                  |       | 2,663 |   |
| Deferred  rent                                                                                                                                                                                          |       | 3,040                  |       | 4,144 |   |
| Other  liabilities                                                                                                                                                                                      |       | 468                    |       | 572 |   |
| Total  liabilities                                                                                                                                                                                      |       | 28,705                 |       | 32,352 |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| Commitments  and contingencies                                                                                                                                                                          |       |                   |       |   |   |
|                                                                                                                                                                                                    |       |                   |       |   |   |
| Stockholders’  equity:                                                                                                                                                                             |       |                   |       |   |   |
| Common  stock, 32,000,000 non-convertible shares, $0.01 par value, authorized;  15,071,468 and 14,882,990 shares issued and outstanding at June 30, 2010  and December 31, 2009, respectively |       | 151                    |       | 149 |   |
| Additional  paid-in capital                                                                                                                                                                             |       | 67,921                 |       | 66,699 |   |
| Accumulated  other comprehensive income                                                                                                                                                                 |       | 1,232                  |       | 2,373 |   |
| Retained  earnings                                                                                                                                                                                      |       | 39,156                 |       | 47,495 |   |
| Total  stockholders’ equity                                                                                                                                                                        |       | 108,460                |       | 116,716 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                        |       | $                      | 137,165    |   | $ | 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)

 
| ** **                                                                      | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **June 30,**    | ** ** |
| ** **                                                                      | ** ** | **2010**             | ** ** | **2009** | ** ** |
| **Operating Activities**                                                        | ** ** | ** **           | ** ** | ** ** | ** ** |
| Net  (loss) income                                                              |       | $                    | (8,339     | ) | $ | 1,979 |   |
| Income  from discontinued operations                                            |       | —               |       | 4,640 |   |
| Loss  from continuing operations                                                |       | (8,339               | )          | (2,661 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities |       |                 |       |   |   |
| Depreciation                                                                    |       | 8,580                |       | 7,798 |   |
| Impairment  of property, plant and equipment                                    |       | 2,613                |       | 1,756 |   |
| Non-cash  compensation cost                                                     |       | 1,024                |       | 937 |   |
| Deferred  income taxes                                                          |       | 1,614                |       | 1,407 |   |
| Other,  net                                                                     |       | (156                 | )          | (1 | ) |
| Changes  in operating assets and liabilities:                                   |       |                 |       |   |   |
| Trade  accounts receivable, net                                                 |       | 3,573                |       | (4,316 | ) |
| Prepaid  expenses and other assets                                              |       | 1,227                |       | 81 |   |
| Accounts  payable                                                               |       | (50                  | )          | (872 | ) |
| Income  taxes, net                                                              |       | 5,201                |       | 1,172 |   |
| Accrued  and other liabilities                                                  |       | (2,791               | )          | 3,558 |   |
| Net  cash provided by continuing operating activities                           |       | 12,496               |       | 8,859 |   |
| Cash  used in discontinued operating activities                                 |       | —               |       | (2,335 | ) |
| Net  cash provided by operating activities                                      |       | 12,496               |       | 6,524 |   |
|                                                                            |       |                 |       |   |   |
| **Investing Activities**                                                        |       |                 |       |   |   |
| Proceeds  from disposition of investments available for sale                    |       | 606                  |       | 8,021 |   |
| Purchases  of property, plant and equipment                                     |       | (10,496              | )          | (5,032 | ) |
| Net  cash (used in) provided by continuing investing activities                 |       | (9,890               | )          | 2,989 |   |
| Cash  provided by discontinued investing activities                             |       | —               |       | 7,075 |   |
| Net  cash (used in) provided by investing activities                            |       | (9,890               | )          | 10,064 |   |
|                                                                            |       |                 |       |   |   |
| **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                                         |       | 198                  |       | 112 |   |
| Principal  payments on capital lease obligations                                |       | (105                 | )          | (99 | ) |
| Net  cash provided by (used in) continuing financing activities                 |       | 93                   |       | (6,842 | ) |
| Cash  provided by discontinued financing activities                             |       | —               |       | — |   |
| Net  cash provided by (used in) financing activities                            |       | 93                   |       | (6,842 | ) |
| Effect  of exchange rate changes on cash                                        |       | (610                 | )          | 501 |   |
| Net  increase in cash and cash equivalents                                      |       | 2,089                |       | 10,247 |   |
| Cash  and cash equivalents at beginning of period                               |       | 19,591               |       | 9,580 |   |
| Cash  and cash equivalents at end of period                                     |       | $                    | 21,680     |   | $ | 19,827 |   |
|                                                                            |       |                 |       |   |   |
| **Supplemental Disclosure of Cash Flow Information**                            |       |                 |       |   |   |
| Cash  paid for interest                                                         |       | $                    | 36         |   | $ | 141 |   |
| Income  taxes paid                                                              |       | $                    | 216        |   | $ | 644 |   |
| Property,  plant and equipment acquired or refinanced under long-term debt      |       | $                    | —     |   | $ | 257 |   |

 

*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 six months ended June 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 June 30, 2010, our U.S. segment included the operations ofour eleven facilities in the U.S.; our Canada segment included the operationsof our four facilities in Canada; and our Offshore segment included theoperations of two facilities in the Philippines and one in Costa Rica.  We use gross profit as our measure of profitand loss for each business segment and do not allocate selling, general andadministrative expenses to our business segments.

 

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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 June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2010**                                     | ** ** | **2009**                                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenue:**      |       |                                         |       |                                       |       |   |   |   |   |
| United  States    |       | $                                            | 43,391     |                                       | $          | 52,033 |   | $ | 88,094 |   | $ | 101,397 |   |
| Canada            |       | 16,440                                       |       | 19,232                                     |       | 34,521 |   | 38,413 |   |
| Offshore          |       | 7,845                                        |       | 2,025                                      |       | 12,471 |   | 4,191 |   |
| Total             |       | $                                            | 67,676     |                                       | $          | 73,290 |   | $ | 135,086 |   | $ | 144,001 |   |
|              |       |                                         |       |                                       |       |   |   |   |   |
| **Gross profit:** |       |                                         |       |                                       |       |   |   |   |   |
| United  States    |       | $                                            | 6,582      |                                       | $          | 10,085 |   | $ | 13,362 |   | $ | 18,882 |   |
| Canada            |       | 1,581                                        |       | 3,268                                      |       | 3,137 |   | 5,014 |   |
| Offshore          |       | (528                                         | )          | (224                                       | )          | (1,728 | ) | (44 | ) |
| Total             |       | $                                            | 7,635      |                                       | $          | 13,129 |   | $ | 14,771 |   | $ | 23,852 |   |

 

**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** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                       | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                       | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Loss)  income from continuing operations        |       | $                      | (5,223     | )                    | $          | 1,327 |   | $ | (8,339 | ) | $ | (2,661 | ) |
| Income  from discontinued operations, net of tax |       | —                 |       | —               |       | — |   | 4,640 |   |
| Net  (loss) income                               |       | $                      | (5,223     | )                    | $          | 1,327 |   | $ | (8,339 | ) | $ | 1,979 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Weighted  average shares of common stock         |       | 14,886                 |       | 14,782               |       | 14,866 |   | 14,768 |   |
| Dilutive  effect of stock options                |       | —                 |       | 30                   |       | — |   | 11 |   |
| Common  stock and common stock equivalents       |       | 14,886                 |       | 14,812               |       | 14,866 |   | 14,779 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Basic  net (loss) income per share from:         |       |                   |       |                 |       |   |   |   |   |
| Continuing  operations                           |       | $                      | (0.35      | )                    | $          | 0.09 |   | $ | (0.56 | ) | $ | (0.18 | ) |
| Discontinued  operations                         |       | —                 |       | —               |       | — |   | 0.31 |   |
| Net  (loss) income                               |       | $                      | (0.35      | )                    | $          | 0.09 |   | $ | (0.56 | ) | $ | 0.13 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Diluted  net (loss) income per share from:       |       |                   |       |                 |       |   |   |   |   |
| Continuing  operations                           |       | $                      | (0.35      | )                    | $          | 0.09 |   | $ | (0.56 | ) | $ | (0.18 | ) |
| Discontinued  operations                         |       | —                 |       | —               |       | — |   | 0.31 |   |
| Net  (loss) income                               |       | $                      | (0.35      | )                    | $          | 0.09 |   | $ | (0.56 | ) | $ | 0.13 |   |

 

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 2,520 and2,520 in the three and six months ended June 30, 2010, respectively, and2,214 in the six months ended June 30, 2009, were not included in ourcalculation due to our net loss from continuing operations during those periodsand anti-dilutive securities totaling 2,156 in the three months ended June 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 sixmonths ended June 30, 2010, we recorded approximately $451 ($200 in ourU.S. segment and $251 in our Canadian segment) and $2,613 of impairment losses($2,205 in our U.S. segment and $408 in our Canadian segment), due to theimpairment of certain long-lived assets for which the carrying value of thoseassets is not recoverable.  During thethree months ended June 30, 2010, the impaired assets in our Canadian locationinclude computer and telephone equipment, furniture and fixtures, leaseholdimprovements and software for a location we plan to close in November 2010and the carrying value is not recoverable.   During the three months ended June 30, 2010, the impairment lossesin our U.S. segment relate to a reduction in the fair value of our buildingthat is held for sale at our closed Laramie, Wyoming facility.  We have committed to a plan to sell theassets in this location.  During thesecond quarter of 2010, we received a revised estimate of the selling price,and have reduced the value of the building to fair value or approximately$810.    We reclassified these long-livedassets as a current asset held for sale on our Condensed Consolidated BalanceSheet.  In order for an asset to be held for sale, management mustdetermine that the asset is to be held for sale in its current condition, anactive plan to complete the sale of the asset has been initiated and the saleof the asset is probable within one year.  We evaluated the facility during the first sixmonths of 2010 and determined these assets meet all the criteria for an assetheld for sale.

 

During the three monthsended June 30, 2009, we incurred $0 of impairment losses and during thesix months ended June 30, 2009, we incurred $1,756 of impairment losses inour Canadian segment, due to the impairment of certain long-lived assets forwhich the 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

 

The cumulative amount paidas of June 30, 2010 related to the above closures was $321 in our U.S.segment and $1,992 in our Canadian segment. We expect to incur $387 in our U.S. segment and $4,082 in our Canadiansegment (adjusted for the June 30, 2010 Canadian dollar to U.S. dollarexchange rate) relating to the above closures. In the second quarter of 2010, we entered into a sublease agreement forour Thunder Bay, Ontario, Canada facility, which is effective from July 1,2010 through the remainder of the lease term. In July 2010, we entered into a sublease agreement for ourVictoria, Texas facility, which is effective August 1, 2010 through theremainder of the lease term.  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.  We expect completion of the Regina and Laramierestructuring plans no later than 2013and 2011, respectively; however, it maybe earlier or later depending on our ability to sublease the facility orbuy-out the lease.  We have made certainassumptions related to our ability to sublease these facilities.  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 restructuring charges,that are measured at fair value in the Condensed Consolidated FinancialStatements.

 

Asummary of the activity under the restructuring plans as of June 30, 2010,and changes during the six months ended June 30, 2010, is presented below:

 
| ** **                              | ** ** | **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                                |       | (698                       | )          | (332 | ) | (1,030 | ) | (281 | ) | (40 | ) | (321 | ) | (1,351 | ) |
| Reclassification of long-term liability |       | —                     |       | 701 |   | 701 |   | 936 |   | 3 |   | 939 |   | 1,640 |   |
| Foreign currency translation adjustment |       | (54                        | )          | 53 |   | (1 | ) | — |   | — |   | — |   | (1 | ) |
| Balance as of June 30, 2010        |       | $                          | 1,426      |   | $ | — |   | $ | 1,426 |   | $ | 943 |   | $ | 50 |   | $ | 993 |   | $ | 2,419 |   |

 

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**5.  DISCONTINUED OPERATIONS**

 

Duringthe six months ended June 30, 2009, we recorded income from discontinuedoperations, net of tax, of $4,640 due to the sale of the assets of Domain.com,our then-wholly owned subsidiary, to A. Emmet Stephenson, Jr., Inc. (“Mr. Stephenson”).  Mr. Stephenson is one of ourco-founders, managed the Domain.com subsidiary since 2006 and ownsapproximately 20% of our common shares outstanding.  Because the transaction involved a relatedparty, the Audit Committee of our Board of Directors considered and approvedthe transaction.  The assets were sold inexchange for cash of $7,075, which resulted in a gain on the sale of $6,937.  Operating income from Domain.com prior to thesale was $27 and tax expense totaled $2,324, which resulted in $4,640 in incomefrom discontinued operations, net of tax. The results of operations and cash flows of Domain.com have beenreported in the Condensed Consolidated Statements of Operations as discontinuedoperations.

 

**6.  PRINCIPAL CLIENTS**

 

The following tablerepresents revenue concentration of our principal clients.

 
| ** **                                                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                                     | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| AT&T  Services, Inc. and AT&T Mobility, LLC, subsidiaries of  AT&T, Inc. |       | 68.5                   | %          | 64.2                 | %          | 67.7 | % | 64.5 | % |
| T-Mobile  USA, Inc., a subsidiary of Deutsche Telekom                                     |       | 16.8                   | %          | 22.0                 | %          | 17.5 | % | 21.4 | % |

 

The loss of a principalclient and/or changes in timing or termination of a principal client’s productlaunch, volume delivery or service offering would have a material adverseeffect on our business, revenue, operating results, and financialcondition.   To limit our credit risk,management from time to time will perform credit evaluations of our clients.Although we are directly impacted by the economic conditions in which ourclients operate, management does not believe substantial credit risk existed asof June 30, 2010.

 

In July 2010, weexecuted agreements with AT&T to ramp-down certain wireline services thatwe provide them.  Approximately 260 (notin thousands) full-time equivalent agent positions in two of our U.S. siteswill be eliminated over the next nine months as business declines.  If we are unable to replace these positionswith other work, our utilization at the two sites may be negativelyaffected.  We are currently exploringopportunities to fill the capacity in these sites.

 

Our work for AT&T iscovered by several contracts for a variety of different lines of AT&Tbusiness.  Some of these contracts expirein 2010 and others in 2011.  We havenegotiated extended terms for several contracts that were set to expire duringthe first six months of 2010.  Theinitial term of our master services agreement covering all AT&T workexpired in January 2010.  After theinitial term, the agreement automatically renews month-to-month.  We are currently negotiating a new masterservices agreement.  Until the newagreement is signed, our services provided to AT&T are covered under theexisting master services agreement.

 

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 for one-year periodsthereafter, unless either party provides written notice of termination at least60 days prior to the expiration of the then-current term.  Although the initial term of the contractended on September 30, 2009, the contract automatically renewed for aone-year term which would expire on September 30, 2010.  We are currently negotiating a new contractwith T-Mobile.  Until the new agreementis signed, our services provided to T-Mobile are covered under the existingagreement effective October 1, 2007.

 

Weare working diligently to complete negotiation of the new agreements.  However, if we fail to do so, it would have amaterial adverse effect on our business, results of operations, and financialcondition.

 

**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 are theCanadian dollar and the Philippine peso, respectively, which are used to paylabor 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 functional currency is theU.S. dollar and the majority of our costs are denominated in U.S. dollars.  We have elected to follow cash flow hedge

 

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accounting in order toassociate the results of the hedges with forecasted future expenses.  The current mark-to-market gain or loss isrecorded in accumulated other comprehensive income (“AOCI”) as a component ofstockholders’ equity and will be re-classified to operations as the forecastedexpenses are incurred, typically within one year.  During the three and six months ended June 30,2010 and 2009, our cash flow hedges were highly effective and there were noamounts charged to the Condensed Consolidated Statements of Operations forhedge ineffectiveness.

 

During the three and sixmonths ended June 30, 2010, we entered into Canadian dollar forwardcontracts with UMB Bank for a notional amount of 13,800 and 29,600 Canadiandollars, respectively, to hedge our foreign currency risk with respect to laborcosts in Canada.  During the three andsix months ended June 30, 2010, we entered into non-deliverable forwardcontracts with respect to the Philippine peso with UMB Bank for a notionalamount of 322,000 and 322,000 Philippine pesos, respectively, to hedge ourforeign currency risk with respect to labor costs in the Philippines.  As of June 30, 2010, we have not enteredinto any arrangements to hedge our exposure to fluctuations in the Costa Ricancolon relative to the U.S. dollar.

 

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

 
| ** **                                   | ** ** | **Currency**    | ** ** | **Notional  Principal** | ** ** |
|----------------------------------------------|------------|-----------------|------------|-------------------------|------------|
| Instruments qualifying as accounting hedges: |       |            |       |                    |       |
| Foreign exchange contracts                   |       | Canadian dollar |       | CDN  29,600             |       |
| Foreign exchange contracts                   |       | Philippine peso |       | PHP  246,000            |       |

 

The above Canadian dollarforeign exchange contracts are to be delivered periodically through December 2010at a purchase price of approximately $28,066, and the above Philippine pesoforeign exchange contracts are to be delivered periodically through September 2010at a purchase price of approximately $5,285, 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 andprevailing financial market information as of June 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 June 30,2010 and December 31, 2009:

 
| ** **                 | ** ** | **As of**              | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
| Derivative assets:         |       |                   |       |   |   |
| Foreign exchange contracts |       | $                      | 74         |   | $ | 628 |   |
|                       |       |                   |       |   |   |
| Derivative liabilities:    |       |                   |       |   |   |
| Foreign exchange contracts |       | $                      | 299        |   | $ | — |   |

 

Thefollowing table shows the effect of our derivative instruments designated ascash flow hedges in the Condensed Consolidated Statements of Operations for thethree and six months ended June 30, 2010 and 2009:

 

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| ** **                 | ** ** | **Three Months Ended**                     | ** ** | ** **                                     | ** ** |
|----------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|
| ** **                 | ** ** | **June 30, 2010**                     | ** ** | **June 30, 2009**                         | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Loss  Recognized in  AOCI, net of  tax** | ** ** | **Gain  Reclassified  from AOCI into  Income** | ** ** | **Gain  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 |       | $                                          | (1,727     | )                                              | $          | 480 |   | $ | 1,699 |   | $ | 23 |   | Cost of services |   |
|                            |            |                                            |            |                                                |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                 | ** ** | **Six Months Ended**                       | ** ** | ** **                                     | ** ** |
|----------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|
| ** **                 | ** ** | **June 30, 2010**                     | ** ** | **June 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 Loss  Reclassified from  AOCI into  Income** | ** ** |
| Cash flow hedges:          |       |                                       |       |                                           |       |   |   |   |   |   |   |
| Foreign exchange contracts |       | $                                          | (1,400     | )                                              | $          | 871 |   | $ | 3,026 |   | $ | (1,629 | ) | 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 half of 2010 we closedfacilities in Thunder Bay, Ontario, Victoria, Texas and Laramie, Wyoming.  In February 2009, we closed our facilityin Regina, Saskatchewan.  We estimatedthe fair value of our restructuring charges using a discounted cash flowmodel.  The cash flows consist of thefuture lease payment obligations required under the lease agreements.  Future cash flows also include estimatedproperty taxes through the remainder of the lease terms, which are valued basedupon historical tax payments.  The futurecash flows were discounted using a rate of 3%. In each of the restructuring plans, we made an assumption that we wouldbe able 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.

 

***Long-Lived Assets***

 

As described in Note 4, “ImpairmentLosses and Restructuring Charges,” during the three and six months ended June 30,2010, we recorded approximately $451 ($200 in our U.S. segment and $251 in ourCanadian segment) and $2,613 of impairment losses ($2,205 in our U.S. segmentand $408 in our Canadian segment), 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 $243 for the assets impaired during the threemonths ended June 30, 2010 and $3,155 for the assets impaired during thesix months ended June 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 impairment losses during the three monthsended June 30, 2010, is $200 related to a change in estimated fair valueof the building in our Laramie, Wyoming location which we have classified asheld for sale.  During the six monthsended June 30, 2010, we committed to a plan to sell the assets in thisclosed location.  The measurement of thefair value of the building was based upon our third-party real estate broker’sestimate of fair value 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.

 

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***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 June 30, 2010** | ** ** |
| ** **                                                     | ** ** | **Level 1**                                       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                        | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Foreign  exchange contracts                                    |       | $                                                 | —     |   | $ | 74 |   | $ | — |   | $ | 74 |   |
| Total  fair value of assets measured on a recurring basis      |       | $                                                 | —     |   | $ | 74 |   | $ | — |   | $ | 74 |   |
|                                                           |       |                                              |       |   |   |   |   |   |   |
| Liabilities:                                                   |       |                                              |       |   |   |   |   |   |   |
| Foreign  exchange contracts                                    |       | $                                                 | —     |   | $ | 299 |   | $ | — |   | $ | 299 |   |
| Total  fair value of liabilities measured on a recurring basis |       | $                                                 | —     |   | $ | 299 |   | $ | — |   | $ | 299 |   |

 
| ** **                                                         | ** ** | **Assets and Liabilities Measured at Fair Value on a**                  | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Non-Recurring Basis During the Six Months ended  June 30, 2010** | ** ** |
| ** **                                                         | ** ** | **Level 1**                                                             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                            |       |                                                                    |       |   |   |   |   |   |   |
| Assets  held for sale                                              |       | $                                                                       | —     |   | $ | — |   | $ | 810 |   | $ | 810 |   |
| Property,  plant and equipment, net                                |       | —                                                                  |       | — |   | 3,155 |   | 3,155 |   |
| Total  fair value of assets measured on a non-recurring basis      |       | $                                                                       | —     |   | $ | — |   | $ | 3,965 |   | $ | 3,965 |   |
|                                                               |       |                                                                    |       |   |   |   |   |   |   |
| 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”) torenew our $15 million secured revolving line of credit.  The Agreement is effective August 1,2010 through August 1, 2011 and replaces our $15 million secured revolvingline of credit with UMB Bank which will expire by its terms on August 1,2010.  There was no balanceoutstanding on the line of credit as of June 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 security interest in all of our present and future accountsreceivable, general intangibles, and owned real property.   In addition, under the Agreement, we aresubject to certain financial covenants, which include maintaining 1) a ratio oftotal liabilities to tangible net worth of less than 1.0 to 1.0, 2) a tangiblenet worth of at least $100 million, 3) unencumbered liquid assets, defined ascash, certificate of deposits and marketable securities, of at least $10million measured on the last day of each fiscal quarter and 4) a cash flowcoverage ratio, as defined in the Agreement, of greater than 1.50 to 1.0measured on the last day of each fiscal quarter for the previous twelve months.

 

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

 

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

 
| ** **                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                  | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  (loss) income                                          |       | $                                     | (5,223     | )                                   | $          | 1,327 |   | $ | (8,339 | ) | $ | 1,979 |   |
| Other  comprehensive (loss) income:                         |       |                                  |       |                                |       |   |   |   |   |
| Foreign  currency translation adjustments, net of tax       |       | (467                                  | )          | 224                                 |       | (286 | ) | 136 |   |
| Change  in fair value of derivative instruments, net of tax |       | (1,427                                | )          | 1,713                               |       | (855 | ) | 2,007 |   |
| Comprehensive  (loss) income                                |       | $                                     | (7,117     | )                                   | $          | 3,264 |   | $ | (9,480 | ) | $ | 4,122 |   |

 

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

** **
| ** **                                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                             | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Accumulated  foreign currency translation adjustments: |       |                                 |       |                               |       |   |   |   |   |
| Beginning  balance                                     |       | $                                    | 2,160      |                               | $          | 1,002 |   | $ | 1,979 |   | $ | 1,090 |   |
| Translation  adjustments                               |       | (600                                 | )          | 358                                |       | (249 | ) | 218 |   |
| Taxes  associated with translation adjustments         |       | 133                                  |       | (134                               | )          | (37 | ) | (82 | ) |
| Ending  balance                                        |       | $                                    | 1,693      |                               | $          | 1,226 |   | $ | 1,693 |   | $ | 1,226 |   |
| Accumulated  unrealized derivative gains (losses) :    |       |                                 |       |                               |       |   |   |   |   |
| Beginning  balance                                     |       | $                                    | 966        |                               | $          | (1,150 | ) | $ | 394 |   | $ | (1,444 | ) |
| Gain  (loss) reclassified to earnings, net of tax      |       | 300                                  |       | 14                                 |       | 545 |   | (1,019 | ) |
| Change  in fair value of cash flow hedges, net of tax  |       | (1,727                               | )          | 1,699                              |       | (1,400 | ) | 3,026 |   |
| Ending  balance                                        |       | $                                    | (461       | )                                  | $          | 563 |   | $ | (461 | ) | $ | 563 |   |

 

**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 June 30,2010 and 2009 was $468 and $472, respectively, and is included in selling,general and administrative expense in our Condensed Consolidated Statement ofOperations.  The compensation cost thathas been charged against income related to share-based compensation for the sixmonths ended June 30, 2010 and 2009 was $1,024 and $937,respectively.  As of June 30, 2010,there was $3,300 of total unrecognized compensation cost related to non-vestedstock options and $698 related to non-vested restricted stock awards.  That cost is expected to be recognized over aweighted-average period of 2.5 years and 2.1 years for the stock options andrestricted 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 or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.

 

Inassessing the realizability of deferred tax assets, we consider all availableevidence to determine whether it is more likely than not that some portion orall 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 therealizability of deferred tax assets.  Inmaking such judgments, significant weight is given to evidence that can beobjectively verified.  Based on allavailable evidence, in particular our three-year historical cumulative losses,

 

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recentoperating losses and an expected fiscal year 2010 U.S. pre-tax loss, werecorded a valuation allowance against our U.S. net deferred tax assets whichincreased tax expense by $4,244 and $4,244 during the three and six monthsended June 30, 2010, respectively. The valuation allowance for deferred tax assets as of June 30, 2010was $4,660.  No valuation allowance wasrecorded as of December 31, 2009. In order to fully realize the U.S. deferred tax assets, we will need togenerate sufficient taxable income in future periods before the expiration ofthe deferred tax assets governed by the tax code.

 

**13.  SUBSEQUENT EVENT**

 

OnJuly 28, 2010, we entered into an Agreement with UMB Bank for a $15million secured revolving line of credit for one year from August 1, 2010to August 1, 2011. This credit facility replaced our previous securedrevolving line of credit with UMB Bank.

 

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**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, bestbusiness practices, skilled agents, proven operational excellence and flexibletechnology.  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 June 30, 2010, our U.S. segment included the operations of our elevenfacilities in the U.S.; our Canada segment included the operations of our fourfacilities in Canada; and our Offshore segment included the operations of twofacilities in the Philippines and one in Costa Rica.  As of June 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 allocate selling,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 half 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 half of 2010 from our two largest customerscompared to the comparable periods in 2009, which adversely affected ourresults.  We expect North American callvolumes to continue to decline throughout the remainder of 2010.  However, in the first half of 2010, we haveseen strong demand for our Offshore call center services, primarily in thePhilippines, which we expect 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 withus.  Approximately 260 full-timeequivalent agent positions in two of our U.S. sites will be eliminated over thenext nine months as the business declines. If we are unable to replace these positions with other work, ourutilization at the two impacted sites may be negatively affected.  We are currently in discussions with anexisting customer to fill the capacity at one of these sites and are exploringopportunities to sell business in the other site to new or existing customers.

 

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 

 

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telecommunications industrytrends could 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 JUNE 30, 2010**

 

***New Facilities***

Onecomponent of our strategy is to expand our global delivery platform by growingoffshore and near-shore.  Managementbelieves that expansion into international locations will broaden our servicedelivery platform and build our competitive advantage.  As part of this strategy, during the threemonths ended June 30, 2010 we opened our second facility in the Philippinesin April 2010.  Management decidedto open this facility based upon client demand experienced with our firstfacility, which opened in 2008.  In May 2010,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.

 

***Site Closures***

We endeavor to achieve siteoptimization at all of our locations by routinely evaluating siteperformance.  As lease terms expire, orif local economic conditions, prevailing wage rates, or other factorsnegatively impact the long-term financial viability of a location, managementwill from time to time make the decision to close a facility.  In connection with these site optimizationefforts, during the second quarter of 2010 we announced our intention to closeour facility in Sarnia, Ontario in November 2010.  We recorded impairment charges ofapproximately $0.3 million for certain long-lived assets for which the carryingvalue of those assets is not recoverable.

 

***Income Tax Valuation Allowance***

Duringthe second quarter of 2010 we recorded $4.2 million, or $0.29 per share, inincome tax expense related to a valuation allowance against U.S. net deferredtax assets. U.S. GAAP requires that we assess whether a valuation allowanceshould be established against our deferred tax assets based on theconsideration of all available evidence using a “more likely than not”standard. In making such judgments, significant weight is given to evidencethat can be objectively verified. Based on all available evidence, inparticular our three-year historical cumulative losses, recent operating lossesand an expected fiscal year 2010 U.S. pre-tax loss, we recorded a valuationallowance against our net deferred tax asset. The recording of a valuationallowance has no impact on cash and does not preclude us from utilizing thefull amount of the deferred tax asset in future profitable periods.

 

***Revolving Line of Credit***

OnJuly 28, 2010, we entered into an Agreement with UMB Bank to renew our $15million secured revolving line of credit for one year from August 1, 2010to August 1, 2011. The terms of the Agreement are consistent with ourprevious line of credit.

 

**RESULTS OF OPERATIONS — THREEMONTHS ENDED JUNE 30, 2010 AND JUNE 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 June 30,  2010** | ** ** | **% of   Revenue** | ** ** | **Three Months   Ended June 30,  2009** | ** ** | **% of   Revenue** | ** ** | **% Change   Q2 2009 to   Q2 2010** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------------------|------------|
| Revenue                                       |       | $                                                           | 67,676     |                         | 100.0      | %                                                           | $          | 73,290                       |       | 100.0                                                             | %          | -7.7 | % |
| Cost  of services                             |       | 60,041                                                      |       | 88.7                         | %          | 60,161                                                      |       | 82.1                         | %          | -0.2                                                              | %          |
| Gross  profit                                 |       | 7,635                                                       |       | 11.3                         | %          | 13,129                                                      |       | 17.9                         | %          | -41.8                                                             | %          |
| Selling,  general and administrative expenses |       | 10,268                                                      |       | 15.2                         | %          | 10,889                                                      |       | 14.9                         | %          | -5.7                                                              | %          |
| Impairment  losses and restructuring charges  |       | 764                                                         |       | 1.1                          | %          | —                                                      |       | 0.0                          | %          | 100.0                                                             | %          |
| Operating  (loss) income                      |       | (3,397                                                      | )          | -5.0                         | %          | 2,240                                                       |       | 3.0                          | %          | NM                                                                |       |
| Net  interest and other income (expense)      |       | 211                                                         |       | 0.3                          | %          | (103                                                        | )          | -0.1                         | %          | NM                                                                |       |
| (Loss)  income before income taxes            |       | (3,186                                                      | )          | -4.7                         | %          | 2,137                                                       |       | 2.9                          | %          | NM                                                                |       |
| Income  tax expense                           |       | 2,037                                                       |       | 3.0                          | %          | 810                                                         |       | 1.1                          | %          | NM                                                                |       |
| Net  (loss) income                            |       | $                                                           | (5,223     | )                            | -7.7       | %                                                           | $          | 1,327                        |       | 1.8                                                               | %          | NM |   |

 

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

 
| ** **         | ** ** | **For the Three Months Ended June 30,** | ** ** |
|--------------------|------------|----------------------------------------------|------------|
| ** **         | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **         | ** ** | **(in 000s)**                                | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** |       |                                         |       |   |   |   |   |   |   |
| Revenue            |       | $                                            | 43,391     |   | 64.1 | % | $ | 52,033 |   | 71.0 | % |
| Cost  of services  |       | 36,809                                       |       | 61.3 | % | 41,948 |   | 69.7 | % |
| Gross  profit      |       | $                                            | 6,582      |   | 86.2 | % | $ | 10,085 |   | 76.8 | % |
| *Gross profit %*   | * *   | *15.2*                                       | *%*        | * * | * * | *19.4* | *%* | * * | * * |
|               |       |                                         |       |   |   |   |   |   |   |
| **Canada:**        |       |                                         |       |   |   |   |   |   |   |
| Revenue            |       | $                                            | 16,440     |   | 24.3 | % | $ | 19,232 |   | 26.2 | % |
| Cost  of services  |       | 14,859                                       |       | 24.8 | % | 15,964 |   | 26.6 | % |
| Gross  profit      |       | $                                            | 1,581      |   | 20.7 | % | $ | 3,268 |   | 24.9 | % |
| *Gross profit %*   | * *   | *9.6*                                        | *%*        | * * | * * | *17.0* | *%* | * * | * * |
|               |       |                                         |       |   |   |   |   |   |   |
| **Offshore:**      |       |                                         |       |   |   |   |   |   |   |
| Revenue            |       | $                                            | 7,845      |   | 11.6 | % | $ | 2,025 |   | 2.8 | % |
| Cost  of services  |       | 8,373                                        |       | 13.9 | % | 2,249 |   | 3.7 | % |
| Gross  profit      |       | $                                            | (528       | ) | -6.9 | % | $ | (224 | ) | -1.7 | % |
| *Gross profit %*   | * *   | *-6.7*                                       | *%*        | * * | * * | *-11.1* | *%* | * * | * * |

 

***Revenue***

Revenue decreased by $5.6 million, or 7.7%, from$73.3 million in the second quarter of 2009 to $67.7 million in the secondquarter of 2010.  The decreasewas driven by a $8.6 million decline in revenue in our U.S. segment. Of thisdecrease, $3.7 million is attributable to the closure of two sites in the firstquarter of 2010 (Victoria, Texas and Laramie, Wyoming).  Revenue declined approximately $4.9 millionamong our other sites driven by a decline in call volumes from our secondlargest client and telecommunications clients serving the traditional “wireline”or land telephone services.  Revenue inour Canadian segment declined by $2.8 million in the second quarter of 2010compared to the second quarter of 2009. Of this decrease, $1.2 million is attributable to the closure of ourThunder Bay, Ontario facility in March 2010.  Revenue in the Canadian segment alsodecreased approximately $1.2 million from the second quarter of 2009 to thesecond quarter of 2010 from our Sarnia, Ontario location, which we expect toclose in November 2010.   Revenuefrom our Offshore segment increased by $5.8 million, from $2.0 million in thesecond quarter of 2009 to $7.8 million in the second quarter of 2010.  The increase was due primarily to our two newsites in Ortigas, Philippines and Heredia, Costa Rica, which contributed $3.2million in revenue.  The remainder was aresult of the ramp-up of our Makati, Philippines facility, which contributed$2.6 million in additional revenue in the second quarter of 2010.

 

***Cost of Services and GrossProfit***

Cost of services decreasedby $0.1 million, or 0.2%, from $60.2 million in the second quarter of 2009 to$60.0 million in the second quarter of 2010. Cost of services in the U.S. decreased by approximately $5.1million.  Gross profit as a percentage ofrevenue in the U.S. decreased from 19.4% in the second quarter of 2009 to 15.2%in the second quarter of 2010.  Thedecrease in cost of services in the U.S. was driven by a $3.7 million declinerelated to the two site closures in the first quarter of 2010, as discussedabove, as well as a reduction in full-time equivalent agents due to the lowercall volumes from our second largest wireless client and wirelinetelecommunications customers, described above. Cost of services in Canada declined by $1.1 million in the secondquarter of 2010 from the second quarter of 2009, of which $1.2 million was dueto the closure of the facility in Thunder Bay, Ontario.   Cost of services for our Offshore segmentincreased by approximately $6.1 million due to the opening of two new sites inOrtigas, Philippines and Heredia, Costa Rica, and the ramp-up of our Makati,Philippines location, which increased the number of full-time equivalent agentsin our Offshore segment from 277 in the second quarter of 2009 to 1,261 in thesecond quarter of 2010.

 

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***Selling, General andAdministrative Expenses***

Selling,general and administrative expenses decreased by $0.6 million, or 5.7%, from$10.9 million in the second quarter of 2009 to $10.3 million in the secondquarter of 2010.  The decrease in selling, general and administrative expenses wasprimarily due to the absence of $0.6 million of expense recorded in the secondquarter of 2009 due to an accrual for the settlement of our shareholderlawsuit.  Depreciation expense increasedby $0.3 million in the second quarter of 2010 as compared to the second quarterof 2009, due to an increase in the amount of property, plant and equipment, period over period, which waspartially offset by a decline in personnel expense of $0.2 million.  As a percentage of revenue, selling, generaland administrative expenses increased from 14.9% to 15.2% period over period.

 

***Impairment Losses andRestructuring Charges***

During the three monthsended June 30, 2010, we recorded approximately $0.8 million of impairmentlosses and restructuring charges ($0.6 million in our Canadian segment and $0.2million in our U.S. segment).  Werecorded $0.3 million related to the impairment of certain assets at ourSarnia, Ontario location, which we expect to close in November 2010, $0.2million for a reduction in the fair value of our building that is held for saleat our closed Laramie, Wyoming facility, and $0.3 million due to a change inour sublease estimate at our closed Regina, Saskatchewan facility.  During the three months ended June 30,2009, we did not incur any impairment losses or restructuring charges.

 

***Operating (Loss) Income***

We had an operating loss of$3.4 million in the second quarter of 2010 and operating income of $2.2 millionin the second quarter of 2009.  Operating(loss) income as a percentage of revenue was (5.0%) for the second quarter of2010 compared to 3.0% for the second quarter of 2009.  The loss was primarily due to lower revenueand gross profit, and higher impairment and restructuring charges, partiallyoffset by lower selling, general and administrative expenses, as discussedpreviously.

 

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

Net interest and otherincome was approximately $0.2 million during the second quarter of 2010,compared to net interest and other expense of approximately $0.1 million duringthe second quarter of 2009.  The increasewas due to a decrease in interest expense of approximately $0.2 million due tothe pay-off of certain notes payable in 2009, and a realized gain of approximately$0.1 million for the recovery of a previously impaired investment.

 

***Income Tax***

Theprovision for income taxes of $2.0 million in the three months ended June 30,2010 reflects the establishment of a valuation allowances for substantially allof our U.S. net deferred tax assets. During the second quarter of 2010, weevaluated all positive and negative evidence related to our ability to utilizeour U.S. deferred tax assets and recorded a valuation allowance of$4.2 million due to our three-year historical cumulative losses, recentoperating losses and an expected fiscal year 2010 U.S. pre-tax loss,.

 

***Net (Loss) Income***

Net loss was $5.2 millionfor the second quarter of 2010 compared to net income of approximately $1.3million during the second quarter of 2009. The decrease in net income was primarily due to lower revenue and grossprofit and higher impairment and restructuring charges and a valuationallowance taken against net deferred tax assets, partially offset by lowerselling, general and administrative expenses, as discussed previously.

 

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**RESULTS OF OPERATIONS — SIXMONTHS ENDED JUNE 30, 2010 AND JUNE 30, 2009**

 
| ** **                                           | ** ** | **Six Months Ended  June 30, 2010** | ** ** | **% of   Revenue** | ** ** | **Six Months Ended  June 30, 2009** | ** ** | **% of   Revenue** | ** ** | **% change   YTD June   30, 2009 to   2010** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|------------------------------|------------|---------------------------------------------------------|------------|------------------------------|------------|---------------------------------------------------------------------------------|------------|
| Revenue                                              |       | $                                                       | 135,086    |                         | 100.0      | %                                                       | $          | 144,001                      |       | 100.0                                                                           | %          | -6.2 | % |
| Cost  of services                                    |       | 120,315                                                 |       | 89.1                         | %          | 120,149                                                 |       | 83.4                         | %          | 0.1                                                                             | %          |
| Gross  profit                                        |       | 14,771                                                  |       | 10.9                         | %          | 23,852                                                  |       | 16.6                         | %          | -38.1                                                                           | %          |
| Selling,  general and administrative expenses        |       | 21,158                                                  |       | 15.7                         | %          | 20,581                                                  |       | 14.3                         | %          | 2.8                                                                             | %          |
| Impairment  losses and restructuring charges         |       | 764                                                     |       | 0.6                          | %          | 6,437                                                   |       | 4.5                          | %          | -88.1                                                                           | %          |
| Operating  loss                                      |       | (7,151                                                  | )          | -5.3                         | %          | (3,166                                                  | )          | -2.2                         | %          | NM                                                                              |       |
| Net  interest and other income (expense)             |       | 214                                                     |       | 0.2                          | %          | (178                                                    | )          | -0.1                         | %          | NM                                                                              |       |
| Loss  from continuing operations before income taxes |       | (6,937                                                  | )          | -5.1                         | %          | (3,344                                                  | )          | -2.3                         | %          | NM                                                                              |       |
| Income  tax expense (benefit)                        |       | 1,402                                                   |       | 1.0                          | %          | (683                                                    | )          | -0.5                         | %          | NM                                                                              |       |
| Net  loss from continuing operations                 |       | (8,339                                                  | )          | -6.2                         | %          | (2,661                                                  | )          | -1.8                         | %          | NM                                                                              |       |
| Income  from discontinued operations, net of tax     |       | —                                                  |       | 0.0                          | %          | 4,640                                                   |       | 3.2                          | %          | NM                                                                              |       |
| Net  (loss) income                                   |       | $                                                       | (8,339     | )                            | -6.2       | %                                                       | $          | 1,979                        |       | 1.4                                                                             | %          | NM |   |

 

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

 
| ** **         | ** ** | **For the Six Months Ended June 30,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| ** **         | ** ** | **(in 000s)**                              | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** |       |                                       |       |   |   |   |   |   |   |
| Revenue            |       | $                                          | 88,094     |   | 65.2 | % | $ | 101,397 |   | 70.4 | % |
| Cost  of services  |       | 74,732                                     |       | 62.1 | % | 82,515 |   | 68.7 | % |
| Gross  profit      |       | $                                          | 13,362     |   | 90.5 | % | $ | 18,882 |   | 79.2 | % |
| *Gross profit %*   | * *   | *15.2*                                     | *%*        | * * | * * | *18.6* | *%* | * * | * * |
|               |       |                                       |       |   |   |   |   |   |   |
| **Canada:**        |       |                                       |       |   |   |   |   |   |   |
| Revenue            |       | $                                          | 34,521     |   | 25.6 | % | $ | 38,413 |   | 26.7 | % |
| Cost  of services  |       | 31,384                                     |       | 26.1 | % | 33,399 |   | 27.8 | % |
| Gross  profit      |       | $                                          | 3,137      |   | 21.2 | % | $ | 5,014 |   | 21.0 | % |
| *Gross profit %*   | * *   | *9.1*                                      | *%*        | * * | * * | *13.1* | *%* | * * | * * |
|               |       |                                       |       |   |   |   |   |   |   |
| **Offshore:**      |       |                                       |       |   |   |   |   |   |   |
| Revenue            |       | $                                          | 12,471     |   | 9.2 | % | $ | 4,191 |   | 2.9 | % |
| Cost  of services  |       | 14,199                                     |       | 11.8 | % | 4,235 |   | 3.5 | % |
| Gross  profit      |       | $                                          | (1,728     | ) | -11.7 | % | $ | (44 | ) | -0.2 | % |
| *Gross profit %*   | * *   | *-13.9*                                    | *%*        | * * | * * | *-1.0* | *%* | * * | * * |

 

***Revenue***

Revenue decreased by $8.9 million, or 6.2%, from$144.0 million in the first half of 2009 to $135.1 million in the first half of2010.  The decrease was driven by a$13.3 million decline in revenue in our U.S. segment. Of this decrease, $6.8million is attributable to the closure of two sites in the first half of 2010(Victoria, Texas and Laramie, Wyoming). Revenue declined approximately $6.5 million among our other U.S. sites,driven by a decline in call volumes from our second largest wireless client andtelecommunications clients serving the traditional “wireline” or land telephoneservices.  Revenue in our Canadiansegment declined by $3.9 million in the first half of 2010 compared to thefirst half of 2009.  The decrease wasdriven by the closure of our Regina, Saskatchewan facility in February 2009,which had contributed $0.9 million in revenue in the first half of 2009, andthe closure of our Thunder Bay, Ontario facility in March 2010, whichcaused a decline in revenue in the first half of 2010 of approximately $1.7million as compared to the first half of 2009. Revenue from our Sarnia, Ontario location decreased approximately $1.7million from the first half of 2009 to the first half of 2010.  We expect to close this location in November 2010.   Revenue from our Offshore segment increasedby $8.3 million, from $4.2 million in the first half of 2009 to $12.5 millionin the first half of 2010.  The increasewas due to our two new sites in Ortigas, Philippines and Heredia, Costa Rica,which contributed $3.2 million in revenue and the ramp-up of our Makati,Philippines facility, which caused an increase in revenue in the first half of2010 of approximately $5.1 million as compared to the first half of 2009.

 

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***Cost of Services and GrossProfit***

Cost of services increasedby $0.2 million, or 0.1%, from approximately $120.1 million in the first halfof 2009 to $120.3 million in the first half of 2010.  Cost of services in the U.S. decreased byapproximately $7.8 million.  Gross profitas a percentage of revenue in the U.S. decreased from 18.6% in the first halfof 2009 to 15.2% in the first half of 2010. The decrease in cost of services in the U.S. was driven by a $6.8million decline related to the two site closures in the first half of 2010, asdiscussed above, as well as a reduction in full-time equivalent agents due tothe lower call volumes from our telecommunications clients serving thetraditional “wireline” or land telephone services, described above.  Cost of services in Canada declined by $2.0million in the first half of 2010 from the first half of 2009, of which $3.1million was due to the closure of the facilities in Regina, Saskatchewan andThunder Bay, Ontario.   This waspartially offset by an increase to cost of services of $1.5 million due todeclines in the Canadian to U.S. dollar exchange rate.  Cost of services for our Offshore segmentincreased by approximately $10.0 million due to our two new sites in Ortigas,Philippines and Heredia, Costa Rica, which contributed $4.3 million in cost ofservices, and the ramp-up of our Makati, Philippines facility, which caused anincrease in cost of services in the first half of 2010 of approximately $5.7million as compared to the first half of 2009.

 

***Selling, General andAdministrative Expenses***

Selling,general and administrative expenses increased by $0.6 million, or 2.8%, from$20.6 million in the first half of 2009 to $21.2 million in the first half of2010.  As a percentage of revenue, selling, general and administrative expensesincreased from 14.3% to 15.7% period over period.  The increase was driven by an increase of$1.0 million in payroll expense primarily related to international expansionand information systems.  Depreciationexpense increased by $0.6 million due to an increase in the amount of property,plant and equipment period over period. These increases were partially offset by a decrease of $0.6 million dueto the absence of expense recorded in the first half of 2009 for the settlementof a shareholder lawsuit, and a decrease of $0.3 million in legal fees due tothe settlement.

 

***Impairment Losses andRestructuring Charges***

During the six months ended June 30,2010, we recorded approximately $0.8 million of impairment losses andrestructuring charges.  We recordedapproximately $2.7 million of impairment losses ($2.2 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 six months ended June 30, 2009, we incurred $1.7 millionof impairment losses and $4.7 million in restructuring charges in our Canadiansegment.

 

***Operating Loss***

We had an operating loss of$7.2 million in the first half of 2010 and an operating loss of $3.2 million inthe first half of 2009.  Operating lossas a percentage of revenue was 5.3% for the first half of 2010 compared to 2.2%for the first half of 2009.  The increasein the loss was primarily due to lower revenue and gross profit, higherselling, general and administrative expenses, partially offset by lowerimpairment and restructuring charges, as discussed previously.

 

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

Net interest and otherincome was approximately $0.2 million during the first half of 2010, comparedto net interest and other expense of approximately $0.2 million during thefirst half of 2009.  The increase was dueto a decrease in interest expense of approximately $0.3 million period over perioddue to the pay-off of certain notes payable in 2009, and a realized gain ofapproximately $0.1 million for the recovery of a previously impairedinvestment.

 

***Income Tax***

Theprovision for income taxes of $1.4 million in the six months ended June 30,2010 reflects the establishment of valuation allowances for substantially allof our net deferred tax assets. During the first half of 2010, we evaluated allpositive and negative evidence related to our ability to utilize our deferredtax assets and recorded a valuation allowance of $4.2 million due to ourthree-year historical cumulative losses, recent operating losses and anexpected fiscal year 2010 U.S. pre-tax loss,.

 

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

Income from discontinuedoperations was $0 during the first half of 2010 and approximately $4.6 millionduring the first half of 2009.  Theincome from discontinued operations in the first half of 2009 was due to thesale of Domain.com, our then wholly-owned subsidiary, for cash of approximately$7.1 million.  We had a gain on the saleof approximately $6.9 million, less taxes of approximately $2.3 million.

 

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*** ***

***Net (Loss) Income***

Net loss was $8.3 millionfor the first half of 2010 compared to net income of approximately $2.0 millionduring the first half of 2009.  Thedecrease in net income was primarily due to lower revenue and gross profit,higher selling, general and administrative expenses, the absence of income fromdiscontinued operations, and a valuation allowance taken against net deferredtax assets, partially offset by the lower impairment and restructuring charges,as discussed previously.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of June 30, 2010,working capital totaled $52.3 million and our current ratio was 3.21:1,compared to working capital of $60.4 million and a current ratio of 3.42:1 at December 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 for one year, from August 1, 2010to August 1, 2011.  We expect to usethe 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.  Adecrease in demand for our services, particularly from any of our principalclients, which could arise from a number of factors, including, but not limitedto, competitive pressures, adverse trends in the business process outsourcingmarket, industry consolidation, adverse circumstances with respect to theindustries we service, and any of the other factors we describe more fullyherein and in the “Risk Factors” section of our Annual Report on Form 10-Kfor the year ended December 31, 2009. During the six months ended June 30, 2010 and 2009 we used $1.8million and $22.2 million on the line of credit, respectively, for regularoperating activities.  During the sixmonths ended June 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 June 30, 2010.

 
| ** **                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|
| ** **                                 | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | **(in  thousands)**                | ** ** |
| Net  cash provided by (used in):           | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Operating  activities                      |       | $                                  | 12,496     |   | $ | 6,524 |   |
| Investing  activities                      |       | (9,890                             | )          | 10,064 |   |
| Financing  activities                      |       | 93                                 |       | (6,842 | ) |
| Effect  of foreign exchange rates on cash  |       | (610                               | )          | 501 |   |
| Net  increase in cash and cash equivalents |       | $                                  | 2,089      |   | $ | 10,247 |   |

 

Our balance of cash and cashequivalents was $21.7 million at June 30, 2010, compared to a balance of$19.6 million at December 31, 2009.

 

***Operating Activities. ***Net cash provided byoperating activities increased $6.0 million from $6.5 million for the sixmonths ended June 30, 2009 to $12.5 million for the six months ended June 30,2010.  The increase was driven by thefollowing:  1) $7.9 million highercollections of accounts receivable period over period due to the timing ofcollections of large billings and 2) $4.0 million greater decrease in ourincome tax receivable period over period due to a large income tax refundcollected in the first quarter of 2010. These increases to cash provided by operating activities from continuingoperations were partially offset by a $6.4 million decrease in the change inaccrued liabilities in the six months ended June 30, 2010 compared to thesix months ended June 30, 2009 primarily due to fewer restructuring costsin the first half of 2010, compared to the first half of 2009.

 

***Investing Activities. ***Net cash used in investingactivities was $9.9 million in the first half of 2010 compared to cash providedby investing activities of $10.1 million in the first half of 2009.  The decrease was due to 1) the absence ofproceeds from the sale of Domain.com of $7.1 million that was recorded in thefirst half of 2009, 2) a $7.4 million decrease in the proceeds from the sale ofinvestments and 3) an increase of $5.5 million in purchases of property, plantand equipment due to new site openings in Costa Rica in March 2010 and thePhilippines in April 2010.

 

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***Financing Activities. ***Net cash used in financingactivities was $6.8 million for the first half of 2009, compared to less than$0.1 million net cash provided by financing activities for the first half of2010.  The change was due to the absenceof payments on long-term debt which were $6.9 million in the first half of 2009as we paid off two equipment loans in the second quarter of 2009.

 

***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, 2010.  We have renewed this line of credit under thesame terms for a period of one year from August 1, 2010 to August 1,2011.  During the three and six monthsended June 30, 2010, we used $0 and $1.8 million on the line of credit,respectively, for regular operating activities.    During the three and six months ended June 30,2010, we re-paid $0 and $1.8 million, respectively.  During the three and six months ended June 30,2009, we used $0 and $22.2 million on the line of credit, respectively, forregular operating activities.  During thethree and six months ended June 30, 2009, we re-paid $0 and $22.2 million,respectively.  There was no balanceoutstanding on the line of credit as of June 30, 2010.  As of June 30, 2010, we were incompliance with our debt covenants.

 

InJanuary 2010, we entered into a lease agreement for the rental of afacility in Ortigas, Philippines.  Thelease has an initial term of five years with a tenant option for an additionalfive years.  The first phase of the facility opened in April 2010. In May 2010, we entered into a lease for additional space in thisfacility.  The additional space isapproximately 65,000 square feet, which brings total available space toapproximately 223,500 square feet in this location.  Total lease commitments for the additionalspace are approximately $4.1 million over the initial term of the lease, orapproximately five years.

 

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

 

***Other Factors ImpactingLiquidity.*** Effective November 4, 2004, our board ofdirectors authorized purchases of up to $25.0 million of our common stock.  The repurchase program will remain in effectuntil terminated by the board of directors and allows us to repurchase sharesof our common stock from time to time on the open market, in block trades andin privately-negotiated transactions. Repurchases will be implemented by the Chief Financial Officerconsistent with the guidelines adopted by the board of directors and 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 Form 10-Q.  Tolimit our credit risk, management from time to time will perform creditevaluations of our clients. Although we are directly impacted by the economicconditions in which our clients operate, management does not believe substantialcredit risk existed as of June 30, 2010. Refer to Item 1A. “Risk Factors” appearing in our Annual Report on Form 10-Kfor the year ended December 31, 2009 for further information regardingthese 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.

 

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**VARIABILITY OF OPERATING RESULTS**

 

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

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

In preparing 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 a complete description of our Critical Accounting Policies and Estimates.

 

***Recently Adopted AccountingPronouncements***

 

*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.

 

**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 7Ain our Annual Report on Form 10-K for the year ended December 31,2009, in addition to the interim Unaudited Condensed Consolidated FinancialStatements, accompanying notes and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” presented in Items 1 and 2of this Quarterly 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.  As of June 30, 2010, there was no amountoutstanding on the line of credit, and we drew $1.8 million on the line ofcredit during the six months ended June 30, 2010.  If the LIBOR increased 100 basis points,there would not be a material impact to our Condensed Consolidated FinancialStatements.

 

***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 

 

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operate in Canada, the Philippinesand Costa Rica.  The functionalcurrencies of our Canadian and Philippine operations are the Canadian dollarand the Philippine peso, respectively, which are used to pay labor and otheroperating costs in those countries. However, our client contracts primarilygenerate revenues which are paid to us in U.S. dollars.  In Costa Rica, our functional currency is theU.S. dollar and the majority of our costs are denominate in U.S. dollars.  During the three months ended June 30,2010, we entered into Canadian dollar forward contracts for a notional amountof 13.8 million Canadian dollars to hedge our foreign currency risk withrespect to labor costs in Canada.  Duringthe three months ended June 30, 2010, we entered into non-deliverableforward contracts with respect to the Philippine peso for a notional amount of322 million Philippine pesos to hedge our foreign currency risk with respect tolabor costs in the Philippines.  As of June 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.  As of June 30, 2010, we had contractedto purchase 29.6 million Canadian dollars to be delivered periodically through December 2010at a purchase price of approximately $28.1 million and we had contracted topurchase 246 million Philippine pesos to be delivered periodically through September 2010at a purchase price of approximately $5.3 million.

 

During the six months ended June 30,2010, there were no other material changes in our market risk exposure.  For a complete discussion of our market riskassociated with foreign currency and interest rate risk as of December 31,2009, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk”in our Annual Report on Form 10-K for the year ended December 31,2009.  Also, refer to Part II, ItemIA. “Risk Factors” in this Form 10-Q and Part I. Item 1A. “RiskFactors” appearing in our Annual Report on Form 10-K for the year ended December 31,2009 for further information regarding these risks.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

***Evaluation of disclosure controls and procedures.**** *As of June 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) underthe Exchange Act).  Based on suchevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat, as of June 30, 2010, our disclosure controls and procedures wereeffective and were designed to ensure that all information required to bedisclosed by us in our reports filed or submitted under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the SEC, and accumulated and communicated to ourmanagement, including our principal executive officer and principal financialofficer, to allow timely 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 June 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 our2009 Annual Report on Form 10-K, except for the additions andmodifications 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 wasconcentrated in the telecommunications industry.  We experienced lower call volumes in thefirst half of 2010 from our customers in the wire-line business and from ourwireless customers which adversely affected our results.  Our business and growth is largely dependenton continued demand for our services from clients in this industry, and otherindustries that we may target in the future, and on trends in those industriesto purchase outsourced services. A general and continuing economic downturn inthe telecommunications industry or in other industries that we target, or aslowdown or reversal of the trend in these industries to outsource services weprovide, could adversely affect our business, results of operations, growthprospects, and financial condition.  Ageneral and continuing economic downturn in other industries may result inexcess capacity of contact center services in those industries, which couldattract clients in the telecommunications industry or in other 

 

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industries that we target.If this happens, it could adversely affect our business, results of operations,growth prospects, and financial condition.

*** ***

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

 

The following tablerepresents revenue concentration of our principal clients:

 

 
| ** **                                                                                     | ** ** | **Six Months Ended**   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------------|------------|
| ** **                                                                                     | ** ** | **June 30, 2010** | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| AT&T  Services, Inc. and AT&T Mobility, LLC, subsidiaries of  AT&T, Inc. |       | 67.7                   | %          | 63.6                             | %          | 55.0 | % |
| T-Mobile  USA, Inc., a subsidiary of Deutsche Telekom                                     |       | 17.5                   | %          | 21.5                             | %          | 26.8 | % |

 

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 over the next nine months as business declines.  If we are unable to replace these positionswith other work, our utilization at the two sites may be negativelyaffected.  We are currently exploringopportunities to fill the capacity in these sites.

 

Our work for AT&T iscovered by several contracts for a variety of different lines of AT&Tbusiness.  Some of these contracts expirein 2010 and others in 2011.  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 negotiatingthe new master services agreement and expect to execute the agreement duringthe second half of 2010. Until the new agreement is signed, our servicesprovided to AT&T are covered under the existing master services agreement.

 

Our call center servicesagreement with T-Mobile is effective as of October 1, 2007, which had aninitial term of two years.  After theinitial term, the contract automatically renews for one-year periodsthereafter, unless either party provides written notice of termination at least60 days prior to the expiration of the then-current term.  Although the initial term of the contractended on September 30, 2009, the contract automatically renewed for aone-year term which would expire on September 30, 2010.  We are currently negotiating a new contractwith T-Mobile and expect to execute the agreement during the second half of2010.  Until the new agreement is signed,our services provided to T-Mobile are covered under the existing agreementeffective October 1, 2007.

 

Weare working diligently to complete negotiation of the new agreements.  However, if we fail to do so, it would have amaterial adverse effect on our business, results of operations, and financialcondition.

 

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 that client,which could exacerbate the effect that the loss of a principal client wouldhave 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 July 28, 2010, we enteredinto an Agreement with UMB Bank to renew our $15 million secured revolving lineof credit.  The Agreement is effectiveAugust 1, 2010 through August 1, 2011. This Agreement replaces our $15 million secured revolving line of creditwith UMB Bank which will expire by its terms on August 1, 2010.

 

Borrowings under theAgreement bear interest, at our option at the time of the borrowing, of thethirty, sixty or ninety day LIBOR index, plus 1.75%.  The interest rate shall never be less than3.25% per annum.  Under the Agreement, wegranted UMB Bank a security interest in all of our present and future accountsreceivable, general intangibles, and owned real property.   In addition, under the Agreement, we aresubject to certain financial covenants, which include maintaining 1) a ratio oftotal liabilities to tangible net worth of less than 1.0 to 1.0, 2) a tangiblenet worth of at least $100 million, 3) unencumbered liquid assets, defined ascash, certificate of deposits and marketable securities, of at least $10million measured on the last day of each fiscal quarter and 4) a cash flowcoverage ratio, as defined in the Agreement, of greater than 1.50 to 1.0measured on the last day of each fiscal quarter for the previous twelvemonths.  

** **

**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 this Form 10-Qto be signed on its behalf by the undersigned thereunto duly authorized.

 
| STARTEK, INC. |                                                             |   |
|--------------------|------------------------------------------------------------------|--------|
| (REGISTRANT)       |                                                             |   |
|               |                                                             |   |   |
|               |                                                             |   |   |
| By:                | /s/A. LAURENCE JONES                                             |   | Date: July 30, 2010 |
|               | A. Laurence Jones                                                |   |   |
|               | President and Chief  Executive Officer                           |   |   |
|               | (Principal Executive  Officer)                                   |   |   |
|               |                                                             |   |
|               |                                                             |   |
| STARTEK, INC. |                                                             |   |
| (REGISTRANT)       |                                                             |   |
|               |                                                             |   |   |
|               |                                                             |   |   |
| By:                | /s/ DAVID G. DURHAM                                              |   | Date: July 30, 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*       |       | Amendment  20070105.006.S.007.A.003 effective June 17, 2010 to Agreement  No. 20070105.006.S.007 between StarTek, Inc. and AT&T  Services, Inc.         |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                            |       |                                 |   |   |   |   |
| 10.2*&  |       | Amendment  20070105.006.S.018 effective May 26, 2010 to Agreement  No. 20070105.006.C between StarTek, Inc. and AT&T  Services, Inc.                    |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                            |       |                                 |   |   |   |   |
| 10.3*&  |       | Order  No. 20070105.006.S.016.A.001 effective March 31, 2010 to Agreement  No. 20070105.006.S.016 between StarTek, Inc. and AT&T  Services, Inc.        |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                            |       |                                 |   |   |   |   |
| 10.4*&  |       | Amendment  20070105.006.S.014.A.002 effective April 26, 2010 to Agreement  No. 20070105.006.S.014 between StarTek, Inc. and AT&T  Services, Inc.        |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                            |       |                                 |   |   |   |   |
| 10.5*       |       | Amendment  GAMSA-STAR081106-00.S.001.A.002 effective April 28, 2010 to Agreement  No. GAMSA-STAR081106-00.S.001 between StarTek, Inc and AT&T  Mobility LLC. |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                            |       |                                 |   |   |   |   |
| 10.6*       |       | Amendment  GAMSA-STAR081106-00.S.001.A.003 effective May 27, 2010 to Agreement  No. GAMSA-STAR081106-00.S.001 between StarTek, Inc and AT&T  Mobility LLC.   |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                            |       |                                 |   |   |   |   |
| 10.7*       |       | Amendment  20080122.003.A.005 effective May 27, 2010 to Agreement  No. 20080122.003.C between StarTek, Inc. and AT&T Mobility LLC.                           |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                            |       |                                 |   |   |   |   |
| 10.8*       |       | Amendment  20080122.003.A.004 effective April 28, 2010 to Agreement  No. 20080122.003.C between StarTek, Inc. and AT&T Mobility LLC.                         |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                            |       |                                 |   |   |   |   |
| 10.9*       |       | Promissory  Note effective August 1, 2010 between StarTek, Inc., StarTek USA, Inc.  and StarTek Canada Services, Ltd. and UMB Bank Colorado, N.A.                          |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                            |       |                                 |   |   |   |   |
| 10.10*      |       | Business  Loan Agreement effective August 1, 2010 between StarTek, Inc., StarTek  USA, Inc. and StarTek Canada Services, Ltd. and UMB Bank Colorado, N.A.                  |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                            |       |                                 |   |   |   |   |
| 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 this Form 10-Q.                                                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                               |
| &  |   | Certain  portions of this exhibit have been omitted pursuant to a request for  confidential treatment and have been filed separately with the Securities and  Exchange Commission. |

 

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