Table ofContents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-Q**

 

| **(Mark  One)**                                                                                                                                               | ** **                                                                                              |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                    | ** **                                                                                              |
| **x**                                                                                                                                                         | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                                    |
|                                                                                                                                                          |                                                                                                    |
| **For  the quarterly period ended March 31, 2009**                                                                                                       |
|                                                                                                                                                          |                                                                                                    |
| **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** | ** ** | **80206**           |
| **Denver,  Colorado**                       | * *   | (Zip code)          |
| (Address of principal executive offices)    |       |                |

 

**(303)399-2400**

(Registrant’s telephone number, including areacode)

 

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

 

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

 

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

**None**

 

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

 

Indicate by 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 Nox

 

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 — 14,831,288 shares as of April 15, 2009.

 

 

 

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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, 2009 and  2008 |
|              |                                                                                                      |
|              | Condensed Consolidated  Balance Sheets as of March 31, 2009 and December 31, 2008               |
|              |                                                                                                      |
|              | Condensed Consolidated  Statements of Cash Flows for the three months ended March 31, 2009 and  2008 |
|              |                                                                                                      |
|              | Notes to  Condensed Consolidated Financial Statements                                                     |
|              |                                                                                                      |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               |
|              |                                                                                                      |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                               |
|              |                                                                                                      |
| Item 4.           | Controls and  Procedures                                                                                  |
|              |                                                                                                      |
| **PART II.** | **OTHER INFORMATION**                                                                                     |
|              |                                                                                                      |
| Item 1.           | Legal Proceedings                                                                                         |
|              |                                                                                                      |
| Item 1A.          | Risk Factors                                                                                              |
|              |                                                                                                      |
| Item 6.           | Exhibits                                                                                                  |
|              |                                                                                                      |
| SIGNATURES        |

 

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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 itemsset forth in Item 1A. “Risk Factors” appearing in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

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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,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Revenue                                                                                                                                    |       | $                                                    | 70,711     |   | $ | 64,583 |   |
| Cost of services                                                                                                                           |       | 59,988                                               |       | 55,116 |   |
| Gross profit                                                                                                                               |       | 10,723                                               |       | 9,467 |   |
| Selling, general and administrative expenses                                                                                               |       | 9,692                                                |       | 10,090 |   |
| Impairment losses and restructuring charges                                                                                                |       | 6,437                                                |       | 108 |   |
| Operating loss                                                                                                                             |       | (5,406                                               | )          | (731 | ) |
| Net interest and other (expense) income                                                                                                    |       | (75                                                  | )          | 310 |   |
| Loss from continuing operations before income taxes                                                                                        |       | (5,481                                               | )          | (421 | ) |
| Income tax benefit                                                                                                                         |       | (1,493                                               | )          | (18 | ) |
| Net loss from continuing operations                                                                                                        |       | (3,988                                               | )          | (403 | ) |
| Income from discontinued operations, net of tax  (including gain on disposal of $6,937 during the three months ended  March 31, 2009) |       | 4,640                                                |       | 72 |   |
| Net income (loss)                                                                                                                          |       | $                                                    | 652        |   | $ | (331 | ) |
|                                                                                                                                       |       |                                                 |       |   |   |
| Basic and diluted net income (loss) per share from:                                                                                        |       |                                                 |       |   |   |
| Continuing operations                                                                                                                      |       | $                                                    | (0.27      | ) | $ | (0.03 | ) |
| Discontinued operations                                                                                                                    |       | 0.31                                                 |       | 0.01 |   |
| Net income (loss)                                                                                                                          |       | $                                                    | 0.04       |   | $ | (0.02 | ) |

 

*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, 2009** | ** ** | **December 31, 2008** | ** ** |
| ** **                                                                                                                                                                                              | ** ** | **(Unaudited)**              | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                                              |       |                         |       |   |   |
| Current assets:                                                                                                                                                                                         |       |                         |       |   |   |
| Cash and cash equivalents                                                                                                                                                                               |       | $                            | 26,096     |   | $ | 9,580 |   |
| Investments                                                                                                                                                                                             |       | 1,982                        |       | 8,437 |   |
| Trade accounts receivable, less allowance for doubtful  accounts of $32 and $32, respectively                                                                                                           |       | 49,327                       |       | 51,510 |   |
| Income tax receivable                                                                                                                                                                                   |       | 2,410                        |       | 2,675 |   |
| Deferred income tax assets                                                                                                                                                                              |       | 2,124                        |       | 2,185 |   |
| Prepaid expenses and other current assets                                                                                                                                                               |       | 2,813                        |       | 3,273 |   |
| Total current assets                                                                                                                                                                                    |       | 84,752                       |       | 77,660 |   |
|                                                                                                                                                                                                    |       |                         |       |   |   |
| Property, plant and equipment, net                                                                                                                                                                      |       | 54,644                       |       | 59,608 |   |
| Long-term deferred income tax assets                                                                                                                                                                    |       | 8,047                        |       | 8,946 |   |
| Other assets                                                                                                                                                                                            |       | 618                          |       | 650 |   |
| Total assets                                                                                                                                                                                            |       | $                            | 148,061    |   | $ | 146,864 |   |
|                                                                                                                                                                                                    |       |                         |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                           |       |                         |       |   |   |
|                                                                                                                                                                                                    |       |                         |       |   |   |
| Current liabilities:                                                                                                                                                                                    |       |                         |       |   |   |
| Accounts payable                                                                                                                                                                                        |       | $                            | 3,708      |   | $ | 6,193 |   |
| Derivative liability                                                                                                                                                                                    |       | 1,842                        |       | 2,323 |   |
| Accrued liabilities:                                                                                                                                                                                    |       |                         |       |   |   |
| Accrued payroll                                                                                                                                                                                         |       | 8,407                        |       | 9,158 |   |
| Accrued compensated absences                                                                                                                                                                            |       | 4,885                        |       | 4,856 |   |
| Accrued restructuring costs                                                                                                                                                                             |       | 1,948                        |       | 995 |   |
| Other accrued liabilities                                                                                                                                                                               |       | 3,022                        |       | 2,317 |   |
| Current portion of long-term debt                                                                                                                                                                       |       | 3,349                        |       | 3,366 |   |
| Other current liabilities                                                                                                                                                                               |       | 852                          |       | 883 |   |
| Total current liabilities                                                                                                                                                                               |       | 28,013                       |       | 30,091 |   |
|                                                                                                                                                                                                    |       |                         |       |   |   |
| Long-term debt, less current portion                                                                                                                                                                    |       | 2,535                        |       | 3,455 |   |
| Accrued restructuring costs                                                                                                                                                                             |       | 4,696                        |       | 1,714 |   |
| Deferred rent liability                                                                                                                                                                                 |       | 4,301                        |       | 4,501 |   |
| Other liabilities                                                                                                                                                                                       |       | 76                           |       | 84 |   |
| Total liabilities                                                                                                                                                                                       |       | 39,621                       |       | 39,845 |   |
|                                                                                                                                                                                                    |       |                         |       |   |   |
| Commitments and contingencies                                                                                                                                                                           |       |                         |       |   |   |
|                                                                                                                                                                                                    |       |                         |       |   |   |
| Stockholders’ equity:                                                                                                                                                                              |       |                         |       |   |   |
| Common stock, 32,000,000 non-convertible shares,  $0.01 par value, authorized; 14,833,288 and 14,813,912 shares issued and  outstanding at March 31, 2009 and December 31, 2008, respectively |       | 148                          |       | 148 |   |
| Additional paid-in capital                                                                                                                                                                              |       | 64,959                       |       | 64,440 |   |
| Accumulated other comprehensive loss, net of tax                                                                                                                                                        |       | (165                         | )          | (415 | ) |
| Retained earnings                                                                                                                                                                                       |       | 43,498                       |       | 42,846 |   |
| Total stockholders’ equity                                                                                                                                                                         |       | 108,440                      |       | 107,019 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                         |       | $                            | 148,061    |   | $ | 146,864 |   |

 

*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,**               | ** ** |
| ** **                                                                                | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Operating Activities**                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income (loss)                                                                         |       | $                                | 652        |   | $ | (331 | ) |
| Income from discontinued operations                                                       |       | 4,640                            |       | 72 |   |
| Loss from continuing operations                                                           |       | (3,988                           | )          | (403 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities |       |                             |       |   |   |
| Depreciation                                                                              |       | 4,011                            |       | 4,400 |   |
| Impairment of property, plant and equipment                                               |       | 1,756                            |       | — |   |
| Non-cash compensation cost                                                                |       | 465                              |       | 373 |   |
| Deferred income taxes                                                                     |       | 746                              |       | (453 | ) |
| Other, net                                                                                |       | (3                               | )          | 16 |   |
| Changes in operating assets and liabilities:                                              |       |                             |       |   |   |
| Trade accounts receivable, net                                                            |       | 2,181                            |       | (7,504 | ) |
| Prepaid expenses and other assets                                                         |       | 449                              |       | 570 |   |
| Accounts payable                                                                          |       | (2,558                           | )          | (1,592 | ) |
| Income taxes, net                                                                         |       | 276                              |       | 899 |   |
| Accrued and other liabilities                                                             |       | 3,855                            |       | 638 |   |
| Net cash provided by (used in)continuing operating  activities                            |       | 7,190                            |       | (3,056 | ) |
| Cash (used in) provided by discontinued operating  activities                             |       | (2,335                           | )          | 72 |   |
| Net cash provided by (used in) operating activities                                       |       | 4,855                            |       | (2,984 | ) |
|                                                                                      |       |                             |       |   |   |
| **Investing Activities**                                                                  |       |                             |       |   |   |
| Purchases of investments available for sale                                               |       | —                           |       | (5,624 | ) |
| Proceeds from disposition of investments available  for sale                              |       | 6,530                            |       | 4,954 |   |
| Purchases of property, plant and equipment                                                |       | (1,236                           | )          | (3,946 | ) |
| Net cash provided by (used in) continuing investing  activities                           |       | 5,294                            |       | (4,616 | ) |
| Cash provided by discontinued investing activities                                        |       | 7,075                            |       | — |   |
| Net cash provided by (used in) investing activities                                       |       | 12,369                           |       | (4,616 | ) |
|                                                                                      |       |                             |       |   |   |
| **Financing Activities**                                                                  |       |                             |       |   |   |
| Principal payments on borrowings                                                          |       | (801                             | )          | (1,308 | ) |
| Principal payments on line of credit                                                      |       | (22,236                          | )          | (9,290 | ) |
| Proceeds from line of credit                                                              |       | 22,236                           |       | 10,962 |   |
| Proceeds from issuance of common stock                                                    |       | 53                               |       | — |   |
| Principal payments on capital lease obligations                                           |       | (17                              | )          | (11 | ) |
| Net cash (used in) provided by continuing financing  activities                           |       | (765                             | )          | 353 |   |
| Cash provided by discontinued financing activities                                        |       | —                           |       | — |   |
| Net cash (used in) provided by financing activities                                       |       | (765                             | )          | 353 |   |
| Effect of exchange rate changes on cash                                                   |       | 57                               |       | (430 | ) |
| Net increase (decrease) in cash and cash equivalents                                      |       | 16,516                           |       | (7,677 | ) |
| Cash and cash equivalents at beginning of period                                          |       | 9,580                            |       | 23,026 |   |
| Cash and cash equivalents at end of period                                                |       | $                                | 26,096     |   | $ | 15,349 |   |
|                                                                                      |       |                             |       |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                      |       |                             |       |   |   |
| Cash paid for interest                                                                    |       | $                                | 98         |   | $ | 161 |   |
| Income taxes paid                                                                         |       | $                                | 269        |   | $ | 503 |   |
| Property, plant and equipment acquired or refinanced  under long-term debt                |       | $                                | —     |   | $ | 385 |   |

 

*See notes to condensedconsolidated financial statements.*

 

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**STARTEK, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(In thousands, exceptshare and per share 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 U.S. generally accepted accounting principles for complete financialstatements.  These financial statementsreflect all adjustments (consisting only of normal recurring entries, except asnoted) which, in the opinion of management, are necessary for fairpresentation.  Operating results duringthe three months ended March 31, 2009, are not necessarily indicative ofoperating results that may be expected during any other interim period of 2009or the year ending December 31, 2009.

 

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

 

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

 

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

 

***RecentlyAdopted Accounting Pronouncements***

 

Effective January 1,2009, we adopted Statement of Financial Accounting Standards No. 157 “FairValue Measurements” (“SFAS No. 157”) for all non-financial assets andnon-financial liabilities, except for items that are recognized or disclosed atfair value on a recurring basis (at least annually) for which SFAS No. 157was previously adopted.  Refer to Note 9,“Fair Value Measurements,” of this Form 10-Q for additional information onthe adoption of SFAS No. 157.

 

Effective January 1,2009, we adopted FASB No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”).SFAS No. 161 requires entities to provide greater transparencythrough additional disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS No. 133”) and itsrelated interpretations, and (c) how derivative instruments and relatedhedged items affect an entity’s financial position, results of operations andcash flows. Refer to Note 8, “Derivative Instruments,” of this Form 10-Qfor additional information on the adoption of SFAS No. 161.

 

We adopted FASB No. 141(R),“Business Combinations” (“SFAS No. 141(R)”), which significantlychanged the accounting for and reporting of business combination transactions.This standard was effective for us for business combination transactions forwhich the acquisition date was on or after January 1, 2009. No businesscombination transactions occurred during the three months ended March 31,2009.

 

**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, 2009, the U.S. segment included the operations ofour thirteen facilities in the U.S., the Canada segment included the operationsof our five facilities in Canada and the Offshore segment included theoperations of our facility in Makati City, Philippines.  We use gross profit as our measure of profitand loss for each business segment and do not allocate selling, general andadministrative expenses to our business segments.

 

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

 

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| ** **        | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-------------------|------------|------------------------------------------------------------------------|------------|
| ** **        | ** ** | **2009**                                                               | ** ** | **2008** | ** ** |
| **Revenue:**      |       |                                                                   |       |   |   |
| United States     |       | $                                                                      | 49,364     |   | $ | 39,958 |   |
| Canada            |       | 19,181                                                                 |       | 24,625 |   |
| Offshore          |       | 2,166                                                                  |       | — |   |
| Total             |       | $                                                                      | 70,711     |   | $ | 64,583 |   |
|              |       |                                                                   |       |   |   |
| **Gross profit:** |       |                                                                   |       |   |   |
| United States     |       | $                                                                      | 8,797      |   | $ | 8,006 |   |
| Canada            |       | 1,746                                                                  |       | 1,461 |   |
| Offshore          |       | 180                                                                    |       | — |   |
| Total             |       | $                                                                      | 10,723     |   | $ | 9,467 |   |

 

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

 

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

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **March 31,**               | ** ** |
| ** **                                      | ** ** | **2009**                         | ** ** | **2008** | ** ** |
|                                            |       |                             |       |   |   |
| Loss from continuing operations                 |       | $                                | (3,988     | ) | $ | (403 | ) |
| Income from discontinued operations, net of tax |       | 4,640                            |       | 72 |   |
| Net income (loss)                               |       | $                                | 652        |   | $ | (331 | ) |
|                                            |       |                             |       |   |   |
| Weighted average shares of common stock         |       | 14,753                           |       | 14,705 |   |
| Dilutive effect of stock options                |       | —                           |       | — |   |
| Common stock and common stock equivalents       |       | 14,753                           |       | 14,705 |   |
|                                            |       |                             |       |   |   |
| Basic net income (loss) per share from:         |       |                             |       |   |   |
| Continuing operations                           |       | $                                | (0.27      | ) | $ | (0.03 | ) |
| Discontinued operations                         |       | 0.31                             |       | 0.01 |   |
| Net income (loss)                               |       | $                                | 0.04       |   | $ | (0.02 | ) |
|                                            |       |                             |       |   |   |
| Diluted net income (loss) per share from:       |       |                             |       |   |   |
| Continuing operations                           |       | $                                | (0.27      | ) | $ | (0.03 | ) |
| Discontinued operations                         |       | 0.31                             |       | 0.01 |   |
| Net income (loss)                               |       | $                                | 0.04       |   | $ | (0.02 | ) |

 

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 2,165 and1,638 in the three months ended March 31, 2009 and 2008, respectively, werenot included in our calculation due to our net loss from continuing operationsduring those periods.

 

**4.  IMPAIRMENT LOSSES AND RESTRUCTURING CHARGES**

 

***ImpairmentLosses***

 

During the three monthsended March 31, 2009, we incurred $1,756 of impairment losses in ourCanadian segment, due to the impairment of certain long-lived assets for whichthe carrying value of those assets is not recoverable.  These assets are located in a facility forwhich we are uncertain about our ability to generate future cash flows tosupport the carrying value of these assets. The 

 

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long-lived assets includecomputer and telephone equipment, furniture and fixtures, leaseholdimprovements and software.  Refer to Note9, “Fair Value Measurements,” of this Form 10-Q, for additionalinformation on the fair value measurements for all assets and liabilities thatare measured at fair value in the Condensed Consolidated Financial Statements.

 

***RestructuringCharges***

 

In August 2007, August 2008, December 2008 and February 2009,we closed facilities in Hawkesbury, Ontario, Big Spring, Texas, Petersburg,Virginia and Regina, Saskatchewan, respectively.  We have recorded restructuring chargesrelated to lease costs and other expenses related to the facilityclosures.  In accordance with Statementof Financial Accounting Standards No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities” (“SFAS No. 146”), werecognized the liability when it was incurred, instead of upon commitment to aplan.  A significant assumption used indetermining the amount of estimated liability incurred in closing a facility isthe estimated liability for future lease payments on vacant facilities.  If the assumptions regarding earlytermination and the timing and amounts of sublease payments prove to beinaccurate, we may be required to record additional losses, or conversely, afuture gain, in our Condensed Consolidated Statements of Operations.

 

We expect to incur totalrestructuring charges related to our Canada segment of approximately $6,796($2,360 and $4,436 related to the Hawkesbury and Regina closures,respectively).  We expect to incur totalrestructuring charges related to our U.S. segment of approximately $2,192 ($434and $1,758 related to the Big Spring and Petersburg closures,respectively).  The cumulative amountpaid as of March 31, 2009 related to the closure of Hawkesbury, Regina,Big Spring and Petersburg is $1,020, $156, $424 and $456, respectively.  We expect completion of the Hawkesbury,Petersburg and Regina restructuring plans no later than 2012, 2013 and 2013respectively; however, it may be earlier depending on our ability to subleasethe respective facility or buy-out the applicable lease.  During February 2009, we bought out theremainder of the lease at the Big Spring facility for approximately $184 andexpect to pay the remainder of the restructuring costs during the secondquarter of 2009.  Refer to Note 9, “FairValue Measurements,” of this Form 10-Q, for additional information on thefair value measurements for all assets and liabilities, including restructuringcharges, that are measured at fair value in the Condensed Consolidated FinancialStatements.

 

A summary of the activity under the restructuring plans as of March 31,2009, and changes during the three months ended March 31, 2009 ispresented below:

 
| ** **                              | ** ** | **Facility-Related Costs** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Hawkesbury**                  | ** ** | **Regina** | ** ** | **Canada  Total** | ** ** | **Big Spring** | ** ** | **Petersburg** | ** ** | **U.S. Total** | ** ** | **Company  Total** | ** ** |
| Balance as of January 1, 2009      |       | $                               | 1,099      |   | $ | — |   | $ | 1,099 |   | $ | 208 |   | $ | 1,402 |   | $ | 1,610 |   | $ | 2,709 |   |
| Expense                                 |       | 16                              |       | 4,436 |   | 4,452 |   | 31 |   | 198 |   | 229 |   | 4,681 |   |
| Payments                                |       | (115                            | )          | (156 | ) | (271 | ) | (229 | ) | (298 | ) | (527 | ) | (798 | ) |
| Reclassification of long-term liability |       | —                          |       | 136 |   | 136 |   | — |   | (25 | ) | (25 | ) | 111 |   |
| Foreign currency translation adjustment |       | (35                             | )          | (24 | ) | (59 | ) | — |   | — |   | — |   | (59 | ) |
| Balance as of March 31, 2009       |       | $                               | 965        |   | $ | 4,392 |   | $ | 5,357 |   | $ | 10 |   | $ | 1,277 |   | $ | 1,287 |   | $ | 6,644 |   |

 

**5.  DISCONTINUED OPERATIONS**

 

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

 

Theresults of operations and cash flows of Domain.com have been reported in theCondensed Consolidated Statements of Operations as discontinuedoperations.  The following tablesummarizes the results of discontinued operations:

 

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| ** **                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Operating income from discontinued operations before  income taxes |       | $                                                    | 27         |   | $ | 116 |   |
| Gain on the sale of discontinued operations                        |       | 6,937                                                |       | — |   |
| Income tax expense                                                 |       | (2,324                                               | )          | (44 | ) |
| Income from discontinued operations, net of tax                    |       | $                                                    | 4,640      |   | $ | 72 |   |

 

**6.  PRINCIPAL CLIENTS**

 

The followingtable represents revenue concentration of our principal clients.

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 31,**               | ** ** |
| ** **                                 | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| AT&T, Inc.                        |       | 64.7                             | %          | 49.4 | % |
| T-Mobile, a subsidiary of Deutsche Telekom |       | 20.8                             | %          | 27.8 | % |

 

Our work for AT&TInc. (AT&T) is covered by several contracts for a variety of differentlines of AT&T business.  Our contractcovering certain business care services with AT&T is currently beingre-negotiated and has been extended through June 30, 2009, while theparties re-negotiate the agreement.  These services represent approximately 35.2% of our revenue fromAT&T for the three months ended March 31, 2009.

 

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, 2009.

 

**7.  INVESTMENTS**

 

Investmentsavailable for sale consisted of:

 
| ** **                    | ** ** | **Basis** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------|------------|-----------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| As of March 31, 2009:    |       |      |       |                         |       |                          |       |                |       |
| Corporate debt securities     |       | $         | 1,988      |                         | $          | 6                             |       | $                   | (12        | ) | $ | 1,982 |   |
|                          |       |      |       |                         |       |                          |       |                |       |
| As of December 31, 2008: |       |      |       |                         |       |                          |       |                |       |
| Corporate debt securities     |       | $         | 8,513      |                         | $          | 9                             |       | $                   | (85        | ) | $ | 8,437 |   |

 

As of March 31,2009, the investments in our portfolio have remaining contractual maturitieswithin one year.  There are twoinvestments as of March 31, 2009 that have carried unrealized losses forlonger than twelve months.  However, wedo not consider our investments to be other-than-temporarily impaired becausewe have the ability and intent to hold these investments until a market pricerecovery or maturity.  Refer to Note 9, “FairValue Measurements,” of this Form 10-Q, for additional information on thefair value measurements for all assets and liabilities, including investments,that are measured at fair value in the Condensed Consolidated FinancialStatements.

 

**8.  DERIVATIVE INSTRUMENTS**

 

We use derivatives topartially offset our business exposure to foreign currency exchange risk. Weenter into foreign currency exchange contracts to hedge our anticipatedoperating commitments that are denominated in foreign currencies.  The contracts cover periods commensurate withexpected exposure, generally within six months, and are principally unsecuredforeign exchange contracts.  The marketrisk exposure is essentially limited to risk related to currency ratemovements.  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.  Wehave elected to follow cash flow hedge accounting under SFAS No. 133 inorder to associate the results of the hedges with forecasted futureexpenses.  The current mark-to-marketgain or loss is recorded in accumulated other

 

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comprehensive income(“AOCI”) as a component of stockholders’ equity and will be re-classified tooperations as the forecasted expenses are incurred, typically within oneyear.  During the three months ended March 31,2009 and 2008, our cash flow hedges were highly effective and there were noamounts charged to the Condensed Consolidated Statements of Operations forhedge ineffectiveness.

 

During the three monthsended March 31, 2009 and 2008, these hedging commitments resulted inunrealized gains (losses), net of tax, of $294 and ($112), respectively. Werealized losses of $1,652 and $208 during the three months ended March 31,2009 and 2008, respectively.  Therealized gains and losses were recognized in cost of services in our CondensedConsolidated Statements of Operations.  During the first quarter of 2009, we entered into Canadian dollarforward contracts with Wells Fargo Bank for a notional amount of $13,500 Canadiandollars to hedge our foreign currency risk with respect to labor costs inCanada.  As of March 31, 2009, wehave not entered into any arrangements to hedge our exposure to fluctuations inthe Philippine peso relative to the U.S. dollar.

 

The followingtable shows the notional principal of our derivative instruments as of March 31,2009:

 
| ** **                                   | ** ** | **Currency**    | ** ** | **Notional  Principal** | ** ** |
|----------------------------------------------|------------|-----------------|------------|-------------------------|------------|
| Instruments qualifying as accounting hedges: |       |            |       |                    |       |
| Foreign exchange contracts                   |       | Canadian dollar |       | CDN $45,000             |       |

 

The above foreignexchange contracts are to be delivered periodically through December 2009at a purchase price which is no more than $37,846 and no less than$37,529.  The estimates of fair value arebased on applicable and commonly used pricing models and prevailing financialmarket information as of March 31, 2009. Refer to Note 9, “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.

 

The followingtable shows our derivative instruments measured at gross fair value asreflected in the Condensed Consolidated Balance Sheet as of March 31,2009:

 
| ** **                 | ** ** | **Fair value of derivatives  designated as hedge  instruments** | ** ** |
|----------------------------|------------|------------------------------------------------------------------------------------------|------------|
| Derivative assets:         |       |                                                                                     |       |
| Foreign exchange contracts |       | $                                                                                        | 92         |   |
|                       |       |                                                                                     |       |
| Derivative liabilities:    |       |                                                                                     |       |
| Foreign exchange contracts |       | $                                                                                        | (1,934     | ) |

 

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, 2009:

 
| ** **                 | ** ** | **Three Months Ended March 31, 2009** | ** ** |
|----------------------------|------------|----------------------------------------------------------------|------------|
| ** **                 | ** ** | **Gain or (Loss)  Recognized in  AOCI**         | ** ** | **Gain (Loss)  Reclassified from  AOCI into Income** | ** ** | **Location of Gain  (Loss) Reclassified  from AOCI into  Income** | ** ** |
| Cash flow hedges:          |       |                                                           |       |   |   |   |   |
| Foreign exchange contracts |       | $                                                              | 294        |   | $ | (1,652 | ) | Cost of services |   |
|                            |            |                                                                |            |  |  |  |  |  |  |

 

**9.  FAIR VALUE MEASUREMENTS**

 

In the first quarter of2009, we adopted SFAS No. 157 for all non-financial assets and liabilitiesthat are recognized or disclosed at fair value in the financial statements. Wehad previously adopted SFAS No. 157 for all financial assets andliabilities.  SFAS No. 157 definesfair value as the price that would be received from selling an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date. When determining the fair value measurements for assetsand liabilities, which 

 

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are required to berecorded at fair value, we consider the principal or most advantageous marketin which we would transact and the market-based risk measurements orassumptions that market participants would use in pricing the asset orliability, such as inherent risk, transfer restrictions, and credit risk.

 

SFAS No. 157establishes a fair value hierarchy that prioritizes the inputs to valuationtechniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices inactive markets for identical assets or liabilities (level 1 measurements) andthe lowest priority to unobservable inputs (level 3 measurements).  The levels of the fair value hierarchy underSFAS No. 157 are described below:

 

Level 1                   Valuation is based upon quoted prices foridentical instruments traded in active markets.

 

Level 2                   Valuation is based upon quoted prices forsimilar instruments in active markets, quoted prices for identical or similarinstruments in markets that are not active, and model-based valuationtechniques for which all significant assumptions are observable in the market.

 

Level 3                   Valuation is generated from model-basedtechniques that use significant assumptions not observable in the market.  These unobservable assumptions reflect ourown estimates of assumptions that market participants would use in pricing theasset or liability.  Valuation techniquesinclude use of option pricing models, discounted cash flow models and similartechniques.

 

***Investments***

 

As of March 31, 2009and December 31, 2008, our investments consisted entirely of corporatedebt securities.  Our corporate debtsecurities are valued using third-party broker statements.  The value of the majority of our corporatedebt securities is derived from quoted market information.  The inputs to the valuation are generallyclassified as Level 1 given the active market for these securities, however, ifan active market does not exist, the inputs are recorded at a lower level inthe fair value hierarchy.

 

***Derivative Instruments and Hedging Activities***

 

Our derivativeinstruments are valued using third-party broker or counterpartystatements.  The value is derived frompricing models using inputs based upon market information, includingcontractual 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***

 

SFAS No. 146specifies that a liability for a cost associated with an exit or disposalactivity be recognized when the liability is incurred, instead of uponcommitment to an exit plan.  On anongoing basis, management assesses the profitability and utilization of our facilitiesand in some cases management has chosen to close facilities.  Accrued restructuring costs were valued usinga discounted cash flow model. Significant assumptions used in determining the amount of the estimatedliability for closing a facility are the estimated liability for future leasepayments on vacant facilities, which we determine based on a third-party broker’sassessment of our ability to successfully negotiate early terminationagreements with landlords and/or to sublease the facility, and the discountrate utilized to determine the present value of the future expected cash flows.If the assumptions regarding early termination and the timing and amounts ofsublease payments prove to be inaccurate, we may be required to recordadditional losses, or conversely, a future gain, in the Condensed ConsolidatedStatements of Operations.

 

As described in Note 4, “ImpairmentLosses and Restructuring Charges,” during the three months ended March 31,2009, we closed our facility in Regina, Saskatchewan, which resulted in $4,436of accrued restructuring costs.  Thesecosts were valued using a discounted cash flow model.  The cash flows consist of the future leasepayment obligations required under the lease agreement.  We assumed that we would not sublease thevacant facility for the remainder of the lease term based on our knowledge ofthe Regina marketplace, as well as our historical inability to sublease ourfacilities in other locations in which we operate.  In the future, if we are able to sublease thefacility, we may be required to record a gain in the Condensed ConsolidatedStatements of Operations.  Future cashflows also include estimated property taxes through the remainder of the leaseterm, which are valued based upon historical tax payments.  The future cash flows were discounted using arate of 3%.  Given that the restructuringcharges were valued using our internal estimates using a discounted cash flowmodel, we have classified the accrued restructuring costs as Level 3 in thefair value hierarchy.

 

***Impairmentof Long-Lived Assets***

 

As described inNote 4, “Impairment Losses and Restructuring Charges,” during the three monthsended March 31, 2009, we recorded approximately $1,756 of impairmentlosses in our Canadian segment, due to the impairment of certain long-livedassets for which the 

 

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carrying value ofthose assets is not recoverable.  Theseassets are located in a facility for which we do not have current customercommitments and therefore, we are uncertain about our ability to generatefuture cash flows to support the carrying value of these assets.  The long-lived assets include computer and telephoneequipment, furniture and fixtures, leasehold improvements and software.  For assets which were not recoverable throughfuture cash flows or could be used in another facility, we reduced the carryingvalue to fair value.  The fair value ofthese long-lived assets after the impairment charge was $228 as of March 31,2009.  Given that the impairment losseswere valued using internal estimates, we have classified the remaining fairvalue of long-lived assets as Level 3 in the fair value hierarchy.

 

***FairValue Hierarchy***

 

The following tables setforth our assets and liabilities measured at fair value on a recurring basisand a non-recurring basis by level within the fair value hierarchy.  As required by SFAS No. 157, assets andliabilities are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement.

 
| ** **                                                     | ** ** | **Assets and Liabilities Measured at Fair Value**       | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **on a Recurring Basis as of March 31, 2009** | ** ** |
| ** **                                                     | ** ** | **Level 1**                                                                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                                                        | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate debt securities                                      |       | $                                                                                     | 1,982      |   | $ | — |   | $ | — |   | $ | 1,982 |   |
| Total fair value of assets measured on a recurring  basis      |       | $                                                                                     | 1,982      |   | $ | — |   | $ | — |   | $ | 1,982 |   |
|                                                           |       |                                                                                  |       |   |   |   |   |   |   |
| Liabilities:                                                   |       |                                                                                  |       |   |   |   |   |   |   |
| Derivative instruments                                         |       | $                                                                                     | —     |   | $ | 1,842 |   | $ | — |   | $ | 1,842 |   |
| Total fair value of liabilities measured on a  recurring basis |       | $                                                                                     | —     |   | $ | 1,842 |   | $ | — |   | $ | 1,842 |   |

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

 

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

 

Statement ofFinancial Accounting Standards No. 130, “Reporting Comprehensive Income,”establishes standards for reporting and display of comprehensive income.Comprehensive income is defined essentially as all changes in stockholders’equity, exclusive of transactions with owners. The following represents thecomponents of other comprehensive income (loss):

 

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| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **March 31,**               | ** ** |
| ** **                                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Net income (loss)                                                    |       | $                                | 652        |   | $ | (331 | ) |
| Other comprehensive income (loss):                                   |       |                             |       |   |   |
| Foreign currency translation adjustments, net of tax                 |       | (88                              | )          | (373 | ) |
| Unrealized gain (loss) on available for sale  securities, net of tax |       | 44                               |       | (220 | ) |
| Change in fair value of derivative instruments, net  of tax          |       | 294                              |       | (112 | ) |
| Comprehensive income (loss)                                          |       | $                                | 902        |   | $ | (1,036 | ) |

 

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

 
| ** **                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Accumulated foreign currency translation  adjustments:             |       |                                                 |       |   |   |
| Beginning balance                                                  |       | $                                                    | 1,090      |   | $ | 2,553 |   |
| Translation adjustments, net of tax                                |       | (88                                                  | )          | (373 | ) |
| Ending balance                                                     |       | $                                                    | 1,002      |   | $ | 2,180 |   |
| Accumulated unrealized derivative (losses) gains:                  |       |                                                 |       |   |   |
| Beginning balance                                                  |       | $                                                    | (1,444     | ) | $ | 20 |   |
| Loss reclassified to earnings, net of tax                          |       | (1,033                                               | )          | (140 | ) |
| Change in fair value of cash flow hedges, net of tax               |       | 1,327                                                |       | 28 |   |
| Ending balance                                                     |       | $                                                    | (1,150     | ) | $ | (92 | ) |
| Accumulated unrealized losses on available for sale  securities:   |       |                                                 |       |   |   |
| Beginning balance                                                  |       | $                                                    | (61        | ) | $ | (29 | ) |
| Loss reclassified to earnings, net of tax                          |       | (3                                                   | )          | — |   |
| Change in fair value of available for sale  securities, net of tax |       | 47                                                   |       | (220 | ) |
| Ending balance                                                     |       | $                                                    | (17        | ) | $ | (249 | ) |

 

**11.  SHARE-BASED COMPENSATION**

 

Compensation cost thathas been charged against income related to share-based compensation for thethree months ended March 31, 2009 and 2008, was $465 and $373,respectively, and is included in selling, general and administrativeexpense.  The total income tax benefitrecognized in our Condensed Consolidated Statements of Operations related toshare-based compensation arrangements was $174 and $140 for the three monthsended March 31, 2009 and 2008, respectively.  A summary of activity during the three monthsended March 31, 2009 related to our equity awards is presented below.

 

***StockOptions***

 

A summary ofoption activity as of March 31, 2009, and changes during the three monthsthen ended is presented below:

 
| ** **                             | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|----------------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                             | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** |
| Outstanding as of January 1, 2009 |       | 1,628,702  |       | $                         | 11.45      |   |
| Granted                                |       | 527,500    |       | 4.05                      |       |
| Exercised                              |       | —     |       | —                    |       |
| Forfeited                              |       | (30,383    | )          | 9.83                      |       |
| Expired                                |       | (19,184    | )          | 15.67                     |       |
| Outstanding as of March 31, 2009  |       | 2,106,635  |       | $                         | 9.59       |   |
| Exercisable as of March 31, 2009  |       | 659,392    |       | $                         | 14.37      |   |

 

***RestrictedShares***

 

Restricted share activityduring the three months ended March 31, 2009 was as follows:

 

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| ** **                                   | ** ** | **Restricted Shares** | ** ** | **Grant Date Fair Value** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|------------------------------------------|------------|
| Nonvested balance as of January 1, 2009 |       | 62,067                     |       | $                                        | 10.45      |   |
| Granted                                      |       | —                     |       | —                                   |       |
| Vested                                       |       | (2,700                     | )          | 9.01                                     |       |
| Forfeited                                    |       | (1,000                     | )          | 9.01                                     |       |
| Nonvested balance as of March 31, 2009  |       | 58,367                     |       | $                                        | 10.54      |   |

 

**12.  INCOME TAXES**

 

The year-to-date effective tax rate for continuing operations increasedfrom 4.3% during the three months ended March 31, 2008 to 27.2% during thethree months ended March 31, 2009. The primary difference between the periods is a smaller impact from the changein the Canadian statutory tax rates in 2009 compared to 2008.   Effective January 1, 2008, the Canadianstatutory rate was reduced from 22.1% to 19.5% for fiscal year 2008 and to19.0% for fiscal year 2009.  The ratewill continue to decrease each year until it is 15.0% by 2012.

 

Differences between U.S.statutory income tax rates and our effective tax rates for continuingoperations for the three months ended March 31, 2009 and 2008 were:

 
| ** **                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| U.S. statutory tax rate                        |       | 35.0                                                 | %          | 35.0 | % |
| Effect of state taxes (net of Federal benefit) |       | 3.2                                                  | %          | 0.2 | % |
| Work opportunity credits                       |       | (7.0                                                 | )%         | (8.4 | )% |
| Effect of change in Canadian tax rate          |       | (9.5                                                 | )%         | (23.9 | )% |
| Other, net                                     |       | 5.5                                                  | %          | 1.4 | % |
| Total                                          |       | 27.2                                                 | %          | 4.3 | % |

 

**13.  LITIGATION**

 

In our Annual Report on Form 10-Kfiled March 3, 2009, we described two material pending litigationmatters:  West Palm Beach Firefighters’Pension Fund v. StarTek, Inc., et al. (U.S. District Court, District ofColorado) filed on July 8, 2005, and John Alden v. StarTek, Inc., etal. (U.S. District Court, District of Colorado) filed on July 20,2005.   There have been no significantchanges in these legal proceedings since our previous report.

 

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

 

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

 

The followingdiscussion and analysis should be read in conjunction with our Unaudited ConsolidatedFinancial Statements and related Notes included elsewhere in this QuarterlyReport on Form 10-Q and in our Annual Report on Form 10-K for theyear ended December 31, 2008, and with the information under the heading “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inour Annual Report on Form 10-K for the year ended December 31, 2008.

 

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 to the communicationsindustry.  We partner with our clients tomeet their business objectives and improve customer retention, increaserevenues and reduce costs through an improved customer experience.  Our solutions leverage industry knowledge,best business practices, skilled agents, proven operational excellence andflexible technology.  The StarTekcomprehensive service suite includes customer care, sales support, complexorder processing, accounts receivable management, technical support and otherindustry-specific processes.  We operateour business within three 

 

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reportablesegments, based on the geographic regions in which our services are rendered: (1) theU.S., (2) Canada and (3) the Philippines (“Offshore”).  As of March 31, 2009, our U.S. segmentincluded the operations of our thirteen facilities in the U.S.; our Canadasegment included the operations of our five facilities in Canada; and ourOffshore segment included the operations of our facility in Makati City,Philippines.  As of March 31, 2008,there were fourteen, six and zero operating centers in the U.S., Canada andOffshore, respectively.  We use grossprofit as our measure of profit and loss for each business segment and do notallocate selling, general and administrative expenses to our business segments.

 

We endeavor toachieve site optimization at all of our locations by routinely evaluating siteperformance.  If local economicconditions, prevailing wage rates, or other factors, negatively impact thelong-term financial viability of a location, management will from time to timemake the decision to close a facility. As a result, we may incur impairment losses or restructuring charges inconnection with the closure.  Likewise,management is continually in pursuit of opportunities to open new locations ineconomically viable geographic markets in order to improve profitability andgrow the business.

 

**SIGNIFICANTDEVELOPMENTS DURING THE THREE MONTHS ENDED MARCH 31, 2009**

 

In February 2009, weclosed our facility in Regina, Saskatchewan. The closure of our Regina facility was driven by market conditions,namely recruiting challenges in this location, which impacted the profitabilityof the site and management determined it was in our long-term interest to closethe location.   This closure resulted inapproximately $2.3 million less revenue and $0.1 million less gross profitduring the three months ended March 31, 2009 compared to March 31,2008.  We also incurred restructuringcharges of approximately $4.4 million related to the closure, which isdiscussed in further detail below within Item 2, “Results of Operations — ThreeMonths ended March 31, 2009 and March 31, 2008”.

 

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

 

Theresults of operations and cash flows of Domain.com have been reported asdiscontinued operations.

 

**RESULTS OF OPERATIONS — THREEMONTHS ENDED MARCH 31, 2009 AND MARCH 31, 2008**

 

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

 

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| ** **                                          | ** ** | **Three Months  Ended March 31,  2009** | ** ** | **% of  Revenue** | ** ** | **Three Months  Ended March 31,  2008** | ** ** | **% of  Revenue** | ** ** | **% change Q1  2008 to Q1  2009** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------|------------|--------------------------------------------------------|------------|------------------------|------------|-------------------------------------------------------|------------|
| Revenue                                             |       | $                                                      | 70,711     |                   | 100.0      | %                                                      | $          | 64,583                 |       | 100.0                                                 | %          | 9.5 | % |
| Cost of services                                    |       | 59,988                                                 |       | 84.8                   | %          | 55,116                                                 |       | 85.2                   | %          | 8.8                                                   | %          |
| Gross profit                                        |       | 10,723                                                 |       | 15.2                   | %          | 9,467                                                  |       | 14.8                   | %          | 13.3                                                  | %          |
| Selling, general and administrative expenses        |       | 9,692                                                  |       | 13.7                   | %          | 10,090                                                 |       | 15.6                   | %          | -3.9                                                  | %          |
| Impairment losses and restructuring charges         |       | 6,437                                                  |       | 9.1                    | %          | 108                                                    |       | 0.2                    | %          | 5860.2                                                | %          |
| Operating loss                                      |       | (5,406                                                 | )          | -7.6                   | %          | (731                                                   | )          | -1.0                   | %          | 639.5                                                 | %          |
| Net interest and other (expense) income             |       | (75                                                    | )          | -0.1                   | %          | 310                                                    |       | 0.5                    | %          | -124.2                                                | %          |
| Loss from continuing operations before income taxes |       | (5,481                                                 | )          | -7.7                   | %          | (421                                                   | )          | -0.5                   | %          | 1201.9                                                | %          |
| Income tax benefit                                  |       | (1,493                                                 | )          | -2.1                   | %          | (18                                                    | )          | 0.0                    | %          | 8194.4                                                | %          |
| Net loss from continuing operations                 |       | (3,988                                                 | )          | -5.6                   | %          | (403                                                   | )          | -0.5                   | %          | 889.6                                                 | %          |
| Income from discontinued operations, net of tax     |       | 4,640                                                  |       | 6.5                    | %          | 72                                                     |       | 0.1                    | %          | 6344.4                                                | %          |
| Net income (loss)                                   |       | $                                                      | 652        |                   | 0.9        | %                                                      | $          | (331                   | )          | -0.4                                                  | %          | 297.0 | % |

 

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

 
| ** **         | ** ** | **For the Three Months Ended March 31,** | ** ** |
|--------------------|------------|------------------------------------------------------------------------|------------|
| ** **         | ** ** | **2009**                                                               | ** ** | **2008** | ** ** |
| ** **         | ** ** | **(in 000s)**                                                     | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** |       |                                                                   |       |   |   |   |   |   |   |
| Revenue            |       | $                                                                      | 49,364     |   | 69.8 | % | $ | 39,958 |   | 61.9 | % |
| Cost of services   |       | 40,567                                                                 |       | 67.6 | % | 31,952 |   | 58.0 | % |
| Gross profit       |       | $                                                                      | 8,797      |   | 82.0 | % | $ | 8,006 |   | 84.6 | % |
| *Gross profit %*   | * *   | *17.8*                                                                 | *%*        | * * | * * | *20.0* | *%* | * * | * * |
|               |       |                                                                   |       |   |   |   |   |   |   |
| **Canada:**        |       |                                                                   |       |   |   |   |   |   |   |
| Revenue            |       | $                                                                      | 19,181     |   | 27.1 | % | $ | 24,625 |   | 38.1 | % |
| Cost of services   |       | 17,435                                                                 |       | 29.1 | % | 23,164 |   | 42.0 | % |
| Gross profit       |       | $                                                                      | 1,746      |   | 16.3 | % | $ | 1,461 |   | 15.4 | % |
| *Gross profit %*   | * *   | *9.1*                                                                  | *%*        | * * | * * | *5.9* | *%* | * * | * * |
|               |       |                                                                   |       |   |   |   |   |   |   |
| **Offshore:**      |       |                                                                   |       |   |   |   |   |   |   |
| Revenue            |       | $                                                                      | 2,166      |   | 3.1 | % | $ | — |   | 0.0 | % |
| Cost of services   |       | 1,986                                                                  |       | 3.3 | % | — |   | 0.0 | % |
| Gross profit       |       | $                                                                      | 180        |   | 1.7 | % | $ | — |   | 0.0 | % |
| *Gross profit %*   | * *   | *8.3*                                                                  | *%*        | * * | * * | * * | * * | * * | * * |

 

***Revenue***

*** ***

Revenue increased by $6.1million, or 9.5%, from $64.6 million in the first quarter of 2008 to $70.7million in the first quarter of 2009.  Theincrease was driven by the U.S. segment and the Offshore segment whichincreased by $9.4 million and $2.2 million, respectively.  The increase in U.S. revenue was due to threenew U.S. facilities added in 2008, offset by the closure of two U.S. facilities.  The net impact of these openings and closingswas $6.3 million in additional revenue.  Theremaining increase of $3.1 million at the remaining U.S. facilities was drivenby an increase in the number of average full-time equivalent agents, whichincreased approximately 10.5% from the first quarter of 2008 to the firstquarter of 2009.  The offshore facilityin Makati City, Philippines opened in September 2008, and as such did notcontribute revenue during the first quarter of 2008.  Of the $2.2 million of revenue generated fromthe Philippines during the first quarter of 2009, approximately $0.4 millionrelated to one-time training revenue.  Revenuefrom Canada decreased by $5.4 million in the first quarter of 2009 compared to2008 due primarily to the closure of our Regina, Saskatchewan facility inFebruary 2009 which had approximately $2.3 million less revenue in 2009compared to 2008.  In addition, revenuedecreased by approximately $0.3 million due to changes in the foreign exchangerate between the U.S. dollar and Canadian dollar.  The remainder of the decrease in the Canadiansegment was due to a decrease in the number of average full-time equivalentagents, which decreased by approximately 15.2% in the first quarter of 2009from the first quarter of 2008.

 

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*** ***

***Cost of Services and Gross Profit***

 

Cost of services increased by $4.9 million, or 8.8%,from $55.1 million in the first quarter of 2008 to $60.0 million in the firstquarter of 2009.  Cost of services in theU.S. increased by approximately $8.6 million, of which $6.1 million related tothe net addition of new sites year over year, as discussed above.  Cost of services at our other U.S. facilitiesalso increased during the first quarter of 2009 compared to the first quarterof 2008 due to a greater number of agents, as described above.  In addition, cost of services increased byapproximately $2.0 million due to the Makati City, Philippines location.  These increases to cost of services wereoffset by lower cost of services in Canada due in part to the closure of theRegina location, which accounted for $2.2 million of the decrease.  Additionally, gross margin improved in Canadafrom the stronger U.S. to Canadian dollar exchange rate.  Our effective exchange rate of Canadian toU.S. dollars, net of hedges, improved from 1.00 in the first quarter of 2008 to1.11 in the first quarter of 2009 lowering our cost of services byapproximately $2.0 million.  Theremaining decrease in the Canadian segment was due to fewer agents, asdescribed above.

 

***Selling, General andAdministrative Expenses***

*** ***

Selling, general and administrative expenses decreasedby $0.4 million, or 3.9%, from $10.1 million in the first quarter of 2008 to$9.7 million in the first quarter of 2009. The decline was due primarily to decreases in hiring and other personnelexpense of approximately $0.3 million, decreased salaries of $0.3 million,lower commission expense of $0.2 million and less depreciation expense of $0.2million.  These decreases were partiallyoffset by increases in legal expenses of approximately $0.2 million related tothe negotiation of new customer contracts and greater bonus expense of $0.4million.

 

***Impairment Losses andRestructuring Charges***

*** ***

Impairment losses and restructuring charges were $6.4million and $0.1 million for the three months ended March 31, 2009 and 2008,respectively.  Restructuring charges were$4.7 million during the three months ended March 31, 2009, related primarily tothe closure of our Regina, Saskatchewan facility in February 2009 for which weincurred approximately $4.4 million of charges. The costs relate primarily to the building lease costs through theremainder of the lease term, or July 2013. Accrued restructuring costs were valued using a discounted cash flowmodel and the cash flows consist of the future lease payment obligationsrequired under the lease agreements and property taxes through the remainder ofthe lease term.  We assumed that we wouldnot sublease the vacant facilities for the remainder of the lease term.  In the future, if we are able to sublease the facilities, we may be requiredto record a gain in the Condensed Consolidated Statements of Operations.  The remainder of the restructuring chargesduring the first quarter of 2009 were due to adjustments in our estimatedliability for our other restructuring plans. The restructuring charges in the first quarter of 2008related to the closure of our Hawkesbury, Ontario facility in 2007.

 

We recorded approximately $1.7 million in impairmentlosses during the first quarter of 2009 due to the impairment of certainlong-lived assets for which the carrying value of those assets is not recoverable.  These assets are located in a facility forwhich we are uncertain about our ability to generate future cash flows tosupport the carrying value of these assets. The long-lived assets include computer and telephone equipment,furniture and fixtures, leasehold improvements and software.

 

***Operating Loss***

 

We incurred operating losses of approximately $5.4million and $0.7 million for the three months ended March 31, 2009 and 2008,respectively.  Operating loss as apercentage of revenue was (7.6%) for the three months ended March 31, 2009compared to (1.0%) for the three months ended March 31, 2008.  The decline was driven by increased impairmentand restructuring charges and cost of services, partially offset by an increasein revenue and a decrease in selling, general and administrative costs, asdiscussed previously.

 

***Net Interest and Other Income***

 

Net interest and other expense was approximately $0.1million during the first quarter of 2009, compared to net interest and otherincome of approximately $0.3 million in the first quarter of 2008.  The change was due primarily to a decrease ininterest income of approximately $0.5 million in the first quarter of 2009compared to the first quarter of 2008 due to a decline in our investmentbalances, partially offset by less interest expense, which declined byapproximately $0.1 million in the first quarter of 2009 compared to the firstquarter of 2008.

 

***Income Tax***

*** ***

The year-to-date effectivetax rate for continuing operations increased from 4.3% during the three monthsended March 31, 2008 to 27.2% during the three months ended March 31,2009.  The primary difference between theperiods is a smaller impact from the change in the Canadian statutorytax rates in 2009 compared to 2008.  Effective January 1, 2008, the Canadian statutory rate was

 

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reduced from 22.1% to 19.5% for fiscal year 2008 andto 19.0% for fiscal year 2009.  The ratewill continue to decrease each year until it is 15.0% by 2012.

 

***Income from DiscontinuedOperations***

*** ***

Income from discontinued operations was approximately$4.6 million during the first quarter of 2009 and approximately $0.1 millionduring the first quarter of 2008.  InFebruary 2009, we sold Domain.com, a wholly-owned subsidiary, for cash ofapproximately $7.1 million.  We had again on the sale of approximately $6.9 million, less taxes of approximately$2.3 million.

 

***Net Income (Loss)***

*** ***

Net income was $0.7 million during the first quarterof 2009 and net loss was approximately $0.3 million during the first quarter of2008.  The increase in net income wasprimarily due to income from discontinued operations and higher revenue, partiallyoffset by impairment and restructuring charges and income taxes, as discussedpreviously.

 

**LIQUIDITY AND CAPITAL RESOURCES**

** **

As of March 31, 2009, working capital totaled $56.7million and our current ratio was 3.03:1, compared to working capital of $47.6million and a current ratio of 2.58:1 at December 31, 2008.  We have historically financed our operations,liquidity requirements, capital expenditures, and capacity expansion primarilythrough cash flows from operations, and to a lesser degree, through variousforms of debt and leasing arrangements. In addition to funding basicoperations, our primary uses of cash typically relate to capital expendituresto upgrade our existing information technologies and service offerings,investments in our facilities and, prior to 2007, the payment ofdividends.  We believe that cash flowsfrom operations and cash provided by short-term borrowings, when necessary,will adequately meet our ongoing operating requirements and scheduled principleand interest payments on existing debt. Any significant future expansion of our business may require us tosecure additional cash resources.  Ourliquidity could be significantly impacted by large cash requirements to expandour business or a decrease in demand for our services, particularly from any ofour principal clients, which could arise from a number of factors, including,but not limited to, competitive pressures, adverse trends in the businessprocess outsourcing market, industry consolidation, adverse circumstances withrespect to the industries we service, and any of the other factors we describemore fully in the “Risk Factors” section in our Annual Report on Form 10-K for theyear ended December 31, 2008.

 
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                              | ** ** |
| Net cash provided by (used in):                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Operating activities                                 |       | $                                                    | 4,855      |   | $ | (2,984 | ) |
| Investing activities                                 |       | 12,369                                               |       | (4,616 | ) |
| Financing activities                                 |       | (765                                                 | )          | 353 |   |
| Effect of foreign exchange rates on cash             |       | 57                                                   |       | (430 | ) |
| Net increase (decrease) in cash and cash equivalents |       | $                                                    | 16,516     |   | $ | (7,677 | ) |

 

Our balance of cash and cash equivalents was $26.1 millionat March 31, 2009, compared to a balance of $9.6 million at December 31, 2008.

 

***Operating Activities. ***Net cash provided byoperating activities was $4.9 million for the three months ended March 31,2009, an increase of approximately $7.9 million from cash used in operations of$3.0 million for the three months ended March 31, 2008.  Net cash provided by operating activitiesfrom continuing operations was $7.2 million, or an increase of $10.2million.  Cash provided by operatingactivities increased by approximately $9.7 million for the three months endedMarch 31, 2009 compared to the same period in 2008 due to greater collectionsof accounts receivable.  Our accountsreceivable balance can change significantly period to period because themajority of our billings occur monthly with large customers, whereby, thetiming of collections on those receivables can result in significantfluctuations in our accounts receivable balance.  In addition, cash provided by operatingactivities increased by $3.2 million from larger accrued liabilities (primarilydue to increased accrued restructuring costs). Refer to “Results from Operations – Three Months Ended March 31, 2009 andMarch 31, 2008” above for further information on the impairment losses andrestructuring charges.  These increasesto cash provided by operating activities were partially offset by a $3.6million increase in net loss from continuing operations, which included a $1.8million non-cash impairment loss, and a decrease of $1.0 million in accountspayable due to the timing of purchases and payments.

 

***Investing Activities. ***Net cash provided byinvesting activities was $12.4 million in the first quarter of 2009 compared tocash used in investing activities of $4.6 million in the first quarter of2008.  The increase was due to 1)proceeds from the sale of Domain.com of $7.1 million, 2) $2.7 million lesspurchases of property, plant and equipment because of no new site openings inthe first quarter of 

 

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2009 compared to two in the first quarter of 2008 and3) an increase in net proceeds from the sale of investments, net of purchases,of $7.2 million which was a result of a shift towards more conservativeholdings of cash and cash equivalents.

 

***Financing Activities. ***Net cash used infinancing activities was $0.8 million in the first quarter of 2009, compared tonet cash provided by financing activities of $0.4 million in the first quarterof 2008.  The cash used in financingactivities during the first quarter of 2009 was due primarily to payments onour borrowings.  In 2008, we had net cashprovided by financing activities due to net proceeds on our line of credit of$1.7 million, offset by $1.3 million of payments on our borrowings.

 

***Contractual Obligations.* **Otherthan operating and capital leases for certain equipment, real estate and leasesand commitments 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, other than our Canadian Dollar Secured Equipment Loan and the Secured Promissory Note,as described in our Annual Report on Form 10-K for the year ended December 31,2008.  We maintain a $10.0 millionsecured line of credit with Wells Fargo Bank, N.A. which we use to financeregular, short-term operating expenses. The line of credit expires June 30, 2009.  We expect to renew the line of credit orreplace it with other financing when this line of credit expires.  There was no balance outstanding on this lineof credit as of March 31, 2009.  As ofMarch 31, 2009, we were in compliance with our debt covenants.

 

During the three months ended March 31, 2009, therewere no material changes in our contractual obligations.  For a complete discussion of our contractualobligations as of December 31, 2008, see Item 7 “Contractual Obligations” inour Annual Report on Form 10-K for the year ended December 31, 2008.

 

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

 

Our business currently has a high concentration of afew principal clients.  The loss of aprincipal client and/or changes in timing or termination of a principalclient's product launch or service offering would have a material adverse effecton our business, liquidity, operating results, and financial condition.  These client relationships are further discussedin Note 6 “Principal Clients,” to our Condensed Consolidated FinancialStatements, which are included at Item 1, “Financial Statements,” of this Form10-Q.  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, 2009. Refer to Item 1A. “Risk Factors” appearing in our AnnualReport on Form 10-K for the year ended December 31, 2008 for furtherinformation regarding these risks.

 

As of March 31, 2009, we had approximately $2.0million invested in corporate debt securities. There is a risk that if those companies in which we are invested sufferdue to economic conditions or other reasons, we could realize losses on theseinvestments which could impact our liquidity. We do not currently consider any declines in fair value to beother-than-temporary that have not been recognized in our CondensedConsolidated Statements of Operations.

 

There is a risk that the counterparties to our hedginginstruments could suffer financial difficulties due to economic conditions orother reasons and we could realize losses on these arrangements which couldimpact our liquidity.  However, we do not believewe are exposed to more than a nominal amount of credit risk in our derivativehedging activities, as the counterparties are established, well-capitalizedfinancial institutions.

 

Although management cannot accurately anticipate the effectsof domestic and foreign inflation on our operations, management does not believeinflation has had, or is likely in the foreseeable future to have, a materialadverse effect on our results of operations or financial condition.

 

***Variability of Operating Results. ***Our business has beenseasonal only to the extent that our clients’ marketing programs and productlaunches are geared toward the winter holiday buying season.  We have experienced and expect to continue toexperience some quarterly variations in revenue and operating results due to avariety of factors, many of which are outside our control, including: (i)timing and amount of costs incurred to expand capacity in order to provide forvolume growth from existing and future clients; (ii) changes in the volume ofservices provided to principal clients; (iii) expiration or termination ofclient projects or contracts; (iv) timing of existing and future client productlaunches or service offerings; (v) seasonal nature of certain clients’businesses; and (vi) cyclical nature of certain clients’ businesses.

 

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Because we service relatively few, large clients, theavailability of cash is highly dependent on the timing of cash receipts fromaccounts receivable.  As a result, fromtime to time, we borrow cash from our line of credit to cover short-term cashneeds.  These borrowings are typicallyoutstanding for 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 quarter is not necessarily indicative of the debtbalance at any other time during that period.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

** **

In preparing ourcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America, management mustundertake decisions that impact the reported amounts and relateddisclosures.  Such decisions include theselection of the appropriate accounting principles to be applied 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, these judgmentsare subject to an inherent degree of uncertainty.  Accordingly, actual results may varysignificantly from the estimates we have applied.

 

Our critical accounting policies and estimates areconsistent with those disclosed in our Annual Report on Form 10-K for the yearended December 31, 2008.  Please refer toItem 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” in our Annual Report on Form 10-K for the year endedDecember 31, 2008, for a complete description of our Critical AccountingPolicies and Estimates.

 

***RecentlyAdopted Accounting Pronouncements***

*** ***

Effective January 1,2009, we adopted Statement of Financial Accounting Standards No. 157 “FairValue Measurements” (“SFAS No. 157”) for all non-financial assets andnon-financial liabilities, except for items that are recognized or disclosed atfair value on a recurring basis (at least annually).  Refer to Note 9, “Fair Value Measurements,”of Item 1 of this Form 10-Q for additional information on the adoption of SFASNo. 157.

 

Effective January 1,2009, we adopted FASB No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No.161”). SFAS No. 161 requires entities to provide greater transparencythrough additional disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities” (SFAS No. 133) and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, results of operations and cashflows. Refer to Note 8, “Derivative Instruments,” of Item 1 of this Form 10-Qfor additional information on the adoption of SFAS No. 161.

 

We adopted FASBNo. 141(R), “Business Combinations” (“SFAS No. 141(R)”), whichsignificantly changed the accounting for and reporting of business combinationtransactions. This standard was effective for us for business combinationtransactions for which the acquisition date was on or after January 1,2009. No business combination transactions occurred during the three monthsended March 31, 2009.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

** **

In the normal course of business, we are exposed tocertain market risks related to changes in interest rates and other generalmarket 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, 2008, inaddition to the interim unaudited consolidated financial statements,accompanying notes and management's discussion and analysis of financialcondition and results of operations presented in Items 1 and 2 of this QuarterlyReport on Form 10-Q.

 

***Interest Rate Risk***

*** ***

We are exposed to interest rate risk with respect toour cash and cash equivalents, investments and debt obligations.  Cash and cash equivalents are notrestricted.  We consider cash equivalentsto be short-term, highly liquid investments readily convertible to knownamounts of cash, and so near their maturity they present insignificant risk ofchanges in value because of changes in interest rates.  At March 31, 2009, investments available forsale consisted of corporate debt securities. Our investment portfolio is subject to interest and inflation rate risksand will fall in value if market interest and/or inflation rates or marketexpectations relating to these rates increase. Management believes we have the ability to hold the foregoinginvestments until maturity, and therefore, if held to maturity, we would notexpect the future proceeds from these investments to be affected, to anysignificant degree, by any sudden changes in market interest rates. Declines ininterest rates over time will, however, reduce our interest income derived fromfuture investments.  In addition, ourinvestments in corporate debt securities could be adversely affected bydeclines in the economic condition of those companies in which we are invested.

 

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***ForeignCurrency Exchange Risks***

*** ***

We enter into foreign currency exchange contracts tohedge our anticipated operating commitments that are denominated in foreigncurrencies.  The contracts cover periodscommensurate with expected exposure, generally within six months, and areprincipally unsecured foreign exchange contracts.  The market risk exposure is essentiallylimited to risk related to currency rate movements.  Our Canadian and Philippine subsidiaries’functional currencies are the Canadian dollar and the Philippine peso, respectively,which are used to pay labor and other operating costs in those countries.However, our client contracts generate revenues which are paid to us in U.S.dollars.  During the first quarter of2009, we entered into Canadian dollar forward contracts with Wells Fargo Bankfor $13.5 million Canadian dollars to hedge our foreign currency risk withrespect to labor costs in Canada.  As ofMarch 31, 2009, we have not entered into any arrangements to hedge our exposureto fluctuations in the Philippine peso relative to the U.S. dollar.

 

During the three months ended March 31, 2009 and 2008,we recorded losses of approximately $1,652 and $208, respectively, for thesettled Canadian dollar forward contracts included as a component of cost of servicesin the accompanying Condensed Consolidated Statements of Operations.  As of March 31, 2009, we had contracted topurchase $45.0 million Canadian dollars to be delivered periodically throughDecember 2009 at a purchase price which is no more than $37.8 million and noless than $37.5 million.

 

During the three months ended March 31, 2009, therewere no other material changes in our market risk exposure.  For a complete discussion of our market riskassociated with foreign currency and interest rate risk as of December 31, 2008,see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” inour Annual Report on Form 10-K for the year ended December 31, 2008.  Also, refer to Item 1A. “Risk Factors” appearingin our Annual Report on Form 10-K for the year ended December 31, 2008 forfurther information regarding these risks.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

** **

***Evaluationof disclosure controls and procedures.**** *As of March 31, 2009,we carried out an evaluation, under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rules  13a-15(e) and 15d-15(e)under the Exchange Act).  Based on suchevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat, as of March 31, 2009, our disclosure controls and procedures wereeffective and were designed to ensure that all information required to bedisclosed by us in our reports filed or submitted under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the SEC, and accumulated and communicated to ourmanagement, including our principal executive officer and principal financialofficer, to allow timely decisions regarding required disclosure.

 

***Changes in internal controls overfinancial reporting.**** *There was no change in ourinternal control over financial reporting that occurred during the quarterended March 31, 2009, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

* *

**PartII.  Other Information**

** **

**ITEM1.  LEGAL PROCEEDINGS**

** **

In our Annual Report on Form 10-K filed March 3, 2009,we described two material pending litigation matters:  West Palm Beach Firefighters’ Pension Fund v.StarTek, Inc., et al. (U.S. District Court, District of Colorado) filed onJuly 8, 2005, and John Alden v. StarTek, Inc., et al. (U.S. DistrictCourt, District of Colorado) filed on July 20, 2005.   There have been no significant changes inthese legal proceedings since our previous report.

 

We are involved from time to time in other 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.

 

**ITEM 1A.  RISK FACTORS**

** **

There have been no materialchanges in our risk factors from those disclosed in our 2008 Annual Report onForm 10-K.

 

**ITEM 6. EXHIBITS**

** **

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

 

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**SIGNATURES**

** **

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this Form10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

 

STARTEK, INC.

(REGISTRANT)

 

 
| By:    | /s/A. LAURENCE JONES                   |   | Date: May 8, 2009 |
|--------|----------------------------------------|--------|-------------------|
|   | A. Laurence Jones                      |   |              |
|   | President and Chief  Executive Officer |   |              |
|   | (Principal Executive  Officer)         |   |              |

 

 
| By:    | /s/ DAVID G. DURHAM                                              |   | Date: May 8, 2009 |
|--------|------------------------------------------------------------------|--------|-------------------|
|   | 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 the Company.                                                                                                                                                                                                                                                                                                       |       | S-1                                  |   | 3.1 |   | 1/29/1997 |
|        |       |                                                                                                                                                                                                                                                                                                                                                         |       |                                 |   |   |   |   |
| 3.2         |       | Restated Bylaws of the  Company.                                                                                                                                                                                                                                                                                                                             |       | 8-K                                  |   | 3.2 |   | 8/2/2007 |
|        |       |                                                                                                                                                                                                                                                                                                                                                         |       |                                 |   |   |   |   |
| 3.3         |       | Certificate of  Amendment to the Certificate of Incorporation of StarTek, Inc. filed with the  Delaware Secretary of State on May 21, 1999.                                                                                                                                                                                                             |       | 10-K                                 |   | 3.3 |   | 3/8/2000 |
|        |       |                                                                                                                                                                                                                                                                                                                                                         |       |                                 |   |   |   |   |
| 3.4         |       | Certificate of  Amendment to the Certificate of Incorporation of StarTek, Inc. filed with the  Delaware Secretary of State on May 23, 2000.                                                                                                                                                                                                             |       | 10-Q                                 |   | 3.4 |   | 8/14/2000 |
|        |       |                                                                                                                                                                                                                                                                                                                                                         |       |                                 |   |   |   |   |
| 4.1         |       | Specimen Common Stock  certificate.                                                                                                                                                                                                                                                                                                                          |       | 10-Q                                 |   | 4.2 |   | 11/6/2007 |
|        |       |                                                                                                                                                                                                                                                                                                                                                         |       |                                 |   |   |   |   |
| 10.1*       |       | Asset Purchase  Agreement between StarTek, Inc. and A. Emmet Stephenson Jr., Inc effective  February 25, 2009. The schedules have been omitted from this filing pursuant  to Item 601(b(2) of Regulation S-K.  The registrant agrees to furnish  supplementally a copy of any omitted schedule to the Securities and Exchange  Commission upon request. |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                                                                                                                                                                                                         |       |                                 |   |   |   |   |
| 10.2*       |       | Amendment  GASOW-STAR100606-00.A.005 effective April 1, 2009 between StarTek, Inc. and  AT&T Mobility LLC.                                                                                                                                                                                                                                               |       |                                 |   |   |   |   |
|        |       |                                                                                                                                                                                                                                                                                                                                                         |       |                                 |   |   |   |   |
| 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.

 

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