UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2009 |
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or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-12793
StarTek, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
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84-1370538 |
(State or other jurisdiction of |
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(I.R.S. employer |
incorporation or organization) |
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Identification No.) |
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44 Cook Street, 4th Floor |
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Denver, Colorado |
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80206 |
(Address of principal executive offices) |
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(Zip code) |
(303) 399-2400
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
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Name of Each Exchange on Which Registered |
Common Stock, $.01 par value |
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New York Stock Exchange, Inc. |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. Common Stock, $0.01 Par Value 14,868,875 shares as of October 15, 2009.
STARTEK, INC. AND SUBSIDIARIES
FORM 10-Q
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Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the following:
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certain statements, including possible or assumed future results of operations, in Managements Discussion and Analysis of Financial Condition and Results of Operations; |
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any statements contained herein regarding the prospects for our business or any of our services; |
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any statements preceded by, followed by or that include the words may, will, should, seeks, believes, expects, anticipates, intends, continue, estimate, plans, future, targets, predicts, budgeted, projections, outlooks, attempts, is scheduled, or similar expressions; and |
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other statements contained herein regarding matters that are not historical facts. |
Our business and results of operations are subject to risks and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by forward-looking statements, and investors are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. Important factors that could cause actual results to differ materially from our expectations and may adversely affect our business and results of operations, include, but are not limited to those items described herein or set forth in Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2008.
3
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenue |
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$ |
72,462 |
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$ |
68,937 |
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$ |
216,463 |
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$ |
198,987 |
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Cost of services |
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58,988 |
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60,728 |
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179,137 |
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173,007 |
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Gross profit |
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13,474 |
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8,209 |
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37,326 |
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25,980 |
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Selling, general and administrative expenses |
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11,084 |
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10,205 |
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31,665 |
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30,522 |
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Impairment losses and restructuring charges |
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346 |
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6,437 |
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5,954 |
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Operating income (loss) |
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2,390 |
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(2,342 |
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(776 |
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(10,496 |
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Net interest and other (expense) income |
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(38 |
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(304 |
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(216 |
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96 |
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Income (loss) from continuing operations before income taxes |
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2,352 |
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(2,646 |
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(992 |
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(10,400 |
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Income tax expense (benefit) |
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557 |
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(1,143 |
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(126 |
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(3,906 |
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Net income (loss) from continuing operations |
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1,795 |
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(1,503 |
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(866 |
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(6,494 |
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(Loss) income from discontinued operations, net of tax (including gain on disposal of $6,937 during the nine months ended September 30, 2009) |
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(407 |
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4,640 |
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(266 |
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Net income (loss) |
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$ |
1,795 |
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$ |
(1,910 |
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$ |
3,774 |
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$ |
(6,760 |
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Basic net income (loss) per share from: |
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Continuing operations |
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$ |
0.12 |
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$ |
(0.10 |
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$ |
(0.06 |
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$ |
(0.44 |
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Discontinued operations |
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(0.03 |
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0.32 |
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(0.02 |
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Net income (loss) |
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$ |
0.12 |
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$ |
(0.13 |
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$ |
0.26 |
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$ |
(0.46 |
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Diluted net income (loss) per share from: |
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Continuing operations |
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$ |
0.12 |
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$ |
(0.10 |
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$ |
(0.06 |
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$ |
(0.44 |
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Discontinued operations |
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(0.03 |
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0.32 |
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(0.02 |
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Net income (loss) |
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$ |
0.12 |
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$ |
(0.13 |
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$ |
0.26 |
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$ |
(0.46 |
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See notes to condensed consolidated financial statements.
4
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
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As of |
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September 30, 2009 |
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December 31, 2008 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
20,463 |
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$ |
9,580 |
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Investments |
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499 |
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8,437 |
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Trade accounts receivable, less allowance for doubtful accounts of $0 and $32, respectively |
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53,604 |
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51,510 |
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Income tax receivable |
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2,134 |
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2,675 |
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Deferred income tax assets |
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1,435 |
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2,185 |
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Derivative asset |
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1,477 |
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Prepaid expenses and other current assets |
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5,026 |
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3,273 |
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Total current assets |
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84,638 |
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77,660 |
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Property, plant and equipment, net |
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57,833 |
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59,608 |
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Long-term deferred income tax assets |
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6,231 |
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8,946 |
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Other assets |
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921 |
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650 |
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Total assets |
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$ |
149,623 |
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$ |
146,864 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
7,078 |
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$ |
6,193 |
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Derivative liability |
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2,323 |
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Accrued liabilities: |
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Accrued payroll |
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8,451 |
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9,158 |
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Accrued compensated absences |
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4,086 |
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4,856 |
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Accrued restructuring costs |
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2,543 |
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995 |
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Other accrued liabilities |
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1,785 |
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2,317 |
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Current portion of long-term debt |
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3,295 |
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Deferred revenue |
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1,683 |
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Other current liabilities |
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1,171 |
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954 |
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Total current liabilities |
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26,797 |
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30,091 |
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Long-term debt, less current portion |
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3,199 |
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Accrued restructuring costs |
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2,925 |
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1,714 |
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Deferred rent liability |
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4,160 |
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4,501 |
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Other liabilities |
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273 |
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340 |
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Total liabilities |
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34,155 |
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39,845 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock, 32,000,000 shares, $0.01 par value, authorized; 14,868,875 and 14,813,912 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively |
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149 |
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148 |
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Additional paid-in capital |
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66,068 |
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64,440 |
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Accumulated other comprehensive income (loss), net of tax |
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2,631 |
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(415 |
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Retained earnings |
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46,620 |
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42,846 |
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Total stockholders equity |
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115,468 |
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107,019 |
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Total liabilities and stockholders equity |
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$ |
149,623 |
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$ |
146,864 |
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See notes to condensed consolidated financial statements.
5
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
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Nine Months Ended |
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September 30, |
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2009 |
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2008 |
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Operating Activities |
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Net income (loss) |
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$ |
3,774 |
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$ |
(6,760 |
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Income (loss) from discontinued operations |
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4,640 |
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(266 |
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Loss from continuing operations |
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(866 |
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(6,494 |
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Adjustments to reconcile net loss to net cash provided by operating activities |
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Depreciation |
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11,808 |
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13,473 |
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Impairment of property, plant and equipment |
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1,756 |
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4,070 |
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Non-cash compensation cost |
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1,437 |
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1,054 |
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Deferred income taxes |
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2,711 |
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(3,532 |
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Other, net |
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22 |
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453 |
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Changes in operating assets and liabilities: |
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Trade accounts receivable, net |
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(1,972 |
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1,751 |
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Prepaid expenses and other assets |
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(1,943 |
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(200 |
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Accounts payable |
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783 |
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4,693 |
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Income taxes, net |
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620 |
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(1,570 |
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Accrued and other liabilities |
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568 |
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5,416 |
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Net cash provided by continuing operating activities |
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14,924 |
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19,114 |
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Cash used in discontinued operating activities |
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(2,335 |
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(266 |
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Net cash provided by operating activities |
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12,589 |
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18,848 |
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Investing Activities |
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Purchases of investments available for sale |
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(11,384 |
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Proceeds from disposition of investments available for sale |
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8,021 |
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12,229 |
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Purchases of property, plant and equipment |
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(10,581 |
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(22,964 |
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Net cash used in continuing investing activities |
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(2,560 |
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(22,119 |
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Cash provided by discontinued investing activities |
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7,075 |
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Net cash provided by (used in) investing activities |
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4,515 |
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(22,119 |
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Financing Activities |
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Principal payments on borrowings |
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(6,855 |
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(3,042 |
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Principal payments on line of credit |
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(22,236 |
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(82,346 |
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Proceeds from line of credit |
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22,236 |
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82,346 |
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Proceeds from issuance of common stock |
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190 |
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101 |
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Principal payments on capital lease obligations |
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(181 |
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(42 |
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Net cash used in continuing financing activities |
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(6,846 |
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(2,983 |
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Cash provided by discontinued financing activities |
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Net cash used in financing activities |
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(6,846 |
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(2,983 |
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Effect of exchange rate changes on cash |
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625 |
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(819 |
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Net increase (decrease) in cash and cash equivalents |
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10,883 |
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(7,073 |
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Cash and cash equivalents at beginning of period |
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9,580 |
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23,026 |
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Cash and cash equivalents at end of period |
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$ |
20,463 |
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$ |
15,953 |
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Supplemental Disclosure of Cash Flow Information |
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Cash paid for interest |
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$ |
148 |
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$ |
532 |
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Income taxes paid |
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$ |
726 |
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$ |
1,940 |
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Property, plant and equipment acquired or refinanced under long-term debt |
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$ |
257 |
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$ |
385 |
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See notes to condensed consolidated financial statements.
6
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements reflect all adjustments (consisting only of normal recurring entries, except as noted) which, in the opinion of management, are necessary for fair presentation. Operating results during the three and nine months ended September 30, 2009, are not necessarily indicative of operating results that may be expected during any other interim period of 2009 or the year ending December 31, 2009. We have evaluated all subsequent events through October 30, 2009, the date the financial statements were issued.
The consolidated balance sheet as of December 31, 2008, was derived from audited financial statements at that date, but does not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the StarTek, Inc. Annual Report on Form 10-K for the year ended December 31, 2008.
Certain reclassifications have been made to 2008 information to conform to 2009 presentation due to the presentation of discontinued operations (see Note 5).
Unless otherwise noted in this report, any description of us refers to StarTek, Inc. and our subsidiaries. The assets and liabilities of our foreign operations that are recorded in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenues and expenses are translated at the weighted-average exchange rate during the reporting period.
Recently Adopted Accounting Pronouncements
Effective July 1, 2009, we adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 105-10, Generally Accepted Accounting Principles Overall (ASC 105-10). ASC 105-10 establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB has indicated that it will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the equivalent references under the Codification.
Effective January 1, 2009, we adopted FASB ASC 820-10, Fair Value Measurements and Disclosures Overall (ASC 820-10), formerly Statement of Financial Accounting Standards No. 157, Fair Value Measurements, for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis (at least annually) for which ASC 820-10 was previously adopted. Refer to Note 9, Fair Value Measurements, of this Form 10-Q for additional information on the adoption of ASC 820-10.
Effective January 1, 2009, we adopted FASB ASC 815-10, Derivatives and Hedging Overall (ASC 815-10), formerly Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. ASC 815-10 requires entities to provide greater transparency through additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entitys financial position, results of operations and cash flows. Refer to Note 8, Derivative Instruments, of this Form 10-Q for additional information.
We adopted FASB ASC 805, Business Combinations (ASC 805), formerly Statement of Financial Accounting Standards No. 141(R), Business Combinations, which significantly changed the accounting for and reporting of business combination transactions. This standard was effective for us for business combination transactions for which the acquisition date was on or after January 1, 2009. No business combination transactions occurred during the nine months ended September 30, 2009.
7
Effective April 1, 2009, we adopted FASB ASC 320-10-65, Investments Debt and Equity Securities Overall Transition and Open Effective Date Information (ASC 320-10-65), formerly FASB Staff Position No. 115-2 and Statement of Financial Accounting Standards No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. ASC 320-10-65 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the credit and noncredit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses, and securities with unrealized losses. Refer to Note 7, Investments, of this Form 10-Q for the relevant disclosures required by adoption of ASC 320-10-65. The adoption of ASC 320-10-65 did not have a material impact on our financial statements.
Effective April 1, 2009, we adopted FASB ASC 825-10-65, Financial Instruments Overall Transition and Open Effective Date Information (ASC 825-10-65), formerly FASB Staff Position No. 107-1 and APB Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (ASC 270-10). ASC 825-10-65 amends ASC 825-10 to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements and also amends ASC 270-10 to require those disclosures in all interim financial statements. The adoption of ASC 825-10-65 did not have a material impact on our financial statements.
Effective April 1, 2009, we adopted FASB ASC 855-10, Subsequent Events Overall (ASC 855-10), formerly Statement of Financial Accounting Standards No. 165, Subsequent Events. ASC 855-10 establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. Refer to this Note 1, Basis of Presentation, for the related disclosures. The adoption of ASC 855-10 did not have a material impact on our financial statements.
2. SEGMENT INFORMATION
We operate within three business segments, U.S., Canada and Offshore. The business segments align with those regions in which our services are rendered. As of September 30, 2009, the U.S. segment included the operations of our thirteen facilities in the U.S., the Canada segment included the operations of our five facilities in Canada and the Offshore segment included the operations of one facility in Makati City, Philippines. We use gross profit as our measure of profit and loss for each business segment and do not allocate selling, general and administrative expenses to our business segments.
Information about our reportable segments, which correspond to the geographic areas in which we operate, is as follows:
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For the Three Months Ended September 30, |
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For the Nine Months Ended September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenue: |
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United States |
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$ |
50,490 |
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$ |
47,293 |
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$ |
151,887 |
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$ |
129,018 |
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Canada |
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18,799 |
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21,592 |
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57,212 |
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69,917 |
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Offshore |
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3,173 |
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52 |
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7,364 |
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52 |
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Total |
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$ |
72,462 |
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$ |
68,937 |
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$ |
216,463 |
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$ |
198,987 |
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Gross profit: |
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United States |
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$ |
9,848 |
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$ |
7,475 |
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$ |
28,730 |
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$ |
21,720 |
|
Canada |
|
3,400 |
|
1,242 |
|
8,414 |
|
4,768 |
|
||||
Offshore |
|
226 |
|
(508 |
) |
182 |
|
(508 |
) |
||||
Total |
|
$ |
13,474 |
|
$ |
8,209 |
|
$ |
37,326 |
|
$ |
25,980 |
|
3. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per common share is computed on the basis of our weighted average number of common shares outstanding, as determined by using the calculations outlined below:
8
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income (loss) from continuing operations |
|
$ |
1,795 |
|
$ |
(1,503 |
) |
$ |
(866 |
) |
$ |
(6,494 |
) |
(Loss) income from discontinued operations, net of tax |
|
|
|
(407 |
) |
4,640 |
|
(266 |
) |
||||
Net income (loss) |
|
$ |
1,795 |
|
$ |
(1,910 |
) |
$ |
3,774 |
|
$ |
(6,760 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares of common stock |
|
14,808 |
|
14,708 |
|
14,781 |
|
14,706 |
|
||||
Dilutive effect of stock options |
|
204 |
|
|
|
|
|
|
|
||||
Common stock and common stock equivalents |
|
15,012 |
|
14,708 |
|
14,781 |
|
14,706 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic net income (loss) per share from: |
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
0.12 |
|
$ |
(0.10 |
) |
$ |
(0.06 |
) |
$ |
(0.44 |
) |
Discontinued operations |
|
|
|
(0.03 |
) |
0.32 |
|
(0.02 |
) |
||||
Net income (loss) |
|
$ |
0.12 |
|
$ |
(0.13 |
) |
$ |
0.26 |
|
$ |
(0.46 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Diluted net income (loss) per share from: |
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
0.12 |
|
$ |
(0.10 |
) |
$ |
(0.06 |
) |
$ |
(0.44 |
) |
Discontinued operations |
|
|
|
(0.03 |
) |
0.32 |
|
(0.02 |
) |
||||
Net income (loss) |
|
$ |
0.12 |
|
$ |
(0.13 |
) |
$ |
0.26 |
|
$ |
(0.46 |
) |
Diluted earnings per share is computed on the basis of our weighted average number of common shares outstanding plus the effect of dilutive outstanding stock options and non-vested restricted stock using the treasury stock method. Anti-dilutive securities totaling 847 in the three months ended September 30, 2009, were not included in our calculation because the stock options exercise prices were greater than the average market price of the common shares during such period, and anti-dilutive securities totaling 2,187 in the nine months ended September 30, 2009 were not included in our calculation due to our net loss from continuing operations during such period. Anti-dilutive securities totaling 1,735 and 1,735 in the three and nine months ended September 30, 2008, respectively, were not included in our calculation due to our net loss from continuing operations during those periods.
4. IMPAIRMENT LOSSES AND RESTRUCTURING CHARGES
Impairment Losses
During the nine months ended September 30, 2009, we incurred $1,756 of impairment losses in our Canadian segment, due to the impairment of certain long-lived assets for which the carrying value of those assets is not recoverable. These assets are located in a facility for which we are uncertain about our ability to generate future cash flows to support the carrying value of these assets. The long-lived assets include computer and telephone equipment, furniture and fixtures, leasehold improvements and software. Refer to Note 9, Fair Value Measurements, of this Form 10-Q, for additional information on the fair value measurements for all assets and liabilities that are measured at fair value in the Condensed Consolidated Financial Statements.
Restructuring Charges
In August 2007, August 2008, December 2008 and February 2009, we closed facilities in Hawkesbury, Ontario, Big Spring, Texas, Petersburg, Virginia and Regina, Saskatchewan, respectively. We have recorded restructuring charges related to lease costs and other expenses related to the facility closures. In accordance with FASB ASC 420-10, Exit or Disposal Cost Obligations, formerly Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (ASC 420-10), we recognized the liability when it was incurred, instead of upon commitment to a plan. A significant assumption used in determining the amount of estimated liability incurred in closing a facility is the estimated liability for future lease payments on vacant facilities. If the assumptions regarding early termination and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses, or conversely, a future gain, in our Condensed Consolidated Statements of Operations.
During the nine months ended September 30, 2009, we entered into an agreement with the respective landlords at the facilities in Big Spring, Texas and Petersburg, Virginia to buy-out our remaining lease obligations for $184 and $813, respectively. As of September 30, 2009, these payments have been made and we do not expect to incur any additional charges. In October 2009, we entered into an agreement with the landlord at the facility in Hawkesbury, Ontario to buy-out the remaining lease obligation for $1,125 Canadian dollars, which was paid in October 2009. We do not expect to incur any additional charges in Hawkesbury. The cumulative amount paid as of September 30, 2009 related to the closure of the facility in Regina, Saskatchewan is $938 and we expect to incur total
9
restructuring charges of $5,580 (adjusted for the September 30, 2009 Canadian dollar to U.S. dollar exchange rate). We expect completion of the Regina restructuring plan no later than 2013; however, it may be earlier depending on our ability to sublease the facility or buy-out the lease. Refer to Note 9, Fair Value Measurements, of this Form 10-Q, for additional information on the fair value measurements for all assets and liabilities, including restructuring charges, that are measured at fair value in the Condensed Consolidated Financial Statements.
A summary of the activity under the restructuring plans as of September 30, 2009, and changes during the nine months ended September 30, 2009 is presented below:
|
|
Facility-Related Costs |
|
|||||||||||||||||||
|
|
Hawkesbury |
|
Regina |
|
Canada |
|
Big Spring |
|
Petersburg |
|
U.S. Total |
|
Company |
|
|||||||
Balance as of January 1, 2009 |
|
$ |
1,099 |
|
$ |
|
|
$ |
1,099 |
|
$ |
208 |
|
$ |
1,402 |
|
$ |
1,610 |
|
$ |
2,709 |
|
Expense |
|
16 |
|
4,436 |
|
4,452 |
|
31 |
|
198 |
|
229 |
|
4,681 |
|
|||||||
Payments |
|
(363 |
) |
(938 |
) |
(1,301 |
) |
(239 |
) |
(1,334 |
) |
(1,573 |
) |
(2,874 |
) |
|||||||
Reclassification of long-term liability |
|
175 |
|
202 |
|
377 |
|
|
|
(266 |
) |
(266 |
) |
111 |
|
|||||||
Foreign currency translation adjustment |
|
125 |
|
716 |
|
841 |
|
|
|
|
|
|
|
841 |
|
|||||||
Balance as of September 30, 2009 |
|
$ |
1,052 |
|
$ |
4,416 |
|
$ |
5,468 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
5,468 |
|
5. DISCONTINUED OPERATIONS
On February 25, 2009, we entered into an agreement to sell the assets of Domain.com, our wholly owned subsidiary, to A. Emmet Stephenson, Jr., Inc. (Mr. Stephenson) in exchange for cash of $7,075. The assets of Domain.com consist of domain names, trademarks and corporation names. We conducted an auction for the assets and received bids from multiple parties, including Mr. Stephenson. Mr. Stephenson presented the highest bid, which represented the selling price, of $7,075 and the sale was completed effective February 25, 2009. Mr. Stephenson is one of our co-founders, has managed the Domain.com subsidiary since 2006 and owns approximately 20% of our common shares outstanding. Because the transaction involved a related party, the Audit Committee of our Board of Directors considered and approved the transaction. The results of operations and cash flows of Domain.com have been reported in the Condensed Consolidated Statements of Operations as discontinued operations.
During the three and nine months ended September 30, 2008, we recorded a loss from discontinued operations of $461 due to the write-off of the principal on a note receivable related to the sale of our supply chain management services platform in December 2005. We wrote off $740 for principal balance on the note receivable, less a tax benefit of $279.
The following table summarizes the results of discontinued operations:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Operating income from discontinued operations before income taxes |
|
$ |
|
|
$ |
86 |
|
$ |
27 |
|
$ |
312 |
|
(Loss) gain on the sale of discontinued operations |
|
|
|
(740 |
) |
6,937 |
|
(740 |
) |
||||
Income tax benefit (expense) |
|
|
|
247 |
|
(2,324 |
) |
162 |
|
||||
(Loss) income from discontinued operations, net of tax |
|
$ |
|
|
$ |
(407 |
) |
$ |
4,640 |
|
$ |
(266 |
) |
6. PRINCIPAL CLIENTS
The following table represents revenue concentration of our principal clients.
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
September 30, |
|
September 30, |
|
||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
AT&T Services, Inc. and AT&T Mobility, LLC, subsidiaries of AT&T, Inc. |
|
62.7 |
% |
56.5 |
% |
63.9 |
% |
52.7 |
% |
T-Mobile USA, Inc., a subsidiary of Deutsche Telekom |
|
21.9 |
% |
26.4 |
% |
21.6 |
% |
27.6 |
% |
The call center services agreement with T-Mobile USA, Inc. (see Exhibit 10.120 to our Form 10-Q filed on November 6, 2007) is effective as of October 1, 2007 and has an initial term of two years. After the initial term, the contract automatically renews for one-
10
year periods thereafter, unless either party provides written notice of termination at least 60 days prior to the expiration of the then-current term. Although the initial term of the contract ended on September 30, 2009, the contract automatically renewed for a one-year term which would expire on September 30, 2010. We are currently negotiating a new contract with T-Mobile USA, Inc. and expect to execute the agreement during the fourth quarter of 2009. Until the new agreement is signed, our services provided to T-Mobile USA, Inc. are covered under the existing agreement effective October 1, 2007.
The loss of a principal client and/or changes in timing or termination of a principal clients product launch, volume delivery or service offering would have a material adverse effect on our business, revenue, operating results, and financial condition. To limit our credit risk, management from time to time will perform credit evaluations of our clients. Although we are directly impacted by the economic conditions in which our clients operate, management does not believe substantial credit risk existed as of September 30, 2009.
7. INVESTMENTS
Investments available for sale consisted of:
|
|
Basis |
|
Gross |
|
Gross |
|
Fair Value |
|
||||
As of September 30, 2009: |
|
|
|
|
|
|
|
|
|
||||
Corporate debt securities |
|
$ |
493 |
|
$ |
3 |
|
$ |
|
|
$ |
499 |
|
|
|
|
|
|
|
|
|
|
|
||||
As of December 31, 2008: |
|
|
|
|
|
|
|
|
|
||||
Corporate debt securities |
|
$ |
8,513 |
|
$ |
9 |
|
$ |
(85 |
) |
$ |
8,437 |
|
As of September 30, 2009, the investments in our portfolio have remaining contractual maturities within one year. There are no investments as of September 30, 2009 that have carried unrealized losses for longer than twelve months. Refer to Note 9, Fair Value Measurements, of this Form 10-Q, for additional information on the fair value measurements for all assets and liabilities, including investments, that are measured at fair value in the Condensed Consolidated Financial Statements. Proceeds from the sale of investment securities available for sale were $0 and $8,021 for the three and nine months ended September 30, 2009, respectively, and $2,760 and $12,229 for the three and nine months ended September 30, 2008, respectively. Gross realized gains included in other income were $0 and $5 for the three and nine months ended September 30, 2009, respectively, and $0 and $0 for the three and nine months ended September 30, 2008, respectively. Gross realized losses included in other income were $0 and $3 for the three and nine months ended September 30, 2009, respectively, and $437 and $437 for the three and nine months ended September 30, 2008, respectively. The loss recorded in the three and nine months ended September 30, 2008 was on Lehman Brothers corporate debt securities that were determined to be other-than-temporarily impaired after their bankruptcy announcement. Original cost of investments available for sale is based on the specific identification method.
The following table summarizes the aggregate fair value of those investments in a gross unrealized loss position:
|
|
As of |
|
||||
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
Investments in a continuous unrealized loss position for less than 12 months |
|
|
|
|
|
||
Aggregate unrealized losses on corporate debt securities |
|
$ |
|
|
$ |
(38 |
) |
Aggregate fair value of corporate debt securities |
|
|
|
1,996 |
|
||
|
|
|
|
|
|
||
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 |
|
8. DERIVATIVE INSTRUMENTS
We use derivatives to partially offset our business exposure to foreign currency exchange risk. We enter into foreign currency exchange contracts to hedge our anticipated operating commitments that are denominated in foreign currencies. The contracts cover periods commensurate with expected exposure, generally within twelve months, and are principally unsecured foreign exchange contracts. The market risk exposure is essentially limited to risk related to currency rate movements. We operate in Canada and the Philippines and the functional currencies are the Canadian dollar and the Philippine peso, respectively, which are used to pay labor and other operating costs in those countries. However, our client contracts primarily generate revenues which are paid to us in U.S. dollars. We have elected to follow cash flow hedge accounting under ASC 815-10 in order to associate the
11
results of the hedges with forecasted future expenses. The current mark-to-market gain or loss is recorded in accumulated other comprehensive income (AOCI) as a component of stockholders equity and will be re-classified to operations as the forecasted expenses are incurred, typically within one year. During the three and nine months ended September 30, 2009 and 2008, our cash flow hedges were highly effective and there were no amounts charged to the Condensed Consolidated Statements of Operations for hedge ineffectiveness.
During the nine months ended September 30, 2009, we entered into Canadian dollar forward contracts with Wells Fargo Bank for a notional amount of $13,500 Canadian dollars to hedge our foreign currency risk with respect to labor costs in Canada. As of September 30, 2009, we have not entered into any arrangements to hedge our exposure to fluctuations in the Philippine peso relative to the U.S. dollar.
The following table shows the notional principal of our derivative instruments as of September 30, 2009:
|
|
Currency |
|
Notional |
|
|
Instruments qualifying as accounting hedges: |
|
|
|
|
|
|
Foreign exchange contracts |
|
Canadian dollar |
|
CDN$ |
14,550 |
|
The above foreign exchange contracts are to be delivered periodically through December 2009 at a purchase price which is no more than $17,671 and no less than $17,453. The estimates of fair value are based on applicable and commonly used pricing models and prevailing financial market information as of September 30, 2009. Refer to Note 9, Fair Value Measurements, of this Form 10-Q, for additional information on the fair value measurements for all assets and liabilities, including derivative assets and derivative liabilities, that are measured at fair value in the Condensed Consolidated Financial Statements.
The following table shows our derivative instruments measured at gross fair value as reflected in the Condensed Consolidated Balance Sheet as of September 30, 2009:
|
|
Fair Value of |
|
Fair value of |
|
||
Derivative assets: |
|
|
|
|
|
||
Foreign exchange contracts |
|
$ |
1,477 |
|
$ |
|
|
|
|
|
|
|
|
||
Derivative liabilities: |
|
|
|
|
|
||
Foreign exchange contracts |
|
$ |
|
|
$ |
|
|
The following table shows the effect of our derivative instruments designated as cash flow hedges in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2009:
12
|
|
Three Months Ended |
|
|
|
||||||||||
|
|
September 30, 2009 |
|
September 30, 2008 |
|
Location of Gain |
|
||||||||
|
|
Gain |
|
Gain |
|
Loss |
|
Loss |
|
(Loss) |
|
||||
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange contracts |
|
$ |
358 |
|
$ |
1,125 |
|
$ |
(585 |
) |
$ |
(461 |
) |
Cost of services |
|
|
|
Nine Months Ended |
|
|
|
||||||||||
|
|
September 30, 2009 |
|
September 30, 2008 |
|
Location of Gain |
|
||||||||
|
|
Gain |
|
Loss |
|
Loss |
|
Loss |
|
(Loss) |
|
||||
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange contracts |
|
$ |
2,365 |
|
$ |
(506 |
) |
$ |
(626 |
) |
$ |
(752 |
) |
Cost of services |
|
9. FAIR VALUE MEASUREMENTS
As of January 1, 2009, we adopted ASC 820-10 for all non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements. We had previously adopted ASC 820-10 for all financial assets and liabilities. ASC 820-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and credit risk.
ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The levels of the fair value hierarchy under ASC 820-10 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.
Investments
As of September 30, 2009 and December 31, 2008, our investments consisted entirely of corporate debt securities. Our corporate debt securities are valued using third-party broker statements, which is derived from quoted market information. The inputs to the valuation are generally classified as Level 1 given the active market for these securities, however, if an active market does not exist, the inputs are recorded at a lower level in the fair value hierarchy.
Derivative Instruments and Hedging Activities
Our derivative instruments are valued using third-party broker or counterparty statements, derived from pricing models using inputs based upon market information, including contractual terms, market prices and yield curves. The inputs to the valuation pricing models are observable in the market, and as such are generally classified as Level 2 in the fair value hierarchy.
13
Restructuring Charges
ASC 420-10 specifies that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, instead of upon commitment to an exit plan. On an ongoing basis, management assesses the profitability and utilization of our facilities and in some cases management has chosen to close facilities. Accrued restructuring costs were valued using a discounted cash flow model. Significant assumptions used in determining the amount of the estimated liability for closing a facility are the estimated liability for future lease payments on vacant facilities, which we determine based on a third-party brokers assessment of our ability to successfully negotiate early termination agreements with landlords and/or to sublease the facility, and the discount rate utilized to determine the present value of the future expected cash flows. If the assumptions regarding early termination and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses, or conversely, a future gain, in the Condensed Consolidated Statements of Operations.
As described in Note 4, Impairment Losses and Restructuring Charges, during the nine months ended September 30, 2009, we closed our facility in Regina, Saskatchewan, which resulted in $0 and $4,436 of accrued restructuring costs during the three and nine months ended September 30, 2009. These costs were valued using a discounted cash flow model. The cash flows consist of the future lease payment obligations required under the lease agreement. We assumed that we could not sublease the vacant facility for the remainder of the lease term based on our knowledge of the Regina marketplace, as well as our historical inability to sublease our facilities in other locations in which we operate. In the future, if we are able to sublease the facility, we may be required to record a gain in the Condensed Consolidated Statements of Operations. Future cash flows also include estimated property taxes through the remainder of the lease term, which are valued based upon historical tax payments. The future cash flows were discounted using a rate of 3%. Given that the restructuring charges were valued using our internal estimates using a discounted cash flow model, we have classified the accrued restructuring costs as Level 3 in the fair value hierarchy.
Impairment of Long-Lived Assets
As described in Note 4, Impairment Losses and Restructuring Charges, during the three and nine months ended September 30, 2009, we recorded approximately $0 and $1,756 of impairment losses in our Canadian segment, due to the impairment of certain long-lived assets for which the carrying value of those assets is not recoverable. These assets are located in a facility for which we do not have long-term customer commitments and therefore, we are uncertain about our ability to generate future cash flows to support the carrying value of these assets. The long-lived assets include computer and telephone equipment, furniture and fixtures, leasehold improvements and software. For assets which were not recoverable through future cash flows or could not be used in another facility, we reduced the carrying value to fair value. The fair value of these long-lived assets after the impairment charge was $228. Given that the impairment losses were valued using internal estimates, we have classified the remaining fair value of long-lived assets as Level 3 in the fair value hierarchy.
Fair Value Hierarchy
The following tables set forth our assets and liabilities measured at fair value on a recurring basis and a non-recurring basis by level within the fair value hierarchy. As required by ASC 820-10, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
Assets Measured at Fair Value |
|
||||||||||
|
|
on a Recurring Basis as of September 30, 2009 |
|
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
||||
Corporate debt securities |
|
$ |
499 |
|
$ |
|
|
$ |
|
|
$ |
499 |
|
Derivative instruments |
|
|
|
1,477 |
|
|
|
1,477 |
|
||||
Total fair value of assets measured on a recurring basis |
|
$ |
499 |
|
$ |
1,477 |
|
$ |
|
|
$ |
1,976 |
|
14
|
|
Assets and Liabilities Measured at Fair Value on a |
|
||||||||||
|
|
Non-Recurring Basis During the Nine Months ended September 30, 2009 |
|
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
||||
Property, plant and equipment, net |
|
$ |
|
|
$ |
|
|
$ |
228 |
|
$ |
228 |
|
Total fair value of assets measured on a non-recurring basis |
|
$ |
|
|
$ |
|
|
$ |
228 |
|
$ |
228 |
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Accrued restructuring costs |
|
$ |
|
|
$ |
|
|
$ |
4,436 |
|
$ |
4,436 |
|
Total fair value of liabilities measured on a non-recurring basis |
|
$ |
|
|
$ |
|
|
$ |
4,436 |
|
$ |
4,436 |
|
10. DEBT
On June 26, 2009, we entered into a business loan agreement, promissory note and three commercial security agreements (together the Agreement) with UMB Bank Colorado, N.A. (UMB Bank) for a $15 million secured revolving line of credit. The Agreement is effective July 1, 2009 through August 1, 2010. This Agreement replaced our $10 million secured revolving line of credit with Wells Fargo Bank N.A., which expired by its terms on June 30, 2009. There was no balance outstanding on the line of credit with UMB Bank as of September 30, 2009.
Borrowings under the Agreement bear interest, at our option at the time of the borrowing, of the thirty, sixty or ninety day LIBOR index, plus 1.75%. The interest rate shall never be less than 3.25% per annum. Under the Agreement, we granted UMB Bank a security interest in all of our present and future accounts receivable, general intangibles, and owned real property. In addition, under the Agreement, we are subject to certain financial covenants, which include maintaining 1) a ratio of total liabilities to tangible net worth of less than 1.0 to 1.0, 2) a tangible net worth of at least $105 million, 3) unencumbered liquid assets, defined as cash, certificate of deposits and marketable securities, of at least $10 million measured on the last day of each fiscal quarter and 4) a cash flow coverage ratio, as defined in the Agreement, of greater than 1.50 to 1.0 measured on the last day of each fiscal quarter for the previous twelve months.
In addition, during the nine months ended September 30, 2009, we paid off the remaining principal balance on the Secured Equipment Promissory Note between Wells Fargo Equipment Finance, Inc. and StarTek USA, Inc., our wholly owned subsidiary, and the Canadian Dollar Secured Equipment Loan between Wells Fargo Equipment Finance Company, Inc. and StarTek Canada Services, Ltd., our wholly owned subsidiary. The loans had original maturities in November 2010. The total payoff on these loans, including pre-payment penalties, was $5,688.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
FASB ASC 220-10, Comprehensive Income, formerly Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income. Comprehensive income is defined essentially as all changes in stockholders equity, exclusive of transactions with owners. The following represents the components of other comprehensive income (loss):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Net income (loss) |
|
$ |
1,795 |
|
$ |
(1,910 |
) |
$ |
3,774 |
|
$ |
(6,760 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments, net of tax |
|
495 |
|
(374 |
) |
631 |
|
(825 |
) |
||||
Change in fair value of derivative instruments, net of tax |
|
358 |
|
(585 |
) |
2,365 |
|
(626 |
) |
||||
Unrealized (loss) gain on available for sale securities, net of tax |
|
(1 |
) |
(138 |
) |
50 |
|
(205 |
) |
||||
Comprehensive income (loss) |
|
$ |
2,647 |
|
$ |
(3,007 |
) |
$ |
6,820 |
|
$ |
(8,416 |
) |
15
Accumulated other comprehensive income (loss) consisted of the following items:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Accumulated foreign currency translation adjustments: |
|
|
|
|
|
|
|
|
|
||||
Beginning balance |
|
$ |
1,226 |
|
$ |
2,102 |
|
$ |
1,090 |
|
$ |
2,553 |
|
Translation adjustments, net of tax |
|
495 |
|
(374 |
) |
631 |
|
(825 |
) |
||||
Ending balance |
|
$ |
1,721 |
|
$ |
1,728 |
|
$ |
1,721 |
|
$ |
1,728 |
|
Accumulated unrealized derivative gains (losses): |
|
|
|
|
|
|
|
|
|
||||
Beginning balance |
|
$ |
563 |
|
$ |
(21 |
) |
$ |
(1,444 |
) |
$ |
20 |
|
Gain (loss) reclassified to earnings, net of tax |
|
703 |
|
(288 |
) |
(316 |
) |
(470 |
) |
||||
Change in fair value of cash flow hedges, net of tax |
|
(345 |
) |
(297 |
) |
2,681 |
|
(156 |
) |
||||
Ending balance |
|
$ |
921 |
|
$ |
(606 |
) |
$ |
921 |
|
$ |
(606 |
) |
Accumulated unrealized losses on available for sale securities: |
|
|
|
|
|
|
|
|
|
||||
Beginning balance |
|
$ |
(10 |
) |
$ |
(96 |
) |
$ |
(61 |
) |
$ |
(29 |
) |
(Loss) gain reclassified to earnings, net of tax |
|
|
|
(273 |
) |
(1 |
) |
(273 |
) |
||||
Change in fair value of available for sale securities, net of tax |
|
(1 |
) |
135 |
|
51 |
|
68 |
|
||||
Ending balance |
|
$ |
(11 |
) |
$ |
(234 |
) |
$ |
(11 |
) |
$ |
(234 |
) |
12. SHARE-BASED COMPENSATION
Compensation cost that has been charged against income related to share-based compensation for the three months ended September 30, 2009 and 2008 was $498 and $440, respectively, and is included in selling, general and administrative expense. The compensation cost that has been charged for the nine months ended September 30, 2009 and 2008 was $1,437 and $1,054, respectively. A summary of activity during the nine months ended September 30, 2009 related to our equity awards is presented below.
Stock Options
A summary of option activity as of September 30, 2009, and changes during the nine months then ended is presented below:
|
|
|
|
Weighted Average |
|
|
|
|
Shares |
|
Exercise Price |
|
|
Outstanding as of January 1, 2009 |
|
1,629 |
|
$ |
11.45 |
|
Granted |
|
726 |
|
4.60 |
|
|
Exercised |
|
|
|
|
|
|
Forfeited |
|
(138 |
) |
7.95 |
|
|
Expired |
|
(77 |
) |
15.90 |
|
|
Outstanding as of September 30, 2009 |
|
2,140 |
|
$ |
9.20 |
|
Restricted Shares
Restricted share activity during the nine months ended September 30, 2009 was as follows:
|
|
2007 |
|
|||
|
|
Number of |
|
Weighted-Average |
|
|
|
|
Restricted Shares |
|
Grant Date Fair Value |
|
|
Non-vested balance as of January 1, 2009 |
|
62 |
|
$ |
10.45 |
|
Granted |
|
7 |
|
4.76 |
|
|
Vested |
|
(19 |
) |
8.79 |
|
|
Forfeited |
|
(3 |
) |
9.01 |
|
|
Non-vested balance as of September 30, 2009 |
|
47 |
|
$ |
10.14 |
|
13. INCOME TAXES
The year-to-date effective tax rate for continuing operations decreased from 37.6% during the nine months ended September 30, 2008 to 12.7% during the nine months ended September 30, 2009. The primary reasons for the decrease in the rate between periods is 1) a larger impact from the change in the Canadian statutory tax rates in 2009 compared to 2008, 2) state income tax expense in 2009 compared to state income tax benefit in 2008 (due to pre-tax book income in the U.S. during 2009 compared to a pre-tax book loss in the U.S. in 2008) and 3) meals and entertainment deductions. The decrease in the rate, and the corresponding decrease in the income tax benefit, were partially offset by an increase in the rate and tax benefit from work opportunity credits.
16
Differences between U.S. statutory income tax rates and our effective tax rates for continuing operations for the nine months ended September 30, 2009 and 2008 were:
|
|
Nine Months Ended September 30, |
|
||
|
|
2009 |
|
2008 |
|
U.S. statutory tax rate |
|
35.0 |
% |
35.0 |
% |
Effect of state taxes (net of Federal benefit) |
|
(10.0 |
)% |
2.3 |
% |
Work opportunity credits |
|
34.2 |
% |
7.1 |
% |
Effect of change in Canadian tax rate |
|
(27.0 |
)% |
(4.2 |
)% |
Other permanent items (i.e. meals and entertainment) |
|
(16.8 |
)% |
(1.9 |
)% |
Other, net |
|
(2.7 |
)% |
(0.7 |
)% |
Total |
|
12.7 |
% |
37.6 |
% |
14. LITIGATION
In our Annual Report on Form 10-K filed March 3, 2009, we described a federal securities class-action lawsuit, West Palm Beach Firefighters Pension Fund v. StarTek, Inc., Civil Action No. 05-cv-01265-WDM-MEH (the Litigation).
On July 20, 2009, we executed a Stipulation of Settlement (Stipulation) with lead plaintiffs to settle the Litigation. Under the terms of the Stipulation, defendants will pay $7,500 to completely resolve the Litigation, in exchange for a release of all claims by lead plaintiffs and class members and a dismissal of the Litigation with prejudice. Our primary insurance carrier has contributed $6,900 and we contributed $600 to the Settlement Fund (as defined in the Stipulation). The United States District Court for the District of Colorado (the Court) granted preliminary approval for the settlement on October 8, 2009. The completion of the settlement as set forth in the Stipulation remains subject to various conditions, including notice to the class members, a final hearing, and final approval by the Court. Our portion of the settlement due, or $600, was recorded in our Condensed Consolidated Statement of Operations during the nine months ended September 30, 2009 and was paid in October 2009.
We are involved from time to time in other litigation arising in the normal course of business, none of which is expected by management to have a material adverse effect on our business, financial condition or results of operations.
SUBSEQUENT EVENT
In October 2009, we entered into an agreement with the landlord at our closed facility in Hawkesbury, Ontario to buy-out the remaining lease obligation. We closed the facility in August 2007 and recorded restructuring costs associated with the remaining lease obligations at the facility. The original lease was due to expire in 2012. The buy-out was $1,125 Canadian dollars, which was paid in October 2009. There was no impact on our consolidated statements of operations during the three or nine months ended September 30, 2009 related to the buy-out. We do not expect to incur any additional charges related to the Hawkesbury closure.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our Unaudited Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2008, and with the information under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.
Unless otherwise noted in this report, any description of us or we refers to StarTek, Inc. and our subsidiaries. Financial information in this report is presented in U.S. dollars.
BUSINESS DESCRIPTION AND OVERVIEW
StarTek is a provider of business process outsourcing services to the communications industry. We partner with our clients to meet their business objectives and improve customer retention, increase revenues and reduce costs through an improved customer experience. Our solutions leverage industry knowledge, best business practices, skilled agents, proven operational excellence and flexible technology. The StarTek comprehensive service suite includes customer care, sales support, complex order processing, accounts receivable management, technical support and other industry-specific processes. We operate our business within three reportable segments, based on the geographic regions in which our services are rendered: (1) the U.S., (2) Canada and (3) Offshore. As of September 30, 2009, our U.S. segment included the operations of our thirteen facilities in the U.S.; our Canada segment
17
included the operations of our five facilities in Canada; and our Offshore segment included the operations of a facility in Makati City, Philippines. As of September 30, 2008, there were fourteen, six and one operating centers in the U.S., Canada and Offshore segments, respectively. We use gross profit as our measure of profit and loss for each business segment and do not allocate selling, general and administrative expenses to our business segments.
We endeavor to achieve site optimization at all of our locations by routinely evaluating site performance. If local economic conditions, prevailing wage rates, local labor pool availability and quality, or other factors, negatively impact the long-term financial viability of a location, management will from time to time make the decision to close a facility. As a result, we may incur impairment losses or restructuring charges in connection with the closure. Likewise, management is continually in pursuit of opportunities to open new locations in economically viable geographic markets, subject to client demand, in order to improve profitability and grow the business.
SIGNIFICANT DEVELOPMENTS DURING THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009
In February 2009, we closed our facility in Regina, Saskatchewan. The closure of our Regina facility was driven by market conditions, namely recruiting challenges in this location, which impacted the profitability of the site and management determined it was in our long-term interest to close the location. This closure resulted in approximately $2.5 million and $7.8 million less revenue during the three and nine months ended September 30, 2009, respectively, and increased gross profit by $0.3 million and $0.4 million during the three and nine months ended September 30, 2009, respectively, compared to the comparable periods ended September 30, 2008 due to negative gross profit at this facility in 2008. We also incurred restructuring charges of approximately $4.4 million during the nine months ended September 30, 2009 related to the closure, which is discussed in further detail below.
On February 25, 2009, we entered into an agreement to sell the assets of Domain.com, our wholly owned subsidiary, to A. Emmet Stephenson, Jr., Inc. (Mr. Stephenson) in exchange for cash of $7.075 million. The assets of Domain.com consist of domain names, trademarks and corporation names. We conducted an auction for the assets and received bids from multiple parties, including Mr. Stephenson. Mr. Stephenson presented the highest bid, which represented the selling price, of $7.075 million and the sale was completed effective February 25, 2009. Mr. Stephenson is one of our co-founders, has managed the Domain.com subsidiary since 2006 and owns approximately 20% of our common shares outstanding. Because the transaction involves a related party, the Audit Committee of our Board of Directors considered and approved the transaction. The results of operations and cash flows of Domain.com have been reported as discontinued operations.
In July 2009, we entered into a lease agreement for the rental of a facility in Heredia, Costa Rica. The lease has an initial term of five years with a tenant option for an additional five years. The facility is approximately 37,000 square feet and we expect to open the facility for operations during the first quarter of 2010. Total lease commitments for the rental of this facility are approximately $4.5 million over the term of the lease.
In August 2009, we entered into an agreement with the landlord at our closed facility in Petersburg, Virginia to buy-out the remaining lease obligation. We closed the facility in December 2008 and recorded restructuring costs associated with the remaining lease obligations at the facility. The original lease was due to expire in 2013. The buy-out was $0.8 million dollars, which was paid in August 2009. There was no impact on our condensed consolidated statements of operations during the period related to the buy-out and we do not expect to incur any additional charges related to the Petersburg closure.
SUBSEQUENT EVENT
In October 2009, we entered into an agreement with the landlord at our closed facility in Hawkesbury, Ontario to buy-out the remaining lease obligation. We closed the facility in August 2007 and recorded restructuring costs associated with the remaining lease obligations at the facility. The original lease was due to expire in 2012. The buy-out was $1.125 million Canadian dollars, which was paid in October 2009. There was no impact on our condensed consolidated statements of operations during the three or nine months ended September 30, 2009 related to the buy-out. We do not expect to incur any additional charges related to the Hawkesbury closure.
18
RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008
The following table presents selected items from our Condensed Consolidated Statements of Operations in thousands of dollars and as a percentage of revenue for the periods indicated.
|
|
Three Months Ended |
|
% of |
|
Three Months Ended |
|
% of |
|
% Change |
|
||
Revenue |
|
$ |
72,462 |
|
100.0 |
% |
$ |
68,937 |
|
100.0 |
% |
5.1 |
% |
Cost of services |
|
58,988 |
|
81.4 |
% |
60,728 |
|
88.1 |
% |
-2.9 |
% |
||
Gross profit |
|
13,474 |
|
18.6 |
% |
8,209 |
|
11.9 |
% |
64.1 |
% |
||
Selling, general and administrative expenses |
|
11,084 |
|
15.3 |
% |
10,205 |
|
14.8 |
% |
8.6 |
% |
||
Impairment losses and restructuring charges |
|
|
|
0.0 |
% |
346 |
|
0.5 |
% |
-100.0 |
% |
||
Operating income (loss) |
|
2,390 |
|
3.3 |
% |
(2,342 |
) |
-3.4 |
% |
NM |
|
||
Net interest and other (expense) income |
|
(38 |
) |
-0.1 |
% |
(304 |
) |
-0.4 |
% |
NM |
|
||
Income (loss) from continuing operations before income taxes |
|
2,352 |
|
3.2 |
% |
(2,646 |
) |
-3.8 |
% |
NM |
|
||
Income tax expense (benefit) |
|
557 |
|
0.7 |
% |
(1,143 |
) |
-1.6 |
% |
NM |
|
||
Net income (loss) from continuing operations |
|
1,795 |
|
2.5 |
% |
(1,503 |
) |
-2.2 |
% |
NM |
|
||
Income from discontinued operations, net of tax |
|
|
|
0.0 |
% |
(407 |
) |
-0.6 |
% |
-100.0 |
% |
||
Net income (loss) |
|
$ |
1,795 |
|
2.5 |
% |
$ |
(1,910 |
) |
-2.8 |
% |
NM |
|
The following table summarizes our revenues and gross profit for the periods indicated, by reporting segment:
|
|
For the Three Months Ended September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
||||||
|
|
(in 000s) |
|
(% of Total) |
|
(in 000s) |
|
(% of Total) |
|
||
United States: |
|
|
|
|
|
|
|
|
|
||
Revenue |
|
$ |
50,490 |
|
69.7 |
% |
$ |
47,293 |
|
68.6 |
% |
Cost of services |
|
40,642 |
|
68.9 |
% |
39,818 |
|
65.6 |
% |
||
Gross profit |
|
$ |
9,848 |
|
73.1 |
% |
$ |
7,475 |
|
91.1 |
% |
Gross profit % |
|
19.5 |
% |
|
|
15.8 |
% |
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Canada: |
|
|
|
|
|
|
|
|
|
||
Revenue |
|
$ |
18,799 |
|
25.9 |
% |
$ |
21,592 |
|
31.3 |
% |
Cost of services |
|
15,399 |
|
26.1 |
% |
20,350 |
|
33.5 |
% |
||
Gross profit |
|
$ |
3,400 |
|
25.2 |
% |
$ |
1,242 |
|
15.1 |
% |
Gross profit % |
|
18.1 |
% |
|
|
5.8 |
% |
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Offshore: |
|
|
|
|
|
|
|
|
|
||
Revenue |
|
$ |
3,173 |
|
4.4 |
% |
$ |
52 |
|
0.1 |
% |
Cost of services |
|
2,947 |
|
5.0 |
% |
560 |
|
0.9 |
% |
||
Gross profit |
|
$ |
226 |
|
1.7 |
% |
$ |
(508 |
) |
-6.2 |
% |
Gross profit % |
|
7.1 |
% |
|
|
-976.9 |
% |
|
|
Revenue
Revenue increased by $3.5 million, or 5.1%, from $68.9 million in the third quarter of 2008 to $72.5 million in the third quarter of 2009. The increase was driven by a $3.2 million increase in revenue in our U.S. segment. Of this increase, $5.6 million was from two new sites that were opened in mid-2008 (Mansfield, Ohio and Jonesboro, Arkansas). In addition, a site that transitioned to a new customer during 2009 contributed approximately $1.7 million of additional revenue in the third quarter of 2009 compared to the third quarter of 2008. These increases were partially offset by $3.2 million less revenue from site closures in Big Spring, Texas and Petersburg, Virginia in August 2008 and December 2008, respectively. The remainder of the offset was driven by decreases in the number of average full-time equivalent agents and utilization at other U.S. locations. In the third quarter of 2009, average full-time equivalent agents decreased by 4.8% from the third quarter of 2008 due to layoffs and hiring freezes in certain locations in order to address certain discrepancies in our hiring practices. The hiring freezes have since been lifted. Revenues in our Canadian segment declined by $2.8 million in the third quarter of 2009 compared to the same period in 2008. Of this decrease, $2.5 million was due to the site closure in Regina, Saskatchewan. The remainder was due to a decline of 6.8% in average full-time equivalent agents at our other Canadian locations. Revenue from our Offshore segment increased from $0.1 million in the third quarter of 2008 to $3.2 million in the third quarter of 2009 from our site in Makati City, Philippines which opened in September 2008 and continues to ramp.
19
Cost of Services and Gross Profit
Cost of services decreased by $1.7 million, or 2.9%, from $60.7 million in the third quarter of 2008 to $59.0 million in the third quarter of 2009. Cost of services in the U.S. increased by approximately $0.8 million, of which $0.2 million was related to the net addition of new sites year over year, as discussed above. Gross profit as a percentage of revenue in the U.S. increased from 15.8% in the third quarter of 2008 to 19.5% in the third quarter of 2009. This increase was driven by higher utilization, which we define as average full-time equivalent agents divided by available seat capacity, which increased from 65% in the third quarter of 2008 to 77% in the third quarter of 2009. Cost of services in Canada declined by $5.0 million in the third quarter of 2009 from the third quarter of 2008, of which $2.8 million was due to the closure of the facility in Regina, Saskatchewan and $1.9 million was due to improvements in the Canadian to U.S. dollar exchange rate. The remaining decrease in the Canadian segment was due to fewer agents, as described above. Cost of services for our Offshore segment increased by approximately $2.4 million due to the opening of our Makati City, Philippines location.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $0.9 million, or 8.6%, from $10.2 million in the third quarter of 2008 to $11.1 million in the third quarter of 2009. As a percentage of revenue, selling, general and administrative expenses increased from 14.8% to 15.3%. The increase was driven by an increase of $0.5 million in salary expense and $0.4 million in hiring expense in the third quarter of 2009 compared to the third quarter of 2008 due to investments in personnel in support of growth efforts.
Impairment Losses and Restructuring Charges
Impairment losses and restructuring charges declined from $0.3 million in the third quarter of 2008 to $0 in the third quarter of 2009. In the third quarter of 2008, we recorded $0.3 million in restructuring charges related to the closure of our Big Spring, Texas location in August 2008. We did not incur any impairment losses or restructuring charges during the third quarter of 2009.
Operating Income (Loss)
We had operating income of $2.4 million during the three months ended September 30, 2009 and an operating loss of $2.3 million during the three months ended September 30, 2008. Operating income (loss) as a percentage of revenue was 3.3% for the three months ended September 30, 2009 compared to (3.4%) for the three months ended September 30, 2008. The increase was a result of higher revenue, lower cost of services and lower impairment and restructuring charges, partially offset by an increase in selling, general and administrative expenses, as discussed previously.
Net Interest and Other (Expense) Income
Net interest and other expense declined to approximately $0.04 million during the third quarter of 2009 from $0.3 million in the third quarter of 2008. The decrease was primarily due to $0.4 million recorded in 2008 for an other-than-temporary impairment of an investment. No such impairments were recorded during the third quarter of 2009. This decrease was partially offset by lower interest and investment income in the third quarter of 2009, compared to the third quarter of 2008, due to fewer investments held during the period.
Income Tax
The quarterly effective tax rate for continuing operations changed from an income tax benefit of $1.1 million, or an effective rate of 43.2%, during the three months ended September 30, 2008, to income tax expense of $0.6 million, or an effective rate of 23.7%, during the three months ended September 30, 2009. The change was due primarily to the effects of work opportunity credits, depending on the amount of income or loss for the respective quarter, which reduced the rate and associated tax expense in 2009 and increased the rate and associated tax benefit in 2008.
Loss from Discontinued Operations, net of tax
Loss from discontinued operations was $0 during the third quarter of 2009 and approximately $0.4 million during the third quarter of 2008. The loss in 2008 was due to the write-off of the principal on a note receivable related to the sale of our supply chain management services platform in December 2005 for which approximately $0.7 million related to the principal of the note receivable, less an associated tax benefit of approximately $0.2 million. This was partially offset by the removal of income from discontinued operations related to the sale of our Domain.com subsidiary in February 2009.
20
Net Income (Loss)
Net income was $1.8 million for the third quarter of 2009 compared to a net loss of approximately $1.9 million during the third quarter of 2008. The increase in net income was primarily due to higher revenue, lower cost of services, the absence of impairment and restructuring charges and a loss from discontinued operations, partially offset by higher selling, general and administrative expenses, as discussed previously.
RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008
|
|
Nine Months |
|
% of |
|
Nine Months |
|
% of |
|
% change |
|
||
Revenue |
|
$ |
216,463 |
|
100.0 |
% |
$ |
198,987 |
|
100.0 |
% |
8.8 |
% |
Cost of services |
|
179,137 |
|
82.8 |
% |
173,007 |
|
86.9 |
% |
3.5 |
% |
||
Gross profit |
|
37,326 |
|
17.2 |
% |
25,980 |
|
13.1 |
% |
43.7 |
% |
||
Selling, general and administrative expenses |
|
31,665 |
|
14.6 |
% |
30,522 |
|
15.3 |
% |
3.7 |
% |
||
Impairment losses and restructuring charges |
|
6,437 |
|
3.0 |
% |
5,954 |
|
3.0 |
% |
8.1 |
% |
||
Operating loss |
|
(776 |
) |
-0.4 |
% |
(10,496 |
) |
-5.2 |
% |
NM |
|
||
Net interest and other (expense) income |
|
(216 |
) |
-0.1 |
% |
96 |
|
0.0 |
% |
NM |
|
||
Loss from continuing operations before income taxes |
|
(992 |
) |
-0.5 |
% |
(10,400 |
) |
-5.2 |
% |
NM |
|
||
Income tax benefit |
|
(126 |
) |
-0.1 |
% |
(3,906 |
) |
-2.1 |
% |
NM |
|
||
Net loss from continuing operations |
|
(866 |
) |
-0.4 |
% |
(6,494 |
) |
-3.3 |
% |
NM |
|
||
Income (loss) from discontinued operations, net of tax |
|
4,640 |
|
2.1 |
% |
(266 |
) |
-0.1 |
% |
NM |
|
||
Net income (loss) |
|
$ |
3,774 |
|
1.7 |
% |
$ |
(6,760 |
) |
-3.4 |
% |
NM |
|
The following table summarizes our revenues and gross profit for the periods indicated, by reporting segment:
|
|
For the Nine Months Ended September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
||||||
|
|
(in 000s) |
|
(% of Total) |
|
(in 000s) |
|
(% of Total) |
|
||
United States: |
|
|
|
|
|
|
|
|
|
||
Revenue |
|
$ |
151,887 |
|
70.2 |
% |
$ |
129,018 |
|
64.9 |
% |
Cost of services |
|
123,157 |
|
68.8 |
% |
107,298 |
|
62.0 |
% |
||
Gross profit |
|
$ |
28,730 |
|
77.0 |
% |
$ |
21,720 |
|
83.6 |
% |
Gross profit % |
|
18.9 |
% |
|
|
16.8 |
% |
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Canada: |
|
|
|
|
|
|
|
|
|
||
Revenue |
|
$ |
57,212 |
|
26.4 |
% |
$ |
69,917 |
|
35.1 |
% |
Cost of services |
|
48,798 |
|
27.2 |
% |
65,149 |
|
37.7 |
% |
||
Gross profit |
|
$ |
8,414 |
|
22.5 |
% |
$ |
4,768 |
|
18.4 |
% |
Gross profit % |
|
14.7 |
% |
|
|
6.8 |
% |
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Offshore: |
|
|
|
|
|
|
|
|
|
||
Revenue |
|
$ |
7,364 |
|
3.4 |
% |
$ |
52 |
|
0.0 |
% |
Cost of services |
|
7,182 |
|
4.0 |
% |
560 |
|
0.3 |
% |
||
Gross profit |
|
$ |
182 |
|
0.5 |
% |
$ |
(508 |
) |
-2.0 |
% |
Gross profit % |
|
2.5 |
% |
|
|
|
|
|
|
Revenue
Revenue increased by $17.5 million, or 8.8%, from $199.0 million in the nine months ended September 30, 2008 to $216.5 million in the nine months ended September 30, 2009. The increase was driven by revenues from the U.S. segment and the Offshore segment which increased by $22.9 million and $7.3 million, respectively. The increase in U.S. revenue was due to three new U.S. facilities added in 2008, partially offset by the closure of two U.S. facilities. The net impact of these openings and closures was $14.0 million in additional revenue. U.S. revenue also increased due to the full ramp of a site which transitioned to a new customer and contributed $5.2 million of additional revenue in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. The remaining increase of $3.7 million at the remaining U.S. facilities was driven by an increase in the number of average full-time equivalent agents. The offshore facility in Makati City, Philippines opened in September 2008, and as such contributed minimal
21
revenue during the first nine months of 2008 and contributed $7.4 million in the first nine months of 2009. Revenue from Canada decreased by $12.7 million in the first nine months of 2009 compared to the same period in 2008 due primarily to the closure of our Regina, Saskatchewan facility in February 2009, which had approximately $7.8 million less revenue in the nine months ended September 30, 2009, compared to the same period in 2008. In addition, revenue decreased by approximately $0.9 million due to changes in the foreign exchange rate between the U.S. dollar and Canadian dollar. The remainder of the decrease in the Canadian segment was due to a decrease in the number of average full-time equivalent agents.
Cost of Services and Gross Profit
Cost of services increased by $6.2 million, or 3.6%, from $173.0 million in the nine months ended September 30, 2008 to $179.2 million in the nine months ended September 30, 2009. Cost of services in the U.S. increased by approximately $15.6 million, of which $8.0 million related to the net addition of new sites year over year, as discussed above. Cost of services at our other U.S. facilities also increased during the first nine months of 2009 compared to the first nine months of 2008 due to a greater number of agents, as described above. In addition, cost of services increased by approximately $6.9 million due to the opening of the Makati City, Philippines location. These increases to cost of services were offset by lower cost of services in Canada due in part to the closure of the Regina location, which accounted for $8.2 million of the decrease. Additionally, cost of services decreased by $5.8 million in the first nine months of 2009 compared to the first nine months of 2008 due to a stronger U.S. to Canadian dollar exchange rate. The remaining decrease in the Canadian segment was due to fewer agents, as described above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.1 million, or 3.6%, from $30.5 million in the first nine months of 2008 to $31.6 million in the first nine months of 2009. The increase year-over-year was primarily due to $0.6 million in expense associated with the settlement of the federal securities class action lawsuit, $0.9 million in payroll expense, $0.2 million in other legal expense and $0.2 million in rent expense. These increases were partially offset by declines in depreciation expense of $0.6 million and training expense of $0.2 million.
Impairment Losses and Restructuring Charges
Impairment losses and restructuring charges were $6.4 million and $6.0 million for the nine months ended September 30, 2009 and 2008, respectively. Restructuring charges were $4.7 million during the nine months ended September 30, 2009, related primarily to the closure of our Regina, Saskatchewan facility in February 2009 for which we incurred approximately $4.4 million of charges. The costs relate primarily to the building lease costs through the remainder of the lease term, or July 2013. Accrued restructuring costs were valued using a discounted cash flow model and the cash flows consist of the future lease payment obligations required under the lease agreements and property taxes through the remainder of the lease term. We assumed that we could not sublease the vacant facilities for the remainder of the lease term. In the future, if we are able to sublease the facilities, we may be required to record a gain in the Condensed Consolidated Statements of Operations. The remainder of the restructuring charges during the first nine months of 2009 were due to adjustments in our estimated liability for our other restructuring plans. We recorded $1.9 million in restructuring charges in the first nine months of 2008 related to the closure of our Hawkesbury, Ontario facility in 2007 and our Big Spring, Texas facility in August 2008.
We recorded approximately $1.7 million in impairment losses during the first nine months of 2009 due to the impairment of certain long-lived assets for which the carrying value of those assets is not recoverable. These assets are located in a facility for which we are uncertain about our ability to generate future cash flows to support the carrying value of these assets. The long-lived assets include computer and telephone equipment, furniture and fixtures, leasehold improvements and software. We recorded $4.1 million in impairment losses in the first nine months of 2008 due to impairment of certain long-lived assets ($2.3 million in the U.S. segment and $1.8 million in the Canadian segment).
Operating Loss
We incurred operating losses of approximately $0.8 million and $10.5 million for the nine months ended September 30, 2009 and 2008, respectively. Operating loss as a percentage of revenue was (0.4%) for the nine months ended September 30, 2009 compared to (5.2%) for the nine months ended September 30, 2008. The decline in the loss period over period was driven by an increase in revenue in the nine months ended September 30, 2009, partially offset by higher impairment and restructuring charges, cost of services and selling, general and administrative costs, as discussed previously.
Net Interest and Other (Expense) Income
Net interest and other expense was approximately $0.2 million during the first nine months of 2009, compared to net interest and other income of approximately $0.1 million in the first nine months of 2008. The change was due primarily to a decrease in interest and
22
investment income of approximately $0.9 million in the first nine months of 2009 compared to the first nine months of 2008 due to a decline in our investment balance during these periods, partially offset by less interest expense, which declined by approximately $0.3 million in the first nine months of 2009 compared to the first nine months of 2008. In addition, we recorded approximately $0.4 million related to an other-than-temporary impairment on investments during the first nine months of 2008.
Income Tax
The year-to-date effective tax rate for continuing operations decreased from 37.6% during the nine months ended September 30, 2008 to 12.7% during the nine months ended September 30, 2009. The primary reasons for the decrease to the rate between periods is 1) a larger impact from the change in the Canadian statutory tax rates in 2009 compared to 2008, 2) state income tax expense in 2009 compared to state income tax benefit in 2008 (due to pre-tax book income in the U.S. during 2009 compared to a pre-tax book loss in the U.S. in 2008) and 3) meals and entertainment deductions. These decreases were offset by an increase in work opportunity credits.
Income (Loss) from Discontinued Operations, net of tax
Income from discontinued operations was approximately $4.6 million during the nine months ended September 30, 2009 and loss from discontinued operations was approximately $0.3 million during the nine months ended September 30, 2008. In February 2009, we sold Domain.com, a wholly owned subsidiary, for cash of approximately $7.1 million. We had a gain on the sale of approximately $6.9 million, less taxes of approximately $2.3 million, resulting in the income of $4.6 million. The loss in 2008 was due to the write-off of the principal on a note receivable related to the sale of our supply chain management services platform in December 2005, partially offset by the removal of income from discontinued operations related to the sale of Domain.com.