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**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-Q**

 

**(MarkOne)**

 

| **x**                                                                                                                                                                                                         | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                          |                                                                                                    |
| **For  the quarterly period ended March 31, 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              ** |

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o  No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o                      |   | Accelerated filer x          |
|-------------------------------------------------|--------|-----------------------------------|
|                                            |   |                              |
| Non-accelerated filer o                         |   | Smaller reporting  company o |
| (Do not check if a  smaller  reporting company) |   |                              |

 

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

 

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

Common Stock, $0.01 ParValue – 14,907,940 shares as of April 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 months ended March 31, 2010 and  2009 |   |
|                    |                                                                                                      |   |
|                    | Condensed Consolidated  Balance Sheets as of March 31, 2010 and December 31, 2009               |   |
|                    |                                                                                                      |   |
|                    | Condensed Consolidated  Statements of Cash Flows for the three months ended March 31, 2010 and  2009 |   |
|                    |                                                                                                      |   |
|                    | Notes to  Condensed Consolidated Financial Statements                                                     |   |
|                    |                                                                                                      |   |
| Item 2.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               |   |
|                    |                                                                                                      |   |
| Item 3.            | Quantitative  and Qualitative Disclosures About Market Risk                                               |   |
|                    |                                                                                                      |   |
| Item 4.            | Controls and  Procedures                                                                                  |   |
| ** **              |                                                                                                      |   |
| **PART II. ** | **OTHER  INFORMATION**                                                                                    |   |
|                    |                                                                                                      |   |
| Item 1.            | Legal Proceedings                                                                                         |   |
|                    |                                                                                                      |   |
| Item 1A.           | Risk Factors                                                                                              |   |
|                    |                                                                                                      |   |
| Item 6.            | Exhibits                                                                                                  |   |
|                    |                                                                                                      |
| SIGNATURES              |                                                                                                      |

 

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This QuarterlyReport contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, including the following:

 

·                  certain statements, including possible or assumedfuture results of operations, in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”;

·                  any statements contained herein regarding theprospects for our business or any of our services;

·                  any statements preceded by, followed by or thatinclude the words “may”, “will”, “should”, “seeks”, “believes”, “expects,” “anticipates,”“intends,” “continue,” “estimate,” “plans,” “future,” “targets,” “predicts,” “budgeted,”“projections”, “outlooks”, “attempts”, “is scheduled”, or similar expressions;and

·                  other statements contained herein regarding mattersthat are not historical facts.

 

Our business and resultsof operations are subject to risks and uncertainties, many of which are beyondour ability to control or predict. Because of these risks and uncertainties,actual results may differ materially from those expressed or implied byforward-looking statements, and investors are cautioned not to place unduereliance on such statements, which speak only as of the date thereof.  Important factors that could cause actualresults to differ materially from our expectations and may adversely affect ourbusiness and results of operations, include, but are not limited to those itemsdescribed herein or set forth in Item 1A. “Risk Factors” appearing in ourAnnual Report on Form 10-K for the year ended December 31, 2009.

 

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**Part I.Financial Information**

 

**ITEM1.  FINANCIAL STATEMENTS (UNAUDITED)**

 

**STARTEK, INC. AND SUBSIDIARIES**

CondensedConsolidated Statements of Operations

(Dollars in thousands,except per share data)

(Unaudited)

 
| ** **                                                                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Revenue                                                                                                                                    |       | $                                     | 67,410     |   | $ | 70,711 |   |
| Cost  of services                                                                                                                          |       | 60,274                                |       | 59,988 |   |
| Gross  profit                                                                                                                              |       | 7,136                                 |       | 10,723 |   |
| Selling,  general and administrative expenses                                                                                              |       | 10,890                                |       | 9,692 |   |
| Impairment  losses and restructuring charges                                                                                               |       | —                                |       | 6,437 |   |
| Operating  loss                                                                                                                            |       | (3,754                                | )          | (5,406 | ) |
| Net  interest and other income (expense)                                                                                                   |       | 3                                     |       | (75 | ) |
| Loss  from continuing operations before income taxes                                                                                       |       | (3,751                                | )          | (5,481 | ) |
| Income  tax benefit                                                                                                                        |       | (635                                  | )          | (1,493 | ) |
| Net  loss from continuing operations                                                                                                       |       | (3,116                                | )          | (3,988 | ) |
| Income  from discontinued operations, net of tax (including gain on disposal of  $6,937 during the three months ended March 31, 2009) |       | —                                |       | 4,640 |   |
| Net  (loss) income                                                                                                                         |       | $                                     | (3,116     | ) | $ | 652 |   |
|                                                                                                                                       |       |                                  |       |   |   |
| Basic  net (loss) income per share from:                                                                                                   |       |                                  |       |   |   |
| Continuing  operations                                                                                                                     |       | $                                     | (0.21      | ) | $ | (0.27 | ) |
| Discontinued  operations                                                                                                                   |       | —                                |       | 0.31 |   |
| Net  (loss) income                                                                                                                         |       | $                                     | (0.21      | ) | $ | 0.04 |   |
|                                                                                                                                       |       |                                  |       |   |   |
| Diluted  net (loss) income per share from:                                                                                                 |       |                                  |       |   |   |
| Continuing  operations                                                                                                                     |       | $                                     | (0.21      | ) | $ | (0.27 | ) |
| Discontinued  operations                                                                                                                   |       | —                                |       | 0.31 |   |
| Net  (loss) income                                                                                                                         |       | $                                     | (0.21      | ) | $ | 0.04 |   |
|                                                                                                                                       |       |                                  |       |   |   |
| Weighted  average shares outstanding                                                                                                       |       |                                  |       |   |   |
| Basic                                                                                                                                      |       | 14,846                                |       | 14,753 |   |
| Diluted                                                                                                                                    |       | 14,846                                |       | 14,753 |   |

 

*See notes to condensedconsolidated financial statements.*

 

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**STARTEK, INC. AND SUBSIDIARIES**

CondensedConsolidated Balance Sheets

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

 
| ** **                                                                                                                                                                                               | ** ** | **As of**                | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
| **ASSETS**                                                                                                                                                                                               |       |                     |       |   |   |
|                                                                                                                                                                                                     |       |                     |       |   |   |
| Current  assets:                                                                                                                                                                                         |       |                     |       |   |   |
| Cash  and cash equivalents                                                                                                                                                                               |       | $                        | 27,304     |   | $ | 19,591 |   |
| Investments                                                                                                                                                                                              |       | —                   |       | 500 |   |
| Trade  accounts receivable, net                                                                                                                                                                          |       | 45,553                   |       | 50,521 |   |
| Income  tax receivable                                                                                                                                                                                   |       | 627                      |       | 6,292 |   |
| Deferred  income tax assets                                                                                                                                                                              |       | 1,720                    |       | 511 |   |
| Derivative  asset                                                                                                                                                                                        |       | 1,553                    |       | 628 |   |
| Prepaid  expenses                                                                                                                                                                                        |       | 5,389                    |       | 5,979 |   |
| Assets  held for sale                                                                                                                                                                                    |       | 1,010                    |       | — |   |
| Other  current assets                                                                                                                                                                                    |       | 1,065                    |       | 1,384 |   |
| Total  current assets                                                                                                                                                                                    |       | 84,221                   |       | 85,406 |   |
|                                                                                                                                                                                                     |       |                     |       |   |   |
| Property,  plant and equipment, net                                                                                                                                                                      |       | 55,910                   |       | 58,045 |   |
| Long-term  deferred income tax assets                                                                                                                                                                    |       | 6,730                    |       | 4,529 |   |
| Other  assets                                                                                                                                                                                            |       | 1,432                    |       | 1,088 |   |
| Total  assets                                                                                                                                                                                            |       | $                        | 148,293    |   | $ | 149,068 |   |
|                                                                                                                                                                                                     |       |                     |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                           |       |                     |       |   |   |
|                                                                                                                                                                                                     |       |                     |       |   |   |
| Current  liabilities:                                                                                                                                                                                    |       |                     |       |   |   |
| Accounts  payable                                                                                                                                                                                        |       | $                        | 4,173      |   | $ | 4,884 |   |
| Accrued  liabilities:                                                                                                                                                                                    |       |                     |       |   |   |
| Accrued  payroll                                                                                                                                                                                         |       | 9,197                    |       | 9,253 |   |
| Accrued  compensated absences                                                                                                                                                                            |       | 4,221                    |       | 4,016 |   |
| Accrued  restructuring costs                                                                                                                                                                             |       | 837                      |       | 1,317 |   |
| Other  accrued liabilities                                                                                                                                                                               |       | 3,270                    |       | 1,897 |   |
| Deferred  revenue                                                                                                                                                                                        |       | 839                      |       | 1,019 |   |
| Deferred  income tax liabilities                                                                                                                                                                         |       | 4,507                    |       | 1,470 |   |
| Other  current liabilities                                                                                                                                                                               |       | 641                      |       | 1,117 |   |
| Total  current liabilities                                                                                                                                                                               |       | 27,685                   |       | 24,973 |   |
|                                                                                                                                                                                                     |       |                     |       |   |   |
| Accrued  restructuring charges                                                                                                                                                                           |       | 2,138                    |       | 2,663 |   |
| Deferred  rent                                                                                                                                                                                           |       | 2,920                    |       | 4,144 |   |
| Other  liabilities                                                                                                                                                                                       |       | 526                      |       | 572 |   |
| Total  liabilities                                                                                                                                                                                       |       | 33,269                   |       | 32,352 |   |
|                                                                                                                                                                                                     |       |                     |       |   |   |
| Commitments  and contingencies                                                                                                                                                                           |       |                     |       |   |   |
|                                                                                                                                                                                                     |       |                     |       |   |   |
| Stockholders’  equity:                                                                                                                                                                              |       |                     |       |   |   |
| Common  stock, 32,000,000 non-convertible shares, $0.01 par value, authorized;  14,906,857 and 14,882,990 shares issued and outstanding at March 31,  2010 and December 31, 2009, respectively |       | 149                      |       | 149 |   |
| Additional  paid-in capital                                                                                                                                                                              |       | 67,370                   |       | 66,699 |   |
| Accumulated  other comprehensive income                                                                                                                                                                  |       | 3,126                    |       | 2,373 |   |
| Retained  earnings                                                                                                                                                                                       |       | 44,379                   |       | 47,495 |   |
| Total  stockholders’ equity                                                                                                                                                                         |       | 115,024                  |       | 116,716 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                         |       | $                        | 148,293    |   | $ | 149,068 |   |

 

*See notes to condensedconsolidated financial statements.*

 

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**STARTEK, INC. AND SUBSIDIARIES**

CondensedConsolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | **March 31,**     | ** ** |
| ** **                                                                      | ** ** | **2010**               | ** ** | **2009** | ** ** |
| **Operating Activities**                                                        | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net  (loss) income                                                              |       | $                      | (3,116     | ) | $ | 652 |   |
| Income  from discontinued operations                                            |       | —                 |       | 4,640 |   |
| Loss  from continuing operations                                                |       | (3,116                 | )          | (3,988 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities |       |                   |       |   |   |
| Depreciation                                                                    |       | 4,236                  |       | 4,011 |   |
| Impairment  of property, plant and equipment                                    |       | 2,162                  |       | 1,756 |   |
| Non-cash  compensation cost                                                     |       | 556                    |       | 465 |   |
| Deferred  income taxes                                                          |       | (653                   | )          | 746 |   |
| Other,  net                                                                     |       | —                 |       | (3 | ) |
| Changes  in operating assets and liabilities:                                   |       |                   |       |   |   |
| Trade  accounts receivable, net                                                 |       | 5,073                  |       | 2,181 |   |
| Prepaid  expenses and other assets                                              |       | 605                    |       | 449 |   |
| Accounts  payable                                                               |       | (700                   | )          | (2,558 | ) |
| Income  taxes, net                                                              |       | 5,369                  |       | 276 |   |
| Accrued  and other liabilities                                                  |       | (1,691                 | )          | 3,855 |   |
| Net  cash provided by continuing operating activities                           |       | 11,841                 |       | 7,190 |   |
| Cash  used in discontinued operating activities                                 |       | —                 |       | (2,335 | ) |
| Net  cash provided by operating activities                                      |       | 11,841                 |       | 4,855 |   |
|                                                                            |       |                   |       |   |   |
| **Investing Activities**                                                        |       |                   |       |   |   |
| Proceeds  from disposition of investments available for sale                    |       | 499                    |       | 6,530 |   |
| Purchases  of property, plant and equipment                                     |       | (4,854                 | )          | (1,236 | ) |
| Net  cash (used in) provided by continuing investing activities                 |       | (4,355                 | )          | 5,294 |   |
| Cash  provided by discontinued investing activities                             |       | —                 |       | 7,075 |   |
| Net  cash (used in) provided by investing activities                            |       | (4,355                 | )          | 12,369 |   |
|                                                                            |       |                   |       |   |   |
| **Financing Activities**                                                        |       |                   |       |   |   |
| Principal  payments on borrowings                                               |       | —                 |       | (801 | ) |
| Principal  payments on line of credit                                           |       | —                 |       | (22,236 | ) |
| Proceeds  from line of credit                                                   |       | —                 |       | 22,236 |   |
| Proceeds  from issuance of common stock                                         |       | 112                    |       | 53 |   |
| Principal  payments on capital lease obligations                                |       | (85                    | )          | (17 | ) |
| Net  cash provided by (used in) continuing financing activities                 |       | 27                     |       | (765 | ) |
| Cash  provided by discontinued financing activities                             |       | —                 |       | — |   |
| Net  cash provided by (used in) financing activities                            |       | 27                     |       | (765 | ) |
| Effect  of exchange rate changes on cash                                        |       | 200                    |       | 57 |   |
| Net  increase in cash and cash equivalents                                      |       | 7,713                  |       | 16,516 |   |
| Cash  and cash equivalents at beginning of period                               |       | 19,591                 |       | 9,580 |   |
| Cash  and cash equivalents at end of period                                     |       | $                      | 27,304     |   | $ | 26,096 |   |
|                                                                            |       |                   |       |   |   |
| **Supplemental Disclosure of Cash Flow Information**                            |       |                   |       |   |   |
| Cash  paid for interest                                                         |       | $                      | —     |   | $ | 98 |   |
| Income  taxes paid                                                              |       | $                      | 62         |   | $ | 269 |   |

 

*See notes to condensedconsolidated financial statements.*

 

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**STARTEK, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(In thousands, except pershare data)

 

**1.  BASIS OF PRESENTATION**

 

The accompanyingUnaudited Condensed Consolidated Financial Statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements.  Thesefinancial statements reflect all adjustments (consisting only of normalrecurring entries, except as noted) which, in the opinion of management, arenecessary for fair presentation. Operating results during the three months ended March 31, 2010, arenot necessarily indicative of operating results that may be expected during anyother interim period 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.

 

**2.  SEGMENT INFORMATION**

 

We operate withinthree business segments, U.S., Canada and Offshore.  The business segments align with thoseregions in which our services are rendered. As of March 31, 2010, our U.S. segment included the operations ofour eleven facilities in the U.S.; our Canada segment included the operationsof our five facilities in Canada; and our Offshore segment included theoperations of one facility 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.

 

Information about our reportable segments, which correspond to thegeographic areas in which we operate, is as follows:

 
| ** **        | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-------------------|------------|-----------------------------------------------|------------|
| ** **        | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| **Revenue:**      |       |                                          |       |   |   |
| United  States    |       | $                                             | 44,703     |   | $ | 49,364 |   |
| Canada            |       | 18,081                                        |       | 19,181 |   |
| Offshore          |       | 4,626                                         |       | 2,166 |   |
| Total             |       | $                                             | 67,410     |   | $ | 70,711 |   |
|              |       |                                          |       |   |   |
| **Gross profit:** |       |                                          |       |   |   |
| United  States    |       | $                                             | 6,780      |   | $ | 8,797 |   |
| Canada            |       | 1,556                                         |       | 1,746 |   |
| Offshore          |       | (1,200                                        | )          | 180 |   |
| Total             |       | $                                             | 7,136      |   | $ | 10,723 |   |

 

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

 

Basic and dilutednet (loss) income per common share is computed on the basis of our weightedaverage number of common shares outstanding, as determined by using thecalculations outlined below:

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **March 31,**     | ** ** |
| ** **                                       | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                             |       |                   |       | ** ** |   |
| Loss  from continuing operations                 |       | $                      | (3,116     | ) | $ | (3,988 | ) |
| Income  from discontinued operations, net of tax |       | —                 |       | 4,640 |   |
| Net  (loss) income                               |       | $                      | (3,116     | ) | $ | 652 |   |
|                                             |       |                   |       |   |   |
| Weighted  average shares of common stock         |       | 14,846                 |       | 14,753 |   |
| Dilutive  effect of stock options                |       | —                 |       | — |   |
| Common  stock and common stock equivalents       |       | 14,846                 |       | 14,753 |   |
|                                             |       |                   |       |   |   |
| Basic  net (loss) income per share from:         |       |                   |       |   |   |
| Continuing  operations                           |       | $                      | (0.21      | ) | $ | (0.27 | ) |
| Discontinued  operations                         |       | —                 |       | 0.31 |   |
| Net  (loss) income                               |       | $                      | (0.21      | ) | $ | 0.04 |   |
|                                             |       |                   |       |   |   |
| Diluted  net (loss) income per share from:       |       |                   |       |   |   |
| Continuing  operations                           |       | $                      | (0.21      | ) | $ | (0.27 | ) |
| Discontinued  operations                         |       | —                 |       | 0.31 |   |
| Net  (loss) income                               |       | $                      | (0.21      | ) | $ | 0.04 |   |

 

Diluted earnings pershare is 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 2,192 and2,165 in the three months ended March 31, 2010 and 2009, respectively,were not included in our calculation due to our net loss from continuingoperations during those periods.

 

**4.  IMPAIRMENT LOSSES AND RESTRUCTURING CHARGES**

 

***ImpairmentLosses***

 

During the threemonths ended March 31, 2010, we recorded approximately $2,162 ofimpairment losses ($2,005 in our U.S. segment and $157 in our Canadiansegment), due to the impairment of certain long-lived assets for which thecarrying value of those assets is not recoverable.  The long-lived assets include computer andtelephone equipment, furniture and fixtures, leasehold improvements andsoftware.  For assets which were notrecoverable through future cash flows or could not be used in another facility,we reduced the carrying value to fair value. During the three months ended March 31, 2009, we incurred $1,756 ofimpairment losses in our Canadian segment, due to the impairment of certainlong-lived assets for which the carrying value of those assets was notrecoverable.

 

***RestructuringCharges***

 

We have closed the following facilities, and have recordedrestructuring charges related to lease costs and other expenses related to thefacility closures.  We record expenses inaddition to the initially recognized expense when a change in estimate occursor to accrete 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 amountpaid as of March 31, 2010 related to the above closures was $214 in ourU.S. segment and $1,652 in our Canadian segment.  We expect to incur $330 in our U.S. segmentand $3,386 in our Canadian segment (adjusted for the March 31, 2010Canadian dollar to U.S. dollar exchange rate) relating to the aboveclosures.  We expect completion of theRegina, Victoria, Laramie and Thunder Bay restructuring plans no later than2013, 2014, 2011 and 2013, respectively; however, it may be earlier or 

 

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later depending on ourability to sublease the facility or buy-out the lease.  We have made certain assumptions related toour ability to sublease these facilities. Refer to Note 8, “Fair Value Measurements,” of this Form 10-Q, foradditional information on the fair value measurements for all assets andliabilities, including restructuring charges, that are measured at fair valuein the Condensed Consolidated Financial Statements.   During the three months ended March 31,2010, we recorded a reduction of restructuring charges in the CondensedConsolidated Statements of Operations of $2,047 to adjust the estimatedrestructuring liability for our Regina, Saskatchewan facility due to a subleaseproposal in the first quarter of 2010. We had previously assumed that we would not be able to sublease thefacility.  In addition, we recorded areduction of restructuring charges of $445 for the reversal of certain deferredrent liabilities for our Thunder Bay closure. These reductions were offset by $330 for additional restructuringcharges related to the Victoria and Laramie location closures. On April 30,2010, we entered into a sublease agreement for our Thunder Bay, Ontario, Canadafacility.  The sublease is effective fromJuly 1, 2010 through the remainder of the lease term.  We assumed a sublease in our estimatedrestructuring liability for this facility and do not expect to incur materialchanges to the restructuring liability in future periods as a result of the sublease.

 

A summary of the activity under the restructuring plans as of March 31,2010, and changes during the three months ended March 31, 2010, ispresented 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                                  |       | (2,047                     | )          | (445 | ) | (2,492 | ) | 243 |   | 87 |   | 330 |   | (2,162 | ) |
| Payments                                 |       | (358                       | )          | — |   | (358 | ) | (162 | ) | (52 | ) | (214 | ) | (572 | ) |
| Reclassification  of long-term liability |       | —                     |       | 701 |   | 701 |   | 936 |   | 3 |   | 939 |   | 1,640 |   |
| Foreign  currency translation adjustment |       | 46                         |       | 43 |   | 89 |   | — |   | — |   | — |   | 89 |   |
| Balance  as of March 31, 2010       |       | $                          | 1,621      |   | $ | 299 |   | $ | 1,920 |   | $ | 1,017 |   | $ | 38 |   | $ | 1,055 |   | $ | 2,975 |   |

 

***AssetsHeld for Sale***

 

We own our facility inLaramie, Wyoming.  We have committed to aplan to sell the assets in this location. Although we anticipate selling the facility in excess of its book value,no assurance can be given as to how much the facility and its assets will besold for.

We reclassified theselong-lived assets as a current asset held for sale on our CondensedConsolidated Balance Sheet.  In order for an asset to be held for sale,management must determine that the asset is to be held for sale in its currentcondition, an active plan to complete the sale of the asset has been initiatedand the sale of the asset is probable within one year.  We evaluated the facility during the firstquarter of 2010 and determined these assets meet all the criteria for an assetheld for sale. Long-lived assets held for sale are reported at the lower ofcost or fair value less costs to sell. As of March 31, 2010, the assets are recorded at their net bookvalue of approximately $1,010, as we believe that fair value less the cost tosell the asset is above net book value.

 

**5.  DISCONTINUED OPERATIONS**

 

During the three months ended March 31, 2009, we recorded incomefrom discontinued operations, net of tax, of $4,640 due to the sale of theassets of Domain.com, our then-wholly owned subsidiary, to A. Emmet Stephenson, Jr., Inc.(“Mr. Stephenson”).  Mr. Stephensonis one of our co-founders, managed the Domain.com subsidiary since 2006 andowns approximately 20% of our common shares outstanding.  Because the transaction involved a relatedparty, the Audit Committee of our Board of Directors considered and approvedthe transaction.  The assets were sold inexchange for cash of $7,075, which resulted in a gain on the sale of$6,937.  Operating income from Domain.comprior to the sale was $27 and tax expense totaled $2,324, which resulted in$4,640 in income from discontinued operations, net of tax.  The results of operations and cash flows ofDomain.com have been reported in the Condensed Consolidated Statements ofOperations as discontinued operations.

 

**6.  PRINCIPAL CLIENTS**

 

The followingtable represents revenue concentration of our principal clients.

 
| ** **                                                                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                     | ** ** | **March 31,**     | ** ** |
| ** **                                                                                     | ** ** | **2010**               | ** ** | **2009** | ** ** |
| AT&T  Services, Inc. and AT&T Mobility, LLC, subsidiaries of  AT&T, Inc. |       | 66.9                   | %          | 64.7 | % |
| T-Mobile  USA, Inc., a subsidiary of Deutsche Telekom                                     |       | 18.2                   | %          | 20.8 | % |

 

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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 March 31, 2010.

 

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.  The initialterm of our master services agreement covering all AT&T work expired in January 2010.  After the initial term, the agreementautomatically renews month-to-month.  Weare currently negotiating a new master services agreement.  Until the new agreement is signed, ourservices provided to AT&T are covered under the existing master servicesagreement.

 

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.

 

We are workingdiligently 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. Our Canadian and Philippine subsidiaries’ functional currencies 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 functionalcurrency is the U.S. dollar and the majority of our costs are denominated inU.S. dollars.  We have elected to followcash flow hedge accounting in order to associate the results of the hedges withforecasted future expenses.  The currentmark-to-market gain or loss is recorded in accumulated other comprehensiveincome (“AOCI”) as a component of stockholders’ equity and will bere-classified to operations as the forecasted expenses are incurred, typicallywithin one year.  During the three monthsended March 31, 2010 and 2009, our cash flow hedges were highly effectiveand there were no amounts charged to the Condensed Consolidated Statements ofOperations for hedge ineffectiveness.

 

During the three monthsended March 31, 2010, we entered into Canadian dollar forward contractswith UMB Bank for a notional amount of 15,800 Canadian dollars to hedge ourforeign currency risk with respect to labor costs in Canada.  As of March 31, 2010, we have notentered into any arrangements to hedge our exposure to fluctuations in thePhilippine peso or Costa Rican colon relative to the U.S. dollar.

 

The following table shows the notional principal of our derivativeinstruments as of March 31, 2010:

 
| ** **                                    | ** ** | **Currency**    | ** ** | **Notional  Principal** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-------------------------|------------|
| Instruments  qualifying as accounting hedges: |       |            |       |                    |       |
| Foreign  exchange contracts                   |       | Canadian dollar |       | CDN                     | 31,400     |   |
|                                               |            |                 |            |                         |            |  |

 

The above foreignexchange contracts are to be delivered periodically through December 2010at a purchase price of approximately $29,376, and as such we expect unrealizedgains and losses reported in accumulated other comprehensive income will bereclassified to earnings during the next twelve months.  The estimates of fair value are based onapplicable and commonly used pricing models and prevailing financial marketinformation as of March 31, 2010. Refer to Note 8, “Fair Value Measurements,” of this Form 10-Q, foradditional information on the fair value measurements for all assets andliabilities, including derivative assets and derivative liabilities, that aremeasured at fair value in the Condensed Consolidated Financial Statements.

 

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The followingtable shows our derivative instruments measured at gross fair value as reflectedin the Condensed Consolidated Balance Sheet as of March 31, 2010 and December 31,2009:

 
| ** **                  | ** ** | **As of**               | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
| Derivative  assets:         |       |                    |       |   |   |
| Foreign  exchange contracts |       | $                       | 1,553      |   | $ | 628 |   |
|                             |            |                         |            |  |  |  |  |

 

The followingtable shows the effect of our derivative instruments designated as cash flowhedges in the Condensed Consolidated Statement of Operations for the threemonths ended March 31, 2010 and 2009:

 
| ** **                  | ** ** | **Three Months Ended**                    | ** ** | **Location  of Gain**                          | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|------------------------------------------------|------------|
| ** **                  | ** ** | **March 31, 2010**                   | ** ** | **March 31, 2009**                        | ** ** | **(Loss)** | ** ** |
|                        | ** ** | **Gain 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** | ** ** | **Reclassified  from  AOCI into  Income** | ** ** |
| Cash  flow hedges:          |       |                                      |       |                                           |       |   |   |   |   |   |   |
| Foreign  exchange contracts |       | $                                         | 327        |                                           | $          | 391 |   | $ | 1,327 |   | $ | (1,652 | ) | Cost of services |   |
|                             |            |                                           |            |                                                |            |  |  |  |  |  |  |  |  |  |  |

 

**8.  FAIR VALUE MEASUREMENTS**

 

***Derivative Instruments and Hedging Activities***

 

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

 

***Restructuring Charges***

 

As described in Note 4, “ImpairmentLosses and Restructuring Charges,” during the three months ended March 31,2010, we recorded a gain in the Condensed Consolidated Statements of Operationsof $2,047 to adjust the estimated restructuring liability for our Regina,Saskatchewan facility due to a sublease proposal that was received by us.  We had previously assumed that we would notbe able to sublease the facility.  Inaddition, during the quarter we closed facilities in Thunder Bay, Ontario,Victoria, Texas and Laramie, Wyoming, which resulted in restructuring(reductions) charges of ($445), $260 and $70, respectively.  The costs were valued using a discounted cashflow model.  The cash flows consist ofthe future 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.

 

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***Long-LivedAssets***

 

As described inNote 4, “Impairment Losses and Restructuring Charges,” during the three monthsended March 31, 2010, we recorded approximately $2,162 of impairmentlosses ($2,005 in our U.S. segment and $157 in our Canadian segment), due tothe impairment of certain long-lived assets for which the carrying value ofthose assets is not recoverable.  Thelong-lived assets include computer and telephone equipment, furniture andfixtures, leasehold improvements and software. For assets which were not recoverable through future cash flows or couldnot be used in another facility, we reduced the carrying value to fairvalue.  The fair value of theselong-lived assets after the impairment charge was $2,912.  Given that the impairment losses were valuedusing internal estimates, we have classified the remaining fair value oflong-lived assets as Level 3 in the fair value hierarchy.

 

During the three monthsended March 31, 2010, we committed to a plan to sell the assets in ourclosed Laramie, Wyoming location. Long-lived assets held for sale are reported at the lower of cost orfair value less costs to sell.  As of March 31,2010, the assets are recorded at their net book value, as the net book valuewas less than the estimated fair value less costs to sell.  The measurement of the fair value of assetsheld for sale was based upon our third-party real estate broker’s estimate offair 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.

 

***FairValue Hierarchy***

 

The following tables setforth our assets and liabilities measured at fair value on a recurring basisand a non-recurring basis by level within the fair value hierarchy.  Assets and liabilities are classified in theirentirety based on the lowest level of input that is significant to the fairvalue measurement.

 
| ** **                                                | ** ** | **Assets Measured at Fair Value**                  | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                | ** ** | **on a Recurring Basis as of March 31, 2010** | ** ** |
| ** **                                                | ** ** | **Level 1**                                        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                   | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Foreign  exchange contracts                               |       | —                                             |       | 1,553 |   | — |   | 1,553 |   |
| Total  fair value of assets measured on a recurring basis |       | $                                                  | —     |   | $ | 1,553 |   | $ | — |   | $ | 1,553 |   |
|                                                           |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                         | ** ** | **Assets and Liabilities Measured at Fair Value on a**                     | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Non-Recurring Basis During the Three Months ended  March 31, 2010** | ** ** |
| ** **                                                         | ** ** | **Level 1**                                                                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                            |       |                                                                       |       |   |   |   |   |   |   |
| Assets  held for sale                                              |       | $                                                                          | —     |   | $ | — |   | $ | 1,010 |   | $ | 1,010 |   |
| Property,  plant and equipment, net                                |       | —                                                                     |       | — |   | 2,912 |   | 2,912 |   |
| Total  fair value of assets measured on a non-recurring basis      |       | $                                                                          | —     |   | $ | — |   | $ | 3,922 |   | $ | 3,922 |   |
|                                                               |       |                                                                       |       |   |   |   |   |   |   |
| Liabilities:                                                       |       |                                                                       |       |   |   |   |   |   |   |
| Accrued  restructuring costs                                       |       | $                                                                          | —     |   | $ | — |   | $ | 1,818 |   | $ | 1,818 |   |
| Total  fair value of liabilities measured on a non-recurring basis |       | $                                                                          | —     |   | $ | — |   | $ | 1,818 |   | $ | 1,818 |   |

 

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

 

The followingrepresents the components of other comprehensive (loss) income:

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **March 31,**     | ** ** |
|                                                        | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net  (loss) income                                          |       | $                      | (3,116     | ) | $ | 652 |   |
| Other  comprehensive (loss) income:                         |       |                   |       |   |   |
| Foreign  currency translation adjustments, net of tax       |       | 181                    |       | (88 | ) |
| Change  in fair value of derivative instruments, net of tax |       | 572                    |       | 44 |   |
| Comprehensive  (loss) income                                |       | $                      | (2,363     | ) | $ | 608 |   |

 

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

 
| ** **                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Accumulated  foreign currency translation adjustments: |       |                                  |       |   |   |
| Beginning  balance                                     |       | $                                     | 1,979      |   | $ | 1,090 |   |
| Translation  adjustments                               |       | 351                                   |       | (140 | ) |
| Taxes  associated with translation adjustments         |       | (170                                  | )          | 52 |   |
| Ending  balance                                        |       | $                                     | 2,160      |   | $ | 1,002 |   |
| Accumulated  unrealized derivative gains (losses):     |       |                                  |       |   |   |
| Beginning  balance                                     |       | $                                     | 394        |   | $ | (1,444 | ) |
| Gain  (loss) reclassified to earnings, net of tax      |       | 245                                   |       | (1,033 | ) |
| Change  in fair value of cash flow hedges, net of tax  |       | 327                                   |       | 1,327 |   |
| Ending  balance                                        |       | $                                     | 966        |   | $ | (1,150 | ) |

 

**10.  SHARE-BASED COMPENSATION**

 

Our share-basedcompensation arrangements include grants of stock options and restricted stockawards under the StarTek, Inc. 2008 Equity Incentive Plan, which replacedthe StarTek, Inc. Stock Option Plan and StarTek, Inc. Directors’Stock Option Plan, certain awards granted outside of these plans and ourEmployee Stock Purchase Plan.  Refer toNote 11, “Share-Based Compensation,” in Item 8. “Financial Statements andSupplementary Financial Data” appearing in our Annual Report on Form 10-Kfor the year ended December 31, 2009 for further information on ourshare-based compensation arrangements.  The compensation cost that has been charged against income related toshare-based compensation for the three months ended March 31, 2010 and2009 was $556 and $465, respectively, and is included in selling, general andadministrative expense in our Condensed Consolidated Statement ofOperations.  As of March 31, 2010,there was $2,942 of total unrecognized compensation cost related to non-vestedstock options and $125 related to non-vested restricted stock awards.  That cost is expected to be recognized over aweighted-average period of 2.31 and 0.92 years for the stock options andrestricted stock awards, respectively.

 

**11.  INCOME TAXES**

 

The quarterly effective tax rate for continuing operations decreasedfrom 27.2% during the three months ended March 31, 2009, to 16.9%, duringthe three months ended March 31, 2010. The primary reasons for the decrease in the rate between periods ishigher work opportunity credits and a decline related to other permanent items,partially offset by a smaller impact from a change in the Canadianstatutory tax rates in 2010 compared to 2009.

 

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Differencesbetween U.S. statutory income tax rates and our effective tax rates forcontinuing operations for the three months ended March 31, 2010 and 2009were:

 
| ** **                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                      | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| U.S.  statutory tax rate                        |       | 35.0                                  | %          | 35.0 | % |
| Effect  of state taxes (net of Federal benefit) |       | 0.2                                   | %          | 3.2 | % |
| Work  opportunity credits                       |       | (11.9                                 | )%         | (7.0 | )% |
| Effect  of change in Canadian tax rate          |       | (3.0                                  | )%         | (9.5 | )% |
| Other,  net                                     |       | (3.4                                  | )%         | 5.5 | % |
| Total                                           |       | 16.9                                  | %          | 27.2 | % |

 

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

 

The following discussion and analysis should be read in conjunctionwith our Unaudited Condensed Consolidated Financial Statements and relatedNotes included elsewhere in this Quarterly Report on Form 10-Q, theConsolidated Financial Statements and related Notes included in our AnnualReport on Form 10-K for the year ended December 31, 2009, and with theinformation under the heading “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our Annual Report on Form 10-Kfor the year ended 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.

 

**BUSINESS DESCRIPTION AND OVERVIEW**

 

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

 

We seek to become a market leader in providing high-value services toclients. Our approach is to develop relationships with our clients that arepartnering and collaborative in nature and create industry-based solutions tomeet our clients’ business needs.  To bea leader in the market, our strategy is to:

 

·                  grow our existing client base bydeepening and broadening our relationships,

·                  add new clients and continue to diversifyour client base,

·                  improve the profitability of our businessthrough operational improvements and securing higher margin business,

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

·                  expand our global delivery platform bygrowing offshore and near-shore,

·                  invest in our StarTek@Home platform toincrease our presence of home agents,

·                  broaden our service offerings byproviding more technology solutions,

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

·                  make prudent acquisitions to expand ourbusiness scale and service offerings.

 

We operate ourbusiness within three reportable segments, based on the geographic regions inwhich our services are rendered: (1) the U.S., (2) Canada and (3) Offshore.  As of March 31, 2010, our U.S. segmentincluded the operations of our eleven facilities in the U.S.; our Canadasegment included the operations of our five facilities in Canada; and ourOffshore segment included the operations of one facility in the Philippines andone in Costa Rica.  As of March 31, 2009,there were thirteen, five and one operating centers in the U.S., Canada andOffshore segments, respectively.  We usegross profit as our measure of profit and loss for each business segment and donot allocate selling, general and administrative expenses to our businesssegments.

 

Overall economicconditions have impacted the telecommunications industry and our clients.  We have continued to notice a downturn inthis sector which adversely affected our results in the first quarter of 2010.  The growth in wireless subscribers appears tobe slowing.  We observed lower callvolumes in the first quarter of 2010 compared to the fourth quarter of 2009from our second largest customer and from our largest customer late in thefirst quarter, which adversely affected our results.  We expect call volumes to continue to declinethroughout the remainder of 2010.  Theindustry slowdown has impacted our customers and in response to this, we haveobserved a greater focus on cutting costs by them.  In order to reduce their costs, customers areconcentrated on 1) shifting a larger portion of their customer care offshore,2) increasing their use of outsourced providers and 3) decreasing the number ofagents handling calls.  In addition, thetelecommunications space continues to shift away from traditional “wireline”,or land telephone services, to wireless as many consumers disconnect their hometelephone lines in favor of using wireless devices, leading to lower callvolumes among wireline clients.  Thesetelecommunications industry trends could adversely impact our financial resultsfor the remainder of 2010; however, the shift toward outsourced and offshoreproviders could positively impact our business. Given that over 95% of our revenue is concentrated in the telecommunicationsindustry, the speed and intensity in which these trends develop could adverselyaffect our business.  Our strategyincludes expanding into other vertical markets, including healthcare, insuranceand technology, to diversify our client base and 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.

 

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**SIGNIFICANT DEVELOPMENTS DURING THE THREE MONTHSENDED MARCH 31, 2010**

 

***New Facilities***

 

One component of our strategy is to expand our global delivery platformby growing offshore and near-shore. Management believes that expansion into international locations willbroaden our service delivery platform and build our competitive advantage.  As part of this strategy, during the threemonths ended March 31, 2010 we:

 

·                  Entered into a lease agreement for the rental of a facility in Ortigas,Philippines.  Management decided to openthis second facility in the Philippines based upon the client demandexperienced with our first facility, which opened in 2008.  We have found that our customers areinterested in this lower cost alternative.  The lease has an initial term of five years with a tenant option for anadditional five years.  The facility is approximately 158,500 square feetand opened for operations in April 2010.  Total lease commitments forthe rental of this facility are approximately $5.8 million over the initialterm of the lease.

 

·                  Opened our first facility in Costa Ricain March 2010.   Management choseCosta Rica for its large, well-educated bilingual talent pool and good businessclimate.  The facility is located inHeredia, Costa Rica and is approximately 37,000 square feet.

 

***SiteClosures***

 

We endeavor toachieve site optimization 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, management made the decision to close the following sites during thefirst quarter of 2010:

 

·                  In January 2010, we closed our facility inLaramie, Wyoming.  The closure resulted in approximately $0.8 million lessrevenue during the first quarter of 2010 compared to the first quarter of 2009,and decreased gross profit by $0.1 million, compared to the first quarter of2009.  We have transitioned the workeither to StarTek’s @Home platform, whereby agents work from their homes, orour Greeley, Colorado facility.  We incurred restructuring and impairmentcharges of approximately $0.1 million. We own our facility in Laramie, Wyoming and have committed to a plan tosell the assets in this location. Therefore, we reclassified these long-lived assets as a current assetheld for sale on our Condensed Consolidated Balance Sheet.

 

·                  In January 2010, we closed our facility in Victoria, Texas.  The closure was driven by the loss of aclient program, resulting from lower call volumes from our second largestclient.  The closure resulted inapproximately $2.3 million less revenue during the first quarter of 2010compared to the first quarter of 2009, and increased gross profit by $0.3million, compared to the first quarter of 2009, due to negative gross profit atthis facility in 2009.  We incurredrestructuring and impairment charges of approximately $2.3 million during thethree months ended March 31, 2010. We are currently in negotiations and intend to sublease the facility.

 

·                  In March 2010, we closed our Thunder Bay, Ontario, Canadalocation.  The closure in Thunder Bay was driven by market conditions,namely recruiting challenges in this location, which negatively impacted theprofitability of the location and led to management’s determination that it wasin our long-term interest to close the location.  We recordedapproximately $1.7 million in impairment losses during 2009 related to assetsheld at this facility because the carrying value of those assets was notrecoverable.  We recorded an offset to restructuring and impairmentcharges of approximately $0.3 million in the three months ended March 31,2010 for the reversal of certain deferred rent liabilities, partially offset byadditional impairment and restructuring charges.  On April 30, 2010, we entered into asublease agreement for our Thunder Bay, Ontario, Canada facility.  The sublease is effective from July 1,2010 through the remainder of the lease term. We assumed a sublease in our estimated restructuring liability for thisfacility and do not expect to incur material changes to the restructuringliability in future periods as a result of the sublease.  The closure resulted in approximately $0.5million less revenue during the first quarter of 2010 compared to 2009, andincreased gross profit by $0.2 million, compared to the first quarter of 2009,due to negative gross profit at this facility in 2009.

 

·                  During the three months ended March 31, 2010, werecorded a reduction of restructuring charges in the Condensed ConsolidatedStatements of Operations of $2.0 million to adjust the estimated restructuringliability for our Regina, Saskatchewan facility, which closed in February 2009,due to a sublease proposal.  We hadpreviously assumed that we would not be able to sublease the facility.

 

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**RESULTSOF OPERATIONS — THREE MONTHS ENDED MARCH 31, 2010 AND MARCH 31, 2009**

 

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

 
| ** **                                           | ** ** | **Three Months  Ended March 31,  2010** | ** ** | **% of  Revenue** | ** ** | **Three Months  Ended March 31,  2009** | ** ** | **% of  Revenue** | ** ** | **% Change  Q1 2009 to  Q1 2010** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|-------------------|------------|----------------------------------------------|------------|-------------------|------------|-----------------------------------|------------|
| Revenue                                              |       | $                                            | 67,410     |              | 100.0      | %                                            | $          | 70,711            |       | 100.0                             | %          | -4.7 | % |
| Cost  of services                                    |       | 60,274                                       |       | 89.4              | %          | 59,988                                       |       | 84.8              | %          | 0.5                               | %          |
| Gross  profit                                        |       | 7,136                                        |       | 10.6              | %          | 10,723                                       |       | 15.2              | %          | -33.5                             | %          |
| Selling,  general and administrative expenses        |       | 10,890                                       |       | 16.2              | %          | 9,692                                        |       | 13.7              | %          | 12.4                              | %          |
| Impairment  losses and restructuring charges         |       | —                                       |       | 0.0               | %          | 6,437                                        |       | 9.1               | %          | -100.0                            | %          |
| Operating  loss                                      |       | (3,754                                       | )          | -5.6              | %          | (5,406                                       | )          | -7.6              | %          | NM                                |       |
| Net  interest and other income (expense)             |       | 3                                            |       | 0.0               | %          | (75                                          | )          | -0.1              | %          | NM                                |       |
| Loss  from continuing operations before income taxes |       | (3,751                                       | )          | -5.6              | %          | (5,481                                       | )          | -7.7              | %          | NM                                |       |
| Income  tax benefit                                  |       | (635                                         | )          | 0.7               | %          | (1,493                                       | )          | -2.1              | %          | NM                                |       |
| Loss  from continuing operations                     |       | (3,116                                       | )          | -4.6              | %          | (3,988                                       | )          | -5.6              | %          | NM                                |       |
| Income  from discontinued operations, net of tax     |       | —                                       |       | 0.0               | %          | 4,640                                        |       | 6.5               | %          | -100.0                            | %          |
| Net  (loss) income                                   |       | $                                            | (3,116     | )                 | -4.6       | %                                            | $          | 652               |       | 0.9                               | %          | NM |   |

 

The followingtable summarizes our revenues and gross profit for the periods indicated, byreporting segment:

 
| ** **         | ** ** | **For the Three Months Ended March 31,** | ** ** |
|--------------------|------------|-----------------------------------------------|------------|
| ** **         | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| ** **         | ** ** | **(in 000s)**                                 | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** |       |                                          |       |   |   |   |   |   |   |
| Revenue            |       | $                                             | 44,703     |   | 66.3 | % | $ | 49,364 |   | 69.8 | % |
| Cost  of services  |       | 37,923                                        |       | 62.9 | % | 40,567 |   | 67.6 | % |
| Gross  profit      |       | $                                             | 6,780      |   | 95.0 | % | $ | 8,797 |   | 82.0 | % |
| *Gross profit %*   | * *   | *15.2*                                        | *%*        | * * | * * | *17.8* | *%* | * * | * * |
|               |       |                                          |       |   |   |   |   |   |   |
| **Canada:**        |       |                                          |       |   |   |   |   |   |   |
| Revenue            |       | $                                             | 18,081     |   | 26.8 | % | $ | 19,181 |   | 27.1 | % |
| Cost  of services  |       | 16,525                                        |       | 27.4 | % | 17,435 |   | 29.1 | % |
| Gross  profit      |       | $                                             | 1,556      |   | 21.8 | % | $ | 1,746 |   | 16.3 | % |
| *Gross profit %*   | * *   | *8.6*                                         | *%*        | * * | * * | *9.1* | *%* | * * | * * |
|               |       |                                          |       |   |   |   |   |   |   |
| **Offshore:**      |       |                                          |       |   |   |   |   |   |   |
| Revenue            |       | $                                             | 4,626      |   | 6.9 | % | $ | 2,166 |   | 3.1 | % |
| Cost  of services  |       | 5,826                                         |       | 9.7 | % | 1,986 |   | 3.3 | % |
| Gross  profit      |       | $                                             | (1,200     | ) | -16.8 | % | $ | 180 |   | 1.7 | % |
| *Gross profit %*   | * *   | *-25.9*                                       | *%*        | * * | * * | *8.3* | *%* | * * | * * |

 

***Revenue***

 

Revenue decreased by $3.3 million, or 4.7%, from $70.7 million in thefirst quarter of 2009 to $67.4 million in the first quarter of 2010.  The decrease was driven by a $4.7 million decline inrevenue in our U.S. segment. Of this decrease, $3.1 million was from two sitesthat closed in the first quarter of 2010 (Victoria, Texas and Laramie,Wyoming).  Revenue declined approximately$1.6 million among our other sites driven by a decline in call volumes fromtelecommunications clients serving the traditional “wireline” or land telephoneservices.  Revenue in our Canadiansegment declined by $1.1 million in the first quarter of 2010 compared to thefirst quarter 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 2009, and the closure of ourThunder Bay, Ontario facility in March 2010, which caused a decline inrevenue in the first quarter of 2010 of approximately $0.5 million as comparedto the first quarter of 2009.  Thedecline in revenue in our Canadian segment was partially offset by an increasein revenue of $0.3 million driven by an increase in full-time equivalent agentsin our other Canadian locations in the first quarter of 2010 compared to thefirst quarter of 2009.  Revenue from ourOffshore segment increased by $2.4 million from $2.2 million in the firstquarter of 2009 to $4.6 million in the first quarter of 2010, resulting fromnew business launched at our site in Makati City, Philippines.

 

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***Costof Services and Gross Profit***

 

Cost of servicesincreased by $0.3 million, or 0.5%, from $60.0 million in the first quarter of2009 to $60.3 million in the first quarter of 2010.  Cost of services in the U.S. decreased byapproximately $2.6 million.  Gross profitas a percentage of revenue in the U.S. decreased from 17.8% in the firstquarter of 2009 to 15.2% in the first quarter of 2010.  The decrease in cost of services in the U.S.was driven by a $3.0 million decline related to the two site closures in thefirst quarter of 2010, as discussed above, as well as a reduction in full-timeequivalent agents due to the lower call volumes from our telecommunicationsclients serving the traditional “wireline” or land telephone services,described above.  This was partiallyoffset by higher cost of services of approximately $1.2 million due to highercosts associated with investments in technology solutions for a new clientsigned in 2009.   Cost of services inCanada declined by $0.9 million in the first quarter of 2010 from the firstquarter of 2009, of which $1.9 million was due to the closure of the facilitiesin Regina, Saskatchewan and Thunder Bay, Ontario.   This was partially offset by an increase tocost of services of $0.5 million due to declines in the Canadian to U.S. dollarexchange rate.  Cost of services for ourOffshore segment increased by approximately $3.8 million due to a $2.9 millionincrease in the first quarter of 2010 from the first quarter of 2009 in thePhilippines related to higher full-time equivalent agents period over periodand $0.8 million related to the opening of our Costa Rica location in March 2010.

 

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

 

Selling, general and administrative expenses increased by $1.2 million,or 12.4%, from $9.7 million in the first quarter of 2009 to $10.9 million inthe first quarter of 2010.  As a percentage of revenue, selling, generaland administrative expenses increased from 13.7% to 16.2% period overperiod.  The increase was driven by anincrease of $1.3 million in payroll expense primarily related to internationalexpansion and information systems. Depreciation expense increased by $0.3 million due to capitalexpenditures over the period.  Theseincreases were partially offset by a decline in bonus expense of $0.4 million.

 

***ImpairmentLosses and Restructuring Charges***

 

During the threemonths ended March 31, 2010, we recorded approximately $2.2 million ofimpairment losses ($2.0 million in our U.S. segment and $0.2 million in ourCanadian segment), due to the impairment of certain long-lived assets for whichthe carrying value of those assets is not recoverable.  During the three months ended March 31,2009, we incurred $1.8 million of impairment losses in our Canadian segment.

 

The impairment losseswere offset by $2.2 million in income from adjustments to our restructuringplans in the first quarter of 2010.  Werecorded a reduction of restructuring charges of $2.0 million to adjust theestimated restructuring liability for our Regina, Saskatchewan facility thatclosed in February 2009 due to a sublease proposal received in the firstquarter of 2010.  We had previouslyassumed that we would not be able to sublease the facility.  In addition, we recorded a reduction ofrestructuring charges of $0.4 million for the reversal of certain deferred rentliabilities for our Thunder Bay closure. These reductions were offset by $0.2 million for additional restructuringcharges related to the Victoria and Laramie location closures.  Restructuring charges were $4.7 million inthe first quarter of 2009 due to the Regina closure.

 

***OperatingLoss***

 

We had an operating lossof $3.8 million in the first quarter of 2010 and $5.4 million in the firstquarter of 2009.  Operating loss as apercentage of revenue was (5.6%) for the first quarter of 2010 compared to(7.6%) for the first quarter of 2009. The decrease in the loss was primarily due to lower impairment and restructuringcharges, offset by lower revenue and higher selling, general and administrativeexpenses, as discussed previously.

 

***IncomeTax***

 

The quarterly effective tax rate for continuing operations decreasedfrom 27.2% during the three months ended March 31, 2009, to 16.9% duringthe three months ended March 31, 2010. The primary reasons for the decrease in the rate period over period arehigher work opportunity credits and a decline related to other permanent items,partially offset by a smaller impact from a change in the Canadianstatutory tax rates in the first quarter of 2010 compared to the first quarterof 2009.

 

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***Incomefrom Discontinued Operations, net of tax***

 

Income fromdiscontinued operations was $0 during the first quarter of 2010 andapproximately $4.6 million during the first quarter of 2009.  The income from discontinued operations inthe first quarter of 2009 was due to the sale of Domain.com, a wholly-ownedsubsidiary, for cash of approximately $7.1 million.  We had a gain on the sale of approximately$6.9 million, less taxes of approximately $2.3 million.

 

***Net(Loss) Income***

 

Net loss was $3.1million for the first quarter of 2010 compared to net income of approximately$0.7 million during the first quarter of 2009. The decrease in net income was primarily due to lower revenue, higherselling, general and administrative expenses, the absence of income fromdiscontinued operations and a lower income tax benefit, partially offset by thelower impairment and restructuring charges, as discussed previously.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of March 31,2010, working capital totaled $56.5 million and our current ratio was 3.04:1,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 expect to be able torenew our existing line of credit or replace it with other financingarrangements when that line of credit expires on August 1, 2010.  If we are unable to renew the line of creditor are unable to secure alternative sources of capital funding undersatisfactory terms, or at all, we may be unable to meet cash needs required forongoing operating activities and growth opportunities.  Any significant future expansion of ourbusiness may require us to secure additional cash resources.  If we enter into an acquisition, it may requireus to use our cash, draw on our line of credit or obtain additional financing,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 three months ended March 31, 2010 and 2009 we used $0and $22.2 million on the line of credit, respectively, for regular operatingactivities.  During the three monthsended March 31, 2010 and 2009, we re-paid $0 and $22.2 million,respectively, on the line of credit and there was no balance outstanding as of March 31,2010.

 
| ** **                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | **(in  thousands)**                   | ** ** |
| Net  cash provided by (used in):           | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Operating  activities                      |       | $                                     | 11,841     |   | $ | 4,855 |   |
| Investing  activities                      |       | (4,355                                | )          | 12,369 |   |
| Financing  activities                      |       | 27                                    |       | (765 | ) |
| Effect  of foreign exchange rates on cash  |       | 200                                   |       | 57 |   |
| Net  increase in cash and cash equivalents |       | $                                     | 7,713      |   | $ | 16,516 |   |

 

Our balance of cash andcash equivalents was $27.3 million at March 31, 2010, compared to abalance of $19.6 million at December 31, 2009.

 

***OperatingActivities. ***Net cash provided by operating activitiesincreased $7.0 million from $4.9 million for the three months ended March 31,2009 to $11.8 million for the three months ended March 31, 2010.  Net cash provided by operating activitiesfrom continuing operations was $11.8 million for the three months ended March 31,2010.  The increase of $4.7 million incash provided by operating activities from continuing operations was driven bythe following increases:  1) a $5.0million decrease in our income tax receivable period over period due to a largeincome tax refund collected in the first quarter of 2010, 2) $2.9 million ofhigher collections of accounts receivable period over period due to the timingof collections of large billings and 3) $1.9 million in higher

 

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accounts payable in thefirst quarter of 2010 compared to the first quarter of 2009 due primarily tomore capital expenditures in the period. These increases to cash provided by operating activities from continuingoperations were partially offset by a $5.5 million decrease in the change inaccrued liabilities in the three months ended March 31, 2010 compared tothe three months ended March 31, 2009 primarily due to fewer restructuringcosts in the first quarter of 2010, compared to the first quarter of 2009.

 

***InvestingActivities. ***Net cash used in investing activities was$4.4 million in the first quarter of 2010 compared to cash provided byinvesting activities of $12.4 million in the first quarter 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 quarter of 2009, 2) a $6.0 million decrease in the proceeds from the saleof investments and 3) an increase of $3.6 million in purchases of property,plant and equipment due to new site openings in Costa Rica in the first quarterof 2010 and the Philippines in April 2010.

 

***FinancingActivities. ***Net cash used in financing activities was$0.8 million for the first quarter of 2009, compared to less than $0.1 millionfor the first quarter of 2010.  Thedecline was due to the absence of payments on long-term debt which were $0.8million in the first quarter of 2009.  Wepaid off our long-term debt during the second quarter of 2009.

 

***Contractual******Obligations.***** **Other thanoperating and capital leases for certain equipment, real estate and leases andcommitments to purchase goods and services in the future, we have nooff-balance sheet transactions, unconditional purchase obligations or similarinstruments and we are not a guarantor of any other entities’ debt or otherfinancial obligations.  We maintain a $15million revolving line of credit with UMB Bank Colorado, N.A. which we use tofinance regular, short-term operating expenses. The line of credit expires on August 1, 2010.  We expect to renew the line of credit orreplace it with other financing when this line of credit expires.  During the three months ended March 31,2010 and 2009 we used $0 and $22.2 million on the line of credit, respectively,for regular operating activities.  Duringthe three months ended March 31, 2010 and 2009, we re-paid $0 and $22.2million, respectively.  There was nobalance outstanding on the line of credit as of March 31, 2010.  As of March 31, 2010, we were incompliance with our debt covenants.

 

In January 2010,we entered into a lease agreement for the rental of a facility in Ortigas,Philippines.  The lease has an initialterm of five years with a tenant option for an additional five years.  Thefacility is approximately 158,500 square feet and opened in April 2010. Total lease commitments for the rental of this facility are approximately $5.8million over the initial term of the lease.

 

During the three monthsended March 31, 2010, there were no other material changes in ourcontractual obligations.  For a completediscussion of our contractual obligations as of December 31, 2009, seeItem 7 “Contractual Obligations” in our Annual Report on Form 10-K for theyear ended December 31, 2009.

 

***OtherFactors Impacting Liquidity.*** Effective November 4, 2004, our board of directorsauthorized purchases of up to $25.0 million of our common stock.  The repurchase program will remain in effectuntil terminated by the board of directors and allows us to repurchase sharesof our common stock from time to time on the open market, in block trades andin privately-negotiated transactions. Repurchases will be implemented by the Chief Financial Officerconsistent with the guidelines adopted by the board of directors and willdepend on market conditions and other factors. Any repurchases of shares will be made in accordance with Securities andExchange Commission rules.  We have notyet repurchased any shares pursuant to this board authorization.

 

Our business currentlyhas a high concentration of a few principal clients.  The loss of a principal client and/or changesin timing or termination of a principal client’s product launch or serviceoffering would have a material adverse effect on our business, liquidity,operating results, and financial condition. These client relationships are further discussed in Note 6, “PrincipalClients,” to our Condensed Consolidated Financial Statements, which areincluded at Item 1, “Financial Statements,” of this Form 10-Q.  To limit our credit risk, management fromtime to time will perform credit evaluations of our clients. Although we aredirectly impacted by the economic conditions in which our clients operate,management does not believe substantial credit risk existed as of March 31,2010.  Refer to Item 1A. “Risk Factors”appearing in our Annual Report on Form 10-K for the year ended December 31,2009 for further information regarding these risks.

 

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

 

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

 

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Although managementcannot accurately 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.

 

**VARIABILITYOF OPERATING RESULTS**

 

Our business hasbeen seasonal only to the extent that our clients’ marketing programs andproduct launches 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.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

In preparing ourCondensed Consolidated Financial Statements in conformity with accountingprinciples generally accepted in the United States of America, management mustundertake decisions that impact the reported amounts and relateddisclosures.  Such decisions include theselection of the appropriate accounting principles to be applied andassumptions upon which accounting estimates are based.  Management applies its best judgment based onits understanding and analysis of the relevant circumstances to reach thesedecisions.  By their nature, thesejudgments are subject to an inherent degree of uncertainty.  Accordingly, actual results may vary significantlyfrom the estimates we have 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.

 

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

 

In the normal course ofbusiness, we are exposed to certain market risks related to changes in interestrates and other general market risks, and foreign currency exchange rates.  This information should be read inconjunction with information set forth in Part II, Item 7A in ourAnnual Report on Form 10-K for the year ended December 31, 2009, inaddition to the interim Unaudited Condensed Consolidated Financial Statements,accompanying notes and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” presented in Items 1 and 2 of thisQuarterly Report on Form 10-Q.

 

***InterestRate Risk***

 

We are exposed tointerest rate 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 unsecuredrevolving 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 March 31, 2010, there was noamount outstanding on the line of credit. If the LIBOR increased 100 basis points, there would not be a materialimpact to our Condensed Consolidated Financial Statements.

 

***ForeignCurrency Exchange Risks***

 

We enter into foreigncurrency exchange contracts to hedge our anticipated operating commitments thatare denominated in foreign currencies. The contracts cover periods commensurate with expected exposure,generally three to nine months, and are principally unsecured foreign exchangecontracts.  The market risk exposure isessentially limited to risk related to currency rate movements.  We operate in Canada, the Philippines andCosta Rica.  Our Canadian and Philippinesubsidiaries’ functional currencies are the Canadian dollar and the Philippinepeso, respectively, which are used to pay labor and other operating costs inthose countries. However, our client contracts primarily generate revenueswhich are paid to us in U.S. dollars.  InCosta Rica, our functional currency is the U.S. dollar and the majority of ourcosts are denominate in U.S. dollars. During the first quarter of 2010, we entered into Canadian dollarforward contracts for a notional amount of 15.8 million to hedge our foreigncurrency risk with respect to labor costs in Canada.  As of

 

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March 31, 2010, wehave not entered into any arrangements to hedge our exposure to fluctuations inthe Philippine peso or Costa Rican colon relative to the U.S. dollar.  As of March 31, 2010, we had contractedto purchase 31.4 million Canadian dollars to be delivered periodically through December 2010at a purchase price of approximately $29.4 million.

 

During the three monthsended March 31, 2010, there were no other material changes in our marketrisk exposure.  For a complete discussionof our market risk associated with foreign currency and interest rate risk asof December 31, 2009, see Item 7A. “Quantitative and QualitativeDisclosures about Market Risk” in our Annual Report on Form 10-K for theyear ended December 31, 2009.  Also,refer to Part II, Item IA. “Risk Factors” in this Form 10-Q and Part I.Item 1A. “Risk Factors” appearing in our Annual Report on Form 10-K forthe year ended December 31, 2009 for further information regarding theserisks.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

***Evaluationof disclosure controls and procedures.**** *As of March 31,2010, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of March 31, 2010, our disclosurecontrols and procedures were effective and were designed to ensure that allinformation required to be disclosed by us in our reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the SEC, andaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, to allow timely decisionsregarding required disclosure.

 

***Changesin internal controls over financial reporting.**** *There wasno change in our internal control over financial reporting that occurred duringthe quarter ended March 31, 2010, that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**Part II.  Other Information**

 

**ITEM1.  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 communicationsindustry and our strategy******partiallydepends on a trend of communications companies continuing to outsource******non-core services. Ifthe communications industry suffers a downturn or the trend toward******outsourcing reverses,our business will suffer.***

 

Our currentclients are almost exclusively communications companies, which includecompanies in the wire-line, wireless, cable and broadband lines ofbusiness.  Over 95% of our revenue in2009 was concentrated in the telecommunications industry.  We experienced lower call volumes in the firstquarter 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 industries thatwe target. If this happens, it could adversely affect our business, results ofoperations, growth prospects, and financial condition.

 

***Our operations in Canada, the Philippines and Costa Ricasubject us to the risk of currency exchange******fluctuations.***

 

Because we conducta material portion of our business in Canada, we are exposed to market riskfrom changes in the value of the Canadian dollar. For the smaller portion ofour business that we conduct in the Philippines and Costa Rica, we are exposedto market risk from changes in the value of the Philippine peso and Costa Ricancolon.  Material fluctuations in exchangerates impact our results through translation and consolidation of the financialresults of our foreign operations, and therefore may negatively impact ourresults of operations and financial condition. We have contracts wherein therevenue we earn is denominated in U.S. dollars, but the

 

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costs we incur tofulfill our obligations under those contracts are denominated in Canadiandollars, Philippine pesos and to a lesser extent, the Costa Rican colon.  Therefore, the fluctuations in the U.S.dollar to the Canadian dollar, Philippine peso or Costa Rican colon exchangerates can cause significant fluctuations in our results of operations.  During the first quarter of 2010, we engagedin hedging activities relating to our exposure to such fluctuations in thevalue of the Canadian dollar versus the U.S. dollar.  During the first quarter of 2010, we did notenter into hedging agreements for the Philippine peso or Costa Ricancolon.  We may participate in hedgingactivities in the future relating to the Canadian dollar, Philippine peso andCosta Rican colon. However, currency hedges do not, and will not, eliminate ourexposure to fluctuations in the currencies. In the past few years, there have been large fluctuations in the valueof the U.S. dollar against the value of the Canadian dollar.  If the U.S. dollar weakens against the valueof the Canadian dollar, it would increase our costs and adversely affect ourresults from operations.  Likewise,increases in the value of the Philippine peso or Costa Rican colon, orcurrencies in other foreign markets in which we may operate, in relation to thevalue of the U.S. dollar, would further increase our costs and adversely affectour results of operations.

 

***We face risks inherent in conducting business outside ofNorth America.***

 

Our operations inCanada accounted for 26.8% and 27.1% of our revenue for the three months ended March 31,2010 and 2009, respectively.  Ouroperations in the Philippines and Costa Rica accounted for 6.9% and 3.1% of ourrevenue for the three months ended March 31, 2010 and 2009,respectively.  We also opened our secondfacility in the Philippines in April 2010. An important component of our growth strategy is continued internationalexpansion.  There are risks inherent inconducting business internationally, including but not limited to:

 

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

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

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

·                  Potentially longer working capital cycles;

·                  Unexpected changes in foreign government programs or policies;

·                  Regulatory requirements and labor laws;

·                  Difficulties in staffing and effectively managing foreign operations;

·                  Political and social instability; and

·                  Reluctance of our current or potentialnew clients to have us provide services to them from a location outside ofNorth America.

 

One or more of thesefactors may have an impact on our international operations. Our lack ofsignificant international operating experience may result in any of thesefactors impacting us to a greater degree than they impact our competitors. Tothe extent one or more of these factors impact our international operations itcould adversely affect our business, results of operations, growth prospects,and financial condition as a whole.

 

Various other riskfactors described in our 2009 Annual Report on Form 10-K may beexacerbated with regard to international operations, especially in countrieswhere we do not have well-established operations.  Such risks include those related to the needto retain key management personnel, the inability to hire and retain qualifiedemployees, increases in operating costs, facility capacity utilization,management of growth and costs related to growth, geopolitical militaryconditions, interruptions to our business, and the quality and cost oftelephone and data services infrastructure.

 

***Our lack of a significant international presence outside ofNorth America may******adverselyaffect our ability to serve existing customers or limit our ability******to obtain new customers.***

 

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

 

The movement of businessprocess outsourcing services to other countries has been extensively reportedin the press. Most analysts continue to believe that many outsourced serviceswill continue to migrate to other countries with lower wages than thoseprevailing in the U.S. Accordingly, unless and until we continue to developsignificant international operations outside of North America, we may becompetitively disadvantaged compared to a number of our competitors who havealready devoted significant time and money to establishing extensive offshoreoperations.

 

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If we decide to openfacilities in, or otherwise expand into, additional countries, we may not beable to successfully establish operations in the markets that we target.  There are certain risks inherent in conductingbusiness in other countries including, but not limited to, exposure to currencyfluctuations, difficulties in complying with foreign laws, unexpected changesin government programs, policies, regulatory requirements and labor laws,difficulties in staffing and managing foreign operations, politicalinstability, and potentially adverse tax consequences.  There can be no assurance that one or more ofsuch factors will not have a material adverse effect on our business, growthprospects, results of operations, and financial condition.

 

**ITEM 6.EXHIBITS**

 

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this Form 10-Q to be signed on its behalf by the undersignedthereunto duly authorized.

 

STARTEK, INC.

(REGISTRANT)

 
| By:    | /s/A. LAURENCE JONES                                             |   | Date:  May 7, 2010 |
|--------|------------------------------------------------------------------|--------|------------------------------|
|   | A. Laurence Jones                                                |   |                         |
|   | President and Chief  Executive Officer                           |   |                         |
|   | (Principal Executive  Officer)                                   |   |                         |
|   |                                                             |   |                         |
|   |                                                             |   |                         |
| By:    | /s/ DAVID G. DURHAM                                              |   | Date:  May 7, 2010 |
|   | David G. Durham                                                  |   |                         |
|   | Executive Vice  President, Chief Financial Officer and Treasurer |   |                         |
|   | (Principal Financial  and Accounting Officer)                    |   |                         |

 

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**EXHIBITINDEX**

 
|        |       |                                                                                                                                                                     |       | **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  20080122.003.A.003 effective March 16, 2010 to Agreement  No. 20080122.003.C between StarTek, Inc. and AT&T Mobility LLC.                  |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                     |       |                                 |   |   |   |   |
| 10.2*&  |       | Amendment  20070105.006.S.008.A.001 effective March 25, 2010 to Agreement  No. 20070105.006.S.008 between StarTek, Inc. and AT&T  Services, Inc. |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                     |       |                                 |   |   |   |   |
| 10.3*&  |       | Amendment  20070105.006.S.009.A.001 effective March 25, 2010 to Agreement  No. 20070105.006.S.009 between StarTek, Inc. and AT&T  Services, Inc. |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                     |       |                                 |   |   |   |   |
| 10.4*&  |       | Amendment  20070105.006.S.010.A.001 effective March 25, 2010 to Agreement  No. 20070105.006.S.010 between StarTek, Inc. and AT&T  Services, Inc. |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                     |       |                                 |   |   |   |   |
| 10.5*&  |       | Amendment  20070105.006.S.011.A.001 effective March 25, 2010 to Agreement  No. 20070105.006.S.011 between StarTek, Inc. and AT&T  Services, Inc. |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                     |       |                                 |   |   |   |   |
| 10.6*       |       | Separation Agreement by and between StarTek, Inc. and John J.  Damian.                                                                                              |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                     |       |                                 |   |   |   |   |
| 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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