** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-K**

 

**(Mark One)**

 
| x          | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES  EXCHANGE ACT OF 1934**     |
|------------|------------|-------------------------------------------------------------------------------------------------------------|
|       | ** ** | **For  the fiscal year ended December 31, 2008**                                                       |
| ** ** | ** ** | **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 its charter)*

 

| **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)262-4500**

*(Registrant’s telephone number, including area code)*

 

**Securitiesregistered 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.            |

 

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

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.   Yes  o  No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes  o No x

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of“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 checkmarkwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).   Yes o  No x

 

As of February 15,2009, 14,813,912 shares of common stock were outstanding. The aggregate marketvalue of common stock held by non-affiliates of the registrant on June 30,2008, was $61.5 million, based upon the closing price of the registrant’scommon stock as quoted on the New York Stock Exchange composite tape on suchdate. Shares of common stock held by each executive officer and director and byeach person who owned 5% or more of the outstanding common stock as of suchdate have been excluded, as such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

**DOCUMENTSINCORPORATED BY REFERENCE**

Part IIIincorporates certain information by reference from the registrant’s proxystatement to be delivered in connection with its 2009 annual meeting ofstockholders.  With the exception ofcertain portions of the proxy statement specifically incorporated herein byreference, the proxy statement is not deemed to be filed as part of this Form 10-K.

 

 

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This Form 10-Kcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange 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.  Allforward-looking statements herein speak only as of the date hereof, and weundertake no obligation to update any such forward-looking statements.Important factors that could cause actual results to differ materially from ourexpectations and may adversely affect our business and results of operationsinclude, but are not limited to those items set forth in Item 1A. “Risk Factors”appearing in this Form 10-K.

 

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

 

**Part I**

 

**ITEM 1.BUSINESS**

 

**BUSINESSOVERVIEW**

 

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 and product supportand other industry-specific processes. We operate our business within three reportable segments, based on thegeographic regions in which our services are rendered: (1) the U.S., (2) Canadaand (3) the Philippines (“Offshore”). As of December 31, 2008, our U.S. segment included the operationsof our thirteen facilities in the U.S.; our Canada segment included theoperations of our six facilities in Canada; and our Offshore segment includedthe operations of our facility in Makati City, Philippines.  Financial information for each of ourreportable segments for the last three fiscal years is included in Note 14, “SegmentInformation,” to our Consolidated Financial Statements, which are included inItem 8. “Financial Statements and Supplementary Financial Data,” of this Form 10-K.

 

Our business isproviding high-end ***Customer Service Offerings***through the effective deployment of ***People***and ***Technology***.

 

**Customer Service Offerings**

 

We provide ourclients with an outsourced customer care service offering so that they mayfocus on their core business and preserve capital.  Our service offering includes customer care,sales support, complex order processing, accounts receivable management,technical and product support and other industry-specific processes.  We are well positioned to help our clientsimplement the convergence of product lines, including wire-line, wireless,cable and broadband and high technical consumer products.  Under each service offering, we deliver atransparent extension of our clients’ brands.

 

*CustomerCare. *We provide customer care management throughout thelife cycle of our clients’ customers. These programs include management of customer acquisition, serviceactivation, renewals, account inquiries, complaint resolutions, productinformation and billing support.  Theseservices are aimed at seamlessly managing the relationships between our clientsand their customers in a manner that cultivates customer retention and loyalty.

 

*Technicaland Product Support.**** ***Ourtechnical and product support service offering provides our clients’ customerswith high-end technical support services by telephone, e-mail, facsimile andthe internet, 24 hours per day, seven days per week. Technical support 

 

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inquiries aregenerally driven by a customer’s purchase of a product or service, or by acustomer’s need for ongoing technical assistance.

 

*SalesSupport.* Throughour sales support service we seek to increase the revenue generation of ourclients through cross-selling and up-selling our clients’ products to theircustomers.  We have the ability toincrease customer purchasing levels, implement product promotion programs,introduce our clients’ customers to new products, secure and process additionalcustomer orders and handle inquiries related to product shipments and billing.

 

*Provisioningand Complex Order Processing.*  Our complexorder processing services provide our clients with large scale projectmanagement and direct relationship management for our clients’ large enterprisecustomers.  This service includes ordermanagement and technical sales support for high-end communications services,such as wire-line, wireless, data and customer premise equipment. In addition,we process order fallout from our clients’ automated systems, complete billingreview and revenue recovery, and perform quality assurance.  Our services enable a client to provide largescale project management and customer relations services to their customers ina more efficient and cost-effective way.

 

*ReceivablesManagement.*  We provide billing, credit card support andfirst party collections through our receivables management services.  These services allow our clients to reducethe risk of non-payment by automatically transferring the calls made bydelinquent customers to us, at which point our representatives encourage thecustomers to pay their bill in order to continue to receive service. Customersmay bring their bill current through credit or debit card payments, electronicchecks or money orders. This service allows us to help our clients reduce theirnumber of days sales outstanding and bad debt write-offs.

 

*Other.* We provide other industry-specific processesincluding technical support, phone number portability and directorymanagement.  We provide numberportability services to facilitate the process when our clients’ customers wishto keep their phone number when changing service providers.  Our phone number portability services, whichinclude both automated and live agent interaction, facilitate pre-portvalidation, data collection, automatic processing of port-out/in requests,direct and automated interface with the service order activation platform,fallout management tool and port request tracking and archiving.  We also provide 411 directory listingmanagement services.

 

**People**

 

Our success isdriven by our people, who we believe are industry trained experts in providingthe communications industry with proven business practices and solutions tohelp our clients achieve their business goals. Many of the members of our management team, in addition to our trainedcustomer service representatives, have a background in the communicationsindustry, and bring deep experience to ensure the delivery of optimal solutionsto our clients.  We believe that thisexpertise in our human capital is what allows us to succeed in providingexcellent account management and tailored solutions in serving thecommunications marketplace.

 

**Technology**

 

Our ability todeliver exceptional service to our clients is enhanced by our technologyinfrastructure, agent performance tools, analytics, self service applicationsand technology professional services. Our technology support services included hosted IT infrastructure andapplication services encompassing interactive voice response (IVR), virtualqueuing, IP-PBX, eWorkforce management, quality assurance monitoring,disposition tolls, business intelligence reporting and eServices, including oure-mail, chat and knowledge base capabilities. Through our technology, we are able to rapidly respond to ever-changingclient demands in a tailored, yet cost-effective and efficient manner. We arecapable of handling large call volumes at each of our contact centers throughour reliable and scalable contact center solutions.  We staff our IT personnel such that we cansupport our infrastructure and still have the capability to design programs tomeet the specific needs of our clients.

 

**CUSTOMERTRENDS**

 

In collaboratingwith our clients, we have observed a few emerging trends in the communicationsindustry.   Our clients are increasinglyfocused on: (1) improving customer satisfaction and retention; (2) improvingthe customer experience through right-shoring; and (3) increasing salesper subscriber or user.  We provide someof the industry’s highest customer satisfaction evidenced by our clients’customer service awards and our clients’ ranking of StarTek relative to otheroutsourced partners.  Many of our clientshave realized the value of cultural and language familiarity available fromon-shore providers as a way to improve the customer experience particularly inthe case of voice-enabled services. We have demonstrated to our clients oursuccess in increasing revenue per subscriber by incorporating up-sell andcross-sell methodologies during customer interactions.

 

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**KEYCOMPETITIVE DIFFERENTIATORS**

 

We offer a varietyof customer management solutions that provide front to back-office capabilitiesutilizing the StarTek Choice delivery platform. StarTek Choice includes onshore,near shore, offshore, and StarTek@Home sourcing alternatives. We also offermulti-channel interactions across voice, chat, email, and IVR channels.  Our solution configuration is aligned withour clients’ unique requirements.  We areflexible in designing solutions around our clients’ strategic goals, and weprovide experienced management teams that bring together a trained, productiveworkforce, equipped with the right tools and technology. We believe that we aredifferentiated by our flexibility, people, quality, execution and results.

 

*Flexibility. *We believe that we provide high quality businessprocess outsourcing (BPO) solutions, and we leverage our expertise in workingwith our clients to design solutions around their goals. We offer customermanagement solutions that help our clients manage customer relationships acrossthe customer lifecycle to improve the customer experience, retention, andsales, and reduce the total cost of customer management. We are able to achievethese results through our people, applied technology, dedication to continuousimprovement, and integrated North American, offshore and home agent deliveryplatform.

 

*People*. Our people are the key to our success.We possess a unique culture where people are dedicated to serving our clientsand their customers.  Whether it be an athome agent or call center representative, we use a screening process to ensurepeople will have the right skills and attitude to thrive in our culture. Weoffer blended classroom and eLearning training, knowledge management systems,and other desktop tools to ensure that our representatives are fully equippedto deliver an outstanding customer experience.

 

*Quality. *Quality delivery is the driving force behind ourculture. We are consistently ranked highly by our clients, but just asimportantly, ranked highly by our clients’ customers. We are a catalystenabling our clients to earn the JD Power and other coveted industry qualityawards.

 

*Execution*. Our clients’ customer strategies are the driving force behind oursolutions and their delivery. Our experienced management team brings together awell-trained, productive workforce, equipped with the right tools andtechnology. Our program managers find ways to optimize the effectiveness andefficiency of the delivery of our solutions to achieve our clients’ goals.

 

*Results*. We manage customer relationships to increase loyalty and profitability.Loyal customers purchase more frequently, provide higher revenues per purchase,acquire multiple products or services, refer our clients to others, andcontinue to purchase from our clients over long periods of time. Our solutionsderive more benefits from customer interactions by delivering increasedcustomer satisfaction and revenue, which in turn leads to a higher return onour client’s customer investment.

 

**STRATEGY**

 

We seek to becomea market leader in providing high-value services to clients in thecommunications industry. Our approach is to develop relationships with ourclients that are partnering and collaborative in nature and createindustry-based solutions to meet our clients’ business needs.  To be a leader in the market, our strategy isto:

·                  grow our existing client base by deepening andbroadening our relationships,

 

·                  add new clients and continue to diversify our clientbase,

 

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

 

·                  expand on our delivery platform to broaden our serviceofferings and

 

·                  make prudent acquisitions to expand our business scaleand service offerings.

 

During 2008, we executed on our strategy by launching three new U.S.sites and expanding our geographic presence by opening our first offshoreoperation in the Philippines.  Wepositioned ourselves for improved profitability by announcing the closure ofthree non-performing sites.  We alsoadded two new clients, launched a number of new programs with existing clientsand made significant investments in new systems, home agents and employeeprograms.

 

**HISTORYOF THE BUSINESS**

 

StarTek was founded in1987.  At that time, our business wascentered on supply chain management services, which included packaging,fulfillment, marketing support and logistics services.

 

After our initial publicoffering on June 19, 1997, we began operating contact center services,which primarily focused on customer care, and grew to include our current suiteof offerings as described in the “Business Overview” section of this Form 10-K.  We also expanded internationally through ourStarTek Europe, Ltd. operating subsidiary. Through StarTek Europe, Ltd., we provided call center and supply chainmanagement services from two facilities located in Hartlepool, England.

 

We sold our StarTekEurope, Ltd. operating subsidiary on September 30, 2004.  On December 16, 2005, we sold our supplychain management services platform.

 

 

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While our business is notgenerally seasonal, it does fluctuate quarterly based on our clients’ productofferings as well as their customer interaction volume.  See Item 1A. “Risk Factors,” for a morecomplete description of the seasonality of our business.

 

**INDUSTRY**

 

According to a June 2008report published by IDC, a leading provider of industry research and marketintelligence,  the customer interactionsegment of business process outsourcing is a $55 billion market and is expectedto grow at an 11.5% compound annual growth rate through 2012.  The communication and technology marketcomprises 41% of the total market and is expected to grow at a 13% compoundannual growth rate through 2012.  Thestudy also shows that offshore migration is accelerating, primarily to LatinAmerica and the Philippines, which, combined, currently accounts for 15% of themarket and is expected to account for 24% of the market by 2012.  Currently, the U.S. and EMEA are the largestmarkets with 45% and 28% market share respectively, which is expected todecrease to 35% and 26% by 2012.

 

Outsourcing of non-coreactivities, such as those we provide, offers companies the ability to focus ontheir core competencies, leverage economies of scale and control variable costsof the business while accessing new technology and trained expertpersonnel.  As the business environment continuesto evolve, it has become more difficult and expensive for some companies tomaintain the necessary personnel and product capabilities in-house to providebusiness process services on a cost-effective basis. Accordingly, ouranticipation is that outsourced customer care services will grow significantlyin the coming years.  In general, webelieve that industries having higher levels of customer contact and servicevolume, such as the communications industry, tend to be more likely to seekoutsourced services as a more efficient method for managing their technicalsupport and customer care functions. We believe that outsourced serviceproviders, including ourselves, will continue to benefit from these outsourcingtrends.

 

**COMPETITION**

 

We believe that ourcompetitive differentiators are our flexibility, people, quality, execution andresults.  We compete with a number ofcompanies that provide similar services on an outsourced basis, includingtechnical support and customer care companies such as APAC Customer Services, Inc.;Teleperformance; Convergys Corporation; NCO Group; Aegis PeopleSupport; SitelCorporation; Sykes Enterprises, Incorporated; TeleTech Holdings, Inc.; ICTGroup, Inc. and West Corporation. We compete with the aforementioned companies for new business, forexpansion of existing business, and within the companies we currentlyserve.  Many of these competitors aresignificantly larger than us in revenue, income, number of contact centers andcustomer agents, number of product offerings, and market capitalization.  We believe that while smaller than many ofour competitors, we are able to compete because of our flexibility and abilityto react quickly and efficiently to integrate client technology into ourcontact centers.  We believe our successis contingent more on our quality of service than our overall size.  We also compete with in-house processoutsourcing operations of our current and potential clients.  Such in-house operations include customercare, technical support, internet operations and e-commerce support.  As noted in our industry discussion, it isbelieved that many outsourced services will continue to migrate to othercountries with lower wages than those prevailing in the U.S. Accordingly, ourstrategic objectives include expanding our geographic platform so that we maycompete with those companies who have devoted significant time and money tooperating offshore.

 

**CLIENTS**

 

As mentioned previously,we seek to become the expert provider of outsourced customer care and relatedservices for the communications industry and believe that we possess expertisein servicing clients within that industry. Accordingly, more than 95% of our revenue is derived from customerswithin that industry.  Our two largestcustomers, AT&T Inc. (formerly Cingular Wireless, LLC and AT&T Corporation)and T-Mobile (a subsidiary of Deutsche Telekom), account for a significantpercentage of our revenue. In 2008, AT&T Inc. accounted for 54.9.% of ourrevenue and T-Mobile accounted for 26.7% of our revenue.  In 2007, AT&T Inc. accounted for 50.4% ofour revenue and T-Mobile accounted for 21.8% of our revenue.  In 2006, AT&T Inc. accounted for 52.7%and T-Mobile accounted for 21.2% of our revenue. While we believe that we havegood relationships with these clients, a loss of one or more of these principalclients could adversely affect our business and our results of operations (seeItem 1A. “Risk Factors”).

 

**GOVERNMENT AND ENVIRONMENTALREGULATION**

 

We are subject tonumerous federal, state, and local laws in the states and territories in whichwe operate, including tax, environmental and other laws that govern the way weconduct our business.  There are risksinherent in conducting business internationally, including significant changesin domestic government programs, policies, regulatory requirements, andtaxation with respect to foreign operations, potentially longer working capitalcycles, unexpected changes in foreign government programs, policies, regulatoryrequirements and labor laws, and difficulties in staffing and effectivelymanaging foreign operations.

 

 

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**EMPLOYEESAND TRAINING**

 

Our success inrecruiting, hiring, training, and retaining large numbers of full and part-timeskilled employees, and obtaining large numbers of hourly employees during peakperiods is critical to our ability to provide high quality outsourcedservices.  Competition for labor is withfirms offering similar paying jobs in the communities in which we are located,which includes other contact centers. During 2008, we experienced difficulties hiring and retaining agents aswe faced economic pressures in and around certain of our site locations.  Refer to Item 1A. “Risk Factors” for furtherdiscussion of risks surrounding our ability to recruit and retain personnel.

 

As of December 31,2008, we employed approximately 9,500 employees. We believe the demographicssurrounding our facilities, and our reputation, stability, and compensationplans should allow us to continue to attract and retain qualified employees.None of our employees were members of a labor union or were covered by acollective bargaining agreement during 2008.

 

**CORPORATEINFORMATION**

 

We were founded in 1987and on June 19, 1997, we completed an initial public offering of ourcommon stock.  We conduct our businessthrough our wholly owned operating subsidiaries, StarTek USA, Inc.,StarTek Canada Services, Ltd and StarTek International, Limited.  We are a Delaware corporation headquarteredin Denver, Colorado. Our principal executive offices are located at 44 CookStreet, 4th Floor, Denver, Colorado 80206. Our telephonenumber is (303) 262-4500. Our website address is *www.startek.com*.   Ourstock currently trades on the New York Stock Exchange under the symbol SRT.

 

**WEB SITEAVAILABILITY OF REPORTS**

 

Copies of our AnnualReport on Form 10-K, Quarterly Reports on Form 10-Q, Current Reportson Form 8-K, and amendments to those reports filed or furnished pursuantto Section 13(a) and 15(d) of the Securities Exchange Act of1934 (the “Exchange Act”) are available free of charge through our web site(www.startek.com) as soon as practicable after we furnish it to the Securitiesand Exchange Commission (“SEC”). We also make available on the “InvestorRelations” page of our corporate website, the charters for the CompensationCommittee, Audit Committee and Governance and Nominating Committee of our Boardof Directors, as well as our Corporate Governance Guidelines and our Code ofEthics and Business Conduct.

 

None of the informationon our website or any other website identified herein is part of this report.All website addresses in this report are intended to be inactive textualreferences only.

 

**ITEM1A.  RISK FACTORS**

 

***Continuing unfavorable economic conditions could have amaterial adverse effect on our results of operations and financial condition.***

 

The currenteconomic downturn and disruptions in the capital and credit markets in the U.S.and world economies have reduced consumer spending and reduced spending bybusinesses.  Since our revenue is largelyconcentrated in the telecommunications industry, and the majority of ourbusiness involves technical support and customer care services initiated by ourclients’ customers, our revenue is dependent on the amount oftelecommunications products and services demanded by our clients’customers.  Consequently, a generalreduction in consumer demand for such products and services due to therecession in the domestic and international economies could reduce the demandfor our services and have a material adverse effect on our results ofoperations.

 

In addition, ourexisting clients and a number of clients we are currently targeting have beendecreasing the number of firms they rely on to outsource their business processoutsourced services.  Due to financial uncertaintiesand the potential reduction in demand for our clients’ products and services,our clients and prospective clients may decide to further consolidate thenumber of firms on which they rely for their business process outsourcedservices to reduce costs.  Under thesecircumstances, our clients may cancel current contracts with us, or we may failto attract new clients, which will adversely affect our financialcondition.  If global economic and marketconditions remain uncertain or persist, spread, or deteriorate further, we mayexperience material impacts on our business, operating results, and financialcondition.

 

***If we are unable to renew or replace sources of capitalfunding on satisfactory terms, potential growth and results of operations maysuffer.***

 

We currently have threedebt facilities in place, with approximately $6.8 million in debt outstandingas of December 31, 2008.  One ofthese facilities, a $10.0 million line of credit, is scheduled to expirein June 2009 (See Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources — Contractual Obligations”).  The other 

 

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debt facilities matureover differing periods through 2010.  Ifwe are unable to renew the $10.0 million line of credit or other facilities orare unable to secure alternative sources of capital funding under satisfactoryterms, or at all, we may be unable to meet short-term cash needs required foroperations or growth opportunities.  Thismay adversely impact our financial results. In addition, if we do not meet the debt covenant requirements under theline of credit, we could face adverse effects on our financial statements,including payments for waivers or higher interest rate obligations.  We believe we will obtain financing toreplace or extend this line of credit that will allow us to meet our short-termcash needs.  However, the current poor conditionsof the U.S. credit markets may adversely impact our ability to obtainfinancing.

 

***If the value of our portfolio of investment securitiesdeclines, our results of******operationswill suffer.***

 

Approximately5.7%, 10.5%, and 3.8% of our total assets as of December 31, 2008, 2007and 2006, respectively, consisted of investment securities. During 2008, wemade investments in corporate debt. We periodically review investmentsavailable for sale for other-than-temporary declines in fair value and writedown investments to their fair value when such a decline occurs.  During the year ended December 31, 2008,we recognized a loss totaling $0.5 million (representing the entire basisamount) on a Lehman Brothers corporate debt security that was determined to beother-than-temporarily impaired due to their bankruptcy announcement.  We do not consider the remainder of ourinvestments to be other-than-temporarily impaired because we have the abilityand intent to hold these investments until a market price recovery ormaturity.  We did not record any other-than-temporaryimpairments for the years ended December 31, 2007 or 2006.  Future adverse changes in market conditions,or poor operating results of companies in which we have invested, could resultin losses. Moreover, we implemented a more conservative investment policy inlate 2006, and the resulting lower returns may adversely impact our financialresults.

 

***Over 70% of our revenue in the past several years (over 80%in 2008) has been received from our******twolargest clients. The loss or reduction in business from any of these******clients would adverselyaffect our business and results of operations.***

 

The following tablerepresents revenue concentration of our principal clients:

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| AT&T Inc. (formerly Cingular Wireless, LLC and  AT&T Corp.) |       | 54.9                             | %          | 50.4 | % | 52.7 | % |
| T-Mobile, a subsidiary of Deutsche Telekom                          |       | 26.7                             | %          | 21.8 | % | 21.2 | % |

 

The loss of a principalclient, a material reduction in the amount of business we receive from aprincipal client, or the loss, delay or termination of a principal client’sproduct launch or service offering would adversely affect our business, revenueand operating results. We may not be able to retain our principal clients or,if we were to lose any of our principal clients, we may not be able to timelyreplace the revenue generated by the lost clients. Loss of a principal clientcould result from many factors, including consolidation or economic downturnsin our clients’ industries, as discussed further below.  Our work for AT&T Inc. (AT&T) iscovered by several contracts for a variety of different lines of AT&Tbusiness, some of these contracts expire in 2009 and others in 2010.  For example, we entered into a contractcovering certain customer care services with AT&T Mobility LLC, awholly-owned subsidiary of AT&T, in May 2008 that expires in April 2010.  Previously, in December 2006, we enteredinto another contract covering certain business care services that has beenextended through March 31, 2009 while the parties negotiate a newagreement for such services.** **We entered into a servicesagreement and statement of work with T-Mobile (the “T-Mobile Contract”) for theprovision of certain call center services, each having an initial term expiringSeptember 30, 2009, that automatically renews from year-to-year, subjectto non-renewal by either party.

 

We are workingdiligently to complete negotiation of the new agreements for business careservices and other lines of business for which individual statements of workexpire in 2009, and we expect to renew each of them in due course.  However, if we fail to do so or if any arenot renewed, it would have a material adverse effect on our business, resultsof operations, and financial condition.

 

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

 

 

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***We are currently carrying asignificant amount of net operating loss carry forwards for tax purposes.  If we are not able to generate sufficientfuture taxable income to offset these losses, our financial results may beadversely affected.***

 

Asof December 31, 2008, we had gross federal net operating loss carryforwards of approximately $10.0 million. These carry forwards can be used to offset future taxable income andexpire in 2028.  We have not recorded avaluation allowance related to the net operating loss carry forwards and other temporary items as management believes itis more likely than not that we will be able to use the benefit to reducefuture tax liabilities.  We believe it is“more likely than not” based upon our current estimates of future taxableincome that the deferred tax assets will be realized.  A valuation allowance may be required if weare unable to generate future taxable income. A tax valuation allowance could have a significant negative impact onfuture earnings.

 

***Our client base is concentratedin the communications industry, which has recently experienced consolidationtrends.  As our clients’ businesses change as a result of merger andacquisition activity, there is no guarantee that the newly formed companieswill continue to use our services.***

 

Consolidation in thecommunications industry may decrease the potential number of buyers for our services.Likewise, there is no guarantee that the acquirer of one of our clients willcontinue to use our services after the consolidation is completed.  We are particularly vulnerable on this issuegiven the relatively few significant clients we currently serve and theconcentration of these clients in the telecommunications industry. For example,in late 2006, our client, AT&T. acquired another of our clients, CingularWireless, LLC (now, AT&T Mobility, LLC), thereby further concentrating ourrevenue base.  There can be no assurancethat AT&T Mobility, LLC, AT&T., or other subsidiaries of AT&T. willcontinue to use our services in the future. If we lose principal clients or our service volumes decrease as a resultof principal clients being acquired, our business, financial condition andresults of operations would be adversely affected.  We expect to negotiate renewals of ourcontracts in due course; however, if any of such contracts or any order undersuch a contract is not ultimately renewed, it would have a material adverseeffect on our results of operations and financial condition.

 

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

 

Our current clients arealmost exclusively communications companies, which include companies in thewire-line, wireless, cable and broadband lines of business.  Over 95% of our revenue in 2008 wasconcentrated in the telecommunications industry. Our business and growth islargely dependent on continued demand for our services from clients in thisindustry, and other industries that we may target in the future, and on trendsin those industries to purchase outsourced services. A general and continuingeconomic downturn in the telecommunications industry or in other industriesthat we target, or a slowdown or reversal of the trend in these industries tooutsource services we provide, could adversely affect our business, results ofoperations, growth prospects, and financial condition.  A general and continuing economic downturn inother industries may result in excess capacity of contact center services inthose industries attracting clients in the telecommunications industry or inother industries that we target. If this happens, it could adversely affect ourbusiness, results of operations, growth prospects, and financial condition.

 

***We have experienced significant management turnover and needto retain key management personnel.***

 

On January 5, 2007,A. Laurence Jones was appointed President, Chief Executive Officer and InterimChief Financial Officer as a successor to our former Chief Executive Officer,Steven D. Butler.  On September 10,2007, we hired David G. Durham as our Executive Vice President, Treasurer andChief Financial Officer.  We filledseveral other key management positions during 2007 and eliminated the positionof Chief Information Officer (“CIO”) by integrating the functions managed bythe CIO with finance and operations. During 2008, we eliminated the position of Chief Operating Officer (“COO”)and lost the services of the incumbent Senior Vice President, Sales, a positionwe are actively seeking to fill.  Highturnover of senior management can adversely impact our stock price, our resultsof operations and our client relationships, and may make recruiting for futuremanagement positions more difficult.  Insome cases, we may be required to pay significant amounts of severance toterminated management employees.  Inaddition, we must successfully integrate any new management personnel that wehire within our organization in order to achieve our operating objectives. Changesin other key management positions may temporarily affect our financialperformance and results of operations as new management becomes familiar withour business.  Accordingly, our futurefinancial performance will depend to a significant extent on our ability tomotivate and retain key management personnel.

 

***If we are not able to hire and retain qualified employees,our ability to******service our existingcustomers and retain new customers will be adversely******affected.***

 

Our success islargely dependent on our ability to recruit, hire, train, and retain qualifiedemployees. Our business is labor intensive and, as is typical for our industry,continues to experience high personnel turnover. Our operations, especially ourtechnical support 

 

 

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and customer careservices, generally require specially trained employees. During 2008, wecontinued to experience a high rate of employee turnover, which, in turn,requires significant recruiting and training costs. Such turnover adverselyaffects our operating efficiency, productivity and ability to fully respond toclient demand, thereby adversely impacting our results of operations.  Some of this turnover can be attributed to the fact that we compete for labornot only with other call centers, but also with other similar-paying jobs,including retail, oil and gas industry labor, food service, etc.  As such,improvements in the local economies in which we operate can adversely affectour ability to recruit agents in those locations.  Further increases inemployee turnover or failure to effectively address and remedy these highattrition rates would have an adverse effect on our results of operations andfinancial condition.

 

The addition of newclients or implementation of new projects for existing clients may require usto recruit, hire, and train personnel at accelerated rates. We may not be ableto successfully recruit, hire, train, and retain sufficient qualified personnelto adequately staff for existing business or future growth, particularly if weundertake new client relationships in industries in which we have notpreviously provided services. Because a substantial portion of our operatingexpenses consists of labor-related costs, labor shortages or increases in wages(including minimum wages as mandated by the U.S. and Canadian federalgovernments, employee benefit costs, employment tax rates, and other laborrelated expenses) could cause our business, operating profits, and financialcondition to suffer. In the past, some of our Canadian employees have attemptedto organize a labor union and economic and legislative changes in the U.S. mayencourage organizing efforts in the future which, if successful, could furtherincrease our recruiting and training costs and could decrease our operatingefficiency and productivity.

 

***Our operating costs may increase as a result of higher laborcosts.***

 

During the past economicdownturns, we, like a number of companies in our industry, sought to limit ourlabor costs by limiting salary increases and payment of cash bonuses to ouremployees. During 2008, the local economies in some of the locations in whichwe operate experienced growth, which caused us to increase labor rates toremain competitive within the local economies. If these growth trends continue,we may need to further increase salaries or otherwise compensate our employeesat higher levels in order to remain competitive.  Effective July 2008, the U.S. federalminimum wage was increased, with additional increases expected in July 2009.  The minimum wage applicable to most of ouroperations in Canada is rising even more dramatically than in the U.S.  Higher salaries or other forms ofcompensation are likely to increase our cost of operations. If such increasesare not offset by increased revenue, they will negatively impact our financialresults. Conversely, if labor rates decrease due to higher unemployment in thecurrent economic downturn, our cost of operations may decrease.  In the past, some of our Canadian employeeshave attempted to organize a labor union and economic and legislative changesin the U.S. may encourage organizing efforts in the future, which if successfulcould further increase our recruiting and training costs and could decrease ouroperating efficiency and productivity.

 

***We may need to add specialized sales personnel in order togrow our business.  We may have difficulty recruiting candidates for thesepositions.***

 

Our future growth dependson our ability to initiate, develop and maintain new client relationships, aswell as our ability to maintain relationships with our existing principalclients. To generate opportunities for new business from existing clients, aswell as obtain new clients, we may need to hire specialized sales and marketingstaff to introduce new products and services. If we are unable to hire sales people with the specialized skills andknowledge needed to attract new business, or if we are not able to develop newproducts and services, we will not be able to diversify our revenue base andthereby reduce our reliance on our significant customers.

 

***We face considerable pricing pressure in our business, andif we are not able******to continuallyincrease productivity, our gross margins and results of******operations may be adverselyaffected.***

 

Our strategy depends inpart on our ability to increase productivity. We face significant price pressure arising from our clients’ desire todecrease their operating costs, and from other competitors operating in ourtargeted markets. Price pressure may be more pronounced during periods ofeconomic uncertainty. In addition, our contract with our largest customercurrently contains a tiered pricing structure, under which pricing declines asservice volumes increase, creating increased pricing pressures in future years.Accordingly, our ability to maintain our operating margins depends on ourability to improve productivity and reduce operating costs. If we are not ableto achieve sufficient improvements in productivity to adequately compensate forpotential price decreases, our results of operations may be adversely affected.

 

***Our operating results may be adversely affected if we areunable to maximize******our facilitiescapacity utilization.***

 

Our profitability isinfluenced by our facility capacity utilization. The majority of our businessinvolves technical support and customer care services initiated by our clients’customers, and as a result, our capacity utilization varies and demands on ourcapacity are, to some degree, beyond our control. We have experienced, and inthe future may experience, periods of idle capacity from opening new facilitieswhere forecasted volume levels do not materialize. In addition, we haveexperienced, and in the future may experience, idle peak period capacity whenwe open a new facility or terminate or complete a large client program. Theseperiods of 

 

 

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idle capacity may beexacerbated if we expand our facilities or open new facilities in anticipationof new client business because we generally do not have the ability to requirea client to enter into a long-term contract, or to require clients to reimburseus for capacity expansion costs if they terminate their relationship with us ordo not provide us with anticipated service volumes. From time to time, weassess the expected long-term capacity utilization of our facilities.Accordingly, we may, if deemed necessary, consolidate or close under-performingfacilities in order to maintain or improve targeted utilization and margins. Anysuch closures may result in lease termination costs, severance costs orimpairment charges.  There can be noassurance that we will be able to achieve or maintain optimal facility capacityutilization.

 

***Weand some of our former management employees are the subject of a class actionlawsuit.  The defense and ultimateoutcome of these allegations could negatively affect our future operatingresults.***

 

We and six of our formerdirectors and officers have been named as defendants in West Palm BeachFirefighters’ Pension Fund v. StarTek, Inc., et al. (U.S. District Court,District of Colorado) filed on July 8, 2005, and John Alden v. StarTek, Inc.,et al. (U.S. District Court, District of Colorado) filed on July 20,2005.  Those actions have beenconsolidated by the federal court.  Theconsolidated action is a purported class action brought on behalf of allpersons (except defendants) who purchased shares of our common stock in a****secondary offering by certain of our stockholders in June 2004,****and in the open market between February 26, 2003 and May 5,2005 (the “Class Period”).  Theconsolidated complaint alleges that the defendants made false and misleadingpublic statements about us and our business and prospects in the prospectus forthe secondary offering, as well as in filings with the SEC and in pressreleases issued during the Class Period, and that as a result, the marketprice of our common stock was artificially inflated.  The complaints allege claims under Sections11 and 15 of the Securities Act of 1933 and under Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934.  Theplaintiffs in both cases seek compensatory damages on behalf of the allegedclass and award of attorneys’ fees and costs of litigation.  On May 23, 2006, we and the individual defendantsmoved the court to dismiss the action in its entirety.

 

On March 28, 2008,the motion was denied with respect to the claims under Sections 10(b) and20(a) of the Securities Exchange Act of 1934, except the claim under Section 20(a) ofthe Securities Exchange Act of 1934 was dismissed against two of the individualdefendants.  On the same date, the motionwas granted with respect to the claims under Sections 11 and 15 of theSecurities Act of 1933 without prejudice to plaintiffs filing an amended complaintwith respect to such claims.  On May 19,2008, the plaintiffs filed an amended complaint.  On June 5, 2008, we and the individualdefendants moved the court to dismiss the amended complaint in itsentirety.  On November 6, 2008, themotion was granted with respect to certain claims relating to representationsregarding the Company’s supply-chain management business, but was denied as toall other claims.    We believe we havevalid defenses to the claims and intend to defend the litigation vigorously.

 

It is not possible atthis time to estimate the possibility of a loss or the range of potentiallosses arising from these claims.  Wemay, however, incur material legal fees with respect to our defense of theseclaims.  The claims have been submittedto the carriers of our executive and organization liability insurancepolicies.  We expect the carriers toprovide for certain defense costs and, if needed, indemnification with areservation of rights.  The policies haveprimary and excess coverage that we believe will be adequate to defend thiscase and are subject to a retention for securities claims.  These policies provide that we areresponsible for the first $1.025 million in defense costs.  We have incurred defense costs related to these lawsuits in excess of our $1.025million deductible.

 

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

 

***We generate revenue based on the demand for, and inquiriesgenerated by, our******clients’products and services. If our clients’ products and services are not******successful or do notgenerate the anticipated call volumes, our revenue and******results of operations will beadversely affected.***

 

In substantially all ofour client relationships, we generate revenue based on the amount of productsand services demanded by our clients’ customers.  The amount of our revenue also depends on thenumber and duration of customer inquiries. Consequently, the amount of revenue generated from any particular clientis dependent upon consumers’ interest in and use of that client’s products orservices.  In addition, if thereliability of our customers’ products or services increases as a result oftechnological improvements, the volume of calls that we service may bereduced.  If customer interest in orincreased reliability of any products or services offered by our clients andfor which we provide outsourced services result in reduced service volumes, ourrevenue would be diminished.  We utilizeforecasts made by our clients based on demand from their customers.  If the actual call volumes are materiallydifferent than the forecasted volumes, our financial results could be adverselyaffected.

 

In 2008, we expanded ourcapacity to include four new facilities, in each of Victoria, Texas, Mansfield,Ohio, Jonesboro, Arkansas, and Makati City, Philippines.   As business associated with these additionalfacilities ramped, we experienced excess capacity and incurred additional costsas we worked towards bringing these facilities to normal operationallevels.  In 2008, we announced that we 

 

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would be closing our sitesin Petersburg, Virginia and Regina, Saskatchewan, as part of our efforts toachieve site optimization at all of our locations, and in Big Spring, Texas,due primarily to recruiting challenges in these locations.  If client demand declines due to economicconditions, or otherwise, we would not leverage our fixed costs as effectively,which would have a material adverse effect on our results of operations andfinancial condition.

 

***Our contractsgenerally do not contain minimum purchase requirements and can******generally be terminated by our customers on short noticewithout penalty.***

 

We enter into writtenagreements with each client for our services. We seek to sign multi-yearcontracts with our clients; however these contracts generally permittermination upon 30 to 90 days notice by our clients; do not designate us asour clients’ exclusive outsourced services provider; do not penalize ourclients for early termination; hold us responsible for work performed that doesnot meet pre-defined specifications; and do not contain minimum purchaserequirements or volume commitments. Accordingly, we face the risk that ourclients may cancel contracts we have with them, which may adversely affect ourresults.  In addition, some contractswith our two largest clients either expire in 2009 or are currently undernegotiation for renewal, and we cannot guarantee that they will be extended orrenewed.  If a principal client cancelledor did not renew their contract with us, our results would suffer. In addition,because the amount of revenue generated from any particular client is generallydependent on the volume and activity of our clients’ customers, as describedabove, our business depends in part on the success of our clients’ products.The number of customers who are attracted to the products of our clients maynot be sufficient, or our clients may not continue to develop new products thatwill require our services, in which case it may be more likely for our clientsto terminate their contracts with us. Moreover, clients who may not terminatetheir contacts with us without cause could generally reduce the volume ofservices they outsource to us, which would have an adverse effect on ourrevenue, results of operations, and overall financial condition.

 

***Our existing and potential clients are currently decreasingthe number of******vendors they are usingto outsource their business process services. If we lose******more business than we gain as a result of this vendorconsolidation, our business and******results of operations will be adversely affected.***

 

Our existing clients anda number of clients we are currently targeting have been decreasing the numberof firms they rely on to outsource their business process outsourced services.We believe these clients are taking this action in order to increaseaccountability and decrease their costs, and under current economic conditions,there is an increased risk that our clients will outsource their businessprocess outsourced services to even fewer firms to further reduce costs. Ifthis consolidation results in us losing one or more of our clients, ourbusiness and results of operations will be adversely affected. In addition,this consolidation could make it more difficult for us to secure new clients,which could limit our growth opportunities.

 

***If we do not effectively manage our growth or control costsrelated to growth,******our results ofoperations will suffer.***

 

We intend to grow ourbusiness by increasing the number of services we provide to existing clients,by expanding our overall client base and, in the future, through merger andacquisition activity. Growth could place significant strain on our management,employees, operations, operating and financial systems, and other resources. Toaccommodate significant growth we would be required to open additionalfacilities, expand and improve our information systems and procedures, andhire, train, motivate, and manage a growing workforce, all of which wouldincrease our costs. Our systems, facilities, procedures, and personnel may notbe adequate to support our future operations. Further, we may not be able tomaintain or accelerate our current growth, effectively manage our expandingoperations, or achieve planned growth on a timely and profitable basis. Duringrecent years, we incurred costs related to excess capacity as we opened newfacilities in anticipation of volume levels that did not materialize.  Asa result, our operating profits declined, and our stock price was adverselyimpacted.  If we are unable to manage ourgrowth efficiently, or if growth does not occur, our business, results ofoperations, and financial condition could suffer.

 

***Failure to implement technological advancements could makeour services less******competitive.***

 

Technologies that ourclients or competitors already possess, or may in the future develop oracquire, may decrease the cost or increase the efficiency of competingservices. We believe that to remain competitive, we must continue to invest intechnology to be able to compete for new business and maintain service levelsfor clients. We may not be able to develop and market any new services thatuse, or effectively compete with, existing or future technologies, and suchservices may not be commercially successful. Furthermore, our competitors mayhave greater resources to devote to research and development than we do, andaccordingly may have the ability to develop and market new technologies, withwhich we are unable to successfully compete.

 

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***Our markets are highly competitive. If we do not competeeffectively, we may******lose ourexisting business or fail to gain new business.***

 

The markets in which weoperate are highly competitive, and we expect competition to persist andintensify in the future. We view in-house operations of our existing andpotential clients to be a significant competitive threat. Many of our clientsor potential clients have in-house capabilities, enabling them to perform someor all of the services that we provide. Our performance and growth could be impededif clients, or potential clients, decide to shift in-house, operations servicescurrently outsourced, or if potential clients retain or increase their in-housecapabilities.

 

We anticipate thatcompetition from low-cost, offshore providers of outsourced services willcontinue to increase in the future and that such providers will remain animportant competitive threat. A number of our competitors have, or may develop,greater name recognition or financial and other resources than we have. Inaddition, new competitors with greater name recognition and resources maydecide to enter the markets in which we operate. Some competitors may offer abroader range of services than we do, which may result in clients and potentialclients consolidating their use of outsourced services with larger competitors,rather than using our services. Competitive pressure from current or futurecompetitors could also result in substantial price erosion, as discussed below,which could adversely affect our revenue, margins, and financial condition.

 

***Our operations in Canada and the Philippines subject us tothe risk of currency exchange******fluctuations.***

 

Because we conduct amaterial portion of our business in Canada, we are exposed to market risk fromchanges in the value of the Canadian dollar. For the smaller portion of ourbusiness that we conduct in the Philippines, we are exposed to market risk fromchanges in the value of the Philippine peso. Material fluctuations in exchange rates impact our results throughtranslation and consolidation of the financial results of our foreignoperations, and therefore may negatively impact our results of operations andfinancial condition. We have contracts wherein the revenue we earn isdenominated in U.S. dollars, yet the costs we incur to fulfill our obligationsunder those contracts are denominated in Canadian dollars or Philippine pesos,as applicable.  Therefore, thefluctuations in the U.S. dollar to the Canadian dollar or Philippine pesoexchange rates can cause significant fluctuations in our results ofoperations.  During 2008, 2007 and 2006,we engaged in hedging activities relating to our exposure to such fluctuationsin the value of the Canadian dollar versus the U.S. dollar.  During 2008, we did not enter into hedgingagreements for the Philippine peso.  Weintend to participate in hedging activities in 2009 as it relates to theCanadian dollar and the Philippine peso. However, currency hedges do not, andwill not, eliminate our exposure to fluctuations in the currencies.  Increases in the value of the Canadian dollaror the Philippine peso, or currencies in other foreign markets in which we mayoperate, in relation to the value of the U.S. dollar, would further increaseour costs and adversely affect our results of operations.

 

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

 

Our operations in Canadaaccounted for 33.4%, 39.1%, and 41.6%, of our revenue in 2008, 2007, and 2006,respectively.  We have also opened a newfacility in the Philippines. There are risks inherent in conducting businessinternationally, including competition from local businesses or establishedmultinational companies, who may have firmly established operations inparticular foreign markets.  This maygive these firms an advantage regarding labor and material costs.  Other risks inherent in conducting businessinternationally include significant changes in domestic government programs,policies, regulatory requirements, and taxation with respect to foreignoperations, potentially longer working capital cycles, unexpected changes inforeign government programs, policies, regulatory requirements and labor laws,and difficulties in staffing and effectively managing foreign operations.  Our current or potential new clients may bereluctant to have us provide services to them from a location outside of NorthAmerica. One or more of these factors may have an impact on our internationaloperations. Our lack of significant international operating experience mayresult in any of these factors impacting us to a greater degree than theyimpact our competitors. To the extent one or more of these factors impact ourinternational operations, it could adversely affect our business, results ofoperations, growth prospects, and financial condition as a whole.

 

Various other riskfactors described in this Annual Report on Form 10-K may be exacerbatedwith regard to international operations, especially in countries where we donot have well-established operations. Such risks include those related to the need to retain key managementpersonnel, the inability to hire and retain qualified employees, increases inoperating costs, facility capacity utilization, management of growth and costsrelated to growth, geopolitical military conditions, interruptions to ourbusiness, and the quality and cost of telephone and data servicesinfrastructure.

 

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

 

Although we currentlyconduct operations in Canada and have begun operations in the Philippines, wedo not have a significant international presence. Our lack of significantinternational operations outside of North America could adversely affect ourbusiness if one or more of our customers decide to move their existing businessprocess outsourcing services offshore. Our lack of a significant internationalpresence outside of North America may also limit our ability to gain newclients who may require business process service providers to have thisflexibility.

 

 

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The movement of businessprocess outsourcing services to other countries has been extensively reportedin the press. Most analysts continue to believe that many outsourced serviceswill continue to migrate to other countries with lower wages than thoseprevailing in the U.S.. Accordingly, unless and until we develop significantinternational operations outside of North America, we may be competitivelydisadvantaged compared to a number of our competitors who have already devotedsignificant time and money to operating offshore.

 

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

 

***Our largest stockholder has the ability******to significantly influence corporate actions.***

 

A. Emmet Stephenson, Jr.,one of our co-founders, owned approximately 19.7% of our outstanding commonstock as of February 15, 2009. Mr. Stephenson’s spouse also ownsshares of our common stock. Under an agreement we have entered into with Mr. Stephenson,so long as Mr. Stephenson, together with members of his family,beneficially owns 10% or more but less than 30% of our outstanding commonstock, Mr. Stephenson will be entitled to designate one of our nomineesfor election to the board. In addition, our bylaws allow that any holder of 10%or more of our outstanding common stock may call a special meeting of ourstockholders. The concentration of voting power in Mr. Stephenson’s hands,and the control Mr. Stephenson may exercise over us as described above,may discourage, delay or prevent a change in control that might otherwisebenefit our stockholders.

 

***Our stock price has been volatile and may declinesignificantly and******unexpectedly.***

 

The market price of ourcommon stock has been volatile, and could be subject to wide fluctuations, inresponse to quarterly variations in our operating results, changes inmanagement, the degree of success in implementing our business and growthstrategies, announcements of new contracts or contract cancellations,announcements of technological innovations or new products and services by usor our competitors, changes in financial estimates by securities analysts, theperception that significant stockholders may sell or intend to sell theirshares, or other events or factors we cannot currently foresee. We are alsosubject to broad market fluctuations, given the overall volatility of thecurrent U.S. and global economies, where the market prices of equity securitiesof many companies experience substantial price and volume fluctuations thathave often been unrelated to the operating performance of such companies. Thesebroad market fluctuations may adversely affect the market price of our commonstock. Additionally, because our common stock trades at relatively low volumelevels, any change in demand for our stock can be expected to substantiallyinfluence market prices thereof. The trading price of our stock varied from alow of $2.05 to a high of $9.68 during 2008.

 

***Geopolitical military conditions, including terroristattacks and other acts of******war,may materially and adversely affect the markets in which we operate, and******our results ofoperations.***

 

Terrorist attacks andother acts of war, and any response to them, may lead to armed hostilities andsuch developments could cause substantial business uncertainty. Suchuncertainty could result in potential clients being reluctant to enter into newbusiness relationships, which would adversely affect our ability to win newbusiness. Armed hostilities and terrorism may also directly impact ourfacilities, personnel and operations, as well as those of our suppliers andcustomers. Furthermore, severe terrorist attacks or acts of war may result intemporary halts of commercial activity in the affected regions, possiblyresulting in reduced demand for our services. These developments could impairour business and depress the trading price of our common stock.

 

***If we experience an interruption to our business, ourresults of operations may******suffer.***

 

Our operations depend onour ability to protect our facilities, computer equipment, telecommunicationsequipment, software systems and clients’ products and confidential clientinformation against damage from internet interruption, fire, power loss,telecommunications interruption, e-commerce interruption, natural disaster,theft, unauthorized intrusion, computer viruses, bomb threats and otheremergencies. We maintain procedures and contingency plans to minimize thedetrimental impact of adverse events, but if such an event occurs, ourprocedures and plans may not be successful in protecting us from losses orinterruptions. In the event we experience temporary or permanent interruptionsor other emergencies at one or more of our facilities, our business couldsuffer and we may be required to pay contractual damages to our clients, or allowour clients to renegotiate their arrangements with us. Although we maintainproperty and business interruption insurance, such insurance may not adequatelyor timely compensate us for all losses we may incur. Further, ourtelecommunication systems and networks, and our ability to timely andconsistently access and use telephone, internet, e-commerce, e-mail, facsimileconnections, and other forms of communication, are substantially dependent 

 

 

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upon telephone companies,internet service providers, and various telecommunication infrastructures. Ifsuch communications are interrupted on a short- or long-term basis, ourservices would be similarly interrupted and delayed.

 

***Increases in the cost of telephone and data services orsignificant******interruptions in such services couldadversely affect our business.***

 

We depend on telephoneand data service provided by various local and long distance telephonecompanies. Because of this dependence, any change to the telecommunicationsmarket that would disrupt these services or limit our ability to obtainservices at favorable rates could affect our business. We have taken steps tomitigate our exposure to the risks associated with rate fluctuations andservice disruption by entering into long-term contracts with various providersfor telephone and data services. There is no obligation, however, for thesevendors to renew their contracts with us, or to offer the same or lower ratesin the future, and such contracts are subject to termination or modificationfor various reasons outside of our control. A significant increase in the costof telephone services that is not recoverable through an increase in the priceof our services, or any significant interruption in telephone services, couldseriously affect our business.

 

***Compliance with SEC rules requiring that we and******our independent auditors assess the effectiveness of ourinternal controls over******financial reporting may have adverse consequences.***

 

Section 404 of theSarbanes-Oxley Act of 2002 (“Section 404”) requires our management, on anannual basis, to assess the effectiveness of our internal control overfinancial reporting. We have completed the process of documenting and testingour internal control over financial reporting in order to satisfy therequirements of Section 404, and the reports of our management and ourindependent auditors relating to our internal control over financial reportingare included elsewhere in this Form 10-K. We constantly test and improveour controls as we identify certain deficiencies that we believe requireremediation, and this requires additional management time and otherresources.  If we incur significantexpense relating to future compliance with Section 404, our operatingresults will be adversely impacted.

 

In addition, as ourbusiness develops and grows, we will be required to adapt our internal controlsystems and procedures to conform to our current business, and we will continueto work to improve our controls and procedures and to educate our employees inan effort to maintain an effective internal control environment. However, ifinternal control deficiencies arise in the future, we may not be able toremediate such deficiencies in a timely manner. As a consequence, we may have todisclose in future filings with the SEC any material weaknesses in internalcontrols over our financial reporting system. Disclosures of this type couldcause investors to lose confidence in our financial reporting, and maynegatively affect our stock price. Moreover, effective internal controls arenecessary to produce reliable financial reports and to prevent fraud. If wehave deficiencies in our internal controls over financial reporting, it maynegatively impact our business and operations.

 

***Our quarterly operating results have historically varied,and may not be a good******indicator offuture performance.***

 

We have experienced, andexpect to continue to experience, quarterly variations in revenue and operatingresults, as a result of a variety of factors, many of which are outside ourcontrol.  These factors include, changesin the amount and growth rate of revenue generated from our principal clients;the timing of receipt of payments from our clients; the timing of existing andfuture client product launches or service offerings; unanticipated volumefluctuations; expiration or termination of client projects; timing and amountof costs incurred to expand capacity in order to provide for further revenuegrowth from existing and future clients; and the seasonal nature of someclients’ businesses.

 

**ITEM1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM2.  PROPERTIES**

 

As of December 31,2008, we owned or leased the following facilities, containing in aggregateapproximately 1.1 million square feet:

 

 

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| **Properties**           | ** ** | **Year Opened** | ** ** | **Approximate  Square Feet** | ** ** | **Leased or Owned** | ** ** |
|--------------------------|------------|-----------------|------------|------------------------------|------------|---------------------|------------|
| *U.S. Facilities*        |       |            |       |                         |       |                |       |
| Greeley, Colorado        |       | 1998            |       | 35,000                       |       | Company Owned       |       |
| Laramie, Wyoming         |       | 1998            |       | 22,000                       |       | Company Owned       |       |
| Grand Junction, Colorado |       | 1999            |       | 46,350                       |       | Leased              |       |
| Greeley, Colorado        |       | 1999            |       | 88,000                       |       | Company Owned       |       |
| Big Spring, Texas        |       | 1999            |       | 30,000                       |       | Leased (b)          |       |
| Enid, Oklahoma           |       | 2000            |       | 47,500                       |       | Company Owned       |       |
| Grand Junction, Colorado |       | 2000            |       | 54,500                       |       | Leased              |       |
| Decatur, Illinois        |       | 2003            |       | 37,500                       |       | Leased              |       |
| Alexandria, Louisiana    |       | 2003            |       | 40,000                       |       | Leased              |       |
| Lynchburg, Virginia      |       | 2004            |       | 38,600                       |       | Leased              |       |
| Collinsville, Virginia   |       | 2004            |       | 49,250                       |       | Leased              |       |
| Denver, Colorado         |       | 2004            |       | 23,000                       |       | Leased (a)          |       |
| Petersburg, Virginia     |       | 2005            |       | 39,600                       |       | Leased (c)          |       |
| Victoria, Texas          |       | 2008            |       | 54,100                       |       | Leased              |       |
| Mansfield, Ohio          |       | 2008            |       | 31,000                       |       | Leased              |       |
| Jonesboro, Arkansas      |       | 2008            |       | 65,400                       |       | Leased              |       |
| *Canadian Facilities*    |       |            |       |                         |       |                |       |
| Kingston, Ontario        |       | 2001            |       | 49,000                       |       | Company Owned       |       |
| Kingston, Ontario        |       | 2001            |       | 20,000                       |       | Leased              |       |
| Cornwall, Ontario        |       | 2001            |       | 73,800                       |       | Leased              |       |
| Regina, Saskatchewan     |       | 2003            |       | 62,000                       |       | Leased              |       |
| Sarnia, Ontario          |       | 2003            |       | 37,200                       |       | Leased              |       |
| Thunder Bay, Ontario     |       | 2006            |       | 33,000                       |       | Leased              |       |
| Hawkesbury, Ontario      |       | 2006            |       | 41,000                       |       | Leased (d)          |       |
| *Philippine Facility*    |       |            |       |                         |       |                |       |
| Makati City, Philippines |       | 2008            |       | 78,000                       |       | Leased              |       |

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(a) Company headquarters, which houses executive and administrative employees.

 

(b) Our Big Spring facility ceased operations in August 2008.  We bought-out the remainder of this lease in February 2009.

 

(c) Our Petersburg facility ceased operations in December 2008.

 

(d) Our Hawkesbury, Ontario facility ceased operations in August 2007.

 

Substantially all of ourfacility space can be used to support any of our business process outsourcedservices. We believe our existing facilities are adequate for our currentoperations. We intend to maintain efficient levels of excess capacity to enableus to readily provide for needs of new clients and increasing needs of existingclients.  We hold unencumbered, feesimple title to our company-owned facilities.

 

**ITEM3.  LEGAL PROCEEDINGS**

 

We and six of our formerdirectors and officers have been named as defendants in West Palm BeachFirefighters’ Pension Fund v. StarTek, Inc., et al. (U.S. District Court,District of Colorado) filed on July 8, 2005, and John Alden v. StarTek, Inc.,et al. (U.S. District Court, District of Colorado) filed on July 20,2005.  Those actions have beenconsolidated by the federal court.  Theconsolidated action is a purported class action brought on behalf of allpersons (except defendants) who purchased shares of our common stock in a****secondary offering by certain of our stockholders in June 2004,****and in the open market between February 26, 2003 and May 5,2005 (the “Class Period”).  Theconsolidated complaint alleges that the defendants made false and misleadingpublic statements about us and our business and prospects in the prospectus forthe secondary offering, as well as in filings with the SEC and in pressreleases issued during the Class Period, and that as a result, the marketprice of our common stock was artificially inflated.  The complaints allege claims under Sections11 and 15 of the Securities Act of 1933 and under Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934.  Theplaintiffs in both cases seek compensatory damages on behalf of the allegedclass and award of attorneys’ fees and costs of litigation.  On May 23, 2006, we and the individualdefendants moved the court to dismiss the action in its entirety.

 

15

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On March 28, 2008,the motion was denied with respect to the claims under Sections 10(b) and20(a) of the Securities Exchange Act of 1934, except the claim under Section 20(a) ofthe Securities Exchange Act of 1934 was dismissed against two of the individualdefendants.  On the same date, the motionwas granted with respect to the claims under Sections 11 and 15 of theSecurities Act of 1933 without prejudice to plaintiffs filing an amendedcomplaint with respect to such claims. On May 19, 2008, the plaintiffs filed an amended complaint.  On June 5, 2008, we and the individualdefendants moved the court to dismiss the amended complaint in itsentirety.  On November 6, 2008, themotion was granted with respect to certain claims relating to representationsregarding the Company’s supply-chain management business, but was denied as toall other claims.  We believe we havevalid defenses to the claims and intend to defend the litigation vigorously.

 

It is not possible atthis time to estimate the possibility of a loss or the range of potential lossesarising from these claims.  We may,however, incur material legal fees with respect to our defense of theseclaims.  The claims have been submittedto the carriers of our executive and organization liability insurancepolicies.  We expect the carriers toprovide for certain defense costs and, if needed, indemnification with areservation of rights.  The policies haveprimary and excess coverage that we believe will be adequate to defend thiscase and are subject to a retention for securities claims.  These policies provide that we areresponsible for the first $1.025 million in defense costs.  We have incurred defense costs related tothese lawsuits in excess of our $1.025 million deductible.

 

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

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matters were submittedto a vote of security holders during the fourth quarter of 2008.

 

**Part II**

 

**ITEM5.  MARKET FOR THE REGISTRANT’S COMMONSTOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

**MARKETFOR COMMON STOCK**

 

Our common stock has beenlisted on the New York Stock Exchange under the symbol “SRT” since theeffective date of our initial public offering on June 19, 1997. Thefollowing table shows the high and low closing sales prices for our commonstock on the New York Stock Exchange for the periods shown:

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2008           |       |     |       |    |       |
| First Quarter  |       | $        | 9.43       |    | $          | 8.03 |   |
| Second Quarter |       | $        | 9.68       |    | $          | 8.10 |   |
| Third Quarter  |       | $        | 9.47       |    | $          | 6.23 |   |
| Fourth Quarter |       | $        | 6.90       |    | $          | 2.05 |   |
| 2007           |       |     |       |    |       |
| First Quarter  |       | $        | 14.05      |    | $          | 9.46 |   |
| Second Quarter |       | $        | 10.93      |    | $          | 9.41 |   |
| Third Quarter  |       | $        | 11.60      |    | $          | 10.01 |   |
| Fourth Quarter |       | $        | 10.94      |    | $          | 8.73 |   |

 

**HOLDERSOF COMMON STOCK**

 

As of February 15,2009, there were 59 stockholders of record and 14,813,912 shares of commonstock outstanding.  See Item 1A.  “Risk Factors,” set forth in this Form 10-K for a discussion of risks related tocontrol that may be exercised over us by our principal stockholders.

 

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**DIVIDENDPOLICY**

 

On January 22, 2007,our board of directors announced it would not declare a quarterly dividend onour common stock in the first quarter of 2007, and did not expect to declaredividends in the near future, making the dividend paid in November 2006the last quarterly dividend that will be paid in the foreseeable future.  We plan to invest in growth initiatives inlieu of paying dividends.  We had beenpaying quarterly dividends since August of 2003.

 

**STOCKREPURCHASE PROGRAM**

 

EffectiveNovember 4,2004, our board of directors authorized repurchases of up to $25 million of ourcommon stock. The repurchase program will remain in effect until terminated bythe board of directors, and will allow us to repurchase shares of our

 

common stock from time totime on the open market, in block trades and in privately-negotiatedtransactions. 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 repurchased shares will beheld as treasury stock, and will be available for general corporate purposes.Any repurchases will be made in accordance with SEC rules. As of the date ofthis filing, no shares have been repurchased under this program.

 

**STOCKPERFORMANCE GRAPH**

 

The graph below comparesthe cumulative total stockholder return on our common stock over the past fiveyears with the cumulative total return of the New York Stock Exchange CompositeIndex (“NYSE Composite”) and of the Russell 2000 Index (“Russell 2000”) overthe same period.  We do not believe stockprice performance shown on the graph is necessarily indicative of future priceperformance.

 

 

 

The information set forthunder the heading “Stock Performance Graph” is not deemed to be “solicitingmaterial” or to be “filed” with the SEC or subject to the SEC’s proxy rules orto the liabilities of Section 18 of the Exchange Act, and the graph shallnot be deemed to be incorporated by reference into any of our prior orsubsequent filings under the Securities Act or the Exchange Act.

 

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**ITEM6.  SELECTED FINANCIAL DATA**

 

Thefollowing selectedfinancial data should be read in conjunction with the Consolidated FinancialStatements and Notes thereto which are included in Item 8. “FinancialStatements and Supplementary Financial Data,” of this Form 10-K.Additionally, the following selected financial data should be read inconjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” which is included in Item7 of this Form 10-K.

 

 

 
| ** **                                                      | ** ** | **Year Ended December 31,**          | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data:**                  |       |                                      |       |   |   |   |   |   |   |   |   |
| Revenue                                                         |       | $                                         | 272,890    |   | $ | 245,304 |   | $ | 237,612 |   | $ | 216,371 |   | $ | 221,906 |   |
| Cost of services                                                |       | 238,496                                   |       | 206,087 |   | 201,424 |   | 167,223 |   | 164,363 |   |
| Gross profit                                                    |       | 34,394                                    |       | 39,217 |   | 36,188 |   | 49,148 |   | 57,543 |   |
| Selling, general and administrative expenses                    |       | 40,814                                    |       | 38,991 |   | 30,247 |   | 28,435 |   | 27,451 |   |
| Impairment losses and restructuring charges                     |       | 9,225                                     |       | 4,325 |   | — |   | — |   | — |   |
| Operating (loss) income                                         |       | (15,645                                   | )          | (4,099 | ) | 5,941 |   | 20,713 |   | 30,092 |   |
| Net interest and other income                                   |       | 55                                        |       | 745 |   | 2,126 |   | 1,479 |   | 3,532 |   |
| (Loss) income from continuing operations before  income taxes   |       | (15,590                                   | )          | (3,354 | ) | 8,067 |   | 22,192 |   | 33,624 |   |
| Income tax (benefit) expense                                    |       | (6,150                                    | )          | (523 | ) | 2,303 |   | 8,177 |   | 12,747 |   |
| (Loss) income from continuing operations                        |       | (9,440                                    | )          | (2,831 | ) | 5,764 |   | 14,015 |   | 20,877 |   |
| (Loss) gain from discontinued operations, net of tax            |       | (461                                      | )          | — |   | — |   | (1,155 | ) | 99 |   |
| Net (loss) income                                               |       | $                                         | (9,901     | ) | $ | (2,831 | ) | $ | 5,764 |   | $ | 12,860 |   | $ | 20,976 |   |
|                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Net (loss) income per share from continuing  operations:        |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                           |       | $                                         | (0.64      | ) | $ | (0.19 | ) | $ | 0.39 |   | $ | 0.96 |   | $ | 1.44 |   |
| Diluted                                                         |       | $                                         | (0.64      | ) | $ | (0.19 | ) | $ | 0.39 |   | $ | 0.95 |   | $ | 1.41 |   |
|                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Net (loss) income per share including discontinued  operations: |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                           |       | $                                         | (0.67      | ) | $ | (0.19 | ) | $ | 0.39 |   | $ | 0.88 |   | $ | 1.45 |   |
| Diluted                                                         |       | $                                         | (0.67      | ) | $ | (0.19 | ) | $ | 0.39 |   | $ | 0.88 |   | $ | 1.42 |   |
|                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding:                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                           |       | 14,713                                    |       | 14,696 |   | 14,680 |   | 14,629 |   | 14,455 |   |
| Diluted                                                         |       | 14,713                                    |       | 14,696 |   | 14,714 |   | 14,681 |   | 14,780 |   |
|                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Total assets                                                    |       | $                                         | 146,864    |   | $ | 155,458 |   | $ | 155,735 |   | $ | 153,914 |   | $ | 166,872 |   |
| Total debt                                                      |       | $                                         | 6,821      |   | $ | 11,355 |   | $ | 15,968 |   | $ | 5,650 |   | $ | 9,363 |   |
| Total stockholders’ equity                                 |       | $                                         | 107,019    |   | $ | 118,214 |   | $ | 118,382 |   | $ | 128,164 |   | $ | 136,883 |   |
|                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| **Other Selected Financial Data:**                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Capital expenditures, net of proceeds                           |       | $                                         | 27,979     |   | $ | 15,207 |   | $ | 19,767 |   | $ | 9,379 |   | $ | 17,839 |   |
| Depreciation                                                    |       | $                                         | 17,803     |   | $ | 17,092 |   | $ | 16,758 |   | $ | 13,364 |   | $ | 12,546 |   |
| Cash dividends declared per common share                        |       | $                                         | —     |   | $ | — |   | $ | 1.11 |   | $ | 1.50 |   | $ | 1.58 |   |

 

**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionand analysis of the results of operations and financial condition should beread in conjunction with the accompanying consolidated financial statementsincluded elsewhere in this annual report.

 

**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, 

 

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accountsreceivable management, technical support and other industry-specificprocesses.  We operate our businesswithin three reportable segments, based on the geographic regions in which ourservices are rendered: (1) the U.S., (2) Canada and (3) thePhilippines (“Offshore”).  As of December 31,2008, our U.S. segment included the operations of our thirteen facilities inthe U.S.; our Canada segment included the operations of our six facilities inCanada; and our Offshore segment included the operations of our facility inMakati City, Philippines.  As of December 31,2007, there were eleven, seven and zero operating centers in the U.S., Canadaand Offshore, 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 operating facilities by routinelyevaluating site performance.  If localeconomic conditions, prevailing wage rates, or other factors negatively impactthe long-term financial viability of a facility, management will from time totime make 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 facilities ineconomically viable geographic markets in order to improve profitability andgrow the business.

 

We invoice our clientsmonthly in arrears and recognize revenues for such services when completed.Substantially all of our contractual arrangements are based either on aproduction rate, meaning that we recognize revenue based on the billable hoursor minutes of each call center agent, or on a rate per transaction basis.  These rates could be based on the number ofpaid hours the agent works, the number of minutes the agent is available toanswer calls, or the number of minutes the agent is actually handling calls forthe client, depending on the client contract. Production rates vary by client contract and can fluctuate based on ourperformance against certain pre-determined criteria related to quality andperformance.

 

**SIGNIFICANTDEVELOPMENTS DURING THE YEAR ENDED DECEMBER 31, 2008**

 

During2008, we opened four new facilities. These facilities are located in Victoria, Texas, Mansfield, Ohio,Jonesboro, Arkansas and Makati City, Philippines.  Management believes that expansion into new geographicregions will enhance service offerings to new and existing customers andpositions us for future growth.  Theselocations were also chosen for their large and talented labor pools from whichwe can attract and retain qualified employees.

 

During August 2008and December 2008, we closed facilities in Big Spring, Texas andPetersburg, Virginia, respectively. These closures were driven by market conditions, namely recruitingchallenges, which impacted the profitability of the sites, and managementdetermined it was in our long-term interest to close these locations.

 

The impact on our resultsof operations from these developments during the year ended December 31,2008 is discussed below in “Results of Operations — Years Ended December 31,2008 and December 31, 2007”.

 

In addition, during December 2008,we also announced the closure of our facility in Regina, Saskatchewan that isexpected to close during the first quarter of 2009.  Persistent difficulty recruiting a workforcesuitable to clients’ requirements was a major factor leading to the decision toclose the facility. Upon the closure of the facility, the estimated restructuringcosts are $5 million to $6 million in facility-related costs, to be paidthrough the remainder of the lease term, or July 2013, and approximately$0.2 million in one-time employee termination benefits.   The exact timing and actual amounts of the facility-relatedcharges are dependent upon our ability to sublease these facilities. If theevents and circumstances regarding our ability to sublease the facilitieschange, these estimates would change.

 

**SUBSEQUENT EVENT**

 

On February 25, 2009, after a competitive auction, we entered intoan agreement to sell Domain.com, our wholly-owned subsidiary, to A. EmmetStephenson, Jr. in exchange for cash of approximately $7.1 million.  Mr. Stephenson was the highestbidder.  Mr. Stephenson is one ofour co-founders, served as Chairman of the Board of Directors until hisretirement on May 31, 2006 and managed the Domain.com subsidiary since2006.  Mr. Stephenson ownsapproximately 19.7% of our common shares outstanding.  The effective date of the sale is February 25,2009 and upon that date we recognized a gain of approximately $7.1 million.

 

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** **

**RESULTSOF OPERATIONS — YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007**

 

The following table presents selected items from our ConsolidatedStatements of Operations in thousands of dollars and as a percentage of revenuefor the periods indicated:

 

| ** **                                          | ** ** | **Year Ended December 31, 2008** | ** ** | **%  of Revenue** | ** ** | **Year Ended December 31, 2007** | ** ** | **% of  Revenue** | ** ** | **% change  2007 to 2008** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|---------------------------------------|------------|-------------------|------------|----------------------------|------------|
| Revenue                                             |       | $                                | 272,890    |              | 100.0      | %                                     | $          | 245,304           |       | 100.0                      | %          | 11.2 | % |
| Cost of services                                    |       | 238,496                          |       | 87.4              | %          | 206,087                               |       | 84.0              | %          | 15.7                       | %          |
| Gross profit                                        |       | 34,394                           |       | 12.6              | %          | 39,217                                |       | 16.0              | %          | -12.3                      | %          |
| Selling, general and administrative expenses        |       | 40,814                           |       | 15.0              | %          | 38,991                                |       | 15.9              | %          | 4.7                        | %          |
| Impairment losses and restructuring charges         |       | 9,225                            |       | 3.3               | %          | 4,325                                 |       | 1.8               | %          | 113.3                      | %          |
| Operating loss                                      |       | (15,645                          | )          | -5.7              | %          | (4,099                                | )          | -1.7              | %          | 281.7                      | %          |
| Net interest and other income                       |       | 55                               |       | 0.0               | %          | 745                                   |       | 0.3               | %          | -92.6                      | %          |
| Loss from continuing operations before income taxes |       | (15,590                          | )          | -5.7              | %          | (3,354                                | )          | -1.4              | %          | 364.8                      | %          |
| Income tax benefit                                  |       | (6,150                           | )          | -2.3              | %          | (523                                  | )          | -0.2              | %          | 1075.9                     | %          |
| Loss from continuing operations                     |       | (9,440                           | )          | -3.4              | %          | (2,831                                | )          | -1.2              | %          | 233.5                      | %          |
| Loss from discontinued operations, net of tax       |       | (461                             | )          | -0.2              | %          | —                                |       | 0.0               | %          | 100.0                      | %          |
| Net loss                                            |       | $                                | (9,901     | )                 | -3.6       | %                                     | $          | (2,831            | )          | -1.2                       | %          | 249.7 | % |

 

 

The following table summarizes our revenues and gross profit for theperiods indicated, by reporting segment:

 

 

 

|                | **For the  Year Ended December 31,** |
|---------------------|-------------------------------------------|
|                | **2008**                                  | ** ** | **2007** |
|                | **(in 000s)**                             | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** |
| **United  States:** |                                      |   |   |   |   |   |   |
| Revenue             | $                                         |  181,313 |   | 66.4% |   | $ |  149,389 |   | 60.9% |
| Cost  of services   | 150,452                                   |   | 63.1% |   | 115,987 |   | 56.3% |
| Gross  profit       | $                                         |  30,861 |   | 89.7% |   | $ |  33,402 |   | 85.2% |
| *Gross profit %*    | *17.0%*                                   | * * | * * | * * | *22.4%* | * * | * * |
|                |                                      |   |   |   |   |   |   |
| **Canada:**         |                                      |   |   |   |   |   |   |
| Revenue             | $                                         |  90,929 |   | 33.4% |   | $ |  95,915 |   | 39.1% |
| Cost  of services   | 86,001                                    |   | 36.1% |   | 90,100 |   | 43.7% |
| Gross  profit       |  $ 4,928                        |   | 14.3% |   | $ |  5,815 |   | 14.8% |
| *Gross profit %*    | *5.4%*                                    | * * | * * | * * | *6.1%* | * * | * * |
|                |                                      |   |   |   |   |   |   |
| **Offshore:**       |                                      |   |   |   |   |   |   |
| Revenue             | $                                         |  648 |   | 0.2% |   | $ |  — |   | 0.0% |
| Cost  of services   | 2,043                                     |   | 0.8% |   | — |   | 0.0% |
| Gross  profit       | $                                         |  (1,395) |   | -4.0% |   | $ |  — |   | 0.0% |
| *Gross profit %*    | *-215.3%*                                 | * * | * * | * * | * * | * * | * * |

 

***Revenue***

 

Revenue increased by$27.6 million, or 11.2%, from $245.3 million in 2007 to $272.9 million in 2008.The increase was driven by the U.S. segment in which revenue increased by21.4%, or $31.9 million, due to the opening of three new facilities during2008. The Company opened facilities in Victoria, Texas in January 2008, Mansfield,Ohio in March 2008 and Jonesboro, Arkansas in July 2008. Revenue fromthese facilities during 2008 totaled approximately $31.7 million. Revenue alsoincreased due to improved contract pricing, offset slightly by the closure ofour Big Spring, Texas facility in August 2008, which resulted in areduction in revenue of $4.6 million during 2008. Revenue in the Canada segmentdecreased by $5.0 million during 2008, of which $3.3 million was attributableto lost revenue due to the closure of our Hawkesbury, Ontario site in August 2007.The Offshore segment generated $0.6 million in revenue during 2008 from thefacility in Makati City, Philippines which opened in September 2008.

 

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

 

Cost of servicesincreased by $32.4 million, from $206.1 million in 2007 to $238.5 million in2008. Gross profit as a percentage of revenue decreased from 16.0% in 2007 to12.6% in 2008. The decline in gross profit was primarily due to the launch andinitial ramp of our new facilities and losses on foreign currency hedges. Costof services in the U.S. segment increased by $34.5 million, from $116.0 millionin 2007 to $150.5 million in 2008. Of this increase, approximately $30.0million was related to the new facilities in Victoria, Mansfield and Jonesboro.Gross profit in Canada decreased by $0.9 million from $5.8 million in 2007 to$4.9 million in 2008. The decline was primarily due to lower utilization inCanada and a decline in our effective exchange rate, net of hedges. Oureffective exchange rate (CAD to USD), net of hedges, decreased from 1.10 in2007 to 1.01 in 2008. The Offshore segment contributed negative $1.4 million togross profit during 2008 as the Makati City site was launched in September 2008and continued to ramp through the remainder of 2008.

 

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

 

Selling, general andadministrative expenses increased by $1.8 million, or 4.7%, from $39.0 millionin 2007 to $40.8 million in 2008. As a percentage of revenue, selling, generaland administrative expenses were 15.9% in 2007 and 15.0% in 2008. The increasein selling, general and administrative expenses was due to investments incorporate personnel, human resource programs and technology in support of ourlong-term growth plans, as well as incremental SG&A costs associated withthe new sites.

 

***ImpairmentLosses and Restructuring Charges***

 

Impairment losses andrestructuring charges increased from $4.3 million in 2007 to $9.2 million in2008. During 2008, we recognized impairment losses of $5.9 million. Approximately$1.8 million related to the Canada segment, which was comprised of $1.5 millionand $0.3 million related to impairment of leasehold improvements, furniture andfixtures and equipment in connection with the closures of the Regina,Saskatchewan and Hawkesbury, Ontario facilities, respectively. Approximately$4.1 million of impairment losses related to the U.S. segment, which comprisedof 1) $1.2 million related to the write-off of capitalized software costs forinformation technology infrastructure initiatives which management has decidedto discontinue, 2) $1.1 million of leasehold improvements, furniture andfixtures and equipment in connection with the closure of our Big Spring, Texasfacility, and 3) $1.8 million of leasehold improvements, furniture and fixturesand equipment in connection with the closure of our Petersburg, Virginiafacility.

 

During 2008, werecognized restructuring charges of $3.3 million. The Canada segment recognized$1.6 million of restructuring charges relating to the closure of our Hawkesburyfacility. Approximately $1.7 million related to the U.S. segment, of which $0.3million and $1.4 million were related to the closures in Big Spring, Texas andPetersburg, Virginia, respectively.

 

During 2007, we incurredapproximately $1.9 million in impairment losses and approximately $0.7 millionin restructuring charges in our Canada segment due to the Hawkesbury closure. Werecorded $1.7 million in impairment losses in the U.S. segment due to thewrite-off of capitalized software costs in which the projects were notcompleted and therefore, the carrying value was not recoverable.

 

***OperatingLoss***

 

We incurred operatinglosses of approximately $15.6 million and $4.1 million for the years ended December 31,2008 and 2007, respectively. The increase in the loss was driven by thedecrease in gross margin, the increase in selling, general and administrativeexpenses, and the increase in impairment losses and restructuring charges,discussed previously.

 

***NetInterest and Other Income***

 

Net interest and otherincome was approximately $0.1 million and $0.7 million during the years ended December 31,2008 and 2007, respectively. The primary reason for the change was therecognition of a loss of $0.5 million in 2008 on an investment in LehmanBrothers corporate debt securities that was determined to beother-than-temporarily impaired due to their bankruptcy announcement.

 

***IncomeTax Benefit***

 

The effective tax rateincreased from 15.6% in 2007 to 39.5% in 2008. The primary difference betweenthe periods was the valuation allowance recorded in 2007 on capital losscarryforwards which management did not believe would be recognized before theirexpiration. This impact was offset by decreased work opportunity credits during2008 compared to 2007 and the change in the Canadian statutory tax rate during2008. Effective January 1, 2008, the general corporate income tax rate inCanada was reduced from

 

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22.1% to 19.5% due inpart to the elimination of the corporate surtax on large corporations of 1.12%.The impact was a reduction in our overall effective tax rate and a reduction ofthe value of certain deferred tax assets.

 

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

 

During the year ended December 31,2008, we recorded a loss from discontinued operations, net of tax, ofapproximately $0.5 million compared to $0 during 2007. The loss was due to thewrite-off of the principal on a note receivable related to the sale of oursupply chain management services platform in December 2005. Due to thefact that the purchaser has failed to make interest payments since the fourthquarter of 2007 or the principal payment that was due on December 16,2008, as well as solvency issues with the purchaser, we are uncertain about ourability to collect the principal due on the note. Accordingly, we wrote-offapproximately $0.7 million related to the principal, less an associated taxbenefit of approximately $0.2 million, during the year ended December 31,2008.

 

***NetLoss***

 

We incurred net losses ofapproximately $9.9 million and $2.8 million for the years ended December 31,2008 and 2007, respectively. The increase in the net loss was driven primarilyby decreased gross margin, the increase in selling, general and administrativeexpenses, increased impairment losses and restructuring charges and loss fromdiscontinued operations, partially offset by higher revenue and an income taxbenefit, as discussed previously.

 

**RESULTSOF OPERATIONS — YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006**

 

The following table presents selected items from our ConsolidatedStatements of Operations in thousands of dollars and as a percentage of revenuefor the periods indicated:

 
| ** **                                   | ** ** | **Year Ended December 31, 2007** | ** ** | **% of Revenue** | ** ** | **Year Ended December 31, 2006** | ** ** | **% of Revenue** | ** ** | **% change  2006 to 2007** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| Revenue                                      |       | $                                     | 245,304    |             | 100.0      | %                                     | $          | 237,612          |       | 100.0                      | %          | 3.2 | % |
| Cost of services                             |       | 206,087                               |       | 84.0             | %          | 201,424                               |       | 84.8             | %          | 2.3                        | %          |
| Gross profit                                 |       | 39,217                                |       | 16.0             | %          | 36,188                                |       | 15.2             | %          | 8.4                        | %          |
| Selling, general and administrative expenses |       | 38,991                                |       | 15.9             | %          | 30,247                                |       | 12.7             | %          | 28.9                       | %          |
| Impairment losses and restructuring charges  |       | 4,325                                 |       | 1.8              | %          | —                                |       | 0.0              | %          | 100.0                      | %          |
| Operating (loss) income                      |       | (4,099                                | )          | -1.7             | %          | 5,941                                 |       | 2.5              | %          | -169.0                     | %          |
| Net interest and other income                |       | 745                                   |       | 0.3              | %          | 2,126                                 |       | 0.9              | %          | -65.0                      | %          |
| (Loss) income from before income taxes       |       | (3,354                                | )          | -1.4             | %          | 8,067                                 |       | 3.4              | %          | -141.6                     | %          |
| Income tax (benefit) expense                 |       | (523                                  | )          | -0.2             | %          | 2,303                                 |       | 1.0              | %          | -122.7                     | %          |
| Net (loss) income                            |       | $                                     | (2,831     | )                | -1.2       | %                                     | $          | 5,764            |       | 2.4                        | %          | -149.1 | % |

 

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

 
| ** **         | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------|------------|------------------------------------------|------------|
| ** **         | ** ** | **2007**                                 | ** ** | **2006** | ** ** |
| ** **         | ** ** | **(in 000s)**                            | ** ** | **(% of Total)** | ** ** | **(in 000s)** | ** ** | **(% of Total)** | ** ** |
| **United States:** | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue            |       | $                                        | 149,389    |   | 60.9 | % | $ | 138,855 |   | 58.4 | % |
| Cost of services   |       | 115,987                                  |       | 56.3 | % | 109,599 |   | 54.4 | % |
| Gross profit       |       | $                                        | 33,402     |   | 85.2 | % | $ | 29,256 |   | 80.8 | % |
| *Gross profit %*   | * *   | *22.4*                                   | *%*        | * * | * * | *21.1* | *%* | * * | * * |
|               |       |                                     |       |   |   |   |   |   |   |
| **Canada:**        | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue            |       | $                                        | 95,915     |   | 39.1 | % | $ | 98,757 |   | 41.6 | % |
| Cost of services   |       | 90,100                                   |       | 43.7 | % | 91,825 |   | 45.6 | % |
| Gross profit       |       | $                                        | 5,815      |   | 14.8 | % | $ | 6,932 |   | 19.2 | % |
| *Gross profit %*   | * *   | *6.1*                                    | *%*        | * * | * * | *7.0* | *%* | * * | * * |

 

 

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***Revenue***

 

Revenue increased $7.7million, or 3.2%, to $245.3 million during 2007. This increase was driven byU.S. revenue which increased by $10.5 million, or 7.6%. The increase in theU..S. was offset by declines in Canada which decreased 2.9%. The overallincrease in revenue was due primarily to improved pricing on several contractswith existing customers, as well as revenue growth from new customers. Ouralignment of resources with more profitable contracts in 2007 resulted in anincrease in our average hourly production billing rate compared to 2006. Thepositive impact of these increases on revenue was offset slightly by a declinein our overall headcount. The decrease in headcount was due to the temporaryclosure of our Petersburg, Virginia facility, the permanent closure of ourHawkesbury, Ontario, Canada facility and staffing constraints in certain othersites during 2007.

 

***Cost ofServices and Gross Profit***

 

Cost of servicesincreased $4.7 million, or 2.3%, to $206.1 million during 2007. Gross profit asa percentage of revenue increased from 15.2% in 2006 to 16.0% in 2007. Theimprovement was driven by the U.S. which increased from 21.1% in 2006 to 22.4%in 2007. This was offset by a decline in Canadian gross margin from 7.0% to6.1%. The overall gross profit percentage increase was due primarily toimproved pricing on several contracts with existing customers, as well asrevenue growth from higher margin clients. In addition, the closure of ourHawkesbury, Ontario, Canada site had a positive impact on gross profit as apercentage of revenue in 2007, as this site was underutilized and deliveredrelatively lower gross profit margins in 2006. Also contributing to theimprovement in gross profit percentage was the decrease in costs associatedwith the opening of new facilities. In 2006, we incurred costs related to theopening of three new facilities, compared to costs incurred in the fourthquarter of 2007 related to one facility that opened in early 2008. Theseimprovements in gross margin were offset by the adverse effects of theweakening U.S. dollar compared to the Canadian dollar.

 

***Selling, Generaland Administrative Expenses***

 

Selling, general andadministrative expenses increased $8.7 million, or 28.9%, to $39.0 million in2007. As a percentage of revenue, selling, general and administrative expensesincreased from 12.7% in 2006 to 15.9% in 2007. The increase was due toincreased salary expense of approximately $3.1 million related primarily toturnover in our executive team, which resulted in increased severance,recruiting and hiring expenses. We also incurred increased bonus and stockbased compensation expense of approximately $1.5 million and greaterdepreciation expense of approximately $1.9 million for corporate informationtechnology initiatives in 2007. The remainder of the increase was due tovarious investments in human resources, technology, and process improvements insupport of our long-term growth objectives.

 

***ImpairmentLosses and Restructuring Charges***

 

During 2007, we incurredapproximately $3.6 million in impairment losses and approximately $0.7 millionin restructuring charges. In August 2007, we closed our facility inHawkesbury, Ontario, Canada which resulted in the Canada segment recognizingimpairment losses of $1.3 million associated with facility leaseholdimprovements and $0.6 million in furniture and equipment. We also recorded $0.7million in restructuring costs related to lease costs, telephony disconnectsand other expenses related to the facility closure. In addition, managementinitiated a comprehensive review of our information technology infrastructurein 2007, which resulted in approximately $1.7 million in impairment losses inour U.S. segment. The impairment losses were associated with capitalized softwarecosts on projects that would not be completed, and therefore, the carryingvalue was not recoverable. There were no impairment losses or restructuringcharges recorded in 2006.

 

***Operating(Loss) Income***

 

Operating (loss) incomedeclined $10.0 million during 2007 from operating income of $5.9 million in2006 to an operating loss of $4.1 million in 2007. Operating margin declined to(1.7%) in 2007 from 2.5% in 2006. These declines were the result of thepreviously discussed increase in selling, general and administrative expensesand the impairment and restructuring charges, offset by an increase in grossprofit.

 

***Net Interestand Other Income***

 

Net interest and otherincome decreased $1.4 million, or 65%, to $0.7 million in 2007, compared to$2.1 million in 2006, due primarily to higher interest expense of $0.7 millionin 2007, resulting from the full year impact of interest on debt obligationsentered into during the latter part of 2006. In addition, other incomeassociated with bankruptcy proceeds from a previously impaired investmenttotaled only $0.1 million in 2007 compared to $0.7 million in 2006.

 

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***Income Tax(Benefit) Expense***

 

Our effective income taxrate for 2007 was 15.6% compared to 28.5% in 2006, translating into an incometax benefit of $0.5 million in 2007 and income tax expense of $2.3 million in2006. The change in the effective tax rate was primarily due to increases inthe tax benefit on our pre-tax loss related to (a) $0.8 million in workopportunity credits received during 2007 in excess of amounts estimated forprior periods, and (b) a $0.3 million tax benefit relating to adjustmentsto estimates for our 2006 state, federal and Canadian tax returns. These taxbenefit increases were offset by a decrease relating to a $1.7 millionvaluation allowance established in 2007 on capital loss carry forwards thatmanagement believes will not be offset by future capital gains prior to theirexpiration.

 

***Net (Loss)Income***

 

Net income declined to anet loss of $2.8 million in 2007 from net income of $5.8 million in 2006. Thisdecline was driven by increases in selling, general and administrative expensesand impairment and restructuring charges and decreased interest and otherincome, as discussed previously.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

As of December 31,2008, working capital totaled $47.6 million and our current ratio was 2.58:1,compared to working capital of $66.2 million and a current ratio of 3.45:1 at December 31,2007. We have historically financed our operations, liquidity requirements,capital expenditures, and capacity expansion primarily through cash flows fromoperations, and to a lesser degree, through various forms of debt and leasingarrangements. In addition to funding basic operations, our primary uses of cashtypically relate to capital expenditures to upgrade our existing informationtechnologies and service offerings and investments in our facilities. Webelieve that cash flows from operations and cash provided by short-termborrowings, when necessary, will adequately meet our ongoing operating 

requirements andscheduled principal and interest payments, and we expect to be able to renewour existing line of credit or replace it with other financing arrangementswhen that line of credit expires on June 30, 2009. If we are unable torenew the line of credit or are unable to secure alternative sources of capitalfunding under satisfactory terms, or at all, we may be unable to meetshort-term cash needs required for operations or growth opportunities. Webelieve we will obtain financing to replace or extend this line of credit thatwill allow us to meet our short-term cash needs. However, the current poorconditions of the U.S. credit markets may adversely impact our ability toobtain financing. Any significant future expansion of our business may requireus to secure additional cash resources. Our liquidity could be significantlyimpacted by general economic conditions, uncertainties in the credit marketsand large cash requirements to expand our business or a decrease in demand forour services, particularly from any of our principal clients, which could arisefrom a number of factors, including, but not limited to, competitive pressures,adverse trends in the business process outsourcing market, industryconsolidation, adverse circumstances with respect to the industries we service,and any of the other factors we describe more fully in Item 1A. “Risk Factors”of this Form 10-K.

 
| *** ***                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                                   | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net cash provided by (used in):                      |       |                             |       |   |   |   |   |
| Operating activities                                 |       | $                                | 11,616     |   | $ | 20,647 |   | $ | 18,878 |   |
| Investing activities                                 |       | (20,621                          | )          | (25,672 | ) | 2,591 |   |
| Financing activities                                 |       | (3,722                           | )          | (5,828 | ) | (4,681 | ) |
| Effect of foreign exchange rates on cash             |       | (719                             | )          | 442 |   | (776 | ) |
| Net (decrease) increase in cash and cash equivalents |       | $                                | (13,446    | ) | $ | (10,411 | ) | $ | 16,012 |   |

 

Our balance of cash andcash equivalents was $9.6 million at December 31, 2008, compared to abalance of $23.0 million at December 31, 2007.

 

**CASH FLOWS — YEARS ENDED DECEMBER31, 2008 AND DECEMBER 31, 2007**

 

***OperatingActivities.***Netcash provided by operating activities was $11.6 million in 2008, compared to$20.6 million in 2007. The decrease in cash provided by operating activities ofapproximately $9.0 million was primarily due to the larger net loss during theperiod which increased by $7.1 million. Cash from operating activities alsodecreased by $7.9 million due to the increase in deferred tax assets. Deferredtax assets increased primarily due to the net operating loss carry forwardsgenerated during 2008 that did not exist in 2007. These decreases to cashprovided by operating activities were offset by increases related to 1) $2.4million larger impairment losses due to site closures in 2008 and 2) $3.2million greater accrued liabilities, which was a result of higher accruedpayroll at December 31, 2008 compared to December 31, 2007 because ofthe growth in our number of employees.

 

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***InvestingActivities. ***Net cash used in investing activities wasapproximately $20.6 million in 2008, compared to $25.7 million in 2007.  This represents a decrease of approximately$5.1 million, which was due to greater net proceeds from the sale of investments,partially offset by higher capital expenditures.  During 2008, we had $7.4 million in proceedsfrom the sale of investments, net of purchases. During 2007, we had $10.5 million in purchases of investments, net ofproceeds.  This change was due to ourfocus on site expansion during 2008 which also resulted in capital expendituresincreasing from $15.2 million in 2007 to $28.0 million in 2008.  During 2008 we opened four new sites,compared to no site openings in 2007.

 

***FinancingActivities. ***Net cash used in financing activities wasapproximately $3.7 million in 2008, compared to $5.8 million in 2007.  The decrease of $2.1 million was due to $2.0million less in principal payments during 2008 compared to 2007.  This was due in part to the maturity of oursecured equipment loan with Wells Fargo Equipment Finance, Inc. whereby wemade our final principal payment on February 28, 2008.

 

**CASH FLOWS — YEARS ENDED DECEMBER31, 2007 AND DECEMBER 31, 2006**

 

***OperatingActivities. ***Net cash provided by operating activitieswas $20.6 million in 2007, compared to $18.9 million in 2006.  The increase in cash provided by operatingactivities was due primarily to the timing and size of changes in operatingassets and liabilities.  Accountspayable, accrued liabilities, income taxes and other liabilities increasedduring 2007 by approximately $2.5 million compared to approximately $4.2million in 2006, and accounts receivable, prepaid expenses and other assetsincreased approximately $1.4 million in 2007, compared to approximately $6.1million in 2006.  Additionally, our netloss was approximately $2.8 million in 2007 compared to net income ofapproximately $5.8 million in 2006 due primarily to approximately $3.6 millionin non-cash impairment losses.  Ournon-cash costs increased in 2007 by approximately $0.8 million related tostock-based compensation expense and approximately $0.3 million in depreciationexpense.

 

***InvestingActivities. ***Net cash used in investing activities wasapproximately $25.7 million in 2007, compared to net cash provided by investingactivities of approximately $2.6 million during 2006.  In 2007, net purchases of investments was$10.5 million and purchases of property, plant and equipment was $15.2 million.  In 2006, net proceeds from investments was$22.4 million and purchases of property, plant and equipment was $20.1million.  In 2006, we purchased property,plant and equipment related to the opening of three new facilities, compared to property, plant and equipmentpurchases in the fourth quarter of 2007 related to one facility that opened inearly 2008.  In 2006, we sold a largeportion of our equity securities to fund the build-out of the new facilitieswhich did not occur in 2007 as we invested cash on hand and cash generated byoperating activities in investment securities.

 

***FinancingActivities. ***Net cash used in financing activities wasapproximately $5.8 million in 2007, compared to approximately $4.7 million in2006.  In 2006, we entered into aCanadian dollar secured equipment loan and a secured promissory note, whichresulted in proceeds of approximately $13.3 million, offset by $2.8 million inprincipal payments on these borrowings and existing debt obligations in2006.  During 2007, we did not have anyproceeds from additional financing and made principal payments on existingborrowings of approximately $5.8 million. In 2006, there was approximately $1.1 million of cash received upon theexercise of stock options, whereas there were no stock option exercises during2007.  In addition, during 2006, we usedapproximately $16.3 million in cash to make dividend payments, which we ceasedduring fiscal year 2007.  In January 2007,our board of directors announced that it would not declare a quarterly dividendon our common stock in the first quarter of 2007 nor in the foreseeable futurethereafter.  We plan to invest in growthinitiatives in lieu of paying dividends.

 

**CONTRACTUALOBLIGATIONS**

 

Other than operatingleases for certain equipment and real estate and commitments to purchase goodsand services in the future, in each case as reflected in the table below, wehave no off-balance sheet transactions, unconditional purchase obligations orsimilar instruments and we are not a guarantor of any other entities’ debt orother financial obligations, other than the Canadian Dollar Secured EquipmentLoan and the Secured Promissory Note, as described below. The following tablepresents a summary (in thousands), by period, of our future contractualobligations and payments as of December 31, 2008:

 
| ** **                                    | ** ** | **Within 1 Year** | ** ** | **1 - 2 Years** | ** ** | **2 - 3 Years** | ** ** | **3 - 4 Years** | ** ** | **4 - 5 Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|----------------|------------|-----------|------------|
| Operating leases (1)                          |       | $                 | 6,863      |            | $          | 6,749           |       | $               | 5,849      |            | $          | 4,209          |       | $         | 2,958      |   | $ | 6,984 |   | $ | 33,612 |   |
| Capital leases (2)                            |       | 71                |       | 76              |       | 82              |       | 88              |       | 10              |       | —         |       | 327       |       |
| Purchase obligations (3)                      |       | 62                |       | —          |       | —          |       | —          |       | —          |       | —         |       | 62        |       |
| Long-term debt, including current portion (4) |       | 3,295             |       | 3,199           |       | —          |       | —          |       | —          |       | —         |       | 6,494     |       |
| Total contractual obligations                 |       | $                 | 10,291     |            | $          | 10,024          |       | $               | 5,931      |            | $          | 4,297          |       | $         | 2,968      |   | $ | 6,984 |   | $ | 40,495 |   |

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(1)          We lease facilities and equipment undervarious non-cancelable operating leases.

 

(2)          We lease equipment under certain capitallease agreements.

 

(3)          Purchase obligations include commitmentsto purchase goods and services that in some cases may include provisions forcancellation.

 

(4)          Our outstanding debt obligations as of December 31,2008 are described below.

 

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***Line of Credit***

 

We maintain a $10.0million secured line of credit with Wells Fargo Bank, N.A. (the “Bank”) whichwe use to finance regular, short-term operating expenses.  The line of credit expires June 30,2009.  Effective June 30, 2008, weentered into the Fifth Amendment to the Credit Agreement (the “amendment”).  Under the amendment, borrowings under thisline of credit bear interest at either a fluctuating rate per annum that is 1%below the Prime Rate or at a fixed rate per annum determined by the Bank to be1.5% above LIBOR, when our total tangible net worth is $110 million orgreater.  If our total tangible net worthis less than $110 million, borrowings under this line of credit bear interestat either a fluctuating rate per annum that is 0.75% below the Prime Rate or ata fixed rate per annum determined by the Bank to be 1.75% above LIBOR.  The interest rate on this facility was 2.25%as of December 31, 2008.  Under theamendment, at the end of each fiscal quarter, we must maintain a tangible networth of $105 million plus 25% of net income (only if positive) for each fiscalquarter, beginning with the first quarter of 2008.  We also must maintain unencumbered liquidassets having an aggregate fair market value of not less than $10 millionmeasured at the end of each fiscal quarter. In connection with the amendment, we also granted the Bank a securityinterest in all of our accounts receivable, other rights to payment and generalintangibles, including those of our subsidiary, StarTek USA, Inc.  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 December 31, 2008.

 

***Canadian DollarSecured Equipment Loan***

 

On November 17,2006, StarTek Canada Services, Ltd., one of our subsidiaries, borrowedapproximately $9.6 million Canadian dollars from Wells Fargo Equipment FinanceCompany, Inc.  These borrowings areguaranteed by StarTek, Inc. and our subsidiary, StarTek USA, Inc.,and are secured by fixed assets and tenant improvements at certain of ourCanadian facilities.  Under the guaranteeagreement, if StarTek Canada Services, Ltd. fails to pay its obligations underthe loan agreement when due, the loan guarantors agree to punctually pay anyindebtedness, along with interest and certain expenses incurred on behalf ofWells Fargo Equipment Finance Company, Inc. to enforce the guarantee, toWells Fargo Equipment Finance Company, Inc. The loan will be repaid in 48monthly installments of $0.225 million until maturity on November 20,2010, which reflects an implicit annual interest rate of 5.77%.  We may elect to prepay amounts due under thisloan, provided that we give Wells Fargo Equipment Finance Company, Inc. atleast 30 days written notice and that we pay a prepayment premium, asstipulated in the loan agreement.  As of December 31,2008, approximately $4.0 million U.S. dollars was outstanding under this loan.

 

***SecuredEquipment Promissory Note***

 

On November 17,2006, our subsidiary, StarTek USA, Inc., borrowed approximately $4.9million from Wells Fargo Equipment Finance, Inc.  The loan will be repaid with interest in 48monthly installments of $0.115 million until maturity on November 30,2010. The borrowings bear interest at an annual rate of 6.38% and are securedby fixed assets and tenant improvements at certain of our U.S. facilities.  The borrowings may be repaid early withoutpenalty.  The promissory note isguaranteed by StarTek, Inc. and our subsidiary, StarTek Canada Services,Ltd.  Under the guarantee agreement, ifStarTek USA, Inc. fails to pay its obligations under the loan agreementwhen due, the guarantors agree to full and prompt payment of each and everydebt, liability and obligation of every type and description that StarTek USA, Inc.may now or in the future owe to Wells Fargo Equipment Finance, Inc.  As of December 31, 2008, approximately$2.5 million was outstanding under this note.

 

**OTHER FACTORS IMPACTING LIQUIDITY**

 

Effective November 4,2004, our board of directors authorized purchases of up to $25 million of ourcommon stock.  The repurchase programwill remain in effect until terminated by the board of directors and will allowus to repurchase shares of our common stock from time to time on the openmarket, in block trades and in privately-negotiated transactions.  Repurchases will be implemented by the ChiefFinancial Officer consistent with the guidelines adopted by the board ofdirectors from time to time and will depend on market conditions and otherfactors.  Any repurchased shares will bemade in accordance with SEC rules.  Wehave not yet repurchased any shares pursuant to this board authorization.

 

Our business currentlyhas a high concentration on a few principal clients.  The loss of a principal client and/or changesin timing or termination of a principal client’s product launch or serviceoffering would have a material adverse effect on our business, liquidity,operating results, and financial condition. These client relationships are further discussed in Item 1A. “RiskFactors” and in Note 5, 

 

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“Principal Clients,” toour Consolidated Financial Statements, which are included at Item 8. “FinancialStatements and Supplementary Financial Data,” of this Form 10-K.  To limit our credit risk, management fromtime to time will perform credit evaluations of our clients. Although we aredirectly impacted by the economic conditions in which our clients operate,management does not believe substantial credit risk existed as of December 31,2008.

 

As of December 31,2008, we had approximately $8.4 million invested in corporate debtsecurities.  There is a risk that ifthose companies in which we are invested suffer due to economic conditions orother reasons, we could realize losses on these investments which could impactour liquidity.  During the year ended December 31,2008 we recorded $0.5 million in impairment charges related to Lehman Brotherscorporate debt securities.  We do notcurrently consider any other declines in fair value to be other-than-temporary.

 

There is a risk that thecounterparties to our hedging instruments could suffer financial difficulties dueto economic conditions or other reasons and we could realize losses on thesearrangements which could impact our liquidity. However, we do not believe we are exposed to more than a nominal amount ofcredit risk in our derivative hedging activities, as the counterparties areestablished, well-capitalized financial institutions.

 

Although managementcannot accurately anticipate effects of domestic and foreign inflation on ouroperations, management does not believe inflation has had, or is likely in theforeseeable future to have, a material adverse effect on our results ofoperations 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 holiday buying season.  We have experienced and expect to continue toexperience some quarterly variations in revenue and operating results due to avariety of factors, many of which are outside our control, including: (i) timingand amount of costs incurred to expand capacity in order to provide for volumegrowth from existing and future clients; (ii) changes in the volume ofservices provided to principal clients; (iii) expiration or termination ofclient projects or contracts; (iv) timing of existing and future clientproduct launches or service offerings; (v) seasonal nature of certainclients’ businesses; and (vi) cyclical nature of certain clients’businesses.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our discussion andanalysis of financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of our financialstatements require us to make estimates that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosures ofcontingent assets and liabilities. We base our accounting estimates onhistorical experience and other factors that we believe to be reasonable underthe circumstances. However, actual results may vary from these estimates due tofactors beyond our control or due to changes in these assumptions orconditions. We have discussed the development and selection of criticalaccounting policies and estimates with our Audit Committee. The following is asummary of our critical accounting policies and estimates we make in preparingour consolidated financial statements:

 

***RevenueRecognition***

 

We invoice our businessprocess outsourcing services clients monthly in arrears and recognize revenuefor such services when completed. For substantially all of our contractualarrangements for business process outsourcing services, we recognize revenuebased either on the billable hours or minutes of each customer servicerepresentative, at rates provided in the client contract, or on arate-per-transaction basis. The contractual rates can fluctuate based on ourperformance against certain pre-determined criteria related to quality andperformance. Additionally, some clients are contractually entitled to penaltieswhen we are out of compliance with certain quality and/or performanceobligations defined in the client contract. Such penalties are recorded as areduction to revenue as incurred, based on a measurement of the appropriatepenalty under the terms of the client contract.

 

The provision of businessprocess outsourcing services to our clients generally does not involve multipleelements in the context of Emerging Issues Task Force (“EITF”) Issue No. 00-21,“Revenue Arrangements with Multiple Deliverables.” We provide initial trainingto customer service representatives upon commencement of new business processoutsourcing services contracts and recognize revenues for such training as theservices are provided based upon the production rate (i.e., billable hours andrates related to the training services as stipulated in our contractualarrangements). Accordingly, the corresponding training costs, consistingprimarily of labor and related expenses, are recognized as incurred.  Likewise, some client contracts stipulatethat we are entitled to bonuses should we meet or exceed these predeterminedquality and/or performance obligations. These bonuses are recognized as incremental revenue in the period inwhich they are earned.

 

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***FairValue of Financial Instruments***

 

We measure or monitormany assets and liabilities on a fair value basis.  Fair value is used on a recurring basis forassets and liabilities in which fair value is the primary basis ofaccounting.  Examples of these includederivative instruments, cash and cash equivalents, and available for salesecurities.  Additionally, fair value is usedon a non-recurring basis to evaluate assets or liabilities for impairment orfor disclosure purposes.  Examples ofthese non-recurring uses of fair value include long-lived assets.  Fair value is defined as the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date.

 

We adopted the provisionsof Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (“SFAS No. 157”) related to financial assets and liabilitiesas well as other assets and liabilities carried at fair value on a recurringbasis as of January 1, 2008 and the effect of such adoption was notmaterial to our results of operations or financial position.  FASB Staff Position No. 157-2, “EffectiveDate of FASB Statement No. 157” (“FSP No. 157-2”), deferred theeffective date of SFAS No. 157 for all nonfinancial assets andnonfinancial liabilities to fiscal years beginning after November 15,2008.  We will adopt the provisions ofSFAS No. 157 related to other nonfinancial assets and liabilities prospectivelyfor our fiscal year beginning January 1, 2009.  We are currently evaluating the impact ofadopting the provisions of SFAS No. 157 related to other nonfinancialassets and liabilities.

 

Effective January 1,2008, we adopted Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Liabilities” (“SFAS No. 159”).  SFAS No. 159 provides companies with anoption to report selected financial assets and liabilities at fair value, andestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. The adoption of SFAS No. 159 hadno impact on our Consolidated Financial Statements as of December 31,2008.

 

When determining the fairvalue measurements for assets and liabilities required or permitted to berecorded at and/or marked to fair value, we consider the principal or mostadvantageous market in which it would transact and consider assumptions thatmarket participants would use when pricing the asset or liability.  When possible, we look to active andobservable markets to price identical assets or liabilities.  When identical assets and liabilities are nottraded in active markets, we look to market observable data for similar assetsand liabilities.  Nevertheless, ifcertain assets and liabilities are not actively traded in observable markets,we must use alternative valuation techniques to derive a fair valuemeasurement.  For additional information,see Note 6, “Fair Value of Financial Instruments,” to our ConsolidatedFinancial Statements, included in Item 8. “Financial Statements andSupplementary Financial Data.”

 

***Impairment ofLong-Lived Assets***

 

We periodically, on atleast an annual basis, evaluate potential impairments of our long-lived assetsin accordance with Statement of Financial Accounting Standards No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Inour annual evaluation or when we determine that the carrying value oflong-lived assets may not be recoverable based upon the existence of one ormore indicators of impairment, we evaluate the projected undiscounted cashflows related to the assets. If these cash flows are less than the carryingvalues of the assets, we measure the impairment based on the excess of thecarrying value of the long-lived asset over the long-lived asset’s fair value.Our projections contain assumptions pertaining to anticipated levels ofutilization and revenue that may or may not be under contract but are based onour experience and/or projections received from our customers.  We recognized impairment losses ofapproximately $5.9 million, $3.6 million and $0 during the years ended December 31,2008, 2007 and 2006, respectively.  Foradditional information, see Note 2, “Restructuring Charges and ImpairmentLosses,” to our Consolidated Financial Statements, included in Item 8. “FinancialStatements and Supplementary Financial Data.”

 

***Restructuring Charges***

 

Statement ofFinancial Accounting Standards No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities” (“SFAS No. 146”) specifies that aliability for a cost associated with an exit or disposal activity be recognizedwhen the liability is incurred, instead of upon commitment to an exit plan. Onan ongoing basis, management assesses the profitability and utilization of ourfacilities and in some cases management has chosen to close facilities.  A significant assumption used in determiningthe amount of the estimated liability for closing a facility is the estimatedliability for future lease payments on vacant facilities, which we determinebased on a third-party broker’s assessment of our ability to successfullynegotiate early termination agreements with landlords and/or to sublease thefacility. If the assumptions regarding early termination and the timing andamounts of sublease payments prove to be inaccurate, we may be required torecord additional losses, or conversely, a future gain, in the ConsolidatedStatements of Operations and Comprehensive (Loss) Income. We recognizedrestructuring charges of approximately $3.3 million, $0.7 million and $0 duringthe years ended December 31, 2008, 2007 and 2006, respectively.   For additional information, see Note 2, “RestructuringCharges and Impairment Losses,” to our Consolidated Financial Statements,included in Item 8. “Financial Statements and Supplementary Financial Data.”

 

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***Investments***

 

We have historicallyinvested in investment grade corporate bonds, convertible bonds, mutual funds,commercial paper, various forms of equity securities, option contracts,non-investment grade bonds, and alternative investment partnerships.  These investments are classified as tradingsecurities, investments held to maturity or investments available for sale,based on our intent at the date of purchase. As of December 31, 2008 and2007, we were not invested in any trading securities or held-to-maturitysecurities.

 

We amended our investmentpolicy in October 2006.  Under theamended policy, we may invest in certain U.S. Government andgovernment-sponsored securities, repurchase agreements, option contracts,investment grade corporate obligations, corporate debt securities, municipalsecurities, mortgage-backed securities, money market and mutual funds, subjectto the terms of the policy.   When theinvestments held in our portfolio as of December 31, 2008 mature, weintend to revise our investment policy such that we may invest in moreconservative investments, including U.S. treasury securities, federal agencysecurities, repurchase agreements and money market funds.  The Chief Financial Officer is responsiblefor oversight of the investment portfolio.

 

We exercise judgment inperiodically evaluating investments for impairment. Investments are evaluatedfor other-than-temporary impairment in accordance with the provisions of FASBStaff Position Nos. FAS 115-1 and FAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”  During 2008, we recognized a loss of $0.5million on our investment in Lehman Brothers corporate debt securities that wasdetermined to be other-than-temporarily impaired due to their bankruptcyannouncement.

 

No investments weredetermined to be other-than-temporarily impaired during 2007 or 2006.  During 2008, 2007 and 2006, we recovered cashfrom an investment that had previously been written off.  For additional information, see Note 10, “NetInterest and Other Income,” to our Consolidated Financial Statements, includedin Item 8. “Financial Statements and Supplementary Financial Data.”

 

***Derivative Instruments and Hedging Activities***

 

We follow the provisionsof Statement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS No. 133”) andrelated guidance for all of our derivative and hedging instruments. SFAS No. 133requires every derivative instrument (including certain derivative instrumentsembedded in other contracts) to be recorded in the consolidated balance sheetas either an asset or liability measured at its fair value, with changes in thefair value of qualifying hedges recorded in other comprehensive income. SFAS No. 133requires that changes in a derivative’s fair value be recognized currently inearnings unless specific hedge accounting criteria are met. Special accountingfor qualifying hedges allows a derivative’s gains and losses to offset therelated results of the hedged item and requires that we must formally document,designate and assess the effectiveness of transactions that receive hedgeaccounting treatment.

 

We have elected to followcash flow hedge accounting under SFAS No. 133 in order to associate theresults of the hedges with forecasted future expenses.  The current mark-to-market gain or loss isrecorded in accumulated other comprehensive income as a component ofstockholders’ equity and will be re-classified to operations as the forecastedexpenses are incurred, typically within one year.  During 2008, 2007 and 2006, our cash flowhedges were highly effective and there were no amounts charged to theConsolidated Statements of Operations and Other Comprehensive (Loss) Income forhedge ineffectiveness. While we expect that our derivative instruments thathave been designated as hedges will continue to meet the conditions for hedgeaccounting, if such hedges do not qualify as highly effective or if we do notbelieve that forecasted transactions will occur, the changes in the fair valueof the derivatives used as hedges will be reflected in earnings.

 

***Income Taxes***

 

We account for incometaxes using the liability method as prescribed by Statement of FinancialAccounting Standards No. 109, “Accountingfor Income Taxes” (“SFAS No. 109”).Deferred income taxes reflect net effects of temporary differences betweencarrying amounts of assets and liabilities for financial reporting purposes andamounts used for income tax purposes. We are subject to foreign income taxes onour foreign operations. We are required to estimate our income taxes in eachjurisdiction in which we operate. This process involves estimating our actualcurrent tax exposure, together with assessing temporary differences resultingfrom differing treatment of items for tax and financial reporting purposes. Thetax effects of these temporary differences are recorded as deferred tax assetsor deferred tax liabilities. Deferred tax assets generally represent items thatcan be used as a tax deduction or credit in our tax return in future years forwhich we have already recorded the expense in our financial statements.Deferred tax liabilities generally represent tax items that have been deductedfor tax purposes, but have not yet been recorded as expenses in our financial statements.

 

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As of December 31,2008, we had long-term deferred tax assets, net of a valuation allowance, ofapproximately $8.9 million related to U.S. and Canadian jurisdictions whoserecoverability is dependent upon future profitability.  In accordance with SFAS No. 109, weevaluate our deferred tax assets quarterly to determine if valuation allowancesare required.  SFAS No. 109 requiresthat companies assess whether valuation allowances should be established basedon the consideration of all available evidence using a “more likely than not”standard.  We made this evaluation as of December 31,2008 and believe our deferred tax assets other than those that carry avaluation allowance will primarily be realized through the generation of futuretaxable income, as well as through the reversal of our existing temporarydifferences and the execution of available tax planning strategies. We believeit is “more likely than not” based upon our current estimates of future taxableincome that the deferred tax assets will be realized.  Additional valuation allowances may berequired if we are unable to generate future taxable income.  Additional tax valuation allowances couldhave a significant negative impact on future earnings.

 

Effective January 1,2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken on a tax return.  FIN 48 requires the recognition of penaltiesand interest on any unrecognized tax benefits. Our policy is to reflect penalties and interest as part of income taxexpense as they become applicable.  Wefile numerous consolidated and separate income tax returns in the U.S. federaljurisdiction and in many state jurisdictions, as well as in Canada and thePhilippines.  Our U.S. federal returns andmost state returns for tax years 2005 and forward are subject toexamination.  Canadian returns for taxyears 2004 and forward are subject to examination.  No U.S. federal or state returns arecurrently under audit, and no extensions of statute of limitations have beengranted.  The 2004 and 2005 Canadianreturns are currently under audit by the Canadian Revenue Agency.  The adoption of FIN 48 had no impact on ourConsolidated Financial Statements, and as of December 31, 2008, there wereno unrecognized income tax benefits.

 

***Stock-Based Compensation***

 

On January 1, 2006,we adopted Statement of Financial Accounting Standards Statement No. 123R,“Share-Based Payment” (“SFAS No. 123R”). As such, during 2006, 2007 and 2008, we recognized expense related to allshare-based payments to employees, including grants of employee stock options,in our Consolidated Statements of Operations and Other Comprehensive (Loss)Income, based on the share-based payments’ fair values amortized straight-lineover the period during which the employees are required to provide services inexchange for the equity instruments.  Weadopted this standard using the modified prospective method, which stipulatesthat compensation expense be recognized beginning with the effective date forall share-based payments granted after the effective date and for all awardsgranted to employees prior to the effective date that remain unvested on theeffective date.  We use the Black-Scholesmethod for valuing stock-based awards. For additional information, see Note 9, “Share-Based Compensation,” toour Consolidated Financial Statements, included in Item 8. “FinancialStatements and Supplementary Financial Data.”

 

**ITEM7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

In the normal course ofbusiness, we are exposed to certain market risks related to changes in interestrates and other general market risks, equity market prices, and foreigncurrency exchange rates.  We haveestablished an investment portfolio policy which provides for, among otherthings, investment objectives and portfolio allocation guidelines.  All of our investment decisions are currentlysupervised or managed by our Chief Financial Officer.

 

This discussion containsforward-looking statements subject to risks and uncertainties.  Actual results could vary materially as aresult of a number of factors, including but not limited to, changes ininterest and inflation rates or market expectations thereon, equity marketprices, foreign currency exchange rates, and those factors set forth in Item1A. “Risk Factors” of this Form 10-K.

 

**INTEREST RATE RISK**

 

***Cash and CashEquivalents***

 

At December 31,2008, we had $9.6 million in cash and cash equivalents.  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.  We do not expect any substantial loss with respectto our cash and cash equivalents as a result of interest rate changes, and theestimated fair value of our cash and cash equivalents approximates originalcost.

 

***Investments***

 

At December 31,2008, we had investments available for sale which, in the aggregate, had a fairmarket value of $8.4 million.  At December 31,2008, investments available for sale consisted entirely of investment-gradecorporate bonds.  Our investmentportfolio 

 

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is subject to interestand inflation rate risks and will fall in value if market interest and/orinflation rates or market expectations relating to these rates increase.

 

The fair market value ofand estimated cash flows from our investments in corporate bonds are substantiallydependent upon the credit worthiness of certain corporations expected to repaytheir debts to us.  If such corporations’financial condition and liquidity adversely changes, our investments in thesebonds would be materially and adversely affected.

 

The table below providesinformation (in thousands) as of December 31, 2008 about maturity datesand corresponding weighted-average interest rates related to our investmentsavailable for sale.

 
| ** **      | ** ** | **Weighted- Average Interest Rates** | ** ** | **Within 1 Year** | ** ** | **1 - 2 Years** | ** ** | **2 - 3 Years** | ** ** | **3 - 4 Years** | ** ** | **4 - 5 Years** | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | **Fair Value** | ** ** |
|-----------------|------------|--------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|----------------|------------|------------|------------|----------------|------------|
| Corporate       | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **      | ** ** | ** **      | ** ** | ** **      | ** ** | ** **      | ** ** | ** **     | ** ** | ** ** | ** ** | ** **     | ** ** |
| debt securities |       | 3.60                                 | %          | $                 | 5,991      |            | $          | 2,522           |       | $               | —     |            | $          | —         |       | $          | —     |           | $          | — |   | $ | 8,513 |   | $ | 8,437 |   |
| Total           | ** ** | ** **                           |       | $                 | 5,991      |            | $          | 2,522           |       | $               | —     |            | $          | —         |       | $          | —     |           | $          | — |   | $ | 8,513 |   | $ | 8,437 |   |

 

Management believes wehave the ability to hold the foregoing investments until maturity, andtherefore, if held to maturity, we would not expect the future proceeds fromthese investments to be affected, to any significant degree, by the effect of asudden change in market interest rates. Declines in interest rates over timewill, however, reduce our interest income derived from future investments.

 

***Outstanding Debt***

 

We currently have thefollowing debt facilities:  1) a $10.0million unsecured revolving line of credit, 2) a $9.6 million Canadian dollarsecured equipment loan and 3) a $4.9 million secured promissory note.  These facilities are described in furtherdetail within Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Liquidity and CapitalResources.”* *Also, please refer to Note 8 “Debt,” to ourConsolidated Financial Statements, which are included at Item 8. “FinancialStatements and Supplementary Financial Data,” of this Form 10-K, forfurther explanation of our debt arrangements. Thetable below provides information (in thousands) as of December 31, 2008about maturity dates related to our outstanding debt.

*** ***
| ** **                                    | ** ** | **Within 1 Year** | ** ** | **1 - 2 Years** | ** ** | **2 - 3 Years** | ** ** | **3 - 4 Years** | ** ** | **4 - 5 Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|----------------|------------|-----------|------------|
| Debt obligations  (including current portion) | ** ** | $                 | 3,295      | ** **      | $          | 3,199           | ** ** | $               | —     | ** **      | $          | —         | ** ** | $         | —     | ** ** | $ | — | ** ** | $ | 6,494 | ** ** |
| Capital leases                                |       | 71                |       | 76              |       | 82              |       | 88              |       | 10              |       | —         |       | 327       |       |
| Total                                         |       | $                 | 3,366      |            | $          | 3,275           |       | $               | 82         |            | $          | 88             |       | $         | 10         |   | $ | — |   | $ | 6,821 |   |

 

**FOREIGN CURRENCY EXCHANGE RISKS**

 

We enter into foreign currencyexchange contracts to hedge our anticipated operating commitments that aredenominated in foreign currencies.  Thecontracts cover periods commensurate with expected exposure, generally withinsix months, and are principally 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 thosecountries. However, our client contracts generate revenues which are paid to usin U.S. dollars.  During 2008, we enteredinto Canadian dollar forward contracts with Wells Fargo Bank for $98.4 millionCanadian dollars to hedge our foreign currency risk with respect to labor costsin Canada.  As of December 31, 2008,we have not entered into any arrangements to hedge our exposure to fluctuationsin the Philippine peso relative to the U.S. dollar.

 

During the years ended December 31,2008, 2007 and 2006, we recorded (losses) gains of approximately ($3,445),$1,828 and $768, respectively, for the settled Canadian dollar forwardcontracts included as a component of Cost of Services in the accompanyingConsolidated Statements of Operations and Other Comprehensive (Loss)Income.  As of December 31, 2008, wehad contracted to purchase $49.2 million Canadian dollars to be deliveredperiodically through December 2009 at a purchase price which is no morethan $42.9 million and no less than $42.2 million.

 

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARYFINANCIAL DATA

 

The followingconsolidated financial statements should be read in conjunction with Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” ofthis Form 10-K.

 

**StarTek, Inc. and Subsidiaries:**

** **
| Report of  Independent Registered Public Accounting Firm                                                                                |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Statements of Operations and Other  Comprehensive (Loss) Income for the years ended December 31, 2008, 2007  and 2006 |   |
| Consolidated Balance Sheets as of December 31,  2008 and 2007                                                                      |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2008, 2007 and 2006                                        |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2008, 2007 and 2006                        |   |
| Notes to Consolidated Financial Statements                                                                                              |   |

 

 

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**Report of Independent Registered Public AccountingFirm**

 

The Board ofDirectors and Stockholders of StarTek, Inc.

 

We have auditedthe accompanying consolidated balance sheets of StarTek, Inc. andsubsidiaries as of December 31, 2008 and 2007, and the relatedconsolidated statements of operations and other comprehensive (loss) income,stockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2008. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of StarTek, Inc. andsubsidiaries at December 31, 2008 and 2007, and the consolidated resultsof their operations and their cash flows for each of the three years in theperiod ended December 31, 2008, in conformity with U.S. generally acceptedaccounting principles.

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), StarTek, Inc.’s internal control overfinancial reporting as of December 31, 2008, based on criteria establishedin Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 2,2009 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Denver, Colorado

March 2, 2009

 

 

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**STARTEK,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE (LOSS) INCOME**

(Dollarsin thousands, except per share data)

 
| ** **                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue                                                         |       | $                                | 272,890    |   | $ | 245,304 |   | $ | 237,612 |   |
| Cost of services                                                |       | 238,496                          |       | 206,087 |   | 201,424 |   |
| Gross profit                                                    |       | 34,394                           |       | 39,217 |   | 36,188 |   |
| Selling, general and  administrative expenses                   |       | 40,814                           |       | 38,991 |   | 30,247 |   |
| Impairment losses and  restructuring charges                    |       | 9,225                            |       | 4,325 |   | — |   |
| Operating (loss) income                                         |       | (15,645                          | )          | (4,099 | ) | 5,941 |   |
| Net interest and other  income                                  |       | 55                               |       | 745 |   | 2,126 |   |
| (Loss) income from  continuing operations before income taxes   |       | (15,590                          | )          | (3,354 | ) | 8,067 |   |
| Income tax (benefit)  expense                                   |       | (6,150                           | )          | (523 | ) | 2,303 |   |
| (Loss) income from  continuing operations                       |       | (9,440                           | )          | (2,831 | ) | 5,764 |   |
| Loss from discontinued  operations, net of tax                  |       | (461                             | )          | — |   | — |   |
| Net (loss) income                                               |       | $                                | (9,901     | ) | $ | (2,831 | ) | $ | 5,764 |   |
|                                                            |       |                             |       |   |   |   |   |
| Other comprehensive  (loss) income, net of tax:                 |       |                             |       |   |   |   |   |
| Foreign currency  translation adjustments, net of tax           |       | (1,463                           | )          | 1,331 |   | (424 | ) |
| Unrealized loss on  investments available for sale, net of tax  |       | (32                              | )          | (30 | ) | (2 | ) |
| Change in fair value of  derivative instruments, net of tax     |       | (1,464                           | )          | 255 |   | (362 | ) |
| Comprehensive (loss)  income                                    |       | $                                | (12,860    | ) | $ | (1,275 | ) | $ | 4,976 |   |
|                                                            |       |                             |       |   |   |   |   |
| Net (loss) income per  share from continuing operations:        |       |                             |       |   |   |   |   |
| Basic                                                           |       | $                                | (0.64      | ) | $ | (0.19 | ) | $ | 0.39 |   |
| Diluted                                                         |       | $                                | (0.64      | ) | $ | (0.19 | ) | $ | 0.39 |   |
|                                                            |       |                             |       |   |   |   |   |
| Net (loss) income per  share including discontinued operations: |       |                             |       |   |   |   |   |
| Basic                                                           |       | $                                | (0.67      | ) | $ | (0.19 | ) | $ | 0.39 |   |
| Diluted                                                         |       | $                                | (0.67      | ) | $ | (0.19 | ) | $ | 0.39 |   |
|                                                            |       |                             |       |   |   |   |   |
| Dividends declared per  common share                            |       | $                                | —     |   | $ | — |   | $ | 1.11 |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

 

 

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**STARTEK,INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

(Dollarsin thousands, except share and per share data)

 
| ** **                                                                                                                                                                               | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                                                                               | ** ** | ** **                  | ** ** | ** ** | ** ** |
|                                                                                                                                                                                     |       |                        |       |   |   |
| Current assets:                                                                                                                                                                          |       |                        |       |   |   |
| Cash and cash equivalents                                                                                                                                                                |       | $                           | 9,580      |   | $ | 23,026 |   |
| Investments                                                                                                                                                                              |       | 8,437                       |       | 16,349 |   |
| Trade accounts receivable, less allowance for doubtful  accounts of $32 and $0, respectively                                                                                             |       | 51,510                      |       | 48,887 |   |
| Income tax receivable                                                                                                                                                                    |       | 2,675                       |       | 2,502 |   |
| Short-term deferred income tax assets                                                                                                                                                    |       | 2,185                       |       | 165 |   |
| Prepaid expenses and other current assets                                                                                                                                                |       | 3,273                       |       | 2,243 |   |
| Total current assets                                                                                                                                                                     |       | 77,660                      |       | 93,172 |   |
|                                                                                                                                                                                     |       |                        |       |   |   |
| Property, plant and equipment, net                                                                                                                                                       |       | 59,608                      |       | 57,532 |   |
| Long-term deferred tax assets                                                                                                                                                            |       | 8,946                       |       | 3,686 |   |
| Other assets                                                                                                                                                                             |       | 650                         |       | 1,068 |   |
| Total assets                                                                                                                                                                             |       | $                           | 146,864    |   | $ | 155,458 |   |
|                                                                                                                                                                                     |       |                        |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                            |       |                        |       |   |   |
|                                                                                                                                                                                     |       |                        |       |   |   |
| Current liabilities:                                                                                                                                                                     |       |                        |       |   |   |
| Accounts payable                                                                                                                                                                         |       | $                           | 6,193      |   | $ | 5,908 |   |
| Derivative liability                                                                                                                                                                     |       | 2,323                       |       | — |   |
| Accrued liabilities:                                                                                                                                                                     |       |                        |       |   |   |
| Accrued payroll                                                                                                                                                                          |       | 9,158                       |       | 7,902 |   |
| Accrued compensated absences                                                                                                                                                             |       | 4,856                       |       | 5,072 |   |
| Other accrued liabilities                                                                                                                                                                |       | 3,312                       |       | 1,494 |   |
| Current portion of long-term debt                                                                                                                                                        |       | 3,366                       |       | 3,975 |   |
| Short-term deferred income tax liabilities                                                                                                                                               |       | —                      |       | 1,274 |   |
| Other current liabilities                                                                                                                                                                |       | 883                         |       | 1,358 |   |
| Total current liabilities                                                                                                                                                                |       | 30,091                      |       | 26,983 |   |
|                                                                                                                                                                                     |       |                        |       |   |   |
| Long-term debt, less current portion                                                                                                                                                     |       | 3,455                       |       | 7,380 |   |
| Long-term deferred rent liability                                                                                                                                                        |       | 4,501                       |       | 2,731 |   |
| Other liabilities                                                                                                                                                                        |       | 1,798                       |       | 150 |   |
| Total liabilities                                                                                                                                                                        |       | 39,845                      |       | 37,244 |   |
|                                                                                                                                                                                     |       |                        |       |   |   |
| Commitments and contingencies                                                                                                                                                            |       |                        |       |   |   |
|                                                                                                                                                                                     |       |                        |       |   |   |
| Stockholders’ equity:                                                                                                                                                               |       |                        |       |   |   |
| Common stock, 32,000,000 non-convertible shares,  $0.01 par value, authorized; 14,813,912 and 14,735,791 shares issued and  outstanding at December 31, 2008 and 2007, respectively |       | 148                         |       | 147 |   |
| Additional paid-in capital                                                                                                                                                               |       | 64,440                      |       | 62,776 |   |
| Cumulative translation adjustment, net of tax                                                                                                                                            |       | 1,090                       |       | 2,553 |   |
| Unrealized loss on investments available for sale,  net of tax                                                                                                                           |       | (61                         | )          | (29 | ) |
| Unrealized (loss) gain on derivative instruments,  net of tax                                                                                                                            |       | (1,444                      | )          | 20 |   |
| Retained earnings                                                                                                                                                                        |       | 42,846                      |       | 52,747 |   |
| Total stockholders’ equity                                                                                                                                                          |       | 107,019                     |       | 118,214 |   |
| Total liabilities and stockholders’ equity                                                                                                                                          |       | $                           | 146,864    |   | $ | 155,458 |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

** **

**35**

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** **

**STARTEK,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Dollarsin thousands)

 
| ** **                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Operating Activities**                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (loss) income                                                                         |       | $                                | (9,901     | ) | $ | (2,831 | ) | $ | 5,764 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities: |       |                             |       |   |   |   |   |
| Depreciation                                                                              |       | 17,803                           |       | 17,092 |   | 16,758 |   |
| Impairment of property, plant and equipment                                               |       | 5,936                            |       | 3,583 |   | — |   |
| Non-cash compensation cost                                                                |       | 1,493                            |       | 1,107 |   | 321 |   |
| Deferred income taxes                                                                     |       | (7,492                           | )          | 454 |   | (1,830 | ) |
| Realized loss (gain) on investments                                                       |       | 500                              |       | — |   | (128 | ) |
| Loss (gain) on sale of assets                                                             |       | 38                               |       | 60 |   | (98 | ) |
| Changes in operating assets and liabilities:                                              |       |                             |       |   |   |   |   |
| Trade accounts receivable, net                                                            |       | (2,683                           | )          | (2,367 | ) | (5,752 | ) |
| Prepaid expenses and other assets                                                         |       | (767                             | )          | 1,004 |   | (361 | ) |
| Accounts payable                                                                          |       | 292                              |       | 230 |   | 939 |   |
| Income taxes, net                                                                         |       | (309                             | )          | (1,214 | ) | 2,946 |   |
| Accrued and other liabilities                                                             |       | 6,706                            |       | 3,529 |   | 319 |   |
| Net cash provided by operating activities                                                 |       | 11,616                           |       | 20,647 |   | 18,878 |   |
|                                                                                      |       |                             |       |   |   |   |   |
| **Investing Activities**                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of investments available for sale                                               |       | (11,384                          | )          | (36,813 | ) | (351,108 | ) |
| Proceeds from disposition of investments available  for sale                              |       | 18,742                           |       | 26,348 |   | 373,466 |   |
| Purchases of property, plant and equipment                                                |       | (27,979                          | )          | (15,207 | ) | (20,110 | ) |
| Proceeds from disposition of property, plant and  equipment                               |       | —                           |       | — |   | 343 |   |
| Net cash (used in) provided by investing activities                                       |       | (20,621                          | )          | (25,672 | ) | 2,591 |   |
|                                                                                      |       |                             |       |   |   |   |   |
| **Financing Activities**                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from stock option exercises                                                      |       | —                           |       | — |   | 1,112 |   |
| Proceeds from borrowings                                                                  |       | —                           |       | — |   | 13,294 |   |
| Principal payments on borrowings                                                          |       | (3,835                           | )          | (5,828 | ) | (2,798 | ) |
| Dividend payments                                                                         |       | —                           |       | — |   | (16,289 | ) |
| Proceeds from line of credit                                                              |       | 116,886                          |       | 56,782 |   | 36,597 |   |
| Principal payments on line of credit                                                      |       | (116,886                         | )          | (56,782 | ) | (36,597 | ) |
| Proceeds from the issuance of common stock                                                |       | 172                              |       | — |   | — |   |
| Principal payments on capital lease obligations                                           |       | (59                              | )          | — |   | — |   |
| Net cash used in financing activities                                                     |       | (3,722                           | )          | (5,828 | ) | (4,681 | ) |
| Effect of exchange rate changes on cash                                                   |       | (719                             | )          | 442 |   | (776 | ) |
| Net (decrease) increase in cash and cash equivalents                                      |       | (13,446                          | )          | (10,411 | ) | 16,012 |   |
| Cash and cash equivalents at beginning of period                                          |       | 23,026                           |       | 33,437 |   | 17,425 |   |
| Cash and cash equivalents at end of period                                                |       | $                                | 9,580      |   | $ | 23,026 |   | $ | 33,437 |   |
|                                                                                      |       |                             |       |   |   |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid for interest                                                                    |       | $                                | 660        |   | $ | 772 |   | $ | 237 |   |
| Income taxes paid                                                                         |       | $                                | 2,312      |   | $ | 1,990 |   | $ | 3,013 |   |
| Unrealized loss on investments available for sale,  net of tax                            |       | $                                | (32        | ) | $ | (30 | ) | $ | (2 | ) |
| Property, plant and equipment acquired or refinanced  under long-term debt                |       | $                                | 385        |   | $ | — |   | $ | — |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

** **

**36**

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** **

**STARTEK,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

(Dollarsin thousands)

** **
| ** **                                                         | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                         | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**              | ** ** | **Total**  | ** ** |
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                         | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income (Loss)**      | ** ** | **Equity** | ** ** |
| Balance, December 31, 2005                                    |       | 14,631,091       |       | $           | 146        |           | $          | 60,139            |       | $                      | 66,103     |       | $          | 1,776 |   | $ | 128,164 |   |
| Stock options exercised                                            |       | 64,700           |       | 1           |       | 1,112          |       | —            |       | —                 |       | 1,113      |       |
| Income tax benefit from stock options exercised                    |       | —           |       | —      |       | 97             |       | —            |       | —                 |       | 97         |       |
| Stock-based compensation expense                                   |       | —           |       | —      |       | 321            |       | —            |       | —                 |       | 321        |       |
| Dividends paid                                                     |       | —           |       | —      |       | —         |       | (16,289           | )          | —                 |       | (16,289    | )          |
| Net income                                                         |       | —           |       | —      |       | —         |       | 5,764             |       | —                 |       | 5,764      |       |
| Foreign currency translation adjustments, net of tax               |       | —           |       | —      |       | —         |       | —            |       | (424                   | )          | (424       | )          |
| Unrealized loss on investments available for sale,  net of tax     |       | —           |       | —      |       | —         |       | —            |       | (2                     | )          | (2         | )          |
| Change in fair value of derivative instruments, net  of tax        |       | —           |       | —      |       | —         |       | —            |       | (362                   | )          | (362       | )          |
| Balance, December 31, 2006                                    |       | 14,695,791       |       | $           | 147        |           | $          | 61,669            |       | $                      | 55,578     |       | $          | 988 |   | $ | 118,382 |   |
| Restricted shares granted                                          |       | 40,000           |       | —      |       | —         |       | —            |       | —                 |       | —     |       |
| Stock-based compensation expense                                   |       | —           |       | —      |       | 1,107          |       | —            |       | —                 |       | 1,107      |       |
| Net loss                                                           |       |             |       |        |       |           |       | (2,831            | )          |                   |       | (2,831     | )          |
| Foreign currency translation adjustments, net of tax               |       | —           |       | —      |       | —         |       | —            |       | 1,331                  |       | 1,331      |       |
| Unrealized loss on investments available for sale,  net of tax     |       | —           |       | —      |       | —         |       | —            |       | (30                    | )          | (30        | )          |
| Change in fair value of derivative instruments, net  of tax        |       | —           |       | —      |       | —         |       | —            |       | 255                    |       | 255        |       |
| Balance, December 31, 2007                                    |       | 14,735,791       |       | $           | 147        |           | $          | 62,776            |       | $                      | 52,747     |       | $          | 2,544 |   | $ | 118,214 |   |
| Restricted shares granted                                          |       | 47,800           |       | 1           |       | (1             | )          | —            |       |                   |       | —     |       |
| Restricted shares forfeited                                        |       | (7,000           | )          | —      |       | —         |       | —            |       | —                 |       | —     |       |
| Issuance of common stock pursuant to Employee Stock  Purchase Plan |       | 37,321           |       | —      |       | 172            |       | —            |       | —                 |       | 172        |       |
| Stock-based compensation expense                                   |       | —           |       | —      |       | 1,493          |       | —            |       | —                 |       | 1,493      |       |
| Net loss                                                           |       |             |       |        |       |           |       | (9,901            | )          | —                 |       | (9,901     | )          |
| Foreign currency translation adjustments, net of tax               |       | —           |       | —      |       | —         |       | —            |       | (1,463                 | )          | (1,463     | )          |
| Unrealized loss on investments available for sale,  net of tax     |       | —           |       | —      |       | —         |       | —            |       | (32                    | )          | (32        | )          |
| Change in fair value of derivative instruments, net  of tax        |       | —           |       | —      |       | —         |       | —            |       | (1,464                 | )          | (1,464     | )          |
| Balance, December 31, 2008                                    |       | 14,813,912       |       | $           | 148        |           | $          | 64,440            |       | $                      | 42,846     |       | $          | (415 | ) | $ | 107,019 |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

 

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**STARTEK,INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER31, 2008**

(Inthousands, except share and per share data)

 

**1. BASISOF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

StarTek, Inc.is a provider of business process optimization services for outsourced customerinteractions.  Since 1987, we haveprovided customer experience management solutions that solve strategic businesschallenges so that fast-moving businesses can effectively manage customerrelationships across all contact points including web, voice, email, fax, andvideo. This blended solution helps companies create and maintain customersatisfaction and frees them to focus on preserving capital, while we deliverthe ultimate customer experience. Headquartered in Denver, Colorado, weoperated 20 facilities in the U.S., Canada and the Philippines as of December 31,2008.  We operate within three businesssegments:  the U.S., Canada and Offshore.

 

***Consolidation***

 

Our consolidatedfinancial statements include the accounts of all wholly-owned subsidiariesafter elimination of intercompany accounts and transactions.

 

***Reclassifications***

 

Certain reclassificationshave been made to the 2007 and 2006 financial statements to conform to 2008presentation.

 

***Use of Estimates***

 

The preparation ofconsolidated financial statements in conformity with U.S. generally acceptedaccounting principles requires our management to make estimates and assumptionsthat affect amounts reported in our Consolidated Financial Statements and accompanyingNotes. Actual results could differ from those estimates.  Estimates and assumptions are reviewedperiodically, and the effects of revisions are reflected in the consolidatedfinancial statements in the period they are determined to be necessary.

 

***Concentration of Credit Risk***

 

We are exposed to credit risk in the normal courseof business, primarily related to accounts receivable and derivativeinstruments.  Historically, the lossesrelated to credit risk have been immaterial. We regularly monitor credit risk to mitigate the possibility of currentand future exposures resulting in a loss. We evaluate the creditworthiness of clients prior to entering into anagreement to provide services and on an on-going basis as part of the processesof revenue recognition and accounts receivable. We do not believe we are exposed to more than a nominal amount of creditrisk in our derivative hedging activities, as the counter parties areestablished, well-capitalized financial institutions.

 

***Foreign Currency Translation***

 

The assets andliabilities of our foreign operations that are recorded in foreign currenciesare translated into U.S. dollars at exchange rates prevailing at the balancesheet date. Revenues and expenses are translated at the weighted-average exchangerate during the reporting period. Resulting translation adjustments, net ofapplicable deferred income taxes, are recorded in accumulated othercomprehensive income in the accompanying Balance Sheets, which is a separatecomponent of stockholders’ equity. Foreign currency transaction gains and losses are included in theaccompanying Consolidated Statements of Operations and Other Comprehensive(Loss) Income. Such gains and losses were not material for any periodpresented.

 

***Revenue Recognition***

 

We invoice our clientsmonthly in arrears and recognize revenues for such services when completed.Substantially all of our contractual arrangements are based either on aproduction rate, meaning that we recognize revenue based on the billable hoursor minutes of each call center agent, or on a rate per transaction basis.  These rates could be based on the number ofpaid hours the agent works, the number of minutes the agent is available toanswer calls, or the number of minutes the agent is actually handling calls forthe client, depending on the client contract. Production rates vary by client contract and can fluctuate based on ourperformance against certain pre-determined criteria related to quality andperformance. Additionally, some clients are contractually entitled to penaltieswhen we are out of compliance with certain quality and/or performanceobligations defined in the client contract. Such penalties are recorded as areduction to revenue as incurred based on a measurement of the appropriate penaltyunder the terms of the client contract. Likewise, some client contracts stipulate that we are entitled tobonuses 

 

38

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should we meet or exceedthese predetermined quality and/or performance obligations.  These bonuses are recognized as incrementalrevenue in the period in which they are earned.

 

As a general rule, ourcontracts are not multiple element contracts in the context of Emerging IssuesTask Force (“EITF”)  Issue No. 00-21,“Revenue Arrangements with Multiple Deliverables.” We provide initial trainingto customer service representatives upon commencement of new contracts andrecognize revenues for such training as the services are provided based uponthe production rate (i.e., billable hours and rates related to the trainingservices as stipulated in our contractual arrangements). Accordingly, thecorresponding training costs, consisting primarily of labor and relatedexpenses, are recognized as incurred.

 

***Allowance for Doubtful Accounts***

 

An allowance for doubtfulaccounts is provided for known and estimated potential losses arising fromsales to customers based on a periodic review of these accounts.

 

***Fair Value of Financial Instruments***

 

We measure or monitormany assets and liabilities on a fair value basis.  Fair value is used on a recurring basis forassets and liabilities in which fair value is the primary basis ofaccounting.  Examples of these includederivative instruments, cash and cash equivalents, and available for salesecurities.  Additionally, fair value isused on a non-recurring basis to evaluate assets or liabilities for impairmentor for disclosure purposes.  Examples ofthese non-recurring uses of fair value include long-lived assets.  Fair value is defined as the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date.

 

We adopted the provisionsof Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (“SFAS No. 157”) related to financial assets and liabilitiesas well as other assets and liabilities carried at fair value on a recurringbasis as of January 1, 2008 and the effect of such adoption was notmaterial to our results of operations or financial position.  FASB Staff Position No. 157-2, “EffectiveDate of FASB Statement No. 157” (“FSP No. 157-2”), deferred theeffective date of SFAS No. 157 for all nonfinancial assets andnonfinancial liabilities to fiscal years beginning after November 15,2008.  We will adopt the provisions ofSFAS No. 157 related to other nonfinancial assets and liabilitiesprospectively for our fiscal year beginning January 1, 2009.  We are currently evaluating the impact ofadopting the provisions of SFAS No. 157 related to other nonfinancialassets and liabilities.

 

Effective January 1,2008, we adopted Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Liabilities” (“SFAS No. 159”).  SFAS No. 159 provides companies with anoption to report selected financial assets and liabilities at fair value, andestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. The adoption of SFAS No. 159 hadno impact on our Consolidated Financial Statements as of December 31,2008.

 

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 for identical instruments traded in active markets.                                                                                                                                                                                                                                                                                          |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                |
| Level 2 |   | Valuation is based upon  quoted prices for similar instruments in active markets, quoted prices for  identical or similar instruments in markets that are not active, and  model-based valuation techniques for which all significant assumptions are  observable in the market.                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                |
| Level 3 |   | Valuation is generated  from model-based techniques that use significant assumptions not observable  in the market. These unobservable assumptions reflect our own estimates of  assumptions that market participants would use in pricing the asset or  liability. Valuation techniques include use of option pricing models,  discounted cash flow models and similar techniques. |

 

 

When determining the fairvalue measurements for assets and liabilities required or permitted to berecorded at and/or marked to fair value, we consider the principal or mostadvantageous market in which it would transact and consider assumptions thatmarket participants would use when pricing the asset or liability.  When possible, we look to active andobservable markets to price identical assets or liabilities.  When identical assets and liabilities are nottraded in active markets, we look to market observable data for similar assetsand liabilities.  Nevertheless, ifcertain assets and liabilities are not actively traded in observable markets,we must use alternative valuation techniques to derive a fair value measurement.

 

39

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***Cash and Cash Equivalents***

 

We consider cashequivalents to be short-term, highly liquid investments readily convertible toknown amounts of cash and so near their maturity they present insignificant riskof changes in value because of changes in interest rates.

 

***Investments***

 

Investments available forsale have historically consisted of debt securities reported at fairvalue.  We amended our investment policyin October 2006.  Under the amendedpolicy, we may invest in certain U.S. Government and government-sponsoredsecurities, repurchase agreements, investment grade corporate obligations,corporate debt securities, municipal securities, mortgage-backed securities,money market and mutual funds, subject to the terms of the policy.  When the investments held in our portfolio asof December 31, 2008 mature, we intend to revise our investment policysuch that we may invest in more conservative investments, including U.S.treasury securities, federal agency securities, repurchase agreements and moneymarket funds.  The Chief FinancialOfficer is responsible for oversight of the investment portfolio.

 

Investments areperiodically evaluated for other-than-temporary impairment whenever the fairvalue falls below our cost basis. We then consider additional factors such asmarket conditions, the industry sectors in which the issuer of the investmentoperates, and the viability and prospects of each entity.  Other-than-temporary declines in fair valueare reflected on the statement of operations within Net Interest and OtherIncome.  Original cost of investmentsavailable for sale is based on the specific identification method.Other-than-temporary impairments and interest income from investments availablefor sale is included in Net Interest and Other Income on the accompanyingConsolidated Statements of Operations and Other Comprehensive (Loss)Income.  Investments available for saleare carried at fair market values.  As ofDecember 31, 2008 and 2007, we were not invested in any trading securitiesor held-to-maturity securities.

 

***Derivative Instruments and Hedging Activities***

 

We follow the provisionsof Statement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities” and related guidance (“SFAS No. 133”)for all of our derivative and hedging instruments. SFAS No. 133 requiresevery derivative instrument (including certain derivative instruments embeddedin other contracts) to be recorded in the Consolidated Balance Sheet as eitheran asset or liability measured at its fair value, with changes in the fairvalue of qualifying hedges recorded in other comprehensive income. SFAS No. 133requires that changes in a derivative’s fair value be recognized currently inearnings unless specific hedge accounting criteria are met. Special accountingfor qualifying hedges allows a derivative’s gains and losses to offset therelated results of the hedged item and requires that we must formally document,designate and assess the effectiveness of transactions that receive hedgeaccounting treatment.

 

We have elected cash flowhedge accounting under SFAS No. 133 in order to associate the results ofthe hedges with forecasted future expenses. The current mark-to-market gain or loss is recorded in accumulated othercomprehensive income in the accompanying Consolidated Balance Sheets and willbe re-classified to operations as the forecasted expenses are incurred,typically within one year.  During 2008,2007 and 2006, our cash flow hedges were highly effective and there were noamounts charged to the Consolidated Statements of Operations and OtherComprehensive (Loss) Income for hedge ineffectiveness. While we expect that ourderivative instruments that have been designated as hedges will continue tomeet the conditions for hedge accounting, if hedges do not qualify as highlyeffective or if we do not believe that forecasted transactions will occur, thechanges in the fair value of the derivatives used as hedges will be reflectedin earnings.

 

***Legal Proceedings***

 

We reserve for legalcontingencies when a liability for those contingencies has become probable andthe cost is reasonably estimable, in accordance with Statement of FinancialAccounting Standards No. 5, “Accounting for Contingencies” (“SFAS No. 5”).  Any significant litigation or significantchange in our estimates on our outstanding litigation could cause us toincrease our provision for related costs, which, in turn, could materiallyaffect our financial results.  Anyprovision made for these anticipated costs are expensed to operating expensesin our Consolidated Statements of Operations and Other Comprehensive (Loss)Income.

 

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***Property, Plant and Equipment***

 

Property, plant, and equipmentare stated at depreciated cost. Additions, improvements, and major renewals arecapitalized. Maintenance, repairs, and minor renewals are expensed as incurred.Depreciation and amortization is computed using the straight-line method basedon their estimated useful lives, as follows:

 
| ** **                                        | ** ** | **Estimated Useful Life** |
|---------------------------------------------------|------------|---------------------------|
| Buildings and  improvements                       |       | 3-30 years                |
| Telephone and computer  equipment                 |       | 3-5 years                 |
| Software                                          |       | 3 years                   |
| Furniture, fixtures,  and miscellaneous equipment |       | 5-7 years                 |

 

We depreciateleasehold improvements associated with operating leases over the shorter of theexpected useful life or the initial term of the leases.  Depreciation for assets obtained under acapital lease is included in depreciation expense.

 

***Impairment of Long-Lived Assets***

 

We periodically, on atleast an annual basis, evaluate potential impairments of our long-lived assetsin accordance with Statement of Financial Accounting Standards No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Inour annual evaluation or when we determine that the carrying value of along-lived asset may not be recoverable, based upon the existence of one ormore indicators of impairment, we evaluate the projected undiscounted cashflows related to the assets. If these cash flows are less than the carryingvalues of the assets, we measure the impairment based on the excess of thecarrying value of the long-lived asset over the long-lived asset’s fairvalue.  Our projections containassumptions pertaining to anticipated levels of utilization and revenue thatmay or may not be under contract but are based on our experience and/orprojections received from our customers.

 

***Restructuring Charges***

 

Statement ofFinancial Accounting Standards No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities” (“SFAS No. 146”) specifies that aliability for a cost associated with an exit or disposal activity be recognizedwhen the liability is incurred, instead of upon commitment to an exit plan. Onan ongoing basis, management assesses the profitability and utilization of ourfacilities and in some cases management has chosen to close facilities.  A significant assumption used in determiningthe amount of the estimated liability for closing a facility is the estimatedliability for future lease payments on vacant facilities, which we determinebased on a third-party broker’s assessment of our ability to successfullynegotiate early termination agreements with landlords and/or to sublease thefacility. If the assumptions regarding early termination and the timing andamounts of sublease payments prove to be inaccurate, we may be required torecord additional losses, or conversely, a future gain, in the ConsolidatedStatements of Operations and Comprehensive (Loss) Income. The accrual forrestructuring liabilities is included in Other Accrued Liabilities in theaccompanying Consolidated Balance Sheets.

 

***OperatingLeases***

 

We have negotiatedcertain rent holidays, landlord/tenant incentives and escalations in the baseprice of the rent payments over the term of our operating leases. In accordancewith Statement of Financial Accounting Standards No. 13, “Accountingfor Leases,” Financial Accounting Standards Board (“FASB”) TechnicalBulletin 88-1, “Issues Relating to Accounting for Leases,” and FASBTechnical Bulletin 85-3, “Accounting for Operating Leases with ScheduledRent Increases,” we recognize rent holidays and rent escalations on astraight-line basis over the lease term. The landlord/tenant incentives arerecorded as deferred rent and amortized on a straight line over the lease term.

 

***Income Taxes***

 

We account for incometaxes using the liability method of accounting for income taxes as prescribedby Statement of Financial Accounting Standard No. 109, “Accounting forIncome Taxes” (“SFAS No. 109”). Deferred income taxes reflect net effectsof temporary differences between carrying amounts of assets and liabilities forfinancial reporting purposes and amounts used for income tax purposes. We aresubject to foreign income taxes on our foreign operations.  In accordance with SFAS No. 109, weevaluate our deferred tax assets quarterly to determine if valuation allowancesare required.  SFAS No. 109 requiresthat companies assess whether valuation allowances should be established basedon the consideration of all available evidence using a “more likely than not”standard.  We made this evaluation as of December 31,2008 and believe our deferred tax assets other than those that carry avaluation allowance will primarily be realized through the generation of futuretaxable income, as well as through the reversal of our existing temporarydifferences and the execution of available tax planning strategies. We believeit is “more likely than not” based upon our current estimates of future taxableincome that the deferred tax assets will be realized.  Additional valuation allowances may berequired if we are unable to generate future taxable income.  Additional tax valuation allowances couldhave a significant negative impact on future earnings.

 

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Effective January 1,2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken on a tax return.  FIN 48 requires the recognition of penaltiesand interest on any unrecognized tax benefits. Our policy is to reflect penalties and interest as part of income taxexpense as they become applicable.  Wefile numerous consolidated and separate income tax returns in the U.S. federaljurisdiction and in many state jurisdictions, as well as in Canada and thePhilippines.  Our U.S. federal returnsand most state returns for tax years 2005 and forward are subject toexamination.  Canadian returns for taxyears 2004 and forward are subject to examination.  No U.S. federal or state returns arecurrently under audit, and no extensions of statute of limitations have beengranted.  The 2004 and 2005 Canadianreturns are currently under audit by the Canadian Revenue Agency.  The adoption of FIN 48 had no impact on ourConsolidated Financial Statements, and as of December 31, 2008 and 2007,there were no unrecognized income tax benefits.

 

***Stock-Based Compensation***

 

We account forstock-based compensation in accordance with Statement of Financial AccountingStandards No. 123R, “Share-Based Payment” (“SFAS No. 123R”).  As such, we recognize expense related to allshare-based payments to employees, including grants of employee stock options,in our Consolidated Statements of Operations and Other Comprehensive (Loss)Income based on the share-based payments’ fair values amortized straight-lineover the period during which the employees are required to provide services inexchange for the equity instruments. SFAS No. 123R also requires an estimate of forfeitures whencalculating compensation expense.  We usethe Black-Scholes method for valuing stock-based awards.  See Note 9, “Share-Based Compensation,” forfurther information regarding the assumptions used to calculate share-basedpayment expense.

 

***Employee Benefit Plan***

 

We have a safe harbor 401(k) plan that allows participation byemployees who have completed six months of service and are 21 years orolder.  Participants may defer up to 60% of their gross pay, up to amaximum limit determined by U.S. Federal law.  Participants receive amatching contribution after one year of service, of 100% of the participant’scontribution for the first 3% and 50% of the participant’s contribution for thenext 2%.  Company matching contributions to the 401(k) plan totaled$624, $459 and $0 for the years ended December 31, 2008, 2007 and 2006,respectively.

 

***New Accounting Pronouncements***

 

In December 2007, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 141 (revised 2007),“Business Combinations” (“SFAS No. 141R”).SFAS No. 141R establishes principles and requirements for how anacquirer in a business combination (i) recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,and any noncontrolling interest in the acquiree, (ii) recognizes andmeasures the goodwill acquired in a business combination or a gain from abargain purchase, and (iii) determines what information to disclose toenable users of financial statements to evaluate the nature and financialeffects of the business combination. SFAS No. 141R will be appliedprospectively to business combinations that have an acquisition date on orafter January 1, 2009. The provisions of SFAS No. 141R will notimpact our Consolidated Financial Statements for prior periods.

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities, an amendment of SFAS No. 133” (“SFAS No. 161”). This statement will require additional disclosures about how and why weuse derivative financial instruments, how derivative instruments and relatedhedged items are accounted for under SFAS No. 133 and how derivativeinstruments and related hedged items affect our financial position, results ofoperations, and cash flows.  SFAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008; however early adoption is encouraged, as are comparative disclosures forearlier periods.  We are currently evaluating the impact of adopting SFAS No. 161on our Consolidated Financial Statements.

 

In October 2008, theFASB issued FASB Staff Position No. 157-3, “Determining Fair Value of aFinancial Asset in a Market That Is Not Active” (“FSP No. 157-3”). FSP No. 157-3clarified the application of SFAS No. 157 in an inactive market.  FSP No. 157-3 demonstrates how the fairvalue of a financial asset is determined when the market for that financialasset is inactive. FSP No. 157-3 was effective upon issuance, includingprior periods for which financial statements had not been issued. Theimplementation of this standard did not have a material impact on ourConsolidated Financial Statements.

 

**2.  RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES**

 

In August 2007, we closed our facility in Hawkesbury, Ontario,Canada.  In August 2008 and December 2008,we closed our facilities in Big Spring, Texas and Petersburg, Virginia,respectively.  We have recordedrestructuring charges related to lease costs and other expenses related to thefacility closures.  In accordance withSFAS No. 146, we recognized the liability when it was incurred, instead 

 

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of upon commitment to a plan.  Asignificant assumption used in determining the amount of estimated liabilityincurred in closing sites is the estimated liability for future lease paymentson vacant facilities.  If the assumptionsregarding early termination and the timing and amounts of sublease paymentsprove to be inaccurate, we may be required to record additional losses, orconversely, a future gain, in our Consolidated Statements of Operations.  The restructuring accruals are included inOther Accrued Liabilities in the accompanying Consolidated Balance Sheets.

 

We expect to incur total restructuring charges related to our Canadasegment of approximately $2,344 related to the Hawkesbury closure.  We expect to incur total restructuringcharges related to our U.S. segment of approximately $1,963 ($403 and $1,560related to the Big Spring and Petersburg closures, respectively).  We expect completion of the Hawkesbury andPetersburg restructuring plans no later than 2012 and 2013, respectively;however, it may be earlier depending on our ability to sublease the respectivefacility or buy-out the lease.  During February 2009,we bought out the remainder of the lease at the Big Spring facility forapproximately $184 and expect to pay the remainder of the restructuring costsduring the first quarter of 2009.

 

A summary of the activity under the restructuring plans as of December 31,2008, and changes during the years ended December 31, 2008 and 2007 arepresented below:

 
| ** **                              | ** ** | **Facility-Related Costs** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **Hawkesbury**             | ** ** | **Canada Total** | ** ** | **Big Spring** | ** ** | **Petersburg** | ** ** | **U.S. Total** | ** ** | **Company Total** | ** ** |
| Balance as of December 31, 2006    |       | $                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Expense                                 |       | 742                        |       | 742 |   | — |   | — |   | — |   | 742 |   |
| Payments                                |       | (288                       | )          | (288 | ) | — |   | — |   | — |   | (288 | ) |
| Reclassification of long-term liability |       | 48                         |       | 48 |   | — |   | — |   | — |   | 48 |   |
| Foreign currency translation adjustment |       | —                     |       | — |   | — |   | — |   | — |   | — |   |
| Balance as of December 31, 2007    |       | $                          | 502        |   | $ | 502 |   | $ | — |   | $ | — |   | $ | — |   | $ | 502 |   |
| Expense                                 |       | 1,554                      |       | 1,554 |   | 271 |   | 1,464 |   | 1,735 |   | 3,289 |   |
| Payments                                |       | (617                       | )          | (617 | ) | (195 | ) | (158 | ) | (353 | ) | (970 | ) |
| Reclassification of long-term liability |       | —                     |       | — |   | 132 |   | 96 |   | 228 |   | 228 |   |
| Foreign currency translation adjustment |       | (340                       | )          | (340 | ) | — |   | — |   | — |   | (340 | ) |
| Balance as of December 31, 2008    |       | $                          | 1,099      |   | $ | 1,099 |   | $ | 208 |   | $ | 1,402 |   | $ | 1,610 |   | $ | 2,709 |   |

 

***ImpairmentLosses***

 

In accordance with SFAS No. 144,we evaluate long-lived assets, including property, plant and equipment, forimpairment on at least an annual basis and whenever events or changes incircumstances indicate that the carrying amounts of specific assets or a groupof assets may not be recoverable.  Inaccordance with SFAS No. 144, we analyze the projected undiscounted cashflows related to the assets and if they are less than the carrying value of theassets, we measure the impairment based on the excess of the carrying value ofthe long-lived asset over the long-lived asset’s fair value.  Fair value is determined based upon the presentvalue of the future cash flows.  Ourprojections contain assumptions pertaining to anticipated levels of utilizationand revenue that may or may not be under contract but are based on ourexperience and/or projections received from our customers.

 

During the year ended December 31,2008, we recognized impairment losses of approximately $5,936.  Approximately $1,794 related to the Canadasegment, which was comprised of $1,486 related to impairment of long-livedassets at certain Canadian locations in which the future cash flows were lessthan the carrying value of the assets and 2) $308 of leasehold improvements,furniture and fixtures and equipment in connection with the closure of ourHawkesbury, Ontario, Canada facility. Approximately $4,142 of impairment losses related to the U.S. segment,which comprised of 1) $1,189 related to the write-off of capitalized softwarecosts for information technology infrastructure initiatives which managementhas decided to discontinue, 2) $1,087 of leasehold improvements, furniture andfixtures and equipment in connection with the closure of our Big Spring, Texasfacility, and 3) $1,866 of leasehold improvements, furniture and fixtures andequipment in connection with the closure of our Petersburg, Virginia facility.

 

During the year ended December 31,2007, we incurred a total of $3,583 in impairment losses, of which $1,838 wasin our Canada segment due to the Hawkesbury closure.  We recorded $1,745 in impairment losses inthe U.S. segment due to the write-off of capitalized software costs in whichthe projects were not completed and therefore, the carrying value was notrecoverable.  During the year ended December 31,2006, we incurred $0 impairment losses and restructuring charges.

 

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**3.  DISCONTINUED OPERATIONS**

 

On December 16,2005, we sold our supply chain management services platform to a thirdparty.  In connection with this sale, wereceived a five-year $740 unsecured note. The terms of the note call for the purchaser to make quarterly interestpayments at a fixed rate of 7% per annum for the first two years.  Thereafter, the purchaser must make principalplus interest payments with the first principal payment due December 16,2008 and the entire balance due on or before December 16, 2010.  The purchaser has failed to make interestpayments since the fourth quarter of 2007 and we were unable to collect theprincipal balance due December 16, 2008. We have concerns regarding the solvency of the purchaser and are uncertainabout our ability to collect on the note. Due to the potential uncollectibility of this note, we wrote-off the$740 principal balance, net of tax of $279, which is included as a loss fromdiscontinued operations on our Consolidated Statements of Operations for theyear ended December 31, 2008.

 

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

 

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

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Loss) income from continuing operations      |       | $                                | (9,440     | ) | $ | (2,831 | ) | $ | 5,764 |   |
| Loss from discontinued operations, net of tax |       | (461                             | )          | — |   | — |   |
| Net (loss) income                             |       | $                                | (9,901     | ) | $ | (2,831 | ) | $ | 5,764 |   |
|                                          |       |                             |       |   |   |   |   |
| Weighted average shares of common stock       |       | 14,713                           |       | 14,696 |   | 14,680 |   |
| Dilutive effect of stock options              |       | —                           |       | — |   | 34 |   |
| Common stock and common stock equivalents     |       | 14,713                           |       | 14,696 |   | 14,714 |   |
|                                          |       |                             |       |   |   |   |   |
| Basic net (loss) income per share from:       |       |                             |       |   |   |   |   |
| Continuing operations                         |       | $                                | (0.64      | ) | $ | (0.19 | ) | $ | 0.39 |   |
| Discontinued operations                       |       | (0.03                            | )          | — |   | — |   |
| Net (loss) income                             |       | $                                | (0.67      | ) | $ | (0.19 | ) | $ | 0.39 |   |
|                                          |       |                             |       |   |   |   |   |
| Diluted net (loss) income per share from:     |       |                             |       |   |   |   |   |
| Continuing operations                         |       | $                                | (0.64      | ) | $ | (0.19 | ) | $ | 0.39 |   |
| Discontinued operations                       |       | (0.03                            | )          | — |   | — |   |
| Net (loss) income                             |       | $                                | (0.67      | ) | $ | (0.19 | ) | $ | 0.39 |   |

 

Diluted earnings pershare is computed on the basis of our weighted average number of common sharesoutstanding plus the effect of dilutive outstanding stock options using thetreasury stock method.  Anti-dilutivesecurities totaling 1,690 and 1,660 for the years ended December 31, 2008and 2007, respectively, were not included in our calculation due to our netloss position and anti-dilutive securities of 395 for the year ended December 31,2006 were not included in our calculation because the stock options’ exerciseprices were greater than the average market price of the common shares duringthe periods presented.

 

**5.PRINCIPAL CLIENTS**

 

The following tablerepresents revenue concentration of our principal clients.

 
| ** **                                                          | ** ** | **Year Ended December 31,** |
|---------------------------------------------------------------------|------------|----------------------------------|
| ** **                                                          | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| AT&T Inc. (formerly Cingular Wireless, LLC and  AT&T Corp.) |       | 54.9                             | % | 50.4 | % | 52.7 | % |
| T-Mobile, a subsidiary of Deutsche Telekom                          |       | 26.7                             | % | 21.8 | % | 21.2 | % |

 

The revenues fromAT&T Inc. and T-Mobile were generated in our U.S. and Canada segmentsduring 2008, 2007 and 2006.  During 2008,a portion of the revenue in our Offshore segment related to AT&T Inc.  The loss of a principal client and/or changesin timing or termination of a principal client’s product launch, volumedelivery or service offering would have a material adverse effect on ourbusiness, revenue, operating results, and financial condition.   To limit our credit risk, management fromtime to time will perform 

 

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credit evaluations of ourclients. Although we are directly impacted by the economic conditions in whichour clients operate, management does not believe substantial credit riskexisted as of December 31, 2008.

 

Our work for AT&TInc. (AT&T) is covered by several contracts for a variety of differentlines of AT&T business, some of which contracts expire in 2009 and othersin 2010.  For example, we entered into a contractcovering certain customer care services with AT&T Mobility LLC, awholly-owned subsidiary of AT&T, in May 2008 that expires in April 2010.  Previously, in December 2006, we enteredinto another contract covering certain business care services that has beenextended through March 31, 2009, while the parties negotiate a newagreement for such services.** **We entered into a servicesagreement and statement of work with T-Mobile (the “T-Mobile Contract”) for theprovision of certain call center services, each having an initial term expiringSeptember 30, 2009, that automatically renews from year-to-year, subjectto non-renewal by either party.

 

**6.  FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

Our financial instrumentsconsist of cash and cash equivalents, investments, trade accounts receivable,accounts payable, derivative instruments, a line of credit and long-term debt.Carrying values of cash and cash equivalents, trade accounts receivable, andaccounts payable approximate fair value due to the short term nature of theseaccounts. Investments and derivative instruments are reported at fair value.Management believes differences between the fair value and the carrying valueof the line of credit and long-term debt are not material because interestrates approximate market rates for material items.  As discussed in Note 1, “Basis ofPresentation and Summary of Significant Accounting Policies”, effective January 1,2008, we adopted SFAS No. 157 and SFAS No. 159.  In our adoption of SFAS No. 159, we didnot identify any assets or liabilities, previously recorded at other than fairvalue, which we determined to begin measuring at fair value.

 

The following tablesummarizes our financial instruments measured at fair value as of December 31,2008 and 2007.

 
| ** **                | ** ** | **As of**                  | ** ** |
|---------------------------|------------|----------------------------|------------|
| ** **                | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
| ** **                | ** ** | **Assets**                 | ** ** | **Liabilities** | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| Cash and cash equivalents |       | $                          | 9,580      |   | $ | — |   | $ | 23,026 |   | $ | — |   |
| Investments               |       | 8,437                      |       | — |   | 16,349 |   | — |   |
| Derivative instruments    |       | —                     |       | 2,323 |   | 27 |   | — |   |
| Total                     |       | $                          | 18,017     |   | $ | 2,323 |   | $ | 39,402 |   | $ | — |   |

 

***Cashand Cash Equivalents***

 

We consider cashequivalents to be short-term, highly liquid investments readily convertible toknown amounts of cash and so near their maturity they present insignificantrisk of changes in value because of changes in interest rates.  As of December 31, 2007, included incash and cash equivalents was commercial paper with a fair value of$13,079.  We did not have any investmentsin commercial paper as of December 31, 2008.

 

***Investments***

 

As of December 31,2008 and 2007, investments available for sale consisted of:

 
| ** **                    | ** ** | **Basis** | ** ** | **Gross Unrealized Gains** | ** ** | **Gross Unrealized Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------|------------|-----------|------------|----------------------------|------------|-----------------------------|------------|----------------|------------|
| As of December 31, 2008: |       |      |       |                       |       |                        |       |           |       |
| Corporate debt securities     |       | $         | 8,513      |                       | $          | 9                           |       | $              | (85        | ) | $ | 8,437 |   |
|                          |       |      |       |                       |       |                        |       |           |       |
| As of December 31, 2007: |       |      |       |                       |       |                        |       |           |       |
| Corporate debt securities     |       | $         | 16,412     |                       | $          | 59                          |       | $              | (122       | ) | $ | 16,349 |   |

 

During the yearended December 31, 2008, we recognized a loss totaling $500 (representingthe entire basis amount) on a Lehman Brothers corporate debt security that wasdetermined to be other-than-temporarily impaired due to their bankruptcy announcement.  The Lehman Brothers corporate debt securitywas in an unrealized loss position for eleven months prior to the recognitionof the 

 

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other-than-temporaryimpairment.  We do not consider the remainderof our investments to be other-than-temporarily impaired because we have theability and intent to hold these investments until a market price recovery ormaturity.  We did not record anyother-than-temporary impairments for the years ended December 31, 2007 or2006.

 

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

 
| ** **                                                                       | ** ** | **As of**                  | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                       | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
| Investments in a continuous unrealized loss position  for less than 12 months    |       |                       |       |   |   |
| Aggregate unrealized losses on corporate debt  securities                        |       | $                          | (38        | ) | $ | (122 | ) |
| Aggregate fair value of corporate debt securities                                |       | 1,996                      |       | 7,981 |   |
|                                                                             |       |                       |       |   |   |
| Investments in a continuous unrealized loss position  for greater than 12 months |       |                       |       |   |   |
| Aggregate unrealized losses on corporate debt  securities                        |       | $                          | (47        | ) | $ | — |   |
| Aggregate fair value of corporate debt securities                                |       | 3,447                      |       | — |   |

 

Proceeds from the sale of investment securities available for sale were$18,742, $26,348 and $373,466 in 2008, 2007 and 2006, respectively; grossrealized gains included in other income in 2008, 2007 and 2006 were $1, $niland $148, respectively; and gross realized losses included in other income in2008, 2007 and 2006 were $501, $0 and $20, respectively.

 

As of December 31,2008, the basis of investments available for sale by contractual maturity were:

 

 
| ** **                | ** ** | **Within 1 Year** | ** ** | **1 - 5 Years** | ** ** | **After 5 Years** | ** ** | **Total**  | ** ** |
|---------------------------|------------|-------------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                | ** ** | ** **        | ** ** | ** **      | ** ** | ** **        | ** ** | ** ** | ** ** |
| Corporate debt securities |       | $                 | 5,991      |            | $          | 2,522             |       | $          | —     |   | $ | 8,513 |   |
| Total                     |       | $                 | 5,991      |            | $          | 2,522             |       | $          | —     |   | $ | 8,513 |   |

 

Our corporate debtsecurities and commercial paper are valued using third party brokerstatements.  The value of the majority ofour corporate debt 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.  The value ofcommercial paper is derived from pricing models using inputs based upon marketinformation, including face value, contractual terms and interest rates.

 

***Derivative Instruments and Hedging Activities***

 

We enter into foreignexchange contracts to hedge our anticipated operating commitments that aredenominated in foreign currencies.  Thecontracts cover periods commensurate with expected exposure, generally withinsix months, and are principally unsecured foreign currency exchangecontracts.  The market risk exposure isessentially limited to risk related to currency rate movements.  Our Canadian and Philippine subsidiaries’functional currencies are the Canadian dollar and the Philippine peso, whichare used to pay labor and other operating costs in those countries.  However, our client contracts generaterevenues which are paid to us in U.S. dollars. During 2008, we entered into Canadian dollar forward contracts withWells Fargo Bank for $98.4 million Canadian dollars to hedge our foreigncurrency risk with respect to our labor costs in Canada.  As of December 31, 2008, we have notentered into any arrangements to hedge our exposure to fluctuations in thePhilippine peso relative to the U.S. dollar.

 

During the years ended December 31,2008, 2007 and 2006, we recorded (losses) gains of approximately ($3,445),$1,828 and $768, respectively, for the settled Canadian dollar forwardcontracts included as a component of Cost of Services in the accompanyingConsolidated Statements of Operations and Other Comprehensive (Loss)Income.  As of December 31, 2008, wehad $2,323 in derivative liabilities, and a related tax benefit of $879.  As of December 31, 2007, we had $29 inderivative assets and related tax expense of $9.  As of December 31, 2008, we hadcontracted to purchase $49.2 million Canadian dollars to be deliveredperiodically through December 2009 at a purchase price which is no morethan $42.9 million and no less than $42.2 million.

 

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.

 

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***FairValue Hierarchy***

 

The following table setsforth our financial instruments by level within the fair value hierarchy.  As required by SFAS  No. 157, assets and liabilities areclassified in their entirety based on the lowest level of input that is significantto the fair value measurement.

 
| ** **                  | ** ** | **Assets and Liabilities at Fair Value as of December 31, 2008** | ** ** |
|-----------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Level 1**                                                           | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Financial assets:           |       |                                                                  |       |   |   |   |   |   |   |
| Corporate debt securities   |       | $                                                                     | 7,441      |   | $ | 996 |   | $ | — |   | $ | 8,437 |   |
| Total financial assets      |       | $                                                                     | 7,441      |   | $ | 996 |   | $ | — |   | $ | 8,437 |   |
|                        |       |                                                                  |       |   |   |   |   |   |   |
| Financial liabilities:      |       |                                                                  |       |   |   |   |   |   |   |
| Derivative instruments      |       | $                                                                     | —     |   | $ | 2,323 |   | $ | — |   | $ | 2,323 |   |
| Total financial liabilities |       | $                                                                     | —     |   | $ | 2,323 |   | $ | — |   | $ | 2,323 |   |

 

**7.PROPERTY, PLANT & EQUIPMENT**

 

Ourproperty, plant and equipment as of December 31, 2008 and 2007, consistedof the following, by asset class:

** **
| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Land                                             |       | $                           | 1,671      |   | $ | 1,733 |   |
| Buildings and improvements                       |       | 47,895                      |       | 39,413 |   |
| Telephone and computer equipment                 |       | 48,092                      |       | 50,443 |   |
| Software                                         |       | 29,937                      |       | 27,866 |   |
| Furniture, fixtures, and miscellaneous equipment |       | 21,285                      |       | 21,008 |   |
| Construction in progress                         |       | 3,388                       |       | 8,047 |   |
|                                             |       | 152,268                     |       | 148,510 |   |
| Less accumulated depreciation                    |       | (92,660                     | )          | (90,978 | ) |
| Total property, plant and equipment, net         |       | $                           | 59,608     |   | $ | 57,532 |   |

 

**8. DEBT**

 

Asof December 31, 2008 and 2007, respectively, we had the following balancesoutstanding on our long-term debt facilities:

 
| ** **                             | ** ** | **As of December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| 3.65% secured equipment loan           |       | $                           | —     |   | $ | 446 |   |
| Secured equipment promissory note      |       | 2,484                       |       | 3,665 |   |
| Canadian dollar secured equipment loan |       | 4,010                       |       | 7,244 |   |
| Capital leases                         |       | 327                         |       | — |   |
|                                   |       | 6,821                       |       | 11,355 |   |
| Less current portion of long-term debt |       | (3,366                      | )          | (3,975 | ) |
| Long-term debt, less current portion   |       | $                           | 3,455      |   | $ | 7,380 |   |

 

 

 

 

As of December 31,2008, future scheduled annual principal payments on long-term debt (excludingcapital leases) are:

 
| ** ** | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2009       |       | $          | 3,295      |   |
| 2010       |       | 3,199      |       |
|       |       | $          | 6,494      |   |

 

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***Line of Credit***

 

We maintain a $10.0million secured line of credit with Wells Fargo Bank, N.A. (the “Bank”) whichwe use to finance regular, short-term operating expenses.  The line of credit expires June 30,2009.  Effective June 30, 2008, weentered into the Fifth Amendment to the Credit Agreement (the “amendment”).  Under the amendment, borrowings under thisline of credit bear interest at either a fluctuating rate per annum that is 1%below the Prime Rate or at a fixed rate per annum determined by the Bank to be1.5% above LIBOR, when our total tangible net worth is $110 million orgreater.  If our total tangible net worthis less than $110 million, borrowings under this line of credit bear interestat either a fluctuating rate per annum that is 0.75% below the Prime Rate or ata fixed rate per annum determined by the Bank to be 1.75% above LIBOR.  The interest rate on this facility was 2.25%as of December 31, 2008.  Under theamendment, at the end of each fiscal quarter, we must maintain a tangible networth of $105 million plus 25% of net income (only if positive) for each fiscalquarter, beginning with the first quarter of 2008.  We also must maintain unencumbered liquidassets having an aggregate fair market value of not less than $10 millionmeasured at the end of each fiscal quarter. In connection with the amendment, we also granted the Bank a securityinterest in all of our accounts receivable, other rights to payment and generalintangibles, including those of our subsidiary, StarTek USA, Inc.  We were in compliance with all of our debtcovenants related to this facility as of December 31, 2008 and 2007.  No amounts were outstanding under this lineof credit as of December 31, 2008 or 2007.

 

***3.65%Secured Equipment Loan***

 

As of December 31,2007, we had an outstanding balance of approximately $0.4 million on a securedequipment loan with Wells Fargo Equipment Finance, Inc.  We made our final principal payment on February 28,2008 and as of December 31, 2008, there was no outstanding balance.

 

***Secured Equipment Promissory Note***

 

On November 17,2006, our subsidiary, StarTek USA, Inc., borrowed approximately $4.9million from Wells Fargo Equipment Finance, Inc.  The loan will be repaid with interest in 48monthly installments of $0.115 million until maturity on November 30,2010. The borrowings bear interest at an annual rate of 6.38% and are securedby fixed assets and tenant improvements at certain of our U.S. facilities.  The borrowings may be repaid early withoutpenalty.  The promissory note isguaranteed by StarTek, Inc. and our subsidiary, StarTek Canada Services,Ltd.  Under the guarantee agreement, ifStarTek USA, Inc. fails to pay its obligations under the loan agreementwhen due, the guarantors agree to full and prompt payment of each and everydebt, liability and obligation of every type and description that StarTek USA, Inc.may now or in the future owe to Wells Fargo Equipment Finance, Inc.

 

***Canadian Dollar Secured Equipment Loan***

 

On November 17,2006, StarTek Canada Services, Ltd., one of our subsidiaries, borrowedapproximately $9.6 million Canadian dollars from Wells Fargo Equipment FinanceCompany, Inc.  These borrowings areguaranteed by StarTek, Inc. and our subsidiary, StarTek USA, Inc.,and are secured by fixed assets and tenant improvements at certain of ourCanadian facilities.  Under the guaranteeagreement, if StarTek Canada Services, Ltd. fails to pay its obligations underthe loan agreement when due, the loan guarantors agree to punctually pay anyindebtedness, along with interest and certain expenses incurred on behalf ofWells Fargo Equipment Finance Company, Inc. to enforce the guarantee, toWells Fargo Equipment Finance Company, Inc. The loan will be repaid in 48monthly installments of $0.225 million until maturity on November 20,2010, which reflects an implicit annual interest rate of 5.77%.  We may elect to prepay amounts due under thisloan, provided that we give Wells Fargo Equipment Finance Company, Inc. atleast 30 days written notice and that we pay a prepayment premium, asstipulated in the loan agreement.

 

**9.SHARE-BASED COMPENSATION**

 

On May 5, 2008, ourstockholders approved the StarTek, Inc. 2008 Equity Incentive Plan (the “Plan”).  The Plan replaced the StarTek, Inc.Stock Option Plan and StarTek, Inc. Directors’ Stock Option Plan(together, the “Prior Plans”).  A totalof 900,000 shares were authorized for grant under the Plan.  In addition, a total of 274,298 sharesremaining available for future grants under the Prior Plans were carried overand were made available for grant under the Plan.  The types of awards that may be granted underthe Plan include restricted stock awards, restricted stock unit awards, stockoption awards, stock appreciation rights and performance units.  The Compensation Committee (the “Committee”)also has the discretion to grant other types of awards, as long as they areconsistent with the terms and purposes of the Plan.  The terms of the awards granted under thePlan will expire no later than ten years from the grant date.  The Committee may determine the vestingconditions of awards; however, subject to certain exceptions, an award that isnot subject to the satisfaction of performance measures may not fully vest orbecome fully exercisable earlier than three years from the grant date, and theperformance period for an award subject to performance measures may not beshorter than one year.

 

Stock options granted toemployees under the Plan vest as to 25% of the shares on the first anniversaryof the date of grant and 2.0833% of the shares each month thereafter for 36months.  Restricted stock awards grantedunder the Plan vest as to one third of the shares on the first anniversary ofthe date of grant and one third of the shares each anniversary thereafter forthree years.  Stock options or restrictedstock awards granted to our board of directors under the Plan vest as to 25% ofthe shares after three months from 

 

48

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the date of grant, 25% ofthe shares after six months from the date of grant, 25% of the shares afternine months from the date of grant, and 25% of the shares after twelve monthsfrom the date of grant.

 

On May 5,2008, our stockholders approved the StarTek, Inc. Employee Stock PurchasePlan (the “ESPP”).  Under the ESPP,participants may purchase our common stock as of the last day of a purchaseperiod at a price, which shall be no less than the lesser of (a) 85% ofthe closing price of a share of common stock on the first day of the purchaseperiod; or (b) 85% of the closing price of a share of common stock on thelast day of the purchase period.  Thepurchase period is defined as each quarterly period commencing January 1and ending March 31, commencing April 1 and ending June 30,commencing July 1 and ending September 30, or commencing October 1and ending December 31, unless otherwise determined by the Committee.  Subject to certain maximum stock ownershiprestrictions, employees are eligible to participate in the ESPP if employed bythe Company for at least six months prior to the start of a Purchase Period andwhose customary employment is at least 20 hours per week.  Participating employees may elect to have upto 10% of their base pay in effect at the commencement of each offering periodwithheld pursuant to the ESPP.

 

The compensation costthat has been charged against income for the Plan, the Prior Plans, the ESPP,and for restricted stock awards granted outside of those plans (together, the “Plans”),for the years ended December 31, 2008, 2007 and 2006 was $1,493, $1,107and $321, respectively, and is included in selling, general and administrativeexpense.  The total income tax benefitrecognized in our Consolidated Statements of Operations related to share-basedcompensation arrangements was $560, $415 and $92 for the years ended December 31,2008, 2007 and 2006, respectively.  As ofDecember 31, 2008, there was $3,939 of total unrecognized compensationcost related to nonvested share-based compensation arrangements granted underthe Plans.  That cost is expected to berecognized over a weighted-average period of 2.67 years.

 

***StockOptions***

 

A summary of optionactivity under the Plans as of December 31, 2008, and changes during theyears ended December 31, 2008, 2007 and 2006 are presented below:

 
| ** **                               | ** ** | ** ** | ** ** | ** **           | ** ** | **Weighted-Average**          | ** ** | **Aggregate**       | ** ** |
|------------------------------------------|------------|------------|------------|----------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** | **Remaining**                 | ** ** | **Intrinsic Value** | ** ** |
| ** **                               | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** | **Contractual Term (in yrs)** | ** ** | **(000s)**          | ** ** |
| Outstanding as of December 31, 2005 |       | 981,490    |       | $                    | 19.68      |                          |       |                |       |   |
| Granted                                  |       | 282,840    |       | 13.29                |       |                          |       |                |       |
| Exercised                                |       | (64,700    | )          | 17.19                |       |                          |       |                |       |
| Forfeited                                |       | (150,870   | )          | 14.96                |       |                          |       |                |       |
| Expired                                  |       | (108,560   | )          | 20.56                |       |                          |       |                |       |
| Outstanding as of December 31, 2006 |       | 940,200    |       | $                    | 18.58      |                          |       |                |       |   |
| Granted                                  |       | 1,379,180  |       | 9.85                 |       |                          |       |                |       |
| Exercised                                |       | —     |       | —               |       |                          |       |                |       |
| Forfeited                                |       | (427,866   | )          | 11.95                |       |                          |       |                |       |
| Expired                                  |       | (271,172   | )          | 20.90                |       |                          |       |                |       |
| Outstanding as of December 31, 2007 |       | 1,620,342  |       | $                    | 12.50      |                          |       |                |       |   |
| Granted                                  |       | 465,000    |       | 8.38                 |       |                          |       |                |       |
| Exercised                                |       | —     |       | —               |       |                          |       |                |       |
| Forfeited                                |       | (335,679   | )          | 10.42                |       |                          |       |                |       |
| Expired                                  |       | (120,961   | )          | 17.06                |       |                          |       |                |       |
| Outstanding as of December 31, 2008 |       | 1,628,702  |       | $                    | 11.45      |                          | 8.04       |                | $          | 68 |   |
| Exercisable as of December 31, 2008 |       | 615,894    |       | $                    | 14.85      |                          | 6.96       |                | $          | — |   |

 

The weighted-average grantdate fair value of options granted during the years ended December 31,2008, 2007 and 2006 was $3.24,  $4.10 and$2.94, respectively.  The total intrinsicvalue of options exercised during the years ended December 31, 2008, 2007and 2006 was $0, $0 and $353, respectively. The total fair value of shares vested during the years ended December 31,2008, 2007 and 2006 was $2,408, $389 and $130, respectively.  As of December 31, 2008, there were1,098,278 shares available for future grant under our equity compensationplans.

 

The assumptions used todetermine the value of our stock-based awards under the Black-Scholes methodare summarized below:

 

49

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| ** **              | ** ** | **2008**        | ** ** | **2007**        | ** ** | **2006**      | ** ** |
|-------------------------|------------|-----------------|------------|-----------------|------------|---------------|------------|
| Risk-free interest rate |       | 1.26% - 3.60%   |       | 3.16% - 4.74%   |       | 4.53% - 5.11% |       |
| Dividend yield          |       | 0%              |       | 0%              |       | 6.63% - 9.02% |       |
| Expected volatility     |       | 43.81% - 57.62% |       | 43.12% - 50.47% |       | 42.57%        |       |
| Expected life in years  |       | 4.1             |       | 4.3             |       | 4.1           |       |

 

The risk-free interestrate for periods within the contractual life of the option is based on eitherthe four year or seven year U.S. Treasury strip yield in effect at the time ofgrant.  Expected life and volatilitiesare based on historical experience, which we believe will be indicative of futureexperience.

 

***RestrictedStock Awards***

 

Restricted share activity during the years ended December 31, 2008and 2007 was as follows.  There were norestricted shares outstanding during the year ended December 31, 2006.

** **

| ** **                                     | ** ** | **Number of**         | ** ** | **Weighted-Average**      | ** ** |
|------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|
| ** **                                     | ** ** | **Restricted Shares** | ** ** | **Grant Date Fair Value** | ** ** |
| Nonvested balance as of December 31, 2006 |       | —                |       | $                         | —     |   |
| Granted                                        |       | 40,000                |       | 12.37                     |       |
| Vested                                         |       | —                |       | —                    |       |
| Forfeited                                      |       | —                |       | —                    |       |
| Nonvested balance as of December 31, 2007 |       | 40,000                |       | $                         | 12.37      |   |
| Granted                                        |       | 47,800                |       | 9.01                      |       |
| Vested                                         |       | (18,733               | )          | 11.40                     |       |
| Forfeited                                      |       | (7,000                | )          | 9.01                      |       |
| Nonvested balance as of December 31, 2008 |       | 62,067                |       | $                         | 10.45      |   |

 

Included in the tableabove are grants of restricted stock awards made outside the Plan or the PriorPlans to A. Laurence Jones and David G. Durham. On January 5, 2007, Mr. A. Laurence Jones was granted 30,000restricted shares pursuant to his appointment as President and Chief ExecutiveOfficer.  These shares vest asfollows:  10,000 shares on January 5,2008 and 20,000 shares on January 5, 2011, provided that the restrictionson the 20,000 share tranche may lapse earlier pursuant to certain performancecriteria.  The performance criteriaspecify that the 20,000 share tranche may vest as to 10,000 shares uponcertification by the Committee that Mr. Jones achieved at least 80%performance of specified criteria for the 2008 fiscal year and 10,000 sharesupon certification by the Committee that Mr. Jones achieved at least 80%performance of specified criteria for the 2009 fiscal year.  On September 10, 2007, Mr. David G.Durham was granted 10,000 restricted shares pursuant to his appointment asExecutive Vice President, Treasurer, and Chief Financial Officer.  These shares vest in the same manner as thoserestricted shares granted under the Plan. The total fair value of restricted stock awards vested during the yearsended December 31, 2008, 2007 and 2006 was $213, $0 and $0, respectively.

 

***EmployeeStock Purchase Plan***

 

The first purchase period under the ESPP commenced July 1,2008.  We completed two offering periodsin 2008 in which 18,580 shares were purchased at $5.46 per share on September 30,2008 and 18,741 shares were purchased at $3.78 per share on December 31,2008.    Total expense recognized relatedto the ESPP during the year ended December 31, 2008 was $68.  The assumptions used to value the sharesunder the ESPP using the Black-Scholes method were as follows:

 
| ** **              | ** ** | **2008**        | ** ** |
|-------------------------|------------|-----------------|------------|
| Risk-free interest rate |       | 0.85% - 1.87%   |       |
| Dividend yield          |       | 0%              |       |
| Expected volatility     |       | 34.06% - 39.82% |       |
| Expected life in years  |       | 3 months        |       |

 

The weighted average grant date fair value of these shares was $1.80per share during the year ended December 31, 2008.

 

**10****. NET INTEREST AND OTHERINCOME**

 

Netinterest and other income for the years ended December 31, 2008, 2007 and2006 were composed of the following:

 

50

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| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income                                         |       | $                                | 1,210      |   | $ | 1,579 |   | $ | 1,433 |   |
| Interest expense                                        |       | (726                             | )          | (854 | ) | (196 | ) |
| Net gain (loss) on sale of assets                       |       | 5                                |       | (60 | ) | 98 |   |
| Recovery of previously impaired asset                   |       | 118                              |       | 128 |   | 663 |   |
| Realized (loss) gain on investments available for  sale |       | (500                             | )          | — |   | 128 |   |
| Investment and other (loss) income                      |       | (52                              | )          | (48 | ) | — |   |
| Net interest and other income                           |       | $                                | 55         |   | $ | 745 |   | $ | 2,126 |   |

 

During 2008, werecognized a loss of $500 on an investment in Lehman Brothers corporate debtsecurities that was determined to be other-than-temporarily impaired due totheir bankruptcy announcement.  In 2001,we recognized impairment losses related to our investment in Six Sigma, LLC,which we determined was other-than-temporarily impaired due to the bankruptcyfiling of Six Sigma, LLC.  During 2008,2007 and 2006, we recovered $117, $128 and $663, respectively, in cash from thebankruptcy proceedings, and this amount was recognized in other income.

 

**11.INCOME TAXES**

 

Pre-tax net book incomefrom continuing operations was:

 

 
| ** ** | ** ** | **Year Ended December 31,** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| U.S.       |       | $                                | (15,873    | ) | $ | (7,810 | ) | $ | 4,302 |   |
| Foreign    |       | 293                              |       | 4,456 |   | 3,765 |   |
| Total      |       | $                                | (15,580    | ) | $ | (3,354 | ) | $ | 8,067 |   |

 

Significantcomponents of the provision for income taxes from continuing operations were:

 
| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current:                           |       |                             |       |   |   |   |   |
| Federal                            |       | $                                | (838       | ) | $ | (1,893 | ) | $ | 1,398 |   |
| State                              |       | (108                             | )          | (205 | ) | 246 |   |
| Foreign                            |       | 1,872                            |       | 1,159 |   | 2,343 |   |
| Total current (benefit) expense    |       | $                                | 926        |   | $ | (939 | ) | $ | 3,987 |   |
|                               |       |                             |       |   |   |   |   |
| Deferred:                          |       |                             |       |   |   |   |   |
| Federal                            |       | $                                | (5,241     | ) | $ | (1,554 | ) | $ | (393 | ) |
| State                              |       | (682                             | )          | (169 | ) | (69 | ) |
| Foreign                            |       | (1,108                           | )          | 421 |   | (930 | ) |
| Net change in valuation  allowance |       | (45                              | )          | 1,718 |   | (292 | ) |
| Total deferred (benefit) expense   |       | $                                | (7,076     | ) | $ | 416 |   | $ | (1,684 | ) |
|                               |       |                             |       |   |   |   |   |
| Income tax (benefit) expense       |       | $                                | (6,150     | ) | $ | (523 | ) | $ | 2,303 |   |

 

Income tax benefitsassociated with disqualifying dispositions of equity awards during 2008, 2007and 2006 reduced income taxes by $nil, $0 and $97, respectively. Such benefitswere recorded as an increase to additional paid-in capital.

 

51

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Significant components ofdeferred tax assets and deferred tax liabilities included in the accompanyingConsolidated Balance Sheets as of December 31, 2008 and 2007 were:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Current deferred tax assets:                 |       |                             |       |   |   |
| Bad debt allowance                           |       | $                                | 12         |   | $ | — |   |
| Vacation accrual                             |       | 667                              |       | — |   |
| Unrealized loss on investments               |       | 37                               |       | — |   |
| Self-funded insurance program                |       | 266                              |       | — |   |
| Restructuring costs                          |       | 223                              |       | 165 |   |
| Impairment losses                            |       | 1,117                            |       | — |   |
| Loss on impaired investments                 |       | 189                              |       | — |   |
| Unrealized loss on derivative instruments    |       | 879                              |       | — |   |
| Total current deferred tax assets            |       | $                                | 3,390      |   | $ | 165 |   |
|                                         |       |                             |       |   |   |
| Current deferred tax liabilities:            |       |                             |       |   |   |
| Vacation accrual                             |       | $                                | —     |   | $ | 635 |   |
| Unrealized loss on investments               |       | —                           |       | 14 |   |
| Self-funded insurance program                |       | —                           |       | 61 |   |
| Prepaids                                     |       | (542                             | )          | (531 | ) |
| Cumulative translation adjustment            |       | (663                             | )          | (1,454 | ) |
| Other                                        |       | —                           |       | 1 |   |
| Total current deferred tax liabilities       |       | $                                | (1,205     | ) | $ | (1,274 | ) |
|                                         |       |                             |       |   |   |
| Long-term deferred tax assets (liabilities): |       |                             |       |   |   |
| Depreciation, amortization, and gain/loss    |       | $                                | (817       | ) | $ | 1,483 |   |
| Loss on impaired investments                 |       | 986                              |       | 974 |   |
| Foreign tax credit carryforward              |       | 554                              |       | 554 |   |
| Capital loss carryforward                    |       | 290                              |       | 1,718 |   |
| Stock-based compensation                     |       | 921                              |       | 457 |   |
| Deferred compensation                        |       | 31                               |       | 56 |   |
| Lease inducement                             |       | 234                              |       | 367 |   |
| Work opportunity credit carryforward         |       | 3,048                            |       | — |   |
| Charitable contribution carryforward         |       | 28                               |       | — |   |
| Operating loss caryforward                   |       | 3,823                            |       | — |   |
| Restructuring costs                          |       | 538                              |       | — |   |
| Other                                        |       | 154                              |       | 349 |   |
| Net long-term deferred tax assets            |       | $                                | 9,790      |   | $ | 5,958 |   |
|                                         |       |                             |       |   |   |
| Subtotal                                     |       | $                                | 11,975     |   | $ | 4,849 |   |
| Valuation allowance                          |       | (844                             | )          | (2,272 | ) |
|                                         |       |                             |       |   |   |
| Total net deferred tax asset                 |       | $                                | 11,131     |   | $ | 2,577 |   |

 

As of December 31,2007, we had net current deferred tax assets in our foreign tax jurisdictionsand net current deferred tax liabilities in the U.S.  Accordingly, these items have been presentedseparately in the above table for the year ended December 31, 2007.  As of December 31, 2008, we had netcurrent deferred tax assets in both our foreign tax jurisdictions and in theU.S.  As such, they are presented net inthe above table for the year ended December 31, 2008.

 

Deferred taxes arenot recognized on temporary differences from undistributed earnings of foreignsubsidiaries of approximately $25,009 as these earnings are deemed to bepermanently reinvested.  We have notprovided for U.S. federal income and foreign withholding taxes on undistributedearnings from non-U.S. operations as of December 31, 2008 because we intendto reinvest such earnings indefinitely outside of the U.S.

 

52

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Differences between U.S.federal statutory income tax rates and our effective tax rates for the yearsended December 31, 2008, 2007 and 2006 were:

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| U.S. statutory tax rate                        |       | 35.0                             | %          | 35.0 | % | 35.0 | % |
| Effect of state taxes (net of federal benefit) |       | 2.5                              | %          | 4.9 | % | 1.7 | % |
| Release of reserve for state audit settlements |       | 0.0                              | %          | 0.0 | % | -5.1 | % |
| Effect of change in Canadian tax rate          |       | -2.4                             | %          | 0.0 | % | 0.0 | % |
| Capital loss valuation allowance               |       | 0.3                              | %          | -51.2 | % | -3.6 | % |
| Work opportunity tax credits                   |       | 5.5                              | %          | 29.2 | % | -1.7 | % |
| Other, net                                     |       | -1.4                             | %          | -2.3 | % | 2.2 | % |
| Total                                          |       | 39.5                             | %          | 15.6 | % | 28.5 | % |

 

The effective tax rateincreased from 15.6% in 2007 to 39.5% in 2008. The primary difference between the periods was the valuation allowancerecorded in 2007 on capital loss carryforwards which management did not believewould be recognized before their expiration. This impact was offset by decreased work opportunity credits during 2008compared to 2007 and the change in the Canadian statutory tax rate during2008.  Effective January 1, 2008,the general corporate income tax rate in Canada was reduced from 22.1% to 19.5%due in part to the elimination of the corporate surtax on large corporations of1.12%.  The impact was a reduction in ouroverall effective tax rate and a reduction of the value of certain deferred taxassets.

 

Asof December 31, 2008, we had gross capital loss carry forwards of $766,which expire as follows: $444 in 2009 and $322 in 2010.  During 2007, we established a tax-basisvaluation allowance which reduces our long-term deferred tax asset, related tothese capital loss carry forwards that management does not believe will be offsetby sufficient future capital gains before they expire.  As of December 31, 2008, we had grossforeign tax credit carry forwards of $554, which expire as follows:  $25 in 2011, $4 in 2012, and $525 in2013.  A full tax-basis valuationallowance was established against these carry forwards during 2007 and 2006 dueto the fact that it is more likely than not that these credits will not be usedprior to their expiration date.  Ourtotal valuation allowance related to capital loss carry forwards and foreigntax credit carry forwards is $1,320 as of December 31, 2008.

 

Asof December 31, 2008, we had gross federal net operating loss carryforwards of $10,017.  These carryforwards can be used to offset future taxable income and expire in 2028.  We have not recorded a valuation allowancerelated to the net operating loss carry forwards and other temporary items as management believes itis more likely than not that we will be able to use the benefit to reducefuture tax liabilities.  In accordancewith SFAS No. 109, we evaluate our deferred tax assets quarterly todetermine if valuation allowances are required. SFAS No. 109 requires that companies assess whether valuationallowances should be established based on the consideration of all availableevidence using a “more likely than not” standard.  We made this evaluation as of December 31,2008 and believe our deferred tax assets will primarily be realized through thegeneration of future taxable income, as well as through the reversal of ourexisting temporary differences and the execution of available tax planningstrategies. We believe it is “more likely than not” based upon our currentestimates of future taxable income that the deferred tax assets will be realized.  A valuation allowance may be required if weare unable to generate future taxable income. A tax valuation allowance could have a significant negative impact onfuture earnings.

 

We have been granted “Tax Holidays” as an incentive to attract foreigninvestment by the government of the Philippines. Generally, a Tax Holiday is anagreement between us and a foreign government under which we receive certaintax benefits in that country, such as exemption from taxation on profitsderived from export-related activities. In the Philippines, we have been grantedapproval for a Tax Holiday which expires in 2012.  The aggregate effect on income tax expensefor the years ended December 31, 2008, 2007 and 2006 was $nil, $0 and $0,respectively, which had a favorable impact on net income per share of $nil, $0and $0, respectively.

 

53

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

 

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

** **
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Accumulated foreign currency translation  adjustments:             |       |                             |       |   |   |
| Beginning balance                                                  |       | $                                | 2,553      |   | $ | 1,222 |   |
| Translation adjustments                                            |       | (2,057                           | )          | 2,126 |   |
| Taxes associated with translation adjustments                      |       | 594                              |       | (795 | ) |
| Ending balance                                                     |       | $                                | 1,090      |   | $ | 2,553 |   |
| Accumulated unrealized derivative (losses) gains:                  |       |                             |       |   |   |
| Beginning balance                                                  |       | $                                | 20         |   | $ | (235 | ) |
| (Loss) gain reclassified to earnings, net of tax                   |       | (2,084                           | )          | 1,543 |   |
| Change in fair value of cash flow hedges, net of tax               |       | 3,508                            |       | (1,288 | ) |
| Ending balance                                                     |       | $                                | 1,444      |   | $ | 20 |   |
| Accumulated unrealized losses on available for sale  securities:   |       |                             |       |   |   |
| Beginning balance                                                  |       | $                                | (29        | ) | $ | 1 |   |
| Loss reclassified to earnings, net of tax                          |       | (303                             | )          | — |   |
| Change in fair value of available for sale  securities, net of tax |       | 271                              |       | (30 | ) |
| Ending balance                                                     |       | $                                | (61        | ) | $ | (29 | ) |

 

**13.  COMMITMENTS AND CONTINGENCIES**

 

***Leases***

 

We lease facilities andequipment under various non-cancelable operating leases.  Some of these leases have renewal clausesthat vary both in length and fee, based on our negotiations with the lessors.Rental expense, including equipment rentals, for 2008, 2007 and 2006 was$6,900, $4,602 and $4,416, respectively. As of December 31, 2008, future minimum rental commitments foroperating leases were:

 
| ** **                   | ** ** | **Minimum Lease** | ** ** |
|------------------------------|------------|-------------------|------------|
| ** **                   | ** ** | **Payments**      | ** ** |
| 2009                         |       | $                 | 6,863      |   |
| 2010                         |       | 6,749             |       |
| 2011                         |       | 5,849             |       |
| 2012                         |       | 4,209             |       |
| 2013                         |       | 2,958             |       |
| Thereafter                   |       | 6,984             |       |
| Total minimum lease payments |       | $                 | 33,612     |   |

 

***Other PurchaseCommitments***

 

We incur variouspurchase obligations with vendors and suppliers for the purchase of goods andservices, in the normal course of business.  These obligations aregenerally evidenced by purchase orders with delivery dates from six to twelvemonths from the purchase date, and in certain cases, purchase orders thatcontain non-cancelable/non-returnable terms and conditions associated with thesepurchase arrangements.  We are committed to accept delivery of suchmaterials pursuant to such purchase orders subject to various contractprovisions which allow us to delay receipt of such orders.  Such ordersmay or may not include cancellation costs payable by us.

 
| ** **                 | ** ** | **Purchase**    | ** ** |
|----------------------------|------------|-----------------|------------|
| ** **                 | ** ** | **Obligations** | ** ** |
| 2009                       |       | $               | 62         |   |
| Thereafter                 |       | —          |       |
| Total purchase obligations |       | $               | 62         |   |

 

54

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***LegalProceedings***

 

We and six of our formerdirectors and officers have been named as defendants in West Palm BeachFirefighters’ Pension Fund v. StarTek, Inc., et al. (U.S. District Court,District of Colorado) filed on July 8, 2005, and John Alden v. StarTek, Inc.,et al. (U.S. District Court, District of Colorado) filed on July 20,2005.  Those actions have beenconsolidated by the federal court.  Theconsolidated action is a purported class action brought on behalf of allpersons (except defendants) who purchased shares of our common stock in a****secondary offering by certain of our stockholders in June 2004,****and in the open market between February 26, 2003 and May 5,2005 (the “Class Period”).  Theconsolidated complaint alleges that the defendants made false and misleadingpublic statements about us and our business and prospects in the prospectus forthe secondary offering, as well as in filings with the SEC and in pressreleases issued during the Class Period, and that as a result, the marketprice of our common stock was artificially inflated.  The complaints allege claims under Sections11 and 15 of the Securities Act of 1933 and under Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934.  Theplaintiffs in both cases seek compensatory damages on behalf of the allegedclass and award of attorneys’ fees and costs of litigation.  On May 23, 2006, we and the individualdefendants moved the court to dismiss the action in its entirety.

 

On March 28, 2008,the motion was denied with respect to the claims under Sections 10(b) and20(a) of the Securities Exchange Act of 1934, except the claim under Section 20(a) ofthe Securities Exchange Act of 1934 was dismissed against two of the individualdefendants.  On the same date, the motionwas granted with respect to the claims under Sections 11 and 15 of theSecurities Act of 1933 without prejudice to plaintiffs filing an amendedcomplaint with respect to such claims. On May 19, 2008, the plaintiffs filed an amended complaint.  On June 5, 2008, we and the individualdefendants moved the court to dismiss the amended complaint in itsentirety.  On November 6, 2008, themotion was granted with respect to certain claims relating to representationsregarding the Company’s supply-chain management business, but was denied as toall other claims.  We believe we havevalid defenses to the claims and intend to defend the litigation vigorously.

 

It is not possible atthis time to estimate the possibility of a loss or the range of potentiallosses arising from these claims.  Wemay, however, incur material legal fees with respect to our defense of theseclaims.  The claims have been submittedto the carriers of our executive and organization liability insurancepolicies.  We expect the carriers toprovide for certain defense costs and, if needed, indemnification with areservation of rights.  The policies haveprimary and excess coverage that we believe will be adequate to defend thiscase and are subject to a retention for securities claims.  These policies provide that we areresponsible for the first $1.025 million in defense costs.  We have incurred defense costs related tothese lawsuits in excess of our $1.025 million deductible.

 

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

 

**14.  SEGMENT INFORMATION**

 

We operate withinthree business segments, the U.S., Canada and Offshore, which represented66.4%, 33.4% and 0.2%, respectively, of consolidated revenues in 2008.  The U.S. and Canada represented 60.9% and39.1%, respectively, of consolidated revenues for 2007, and 58.4% and 41.6% ofconsolidated revenues for 2006.  Thebusiness segments align with those regions in which our services arerendered.  As of December 31, 2008,the U.S. segment included the operations of our thirteen facilities in theU.S., the Canada segment included the operations of our six facilities inCanada and the Offshore segment included the operations of our facility inMakati City, Philippines.  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.

 

55

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Information about our reportable segments, which correspond to thegeographic areas in which we operate, for the years ended December 31,2008, 2007 and 2006 is as follows:

 
| ** **                | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------|------------|------------------------------------------|------------|
| ** **                | ** ** | **2008**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenue:**              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States             |       | $                                        | 181,313    |   | $ | 149,389 |   | $ | 138,855 |   |
| Canada                    |       | 90,929                                   |       | 95,915 |   | 98,757 |   |
| Offshore                  |       | 648                                      |       | — |   | — |   |
| Total                     |       | $                                        | 272,890    |   | $ | 245,304 |   | $ | 237,612 |   |
|                      |       |                                     |       |   |   |   |   |
| **Gross profit:**         | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States             |       | $                                        | 30,861     |   | $ | 33,402 |   | $ | 29,256 |   |
| Canada                    |       | 4,928                                    |       | 5,815 |   | 6,932 |   |
| Offshore                  |       | (1,395                                   | )          | — |   | — |   |
| Total                     |       | $                                        | 34,394     |   | $ | 39,217 |   | $ | 36,188 |   |
|                      |       |                                     |       |   |   |   |   |
| **Depreciation:**         | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States             |       | $                                        | 12,526     |   | $ | 11,480 |   | $ | 10,438 |   |
| Canada                    |       | 5,040                                    |       | 5,612 |   | 6,320 |   |
| Offshore                  |       | 237                                      |       | — |   | — |   |
| Total                     |       | $                                        | 17,803     |   | $ | 17,092 |   | $ | 16,758 |   |
|                      |       |                                     |       |   |   |   |   |
| **Capital expenditures:** | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States             |       | $                                        | 21,739     |   | $ | 12,883 |   | $ | 9,665 |   |
| Canada                    |       | 1,844                                    |       | 2,324 |   | 10,445 |   |
| Offshore                  |       | 4,396                                    |       | — |   | — |   |
| Total                     |       | $                                        | 27,979     |   | $ | 15,207 |   | $ | 20,110 |   |

 
| ** **                                      | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2008**               | ** ** | **2007** | ** ** |
| **Total property, plant and equipment, gross:** |       |                   |       |   |   |
| United States                                   |       | $                      | 110,656    |   | $ | 98,268 |   |
| Canada                                          |       | 37,270                 |       | 50,242 |   |
| Offshore                                        |       | 4,342                  |       | — |   |
| Total                                           |       | $                      | 152,268    |   | $ | 148,510 |   |
|                                            |       |                   |       |   |   |
| **Total assets:**                               |       |                   |       |   |   |
| United States                                   |       | $                      | 123,967    |   | $ | 127,206 |   |
| Canada                                          |       | 17,099                 |       | 28,252 |   |
| Offshore                                        |       | 5,798                  |       | — |   |
| Total                                           |       | $                      | 146,864    |   | $ | 155,458 |   |

 

56

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**15.  QUARTERLY FINANCIAL DATA (UNAUDITED)**

 

The following represents selected information from ourunaudited quarterly Statements of Operations for the years ended December 31,2008 and 2007.

 
| ** **                                   | ** ** | **2008 Quarters Ended**  | ** ** |
|----------------------------------------------|------------|--------------------------|------------|
| ** **                                   | ** ** | **March 31**        | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Revenue                                      |       | $                        | 64,745     |   | $ | 65,619 |   | $ | 69,056 |   | $ | 73,470 |   |
| Gross profit                                 |       | 9,583                    |       | 8,414 |   | 8,295 |   | 8,102 |   |
| Selling, general and administrative expenses |       | 10,090                   |       | 10,227 |   | 10,205 |   | 10,292 |   |
| Impairment losses and restructuring charges  |       | 108                      |       | 5,500 |   | 346 |   | 3,271 |   |
| Operating loss                               |       | (615                     | )          | (7,313 | ) | (2,256 | ) | (5,461 | ) |
| Loss from continuing operations              |       | (331                     | )          | (4,519 | ) | (1,449 | ) | (3,141 | ) |
| Loss from discontinued operations            |       | —                   |       | — |   | (461 | ) | — |   |
| Net loss                                     |       | $                        | (331       | ) | $ | (4,519 | ) | $ | (1,910 | ) | $ | (3,141 | ) |
|                                         |       |                     |       |   |   |   |   |   |   |
| Basic net loss per share from:               |       |                     |       |   |   |   |   |   |   |
| Continuing operations                        |       | $                        | (0.02      | ) | $ | (0.31 | ) | $ | (0.10 | ) | $ | (0.21 | ) |
| Discontinued operations                      |       | —                   |       | — |   | (0.03 | ) | — |   |
| Net loss                                     |       | $                        | (0.02      | ) | $ | (0.31 | ) | $ | (0.13 | ) | $ | (0.21 | ) |
|                                         |       |                     |       |   |   |   |   |   |   |
| Diluted net loss per share from:             |       |                     |       |   |   |   |   |   |   |
| Continuing operations                        |       | $                        | (0.02      | ) | $ | (0.31 | ) | $ | (0.10 | ) | $ | (0.21 | ) |
| Discontinued operations                      |       | —                   |       | — |   | (0.03 | ) | — |   |
| Net loss                                     |       | $                        | (0.02      | ) | $ | (0.31 | ) | $ | (0.13 | ) | $ | (0.21 | ) |
|                                         |       |                     |       |   |   |   |   |   |   |
|                                         |       |                     |       |   |   |   |   |   |   |
| ** **                                   | ** ** | **2007  Quarters Ended** | ** ** |
| ** **                                   | ** ** | **March 31**        | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Revenue                                      |       | $                        | 57,647     |   | $ | 58,832 |   | $ | 63,169 |   | $ | 65,656 |   |
| Gross profit                                 |       | 8,910                    |       | 8,537 |   | 10,316 |   | 11,454 |   |
| Selling, general and administrative expenses |       | 9,392                    |       | 9,040 |   | 9,693 |   | 10,866 |   |
| Impairment losses and restructuring charges  |       | —                   |       | 3,018 |   | 1,032 |   | 275 |   |
| Operating (loss) income                      |       | (482                     | )          | (3,521 | ) | (409 | ) | 313 |   |
| Net (loss) income                            |       | $                        | (189       | ) | $ | (3,443 | ) | $ | 371 |   | $ | 430 |   |
|                                         |       |                     |       |   |   |   |   |   |   |
| Basic net (loss) income per share            |       | $                        | (0.01      | ) | $ | (0.23 | ) | $ | 0.03 |   | $ | 0.03 |   |
| Diluted net (loss) income per share          |       | $                        | (0.01      | ) | $ | (0.23 | ) | $ | 0.03 |   | $ | 0.03 |   |

 

**16.  SUBSEQUENT EVENT**

 

On February 25, 2009, after a competitive auction, we entered intoan agreement to sell Domain.com, our wholly-owned subsidiary, to A. EmmetStephenson, Jr. in exchange for cash of $7,075.  Mr. Stephenson as the highestbidder.  Mr. Stephenson is one ofour co-founders, served as Chairman of the Board of Directors until hisretirement on May 31, 2006 and managed the Domain.com subsidiary since2006.  Mr. Stephenson ownsapproximately 19.7% of our common shares outstanding.  The effective date of the sale is February 25,2009 and upon that date we recognized a gain of $7,050.

 

57

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**ITEM9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM9A.  CONTROLS AND PROCEDURES**

 

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

 

As of December 31,2008, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of December 31, 2008, our disclosurecontrols and procedures were effective and were designed to ensure that allinformation required to be disclosed by us in our reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the SEC, andaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, to allow timely decisionsregarding required disclosure.

 

**Management’sReport on Internal Control over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and15d-15(f). Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of the effectiveness of our internal control over financialreporting as of December 31, 2008, based on the framework in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on that evaluation, ourmanagement concluded that our internal control over financial reporting waseffective as of December 31, 2008.

 

Our management, includingour Chief Executive Officer and Chief Financial Officer, does not expect thatour disclosure controls or our internal controls will prevent all possibleerrors or fraud. A control system, no matter how well conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Further, the design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within our company havebeen detected. These inherent limitations include the realities that judgmentsin decision-making can be faulty and breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the control. The design of any system of controls also is based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions; over time, controls may becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of the inherent limitationsin a cost-effective control system, misstatements due to error or fraud mayoccur and not be detected.

 

Our independentregistered public accounting firm, Ernst & Young LLP, issued a reporton the effectiveness of our internal control over financial reporting as of December 31,2008. Ernst & Young LLP’s report is included in Item 9A. of this Form 10-K.

 

**Changesin Internal Control over Financial Reporting**

 

There were no changes inour internal control over financial reporting that occurred during the quarterended December 31, 2008, that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

58

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** **

**Report of Independent Registered Public AccountingFirm**

** **

**The Board of Directors and Stockholders of**StarTek, Inc.

** **

We have audited StarTek Inc.’s internalcontrol over financial reporting as of December 31, 2008, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). StarTekInc.’s management is responsible for maintaining effective internal controlover financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanyingManagement’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk thata material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.

 

A company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

In our opinion,StarTek, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2008, based on****theCOSO criteria**.**

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidatedbalance sheets of StarTek, Inc. as of December 31, 2008 and 2007, andthe related consolidated statements of operations and other comprehensive(loss) income, stockholders’ equity, and cash flows for each of the three yearsin the period ended December 31, 2008, and our report dated March 2,2009 expressed an unqualified opinionthereon.

 
|                |   |   |   | /s/ Ernst &  Young LLP |
|---------------------|--------|--------|--------|---------------------------------|
|                |   |   |   |                            |   |   |   |
| Denver, Colorado    |   |   |   |                            |   |   |   |
| March 2,  2009 |   |   |   |                            |   |   |   |

 

59

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**ITEM9B.  OTHER INFORMATION**

 

None.

 

**Part III**

 

**ITEMS 10THROUGH 14**

 

Information required byItem 10 (Directors, Executive Officers and Corporate Governance), Item 11(Executive Compensation), Item 12 (Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters), Item 13 (CertainRelationships and Related Transactions and Director Independence), and Item 14(Principal Accountant Fees and Services) will be included in our definitiveproxy statement to be delivered in connection with our 2009 annual meeting ofstockholders and is incorporated herein by reference.

 

**Part IV**

 

**ITEM15.  EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

 

(a)                                  The following documents are filed as apart of this Form 10-K:

 

1.  *Consolidated Financial Statements.*    See the index tothe Consolidated Financial Statements of StarTek, Inc. and itssubsidiaries that appears in Item 8 of this Form 10-K.

 

2.  An *Index ofExhibits*follows the signature pages of this Form 10-K.

 

60

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**SIGNATURES**

 

Pursuant to therequirements of the Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this Form 10-K to be signed onits behalf by the undersigned thereunto duly authorized.

 
| STARTEK, INC. |                                          |   |
|---------------|-----------------------------------------------|--------|
| (REGISTRANT)  |                                          |   |
|          |                                          |   |   |
|          |                                          |   |   |
| By:           | /s/ A. LAURENCE JONES                         |   | Date: March 3,  2009 |
|          | A. Laurence Jones                             |   |   |
|          | President and Chief  Executive Officer        |   |   |
|          | (Principal Executive  Officer)                |   |   |
|          |                                          |   |   |
|          |                                          |   |   |
| By:           | /s/ DAVID G. DURHAM                           |   | Date: March 3,  2009 |
|          | David G. Durham                               |   |   |
|          | Executive Vice  President, Chief              |   |   |
|          | Financial Officer and  Treasurer              |   |   |
|          | (Principal Financial  and Accounting Officer) |   |   |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Form 10-K hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
|                  |   |                                       |   |                      |
|-----------------------|--------|--------------------------------------------|--------|---------------------------|
| /s/ A. LAURENCE JONES |   | President and Chief  Executive Officer     |   | Date: March 3,  2009 |
| A. Laurence Jones     |   |                                       |   |                      |
|                  |   |                                       |   |                      |
|                  |   |                                       |   |                      |
| /s/ DAVID G. DURHAM   |   | Executive Vice  President, Chief Financial |   | Date: March 3,  2009 |
| David G. Durham       |   | Officer and Treasurer                      |   |                      |
|                  |   |                                       |   |                      |
|                  |   |                                       |   |                      |
| /s/ ED ZSCHAU         |   | Chairman of the Board                      |   | Date: March 3,  2009 |
| Ed Zschau             |   |                                       |   |                      |
|                  |   |                                       |   |                      |
| /s/ ALBERT C. YATES   |   | Director                                   |   | Date: March 3,  2009 |
| Albert C. Yates       |   |                                       |   |                      |
|                  |   |                                       |   |                      |
| /s/ P. KAY NORTON     |   | Director                                   |   | Date: March 3,  2009 |
| P. Kay Norton         |   |                                       |   |                      |
|                  |   |                                       |   |                      |
| /s/ HARVEY A. WAGNER  |   | Director                                   |   | Date: March 3,  2009 |
| Harvey A. Wagner      |   |                                       |   |                      |

 

61

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**STARTEK,INC.**

**INDEX OFEXHIBITS**

 
| ** **      | ** ** | ** **                                                                                                                                                                                   | ** ** | **Incorporated Herein by Reference** |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|
| **Exhibit No.** | ** ** | **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            |       | Registration Rights Agreement by and among  StarTek, Inc. and A. Emmet Stephenson, Jr.                                                                                             |       | 10-K                                 |   | 10.47 |   | 3/9/2004 |
| 10.2            |       | Investor Rights Agreement by and among  StarTek, Inc., A. Emmet Stephenson Jr., and Toni E. Stephenson.                                                                                 |       | 10-K                                 |   | 10.48 |   | 3/9/2004 |
| 10.3†      |       | StarTek, Inc. Stock Option Plan, as amended.                                                                                                                                            |       | Def 14a                              |   | A |   | 3/27/2007 |
| 10.4†      |       | Form of Stock Option Agreement.                                                                                                                                                         |       | S-1/A                                |   | 10.2 |   | 3/7/1997 |
| 10.5†      |       | Form of Option agreement pursuant to  StarTek, Inc. Stock Option Plan (four year vesting schedule).                                                                                |       | 8-K                                  |   | 10.26 |   | 6/16/2006 |
| 10.6†      |       | StarTek, Inc. Director Stock Option Plan, as  amended.                                                                                                                                  |       | Def 14a                              |   | B |   | 3/27/2007 |
| 10.7†      |       | Form of Option Agreement pursuant to  StarTek, Inc. Director Stock Option Plan.                                                                                                    |       | 8-K                                  |   | 10.2 |   | 9/9/2004 |
| 10.8†      |       | StarTek, Inc. Employee Stock Purchase Plan.                                                                                                                                             |       | Def14a                               |   | A |   | 3/20/2008 |
| 10.9†      |       | StarTek, Inc. 2008 Equity Incentive Plan.                                                                                                                                               |       | Def14a                               |   | B |   | 3/20/2008 |
| 10.10†     |       | Form of Non-Statutory Stock Option Agreement  (Employee) pursuant to StarTek, Inc. 2008 Equity Incentive Plan.                                                                     |       | 8-K                                  |   | 10.2 |   | 5/5/2008 |
| 10.11†     |       | Form of Non-Statutory Stock Option Agreement  (Director) pursuant to StarTek, Inc. 2008 Equity Incentive Plan.                                                                     |       | 8-K                                  |   | 10.3 |   | 5/5/2008 |
| 10.12†     |       | Form of Incentive Stock Option Agreement  pursuant to StarTek, Inc. 2008 Equity Incentive Plan.                                                                                    |       | 8-K                                  |   | 10.4 |   | 5/5/2008 |
| 10.13†     |       | Form of Restricted Stock Award Agreement  (Employee) pursuant to StarTek, Inc. 2008 Equity Incentive Plan.                                                                         |       | 8-K                                  |   | 10.5 |   | 5/5/2008 |
| 10.14†     |       | Form of Restricted Stock Award Agreement (Director)  pursuant to StarTek, Inc. 2008 Equity Incentive Plan.                                                                         |       | 8-K                                  |   | 10.6 |   | 5/5/2008 |
| 10.15†     |       | Form of Indemnification Agreement between  StarTek, Inc. and its Officers and Directors.                                                                                           |       | 10-K                                 |   | 10.49 |   | 3/9/2004 |
| 10.16†     |       | Form of Executive Confidentiality and Non-competition  Agreement.                                                                                                                       |       | 8-K                                  |   | 10.1 |   | 9/14/2004 |
| 10.17†     |       | Form of Executive Employment Contract.                                                                                                                                                  |       | 8-K                                  |   | 10.115 |   | 8/21/2007 |
| 10.18†     |       | Amendment No. 1 to Form of Executive  Employment Contract.                                                                                                                         |       | 10-K                                 |   | 10.11 |   | 2/29/2008 |
| 10.19†     |       | Employment Agreement between StarTek, Inc. and  A. Laurence Jones.                                                                                                                      |       | 8-K                                  |   | 10.78 |   | 1/08/2007 |
| 10.20†     |       | Amendment to employment agreement of A. Laurence  Jones signed July 9, 2007.                                                                                                            |       | 10-Q                                 |   | 10.110 |   | 8/8/2007 |
| 10.21†     |       | Amendment to employment agreement of A. Laurence  Jones signed May 23, 2008.                                                                                                            |       | 10-Q                                 |   | 10.9 |   | 8/11/2008 |
| 10.22†     |       | Option Agreement between StarTek, Inc. and A.  Laurence Jones.                                                                                                                          |       | 8-K                                  |   | 10.79 |   | 1/08/2007 |
| 10.23†     |       | Restricted Stock Agreement between  StarTek, Inc. and A. Laurence Jones.                                                                                                                |       | 8-K                                  |   | 10.80 |   | 1/08/2007 |
| 10.24†     |       | Employment Agreement (Stock Option and Restricted  Stock agreements are attachments to the Employment Agreement) between  StarTek, Inc. and David G. Durham dated August 22, 2007. |       | 8-K                                  |   | 10.116 |   | 8/27/2007 |
| 10.25†     |       | Transition Agreement between StarTek, Inc. and  Mr. Michael Griffith effective September 30, 2008.                                                                            |       | 8-K                                  |   | 10.1 |   | 9/30/2008 |
| 10.26†     |       | 2007 Sales Commission Plan.                                                                                                                                                                  |       | 10-Q                                 |   | 10.113 |   | 8/8/2007 |

 

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| 10.27† |   | Sales Commission Plan (2008 and 2009).                                                                                                                                                                                                              |   | 10-K   |   | 10.24  |   | 2/29/2008  |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|------------|
| 10.28† |   | Amended Sales Commission Plan (2008 and 2009).                                                                                                                                                                                                      |   | 10-Q   |   | 10.1   |   | 10/31/2008 |
| 10.29† |   | Incentive Bonus Plan (2008 and 2009).                                                                                                                                                                                                               |   | 10-K   |   | 10.25  |   | 2/29/2008  |
| 10.30       |   | Credit Agreement and $10,000,000 Revolving Line of  Credit Note between StarTek, Inc. and Wells Fargo Bank West, National  Association dated June 30, 2003.                                                                               |   | 10-Q   |   | 10.32  |   | 8/14/2003  |
| 10.31       |   | Renewal and Amended Credit Agreement by and between  StarTek, Inc. and Wells Fargo NA, dated June 30, 2005.                                                                                                                               |   | 8-K    |   | 10.34  |   | 7/5/2005   |
| 10.32       |   | Third Amendment to Credit Agreement and $10,000,000  Revolving Line of Credit Note, each entered into as of June 1, 2007.                                                                                                                      |   | 8-K    |   | 10.88  |   | 7/3/2007   |
| 10.33       |   | Fourth Amendment to Credit Agreement entered into as  of April 30, 2008.                                                                                                                                                                       |   | 10-Q   |   | 10.23  |   | 8/11/2008  |
| 10.34       |   | Fifth Amendment to Credit Agreement, $10,000,000  Revolving Line of Credit Note, and Addendum to Promissory Note, each entered  into as of June 30, 2008.                                                                                      |   | 10-Q   |   | 10.24  |   | 8/11/2008  |
| 10.35       |   | Continuing Security Agreement between StarTek  USA, Inc. and Wells Fargo Bank, National Association, entered into as of  June 30, 2008.                                                                                                   |   | 10-Q   |   | 10.25  |   | 8/11/2008  |
| 10.36       |   | Continuing Security Agreement between  StarTek, Inc. and Wells Fargo Bank, National Association, entered into  as of June 30, 2008.                                                                                                       |   | 10-Q   |   | 10.26  |   | 8/11/2008  |
| 10.37       |   | Promissory Note to Wells Fargo Equipment  Finance, Inc.                                                                                                                                                                                        |   | 10-K   |   | 10.50  |   | 3/9/2004   |
| 10.38       |   | Security Agreement between StarTek Canada Services,  Ltd. and Wells Fargo Equipment Finance Company.                                                                                                                                                |   | 8-K    |   | 10.74  |   | 11/21/2006 |
| 10.39       |   | Form of Guaranty of StarTek Canada Obligations  executed by StarTek, Inc. and StarTek USA, Inc.                                                                                                                                      |   | 8-K    |   | 10.75  |   | 11/21/2006 |
| 10.40       |   | Promissory Note between StarTek USA, Inc. and  Wells Fargo Equipment Finance, Inc.                                                                                                                                                        |   | 8-K    |   | 10.76  |   | 11/21/2006 |
| 10.41       |   | Form of Guaranty of StarTek USA Obligations  executed by StarTek, Inc. and StarTek Canada Services, Ltd.                                                                                                                                  |   | 8-K    |   | 10.77  |   | 11/21/2006 |
| 10.42       |   | Share Purchase Agreement by and among  StarTek, Inc., StarTek Europe Ltd. and Taelus Limited, dated  September 30, 2004.                                                                                                                  |   | 8-K    |   | 10.1   |   | 10/6/2004  |
| 10.43       |   | Promissory Note between StarTek USA, Inc. and  DPL Corporation Southeast.                                                                                                                                                                      |   | 8-K    |   | 10.72  |   | 12/21/2005 |
| 10.44#      |   | Services Agreement and Statement of Work by and  between StarTek, Inc. and T-Mobile USA, Inc. for certain call  center services dated effective October 1, 2007.                                                                     |   | 10-Q   |   | 10.120 |   | 11/6/2007  |
| 10.45#      |   | Amendment No. 1 effective February 24,  2008 to Services Agreement and Statement of Work by and between  StarTek, Inc. and T-Mobile USA, Inc. for certain call center  services dated effective October 1, 2007.           |   | 10-Q   |   | 10.7   |   | 5/6/2008   |
| 10.46#      |   | Master Services Agreement  No. GAMSA-STAR081106-00 effective August 11, 2006 between StarTek  USA, Inc. and Cingular Wireless LLC.                                                                                                   |   | 10-K   |   | 10.85  |   | 3/15/2007  |
| 10.47#      |   | Amendment No. cing7367.A.001 effective  December 7, 2007 to Master Services Agreement  No. GAMSA-STAR081106-00 effective August 11, 2006 between  StarTek, Inc. and AT&T Mobility, LLC (f/k/a Cingular Wireless, LLC). |   | 10-K   |   | 10.46  |   | 2/29/2008  |
| 10.48#      |   | Statement of Work GASOW-STAR100606-00 dated  December 21, 2006, between StarTek USA, Inc. and Cingular Wireless,  LLC.                                                                                                                    |   | 10-K   |   | 10.83  |   | 3/15/2007  |
| 10.49#      |   | Amendment Cing7866.A.001 effective April 16,  2008 between StarTek USA, Inc. and AT&T Mobility LLC                                                                                                                                    |   | 10-Q   |   | 10.15  |   | 8/11/2008  |
| 10.50*      |   | Amendment No. GASOW-STAR100606-00.A.004  effective March 1, 2009 to GASOW-STAR100606-00 between StarTek  USA, Inc. and AT&T Mobility LLC (successor-in-interest to Cingular  Wireless, LLC)                                      |   |   |   |   |   |       |
| 10.51#      |   | Work Order 20080122.003.C effective May 1, 2008  between StarTek USA, Inc. and AT&T Mobility LLC                                                                                                                                      |   | 10-Q   |   | 10.14  |   | 8/11/2008  |
| 10.52*& |   | Work Order GAMSA-STAR081106-00.S.001 effective  October 1, 2008, between StarTek USA, Inc. and AT&T Mobility  LLC (f/k/a Cingular Wireless, LLC)                                                                                      |   |   |   |   |   |       |

 

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| 10.53*& |   | Work Order GAMSA-STAR081106-00.S.004 effective  December 1, 2008, between StarTek, Inc. and AT&T Mobility LLC  (f/k/a Cingular Wireless, LLC)                                              |   |   |   |   |   |      |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|-----------|
| 10.54#      |   | Contact Call Center Agreement  No. 20070105.006.C between StarTek, Inc. and AT&T  Services, Inc., effective January 26, 2007.                                                    |   | 10-Q   |   | 10.90  |   | 5/8/2007  |
| 10.55#      |   | Amendment 20070105.006.A.001 effective  October 31, 2007 to Master Services Agreement 20070105.006.C entered on  January 26, 2007 between StarTek, Inc. and AT&T  Services, Inc. |   | 10-K   |   | 10.50  |   | 2/29/2008 |
| 10.56#      |   | Agreement Order No. 20070105.006.S.002 for Tier III Service Management by and  between StarTek, Inc. and AT&T Services, Inc., signed  May 2, 2007.                               |   | 10-Q   |   | 10.105 |   | 8/8/2007  |
| 10.57#      |   | Amendment 20070105.006.S.002.A.001 effective  June 27, 2008 by and between StarTek, Inc. and AT&T  Services, Inc.                                                                     |   | 10-Q   |   | 10.16  |   | 8/11/2008 |
| 10.58*      |   | Termination of Agreement Order  No. 20070105.006.S.002 effective 12/31/2008                                                                                                                         |   |   |   |   |   |      |
| 10.59#      |   | Agreement Order 20070105.006.S.007 for EMBR Program  between StarTek, Inc. and AT&T Crop. signed June 15, 2007.                                                                            |   | 10-Q   |   | 10.106 |   | 8/8/2007  |
| 10.60#      |   | Amendment 20070105.006.S.007.A.001 effective  July 14, 2008 between StarTek, Inc. and AT&T Crop.                                                                                           |   | 10-Q   |   | 10.17  |   | 8/11/2008 |
| 10.61#      |   | General Agreement Order 20070105.006.S.008 effective  June 19, 2008 by and between StarTek, Inc. and AT&T  Services, Inc.                                                             |   | 10-Q   |   | 10.18  |   | 8/11/2008 |
| 10.62#      |   | General Agreement Order 20070105.006.S.009 effective  June 5, 2008 by and between StarTek, Inc. and AT&T  Services, Inc.                                                              |   | 10-Q   |   | 10.19  |   | 8/11/2008 |
| 10.63#      |   | General Agreement Order 20070105.006.S.010 effective  June 5, 2008 by and between StarTek, Inc. and AT&T  Services, Inc.                                                              |   | 10-Q   |   | 10.20  |   | 8/11/2008 |
| 10.64#      |   | General Agreement Order 20070105.006.S.011 effective  June 5, 2008 by and between StarTek, Inc. and AT&T  Services, Inc.                                                              |   | 10-Q   |   | 10.21  |   | 8/11/2008 |
| 10.65#      |   | General Agreement Order 20070105.006.S.012 effective  July 10, 2008 by and between StarTek, Inc. and AT&T  Services, Inc.                                                             |   | 10-Q   |   | 10.22  |   | 8/11/2008 |
| 21.1*       |   | Subsidiaries of the Registrant.                                                                                                                                                                          |   |   |   |   |   |      |
| 23.1*       |   | Consent of Ernst & Young, LLP, Independent  Registered Public Accounting Firm.                                                                                                                  |   |   |   |   |   |      |
| 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-K.

 

†      Management contract orcompensatory plan or arrangement.

 

#      The Securities andExchange Commission has granted our request that certain material in thisagreement be treated as confidential. Such material has been redacted from the exhibit as filed.

 

&     Certainportions of this exhibit have been omitted pursuant to a request forconfidential treatment and have been filed separately with the Securities andExchange Commission 

 

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