UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended December 31, 2011

or

For the transition period from                to                

Commission file number 1-12793

StarTek, Inc.

(Exact name of registrant as specified in its charter)

(303) 262-4500

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:  None

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

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

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 x  No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

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

As of February 15, 2012, 15,267,407 shares of common stock were outstanding. The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2011 was $38.3 million, based upon the closing price of the registrant’s common stock as quoted on the New York Stock Exchange composite tape on such date. Shares of common stock held by each executive officer and director and by certain persons who owned more than 5% of the outstanding common stock as of such date who likely are affiliates have been excluded, as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the registrant’s proxy statement to be delivered in connection with its 2012 annual meeting of stockholders.  With the exception of certain portions of the proxy statement specifically incorporated herein by reference, the proxy statement is not deemed to be filed as part of this Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K 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:

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

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

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

·                  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.  All forward-looking statements herein speak only as of the date hereof, and we undertake no obligation to update any such forward-looking statements. 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 set forth in Item 1A. “Risk Factors” appearing in this Form 10-K.

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.

Part I

ITEM 1. BUSINESS

BUSINESS OVERVIEW

StarTek, Inc. is a global provider of business process outsourcing services with over 9,000 employees, whom we refer to as Brand Warriors, that have been committed to making a positive impact on our clients’ business results for 25 years.  Our company mission is to enable and empower our Brand Warriors to fight for our clients’ brands every day to bring value to our stakeholders. We accomplish this by aligning with our clients’ business objectives resulting in a trusted partnership.  The StarTek Advantage is the sum total of our culture, customized solutions and processes that enhance our clients’ customer experience.  StarTek Advantage is focused on improving customer experience and reducing total cost of ownership for our clients.  StarTek has proven results for the multiple services we provide including sales, order management and provisioning, customer care, technical support, receivables management, and retention programs.  We manage programs using a variety of multi-channel customer interaction capabilities including voice, chat, email, IVR and back-office support.  StarTek has delivery centers in the U.S., Philippines, Canada, Costa Rica, Honduras and through its StarTek@Home workforce.

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 December 31, 2011, our U.S. segment included the operations of eight facilities in the U.S.; our Canada segment included the operations of two facilities in Canada; and our offshore segment included the operations of two facilities in the Philippines, one in Costa Rica and one in Honduras.  Financial information for each of our reportable segments for the last three fiscal years is included in Note 15, “Segment Information,” to our Consolidated Financial Statements, which are included at Item 8. “Financial Statements and Supplementary Financial Data,” of this Form 10-K.

Service Offerings

We provide customer experience management throughout the life cycle of our clients’ customers.  These service offerings include customer care, sales support, inbound sales, complex order processing, accounts receivable management, technical and product support, up-sell and cross-sell opportunities and other industry-specific processes.  Our ability to provide these services is enabled by leveraging technology, agent performance tools, analytics, self service applications and various other technologies utilized to enable and empower our Brand Warriors.

2

Technical and Product Support.  Our technical and product support service offering provides our clients’ customers with high-end technical support services by telephone, e-mail, chat, facsimile and the internet, 24 hours per day, seven days per week. Technical support inquiries are generally driven by a customer’s purchase and use of a product or service, or by a customer’s need for ongoing technical assistance.

Sales Support. Through our sales support service, we strive to increase the revenue generation of our clients by receiving and closing sales on inbound sales inquiries as well as through cross-selling and up-selling our clients’ products to their customers.  We have the ability to increase customer purchasing levels, implement product promotion programs, introduce our clients’ customers to new products and enhanced service offerings, secure and process additional customer orders and contract renewal programs and handle inquiries related to product shipments and billing.

Provisioning and Complex Order Processing.  Our complex order processing services provide our clients with large scale project management and direct relationship management for our clients’ large enterprise customers.  This service includes order management and technical sales support for high-end communications services, such as wire-line, wireless, data and customer premise equipment. In addition, we process order fallout from our clients’ automated systems, complete billing review and revenue recovery, and perform quality assurance.  We also provide services for our clients direct to consumer order processing and transfer of accounts between client service providers.  Our services enable a client to provide large scale project management and customer relations services to their customers in a more efficient and cost effective way.

Receivables Management.  We provide billing, credit card support and first party collections through our receivables management services.  These services allow our clients to reduce the risk of nonpayment by automatically transferring the calls made by delinquent customers to us, at which point our representatives encourage the customers to pay their bill in order to continue to receive service. Customers may bring their bill current through credit or debit card payments, electronic checks or money orders. This service allows us to help our clients reduce their number of days sales outstanding and bad debt write-offs.

Other.  We provide other industry-specific processes including technical support, phone number portability and directory management.  We provide number portability services - when our clients’ customers wish to keep their phone number when changing service providers.  Our phone number portability services, which include both automated and live agent interaction, facilitate pre-port validation, data collection, automatic processing of port-out/in requests, direct and automated interface with the service order activation platform, fallout management tool and port request tracking and archiving.  We also provide 411 directory listing management services.  In addition, our Solutions Team engages with clients to execute their specific goals and anticipate the needs of their customers.  As a part of the Startek Advantage, the Solutions Team is involved from the earliest stages of the life cycle of our client engagements through ongoing operations in order to find the right fit for existing StarTek tools and emerging technologies.

CUSTOMER TRENDS

We have observed a few emerging trends in client requirements of our industry.  Our clients are increasingly focused on:  (1) improving client satisfaction and retention; (2) improving the customer experience; (3) increasing up-sell and cross-sell opportunities; and (4) reducing total overall cost of ownership.  We deliver  a high level of customer satisfaction, as evidenced by our clients’ customer service awards and our clients’ ranking of StarTek relative to other outsourced partners.  We have demonstrated to our clients our success in increasing revenue per subscriber  by the results of our up-sell and cross-sell methodologies during customer interactions.  Our clients value a combination of on-shore, near-shore, offshore and home agent delivery platforms to optimize their customer support costs.  In response to the demand for offshore solutions, we opened our first facility in the Philippines in 2008, and a second facility in 2010.  In response to this demand for near-shore solutions, we opened a new facility in Costa Rica in 2010 and in Honduras in 2011, which will enable us to provide a near-shore solution, as well as Spanish speaking capabilities.  Given this demand, we plan to continue to grow the number of offshore and near-shore agents.

We have also observed that our clients are demanding a decrease in the number of contacts it takes for their customers to enjoy their products or services.  Process improvement has also driven further efficiencies for resolution of those contact issues. We are committed to delivering solutions through which we partner with our clients to achieve and deliver these efficiency gains.  We believe we are positioned to benefit from this trend as we have developed a comprehensive suite of services which drive continuous improvement on front and back-office transactions.

3

KEY COMPETITIVE DIFFERENTIATORS

StarTek Advantage

The sum total of the StarTek culture, the StarTek Operating Platform, customized solutions for every client program and our continuous improvement process is our StarTek Advantage.  StarTek Advantage empowers and enables our leaders to deliver consistent execution of operational results while driving year over year improvement for our clients’ critical business requirements.

StarTek’s culture is built on trust and servant leadership. Servant leadership puts the employees first and leads with a focus on solving problems and promoting personal development.   We are a gathering of like minded professionals determined to make a positive impact for our employees, our clients and our stakeholders.  We work to remove noise, challenge the status quo, move with urgency, be creative, drive improvement, win and have fun.

StarTek Operating Platform provides the expertise, best practices and thought leadership to move our clients’ programs toward specific, measurable goals.  It includes execution and innovation in every area of the support process from onboarding our employees, enabling our employees, executing against goals, evaluating performance, improving performance and enhancing our client’s business.

StarTek Solutions is a targeted solution leveraging what we have now, what we have learned from experience across a breadth of clients and industries and what we hear and understand from our client’s goals.  We will deliver the right people with the right leadership enabled by the right technology and empowered by the right tools to make a meaningful impact to our clients’ business.

We offer a variety of customer management solutions that provide front to back-office capabilities utilizing the right delivery platform including onshore, near shore, offshore, and StarTek@Home sourcing alternatives. We also offer multi-channel interactions across voice, chat, email, and IVR channels.  We believe that we are differentiated by our client centric culture, quality of our execution and results, our flexibility and competitive pricing.

Flexibility

Our solution configuration is aligned with our clients’ unique requirements.  We are flexible in designing solutions around our clients’ strategic goals, and we provide experienced management teams that bring together a trained, productive workforce, equipped with the right tools and technology. 

Consistent Performance

Performance is core to the StarTek Operating Platform.  Our clients expect consistent performance against the fundamentals of the business no matter the location or method of the service delivery.  The operating platform sets the stage for us to drive continuous improvement and focus on the value-add aspects of our clients’ business.

Cost Competitive

We are confident in our ability to be cost competitive in our solutions for our clients’ needs. Through clearly understanding their needs and striving to reach goal congruency we can assure that our collective financial goals are aligned in the most efficient way.

STRATEGY

Successful outsourcing partnerships strike a balance by delivering our clients a better customer experience through an efficient support model while generating a fair return for our stakeholders.  Therefore, our mission is simple.  We enable and empower our Brand Warriors to fight for our clients’ brands every day in order to return value to our stakeholders. Our employees and customer service agents are called Brand Warriors because they are on the front lines protecting and promoting our clients’ brand, which creates loyalty for our clients’ products and services.  Our clients’ business objectives become our business objectives, as we seek to become their trusted outsourcing partner.  Every day, we strive to better understand our clients’ market and competitive challenges so that we can play a more effective role as a trusted partner in their businesses.  We seek to build customer loyalty and reduce our customers’ costs through specific actionable continuous improvement efforts.  Management believes that empowering and enabling our Brand Warriors is the most important way we can deliver the best possible consistent customer experience.  StarTek’s leadership team is committed to driving year over year continuous improvement for our clients’ businesses not only in customer experience but in total cost of ownership.

4

We seek to become a market leader in providing meaningful impact BPO services to our clients. Our approach is to develop relationships with our clients that are partnering and collaborative in nature where we are focused, flexible and responsive to their business needs.  In addition, we offer creative industry-based solutions to meet our clients’ ever changing business needs.  The end result is the delivery of a quality customer experience to our client’s customers. To become a leader in the market, our strategy is to:

·                  grow our existing client base by deepening and broadening our relationships,

·                  add new clients and continue to diversify our client base,

·                  improve the profitability of our business through operational improvements, increased utilization and right-sizing our North American operation,

·                  expand our global delivery platform to meet our client needs, and

·                  broaden our service offerings by providing more innovative and technology-enabled solutions.

During 2011, we further expanded our near-shore delivery platform by opening our first facility in Honduras.  Management believes that the labor market in Honduras is strong and our position as an early entrant into this country provides us a competitive advantage to win business with new and existing customers.  During 2011, we also continued to grow our headcount in the Philippines, where we added over 1,100  new full-time equivalent agents.  We believe that diversifying our geographic platform by expanding offshore and near-shore will result in improved margins and position us for future growth.  In 2011, we decreased our North American footprint by closing one facility in the U.S. early in the year and one Canadian facility in the third quarter of 2011.  The decision to close these facilities was due to lower client volumes, and an effort to improve utilization at our centers, thus driving efficiencies and improved margins.  We will continue to evaluate the profitability of our North American locations.  In 2011, we made progress on our strategic objective to add new clients by signing eight new contracts.  We also built-out StarTek Advantage which builds upon the development of the StarTek operating platform in order to drive efficiencies in our operation, execute on our core offerings and deliver customized processes and solutions to our clients.

HISTORY OF THE BUSINESS

StarTek was founded in 1987.  At that time, our business was centered on supply chain management services, which included packaging, fulfillment, marketing support and logistics services.  After our initial public offering on June 19, 1997, we began operating contact center services, which primarily focused on customer care, and grew to include our current suite of offerings as described in the “Business Overview” section of this Form 10-K.

While our business is not generally seasonal, it does fluctuate quarterly based on our clients’ product offerings as well as their customer interaction volume.  See Item 1A. “Risk Factors,” for a more complete description of the seasonality of our business.

INDUSTRY

Outsourcing of non-core activities, such as those we provide, offers companies the ability to focus on their core competencies, leverage economies of scale and control variable costs of the business while accessing new technology and trained expert personnel.  As the business environment continues to evolve, it has become more difficult and expensive for some companies to maintain the necessary personnel and product capabilities in-house to provide business process services on a cost-effective basis. Accordingly, we anticipate that outsourced customer care services will grow significantly in the coming years.  In general, we believe that industries having higher levels of customer contact and service volume, such as the communications industry, tend to be more likely to seek outsourced services as a more efficient method for managing their technical support and customer care functions. We believe that outsourced service providers, including ourselves, will continue to benefit from these outsourcing trends.

COMPETITION

We compete with a number of companies that provide similar services on an outsourced basis, including technical support and customer care companies such as Teleperformance; Convergys Corporation; Transcom; NCO Group; Aegis PeopleSupport; Sitel Corporation; Sykes Enterprises, Incorporated; TeleTech Holdings, Inc., Stream Global Services, Inc. and West Corporation.  We compete with the aforementioned companies for new business and for the expansion of existing business within the clients we currently serve.  Many of these competitors are significantly larger than us in revenue, income, number of contact centers and customer agents, number of product offerings, and market capitalization.  We believe that while smaller than many of our competitors, we are able to compete because of our focus and scale as well as proven performance to add value to our clients.  We believe our success is contingent more on our targeted service offering and performance delivery to our clients than our overall size.  Several of our competitors merged during the last three years, which increased the size and reach of those competitors, which may affect our competitive position.  There are also many private equity backed companies actively pursuing sale so further consolidation in the industry is expected.  However, we believe there are integration challenges involved in consolidations, which may provide us an opportunity to deliver superior customer service to our clients.  Some competitors may offer a broader range of services than we do, which may result in clients and potential clients consolidating their use of outsourced services with larger competitors, rather than using our services.  Therefore, part of our strategy is to expand our service offerings by increasing our presence offshore, near-shore and with StarTek@Home agents to enhance our competitive advantage.  We primarily compete with the aforementioned companies on the basis of price and quality.  As such, our strategy continues to be to execute on

5

our clients’ quality metrics and rank among the top of all of their outsourced vendors, while continuing to be a cost effective solution.  We view our competitive advantage as being a large enough company to offer the breadth of service offerings that are often requested by our clients while being agile enough to quickly respond to our clients’ needs.

CLIENTS

As mentioned previously, we seek to become the expert provider of outsourced customer care and related services for the communications industry and believe that we possess expertise in servicing clients within that industry.  Accordingly, more than 95% of our revenue is derived from customers within that industry.  Our two largest customers, AT&T Inc. (“AT&T”) and T-Mobile USA, Inc. (“T-Mobile”) (a subsidiary of Deutsche Telekom), account for a significant percentage of our revenue. While we believe that we have good relationships with these clients, a loss of a large program from one of these clients, a significant reduction in the amount of business we receive from a principal client, renegotiation of pricing on several programs simultaneously for one of these clients, the delay or termination of a principal clients’ product launch or service offering, or the complete loss of one or more of these principal clients would adversely affect our business and our results of operations (see Item 1A. “Risk Factors”).  The following table represents revenue concentration of our principal clients:

The loss of a principal client, a material reduction in the amount of business we receive from a principal client, renegotiation of price by a principal client, or the loss, delay or termination of a principal client’s product launch or service offering would adversely affect our business, revenue and operating results. We may not be able to retain our principal clients or, if we were to lose any of our principal clients, we may not be able to timely replace the revenue generated by the lost clients. Loss of a principal client could result from many factors, including consolidation or economic downturns in our clients’ industries, as discussed further below.

Our work for AT&T is covered by several contracts for a variety of different lines of AT&T business.  Some of these contracts expire in 2012 and others in 2014.  The initial term of our master services agreement covering all AT&T work expired in January 2010, was extended to July 1, 2011 and was further extended to July 1, 2012.  On July 28, 2011, we entered into a new master services agreement (the “MSA”) with T-Mobile which covers all services that we provide to T-Mobile.  The MSA replaces the previous master services agreement dated October 1, 2007 and has an initial term of five years but may be terminated by T-Mobile upon 90 days written notice.  The agreement is effective July 1, 2011 with an initial term of five years and will automatically renew for additional one-year periods thereafter.

GOVERNMENT AND ENVIRONMENTAL REGULATION

We are subject to numerous federal, state, and local laws in the states and territories in which we operate, including tax, environmental and other laws that govern the way we conduct our business.  There are risks inherent in conducting business internationally, including significant changes in domestic government programs, policies, regulatory requirements, and taxation with respect to foreign operations, potentially longer working capital cycles, unexpected changes in foreign government programs, policies, regulatory requirements and labor laws, and difficulties in staffing and effectively managing foreign operations.

EMPLOYEES AND TRAINING

Our success in recruiting, hiring, training, and retaining large numbers of full and part-time skilled employees, and obtaining large numbers of hourly employees during peak periods is critical to our ability to provide high quality outsourced services.  We compete for labor with firms offering similar paying jobs in the communities in which we are located, which includes other contact centers.  During the past several years, we experienced difficulties hiring and retaining agents as we faced economic pressures in and around certain of our site locations.  Refer to Item 1A. “Risk Factors” for further discussion of risks surrounding our ability to recruit and retain personnel.

6

As of December 31, 2011, we employed approximately 9,100 employees. We believe the demographics surrounding our facilities, and our reputation, stability, and compensation plans should allow us to continue to attract and retain qualified employees. None of our employees were members of a labor union or were covered by a collective bargaining agreement during 2011.

CORPORATE INFORMATION

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

WEB SITE AVAILABILITY OF REPORTS

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available free of charge through our web site (www.startek.com) as soon as practicable after we furnish it to the Securities and Exchange Commission (“SEC”). We also make available on the “Investor Relations” page of our corporate website, the charters for the Compensation Committee, Audit Committee and Governance and Nominating Committee of our Board of Directors, as well as our Corporate Governance Guidelines and our Code of Ethics and Business Conduct.

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

ITEM 1A.  RISK FACTORS

Although our concentration with our largest clients has been reduced, over 75% of our revenue in 2011, 2010 and 2009, has been received from our two largest clients. The loss or reduction in business from any of these clients would adversely affect our business and results of operations.

The following table represents revenue concentration of our principal clients:

We may not be able to retain our principal clients. If we were to lose any of our principal clients, we may not be able to timely replace the revenue generated by them. Loss of a principal client could result from many factors, including consolidation or economic downturns in our clients’ industries, as discussed further below. In the first quarter of 2012, we received notice from one of our largest clients of a significant reduction in volume.

Refer to “Clients”  in Item 1. for further discussion of our client contracts.

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

7

Our client base is concentrated in the communications industry, which has recently experienced consolidation trends.  As our clients’ businesses change as a result of merger and acquisition activity, there is no guarantee that the newly formed companies will continue to use our services.

Consolidation in the communications industry may decrease the potential number of buyers for our services. Likewise, there is no guarantee that the acquirer of one of our clients will continue to use our services after the consolidation is completed.  We are particularly vulnerable on this issue given the relatively few significant clients we currently serve and the concentration of these clients in the telecommunications industry. For example, in late 2006, our client, AT&T, acquired another of our clients, Cingular Wireless, LLC (now, AT&T Mobility, LLC), thereby further concentrating our revenue base.  There can be no assurance that our principal clients will continue to use our services in the future.  If we lose principal clients or our service volumes decrease as a result of principal clients being acquired, our business, financial condition and results of operations would be adversely affected.  We expect to negotiate renewals of our contracts in due course; however, if any of such contracts or any order under such a contract is not ultimately renewed, it would have a material adverse effect on our results of operations and financial condition.

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

Our current clients are almost exclusively communications companies, which include companies in the wire-line, wireless, cable and broadband lines of business.  Over 95% of our revenue in 2009, 2010 and 2011 was concentrated in the telecommunications industry.  During 2011 and 2010, we experienced lower call volumes from our customers in the wire-line and wireless businesses which adversely affected our results.  Currently, our business is largely dependent on continued demand for our services from clients in this industry and on trends in this industry to purchase outsourced services. The recent economic instability has weakened the demand for the products and services offered by our clients in the telecommunications sector and could continue to affect this demand in the future which would consequently weaken the demand for our services.  The weakened demand for our clients’ products and services could also cause a slowdown or reversal of the trend in the telecommunications industry to outsource the services we provide.  These factors could adversely affect our business, results of operations, growth prospects, and financial condition in the future.

We face considerable pricing pressure in our business, and if we are not able to continually increase productivity, our gross margins and results of operations may be adversely affected.

Our strategy depends in part on our ability to increase productivity.  We face significant price pressure arising from our clients’ desire to decrease their operating costs, and from other competitors operating in our targeted markets. Price pressure may be more pronounced during periods of economic uncertainty. In addition, our contract with our largest customer currently contains a tiered pricing structure, under which pricing declines as service volumes increase, creating increased pricing pressures in future years. Accordingly, our ability to maintain our operating margins depends on our ability to improve productivity and reduce operating costs. If we are not able to achieve sufficient improvements in productivity to adequately compensate for potential price decreases, our results of operations may be adversely affected.

Our operating results may be adversely affected if we are unable to maximize our facility capacity utilization.

Our profitability is influenced by our facility capacity utilization. The majority of our business involves technical support and customer care services initiated by our clients’ customers, and as a result, our capacity utilization varies, and demands on our capacity are, to some degree, beyond our control. We have experienced, and in the future may experience periods of idle capacity from opening new facilities where forecasted volume levels do not materialize. In addition, we have experienced, and in the future may experience idle peak period capacity when we open a new facility or terminate or complete a large client program. These periods of idle capacity may be exacerbated if we expand our facilities or open new facilities in anticipation of new client business because we generally do not have the ability to require a client to enter into a long-term contract or to require clients to reimburse us for capacity expansion costs if they terminate their relationship with us or do not provide us with anticipated service volumes. From time to time, we assess the expected long-term capacity utilization of our facilities. Accordingly, we may, if deemed necessary, consolidate or close under-performing facilities in order to maintain or improve targeted utilization and margins.

In 2011, we determined it was necessary to close our facility in Alexandria, Louisiana and one of our Kingston, Ontario facilities.  In addition, we downsized business in our Cornwall, Ontario facility and negotiated our lease for a smaller space.  During 2011,

8

we also announced the closure of our facility in Collinsville, Virginia during the first quarter of 2012.  In 2012, the decision was made to consolidate the business performed in Enid, Oklahoma into another U.S. facility and also in 2012, we received a customer notification of an intent to reduce its business in our Decatur, Illinois and Jonesboro, Arkansas facilities and we are actively trying to sell this capacity to other current and potential clients.  During 2011, we recognized $5.5 million in impairment losses and restructuring charges related to facility closures and assets whereby the carrying value did not support future cash flows.  We may incur further impairment losses and restructuring charges during 2012 related to our planned closures.  There can be no assurance that we will be able to achieve or maintain optimal facility capacity utilization.  In 2011, we expanded our capacity to include a new facility in Honduras.  In addition, the two facilities opened in 2010 in Costa Rica and the Philippines continue to ramp and as of December 31, 2011 have not yet reached full capacity.  While the call volumes associated with these facilities ramped during 2011, we experienced excess capacity and incurred additional costs as we worked towards bringing these facilities to normal operational levels.  If client demand declines due to economic conditions or otherwise, we would not leverage our fixed costs as effectively, which would have a material adverse effect on our results of operations and financial condition.

We generate revenue based on the demand for, and inquiries generated by, our clients’ products and services. If our clients’ products and services are not successful or do not generate the anticipated call volumes, our revenue and results of operations will be adversely affected.

In substantially all of our client relationships, we generate revenue based on the amount of products and services demanded by our clients’ customers.  The amount of our revenue also depends on the number and duration of customer inquiries.  Consequently, the amount of revenue generated from any particular client is dependent upon consumers’ interest in and use of that client’s products or services.  In addition, if the reliability of our clients’ products or services increases as a result of technological improvements, the volume of calls that we service may be reduced.  If customer interest in or increased reliability of any products or services offered by our clients and for which we provide outsourced services result in reduced service volumes, our revenue would be diminished.  We utilize forecasts made by our clients based on demand from their customers.  If the actual call volumes are materially lower than the forecasted volumes, our financial results could be adversely affected.

Our existing and potential clients are currently decreasing the number of vendors they are using to outsource their business process services.  If we lose more business than we gain as a result of this vendor consolidation, our business and results of operations will be adversely affected.

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

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

Our operations depend on our ability to protect our facilities, computer equipment, telecommunications equipment, software systems and clients’ products and confidential client information against damage from telecommunications interruption, power loss, fire, natural disaster, theft, unauthorized intrusion, computer viruses, internet interruption, e-commerce interruption, bomb threats, terrorist attacks, cyber attacks and other emergencies. Our locations in the Philippines are exposed to a higher risk of weather related interruptions (including typhoon, flood and hurricane) than our North American operations.  We maintain procedures and contingency plans to minimize the detrimental impact of adverse events, but if such an event occurs, our procedures and plans may not be successful in protecting us from losses or interruptions. In the event we experience temporary or permanent interruptions or other emergencies at one or more of our facilities, our business could suffer and we may be required to pay contractual damages to our clients or allow our clients to terminate or renegotiate their arrangements with us. Although we maintain property and business interruption insurance, as well as cyber liability insurance, such insurance may not adequately or timely compensate us for all losses we may incur. Further, our telecommunication systems and networks and our ability to timely and consistently access and use telephone, internet, e-commerce, e-mail, facsimile connections and other forms of communication are substantially dependent upon telephone companies, internet service providers, and various telecommunication infrastructures. If such communications are interrupted on a short- or long-term basis, our services would be similarly interrupted and delayed.

9

Our operations in Canada, the Philippines, Costa Rica and Honduras subject us to the risk of currency exchange fluctuations.

Because we conduct a material portion of our business outside the United States, in Canada, the Philippines, Costa Rica and Honduras, we are exposed to market risk from changes in the value of the Canadian dollar, Philippine peso, Costa Rican colon and the Honduran lempira.  Material fluctuations in exchange rates impact our results through translation and consolidation of the financial results of our foreign operations and, therefore, may negatively impact our results of operations and financial condition. We have contracts wherein the revenue we earn is denominated in U.S. dollars, but the costs we incur to fulfill our obligations under those contracts are denominated in Canadian dollars, Philippine pesos and, to a lesser extent, the Costa Rican colon and Honduran lempira.  Therefore, the fluctuations in the U.S. dollar to the Canadian dollar, Philippine peso, Costa Rican colon or Honduran lempira exchange rates can cause significant fluctuations in our results of operations.  During 2011, we engaged in hedging activities relating to our exposure to such fluctuations in the value of the Canadian dollar versus the U.S. dollar and the Philippine peso versus the U.S. dollar.  During 2011, we did not enter into hedging agreements for the Costa Rican colon or Honduran lempira.  We may participate in hedging activities in the future relating to the Canadian dollar, Philippine peso, Costa Rican colon and Honduran lempira. However, currency hedges do not and will not eliminate our exposure to fluctuations in the currencies.  In the past few years, there have been large fluctuations in the value of the U.S. dollar against the value of the Canadian dollar.  If the U.S. dollar weakens against the value of the Canadian dollar, it would increase our costs and adversely affect our results from operations.  Likewise, increases in the value of the Philippine peso, Costa Rican colon or Honduran lempira, or currencies in other foreign markets in which we may operate in relation to the value of the U.S. dollar would further increase our costs and adversely affect our results of operations.

Our contracts generally do not contain minimum purchase requirements and can generally be terminated by our customers on short notice without penalty.

We enter into written agreements with each client for our services. We seek to sign multi-year contracts with our clients.  However these contracts generally permit termination upon 30 to 90 days notice by our clients, they do not designate us as our clients’ exclusive outsourced services provider, we do not penalize our clients for early termination, they hold us responsible for work performed that does not meet pre-defined specifications and they do not contain minimum purchase requirements or volume commitments. Accordingly, we face the risk that our clients may cancel or renegotiate contracts we have with them, which may adversely affect our results.  In addition, some contracts with our two largest clients either expire in 2012 or are currently under negotiation for renewal, and we cannot guarantee that they will be extended or renewed.  If a principal client cancelled or did not renew their contract with us, our results would suffer. In addition, because the amount of revenue generated from any particular client is generally dependent on the volume and activity of our clients’ customers, as described above, our business depends in part on the success of our clients’ products. The number of customers who are attracted to the products of our clients may not be sufficient or our clients may not continue to develop new products that will require our services, in which case it may be more likely for our clients to terminate their contracts with us. Moreover, clients who may not terminate their contacts with us without cause could generally reduce the volume of services they outsource to us which would have an adverse effect on our revenue, results of operations and overall financial condition.

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

Our success is largely dependent on our ability to recruit, hire, train, and retain qualified employees. Our business is labor intensive and, as is typical for our industry, continues to experience high personnel turnover. Our operations, especially our technical support and customer care services, generally require specially trained employees. During 2011, we continued to experience a high rate of employee turnover, which, in turn, requires significant recruiting and training costs. Such turnover adversely affects our operating efficiency, productivity and ability to fully respond to client demand, thereby adversely impacting our operating results.  Some of this turnover can be attributed to the fact that we compete for labor not only with other call centers but also with other similar-paying jobs, including retail, oil and gas industry labor, food service, etc.  As such, improvements in the local economies in which we operate can adversely affect our ability to recruit agents in those locations.  Further increases in employee turnover or failure to effectively address and remedy these high attrition rates would have an adverse effect on our results of operations and financial condition.

The addition of new clients or implementation of new projects for existing clients may require us to recruit, hire, and train personnel at accelerated rates. We may not be able to successfully recruit, hire, train, and retain sufficient qualified personnel to adequately staff for existing business or future growth, particularly if we undertake new client relationships in industries in which we have not previously provided services. Because a substantial portion of our operating expenses consists of labor-related costs,

10

labor shortages or increases in wages (including minimum wages as mandated by the U.S. and Canadian federal governments, employee benefit costs, employment tax rates, and other labor related expenses) could cause our business, operating profits, and financial condition to suffer. In the past, some of our Canadian employees have attempted to organize a labor union and economic and legislative changes in the U.S. may encourage organizing efforts in the future which, if successful, could further increase our recruiting and training costs and could decrease our operating efficiency and productivity.

We may need to develop new products or services in order to compete for new customers or retain our existing customers.

If we are not able to develop new products or services, we may not be able to provide the same level of service provided by our competitors, which could result in the loss of an existing client or being unable to generate new clients.  If we are not able to develop new products and services, we could lose market share or not be able to grow our business and diversify our revenue base and thereby reduce our reliance on our significant customers.

Failure to implement technological advancements could make our services less competitive.

Technologies that our clients or competitors already possess or may in the future develop or acquire may decrease the cost or increase the efficiency of competing services. We believe that to remain competitive, we must continue to invest in technology to be able to compete for new business and maintain service levels for clients. We may not be able to develop and market any new services that use, or effectively compete with, existing or future technologies, and such services may not be commercially successful. Furthermore, our competitors may have greater resources to devote to research and development than we do and accordingly, may have the ability to develop and market new technologies with which we are unable to successfully compete.

Our operating costs may increase as a result of higher labor costs.

During the past economic downturns, we, like a number of companies in our industry, sought to limit our labor costs by limiting salary increases and payment of cash bonuses to our employees. During 2011, the local economies in some of the locations in which we operate experienced growth, which caused us to increase labor rates to remain competitive within the local economies. If these growth trends continue, we may need to further increase salaries or otherwise compensate our employees at higher levels in order to remain competitive.  Effective July 2009, the U.S. federal minimum wage rate was increased.  The minimum wage applicable to most of our operations in Canada is rising even more dramatically than in the U.S.  Higher salaries or other forms of compensation are likely to increase our cost of operations. If such increases are not offset by increased revenue, they will negatively impact our financial results. Conversely, if labor rates decrease due to higher unemployment in the current economic downturn, our cost of operations may decrease.  In the past, some of our Canadian employees have attempted to organize a labor union, and economic and legislative changes in the U.S. may encourage organizing efforts in the future which, if successful, could further increase our recruiting and training costs and could decrease our operating efficiency and productivity.

Our lack of a wide geographic diversity outside of North America may adversely affect our ability to serve existing customers or limit our ability to obtain new customers.

Although we currently conduct operations in Canada, the Philippines, Costa Rica and Honduras, we do not have a wide geographic diversity. Our lack of such diversity could adversely affect our business if one or more of our customers decide to move their existing business process outsourcing services offshore. It may also limit our ability to gain new clients who may require business process service providers to have this greater flexibility across differing geographies.

The movement of business process outsourcing services to other countries has been extensively reported in the press. Most analysts continue to believe that many outsourced services will continue to migrate to other countries with lower wages than those prevailing in the U.S. Accordingly, unless and until we continue to develop significant geographic diversity, we may be competitively disadvantaged compared to a number of our competitors who have already devoted significant time and money to establishing extensive offshore operations.

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

11

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

The current economic downturn and disruptions in the capital and credit markets in the U.S. and world economies have reduced consumer spending and reduced spending by businesses and such spending has not yet returned to pre-downturn levels.  Since our revenue is largely concentrated in the telecommunications industry, and the majority of our business involves technical support and customer care services initiated by our clients’ customers, our revenue is dependent on the amount of telecommunications products and services demanded by our clients’ customers.  Consequently, a general reduction in consumer demand for such products and services due to the recession in the domestic and international economies could reduce the demand for our services and have a material adverse effect on our results of operations.

In addition, our existing clients and a number of clients we are currently targeting have been decreasing the number of firms they rely on to outsource their business process outsourced services.  Due to financial uncertainties and the potential reduction in demand for our clients’ products and services, our clients and prospective clients may decide to further consolidate the number of firms on which they rely for their business process outsourced services to reduce costs.  Under these circumstances, our clients may cancel current contracts with us, or we may fail to attract new clients, which will adversely affect our financial condition.  In addition, they may seek price reductions on our contracts as means to lower their costs.  If global economic and market conditions remain uncertain or persist, spread, or deteriorate further, we may experience material impacts on our business, operating results, and financial condition.

If we do not effectively manage our growth or control costs related to growth, our results of operations will suffer.

We intend to grow our business by expanding our overall client base in current and new vertical markets. Growth could place significant strain on our management, employees, operations, operating and financial systems, and other resources. To accommodate significant growth we would be required to open additional facilities, expand and improve our information systems and procedures, and hire, train, motivate, and manage a growing workforce, all of which would increase our costs. Our systems, facilities, procedures, and personnel may not be adequate to support our future operations. Further, we may not be able to maintain or accelerate our current growth, effectively manage our expanding operations, or achieve planned growth on a timely and profitable basis. During recent years, we incurred costs related to excess capacity as we opened new facilities in anticipation of volume levels that did not materialize.  As a result, our operating profits declined, and our stock price was adversely impacted.  If we are unable to manage our growth efficiently, or if growth does not occur, our business, results of operations, and financial condition could suffer.

Increases in the cost of telephone and data services or significant interruptions in such services could adversely affect our business.

We depend on telephone and data services provided by various local and long distance telephone companies. Because of this dependence, any change to the telecommunications market that would disrupt these services or limit our ability to obtain services at favorable rates could affect our business. We have taken steps to mitigate our exposure to the risks associated with rate fluctuations and service disruption by entering into long-term contracts with various providers for telephone and data services and by investing in redundant circuits.  There is no obligation, however, for the vendors to renew their contracts with us or to offer the same or lower rates in the future, and such contracts are subject to termination or modification for various reasons outside of our control. In addition, there is no assurance that a redundant circuit would not also be disrupted.  A significant increase in the cost of telephone services that is not recoverable through an increase in the price of our services or any significant interruption in telephone services, could adversely affect our business.

We have experienced significant management turnover and need to retain key management personnel.

In June 2011, Chad A. Carlson was named as our President and Chief Executive Officer.  He had previously served as our Executive Vice President and Chief Operating Officer since June 2010.  In addition, we hired a new Senior Vice President, Sales and Marketing in January 2011, a new Senior Vice President and Chief Technology Officer in April 2011 and a new Senior Vice President, Chief Financial Officer and Treasurer in November 2011.  We filled several other key management positions during 2009, 2010 and 2011.  High turnover of senior management can adversely impact our client relationships, stock price, our results of operations, and it may make recruiting for future management positions more difficult.  In some cases, we may be required to pay significant amounts of severance to terminated management employees.  In addition, we must successfully integrate any new management personnel whom we hire within our organization in order to achieve our operating objectives. Changes in other key

12

management positions may temporarily affect our financial performance and results of operations as the new management becomes familiar with our business.  Accordingly, our future financial performance will depend to a significant extent on our ability to motivate and retain key management personnel.

Unauthorized disclosure of sensitive or confidential client and customer data could expose us to protracted and costly litigation and penalties and may cause us to lose clients.

We are dependent on IT networks and systems to process, transmit and store electronic information and to communicate among our locations around the world and with our alliance partners and clients. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential information. We are also required at times to manage, utilize and store sensitive or confidential client or customer data. As a result, we are subject to contractual terms and numerous U.S. and foreign laws and regulations designed to protect this information, such as various U.S. federal and state laws governing the protection of health or other individually identifiable information. If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines and/or criminal prosecution. Although we maintain cyber liability insurance, such insurance may not adequately or timely compensate us for all losses we may incur.  Unauthorized disclosure of sensitive or confidential client or customer data, whether through systems failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems or those we develop for our clients, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation, business, financial condition, results of operations and cash flows.

We process, transmit and store personally identifiable information and unauthorized access to or the unintended release of this information could result in a claim for damage or loss of business and create unfavorable publicity.

We process, transmit and store personally identifiable information, both in our role as a service provider and as an employer. This information may include social security numbers, financial and health information, as well as other personal information. As a result, we are subject to certain contractual terms as well as federal, state and foreign laws and regulations designed to protect personally identifiable information. We take measures to protect against unauthorized access and to comply with these laws and regulations. We use the internet as a mechanism for delivering our services to clients, which may expose us to potential disruptive intrusions. Unauthorized access, system denials of service, or failure to comply with data privacy laws and regulations may subject us to contractual liability and damages, loss of business, damages from individual claimants, fines, penalties, criminal prosecution and unfavorable publicity, any of which could negatively affect our operating results and financial condition. In addition, third party vendors that we engage to perform services for us may have an unintended release of personally identifiable information.

We face risks inherent in conducting business outside of North America.

Our operations in Canada accounted for 20.3% and 24.1% and 26.4% of our revenue in 2011, 2010 and 2009, respectively.  Our operations in the Philippines, Costa Rica and Honduras accounted for 28.5%, 12.7% and 4.1% of our revenue in 2011, 2010 and 2009, respectively.  We opened our first facility in Costa Rica in March 2010, our second facility in the Philippines in April 2010 and our first facility in Honduras in September 2011.  An important component of our growth strategy is continued international expansion.  There are risks inherent in conducting business internationally, including but not limited to:

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

·                  Significant changes in U.S. government programs, policies and regulatory requirements with respect to foreign operations or multinational companies;

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

·                  Potentially longer working capital cycles;

·                  Unexpected changes in foreign government programs or policies;

·                  Regulatory requirements and labor laws;

·                  Difficulties in staffing and effectively managing foreign operations;

·                  Political and social instability; and

·                  Reluctance of our current or potential new clients to have us provide services to them from a location outside of North America.

13

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

Various other risk factors described in this Annual Report on Form 10-K may be exacerbated with regard to international operations, especially in countries where we do not have well-established operations.  Such risks include those related to the need to retain key management personnel, the inability to hire and retain qualified employees, increases in operating costs, facility capacity utilization, management of growth and costs related to growth, geopolitical military conditions, interruptions to our business, and the quality and cost of telephone and data services infrastructure.

We may need to add specialized sales personnel in order to grow our business.  We may have difficulty recruiting candidates for these positions.

Our future growth depends on our ability to initiate, develop and maintain new client relationships, as well as our ability to maintain relationships with our existing principal clients. To generate opportunities for new business from existing clients, as well as obtain new clients, we may need to hire specialized sales and marketing staff to introduce new products and services.  If we are unable to hire sales people with the specialized skills and knowledge needed to attract new business, we would not be able to diversify our revenue base and thereby reduce our reliance on our significant customers.

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

A. Emmet Stephenson, Jr., one of our co-founders, together with his wife, owned approximately 23.7% of our outstanding common stock as of February 15, 2012.  Under an agreement we have entered into with Mr. Stephenson, so long as Mr. Stephenson, together with members of his family, beneficially owns 10% or more (but less than 30%) of our outstanding common stock, Mr. Stephenson will be entitled to designate one of our nominees for election to the board, although he has not currently exercised this right. In addition, our bylaws allow that any holder of 10% or more of our outstanding common stock may call a special meeting of our stockholders. The concentration of voting power in Mr. Stephenson’s hands, and the control Mr. Stephenson may exercise over us as described above, may discourage, delay or prevent a change in control that might otherwise benefit our stockholders.

Our stock price has been volatile and may decline significantly and unexpectedly.

The market price of our common stock has been volatile, and could be subject to wide fluctuations, in response to quarterly variations in our operating results, changes in management, the degree of success in implementing our business and growth strategies, announcements of new contracts or contract cancellations, announcements of technological innovations or new products and services by us or our competitors, changes in financial estimates by securities analysts, the perception that significant stockholders may sell or intend to sell their shares, or other events or factors we cannot currently foresee. We are also subject to broad market fluctuations, given the overall volatility of the current U.S. and global economies, where the market prices of equity securities of many companies experience substantial price and volume fluctuations that have often been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our common stock. Additionally, because our common stock trades at relatively low volume levels, any change in demand for our stock can be expected to substantially influence market prices thereof. The trading price of our stock varied from a low of $1.61 to a high of $5.72 during 2011.

Our quarterly operating results have historically varied and may not be a good indicator of future performance.

We have experienced, and expect to continue to experience quarterly variations in revenue and operating results due to a variety of factors, many of which are outside our control.  These factors include, changes in the amount and growth rate of revenue generated from our principal clients; the timing of receipt of payments from our clients; the timing of existing and future client product launches or service offerings; unanticipated volume fluctuations; expiration or termination of client projects; timing and amount of costs incurred to expand capacity in order to provide for further revenue growth from existing and future clients; and the seasonal nature of some clients’ businesses.

14

If we are unable to meet the debt covenant requirements under our revolving credit facility, potential growth and results of operations may suffer.

As of December 31, 2011, we had a $7.5 million secured line of credit with UMB Bank which we terminated on February 28, 2012 and replaced with a secured revolving credit facility with Wells Fargo Bank which has a term of three years (see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for further details).  As of December 31, 2011, there was no balance outstanding on the secured line of credit with UMB Bank.  We drew and repaid approximately $2.8 million on the line during 2011.  If we do not meet the debt covenant requirements under the new revolving credit facility with Wells Fargo Bank, we may lose an important source of liquidity and be unable to meet short-term cash needs required for growth opportunities and we could face adverse effects on our financial statements, including payments for waivers or higher interest rate obligations. Refer to “Liquidity and Capital Resources” in Item 7. for further discussion of our credit facility.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

As of December 31, 2011, we owned or leased the following facilities, containing in the aggregate approximately 1.1 million square feet:

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

(b)  Our Regina, Saskatchewan facility ceased operations in February 2009.

15

(c)  Our Laramie, Wyoming facility ceased operations in January 2010 and is listed as held for sale in our Consolidated Balance Sheets.

(d)  Our Victoria, Texas facility ceased operations in January 2010 and is currently being sublet through the remaining lease term.

(e)  Our Thunder Bay, Ontario facility ceased operations in March 2010 and is currently being sublet through the remaining lease term.

(f)  Our Collinsville, Virginia facility ceased operations in February 2012 and the lease expired in February 2012.

(g)  Our Greeley, Colorado facility ceased operations in December 2010 and is listed as held for sale in our Consolidated Balance Sheets.

(h)  Our Grand Junction, Colorado facility ramped down operations in December 2010.

Substantially all of our facility space can be used to support any of our business process outsourced services. We believe our existing facilities are adequate for our current operations. We intend to maintain efficient levels of excess capacity to enable us to readily provide for needs of new clients and increasing needs of existing clients.  We hold unencumbered, fee simple title to our company-owned facilities.

ITEM 3.  LEGAL PROCEEDINGS

On February 2, 2011, certain former employees of StarTek USA, Inc., filed a putative collective action under the Fair Labor Standards Act, alleging that they were owed overtime compensation for alleged work performed before and after regular shifts.  The plaintiffs sought overtime compensation, liquidated damages, and other relief for themselves as well as for all other customer service representatives and technical service representatives located throughout the United States who performed alleged uncompensated overtime and who were employed by us three years before the commencement of the civil action.  At the time that the case was filed, we believed that there was no merit to the case and vigorously defended the suit.  Following conditional class certification, plaintiffs mailed notice to approximately 22,000 potential plaintiffs; however, only 1,759 individuals timely opted-in to the class.  This opt-in rate was substantially lower than the parties anticipated.  Following a second mediation session on October 27, 2011, we agreed to settle the case for $0.6 million, including liquidated damages, attorney’s fees, and costs of settlement administration, which was recorded in selling, general and administrative expenses in the Consolidated Statements of Operations and Other Comprehensive Income (Loss).

We have been 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.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

Part II

ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR COMMON STOCK

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

16

HOLDERS OF COMMON STOCK

As of February 15, 2012, there were 64 stockholders of record and 15,267,407 shares of common stock outstanding.  See Item 1A.  “Risk Factors,” set forth in this Form 10-K for a discussion of risks related to control that may be exercised over us by our principal stockholders.

DIVIDEND POLICY

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

STOCK REPURCHASE PROGRAM

Effective November 4, 2004, our board of directors authorized repurchases of up to $25 million of our common stock. The repurchase program will remain in effect until terminated by the board of directors, and will allow us to repurchase shares of our common stock from time to time on the open market, in block trades and in privately-negotiated transactions. Repurchases will be implemented by the Chief Financial Officer consistent with the guidelines adopted by the board of directors, and will depend on market conditions and other factors. Any repurchased shares will be held as treasury stock, and will be available for general corporate purposes. Any repurchases will be made in accordance with SEC rules. As of the date of this filing, no shares have been repurchased under this program.

STOCK PERFORMANCE GRAPH

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

17

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

ITEM 6.  SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto which are included in Item 8. “Financial Statements and Supplementary Financial Data,” of this Form 10-K. Additionally, the following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in Item 7.

Due to the February 2009 sale of our subsidiary, Domain.com, the results of operations related to this line of business has been reported as discontinued operations for all periods presented below.

18

19

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the accompanying Consolidated Financial Statements included elsewhere in this annual report.

OVERVIEW

StarTek, Inc. is a global provider of business process outsourcing services with over 9,000 employees, whom we refer to as Brand Warriors that have been committed to making a positive impact on our clients’ business results for 25 years.  Our company mission is to enable and empower our Brand Warriors to fight for our clients' brands every day to bring value to our stakeholders. We accomplish this by aligning with our clients’ business objectives resulting in a trusted partnership.  The StarTek Advantage is the sum total of our culture, customized solutions and processes that enhance our clients’ customers experience.  StarTek Advantage is focused on improving customer experience and reducing total cost of ownership for our clients.  StarTek has proven results for the multiple services we provide including sales, order management and provisioning, customer care, technical support, receivables management, and retention programs.  We manage programs using a variety of multi-channel customer interaction capabilities including voice, chat, email, IVR and back-office support.  StarTek has delivery centers in the U.S., Philippines, Canada, Costa Rica, Honduras and through its StarTek@Home workforce. 

We seek to become a market leader in providing meaningful impact BPO services to our clients. Our approach is to develop relationships with our clients that are partnering and collaborative in nature where we are focused, flexible and responsive to their business needs.  In addition we offer creative industry-based solutions to meet our clients’ ever changing business needs.  The end result is the delivery of a quality customer experience to our client’s customers. To become a leader in the market, our strategy is to:

·      grow our existing client base by deepening and broadening our relationships,

·      add new clients and continue to diversify our client base,

·      improve the profitability of our business through operational improvements, increased utilization and right-sizing our North American operation,

·      expand our global delivery platform to meet our client needs, and

·      broaden our service offerings by providing more innovative and technology-enabled solutions.

During 2011, we further expanded our near-shore delivery platform by opening our first facility in Honduras.  Management believes that the labor market in Honduras is strong and our position as an early entrant into this country provides us a competitive advantage to win business with new and existing customers.  During 2011, we also continued to grow our headcount in the Philippines, where we added over 1,100  new full-time equivalent agents.  We believe that diversifying our geographic platform by expanding offshore and near-shore will result in improved margins and position us for future growth.  In 2011, we decreased our North American footprint by closing one facility in the U.S. early in the year and one Canadian facility in the third quarter of 2011.  The decision to close these facilities was due to lower client volumes and an effort to improve utilization at our centers, thus driving efficiencies and improved margins.  We will continue to evaluate the profitability of our North American locations.  In 2011, we made progress on our strategic objective to add new clients by signing eight new contracts.  We also built-out StarTek Advantage which builds upon the development of the StarTek operating platform in order to drive efficiencies in our operation, execute on our core offerings and deliver customized processes and solutions to our clients.

We operate within three business segments: U.S., Canada and Offshore.  The business segments align with the regions in which our services are rendered.  As of December 31, 2011, our U.S. segment included the operations of eight facilities in the U.S.; our Canada segment included the operations of two facilities in Canada; and our offshore segment included the operations of two facilities in the Philippines, one in Costa Rica and one in Honduras.  As of December 31, 2010, there were nine, three and three facilities in the U.S., Canada and Offshore segments, respectively.  As of December 31, 2009, there were thirteen, five and one facilities 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.

In 2010 and 2011 we received lower call volumes in our North American facilities, which adversely affected our results.  Partially offsetting lower call volumes in North America has been strong demand for our Offshore call center services, primarily in the Philippines.  We have observed that our customers are decreasing the number of agents handling calls by leveraging call disposition technology and there continues to be a shift toward outsourced and offshore providers.  While the increased use of call disposition technology has somewhat adversely impacted our 2011 financial results, the shift toward outsourced and offshore providers has positively impacted our business due to our expanded presence in the Philippines, Costa Rica and Honduras.  Part of our strategy (as noted above) is to further expand our geographic footprint offshore and near-shore to capitalize on this trend and to diversify geographic risk.  We also believe our customers and potential customers are seeking front and back-office business processes to increase operating efficiencies in order to enhance their customer experience.  We believe we are positioned to benefit from this trend as we have developed a comprehensive suite of services which includes front and back-office offerings for our customers.

20

SIGNIFICANT DEVELOPMENTS DURING THE YEAR ENDED DECEMBER 31, 2011

New Facilities

One component of our strategy is to expand our global delivery platform by growing offshore and near-shore.  Management believes that expansion into targeted international locations will broaden our service delivery platform and build our competitive advantage.  In connection with this strategy, and in response to client demand for another Latin America offering, we opened our first facility in Honduras in September 2011. Total lease commitments are approximately $5.8 million over the initial term of the lease, which is approximately seven years.

Site Closures

Management made the decision to close the following sites during 2011:

·                  Alexandria, Louisiana: In February 2011, we closed our facility in Alexandria, Louisiana due to lower call volumes from our second largest client.  The closure coincided with our lease expiration, and as such we did not incur material impairment and restructuring charges.  The closure resulted in approximately $10.5 million less revenue during 2011 compared to 2010, and decreased gross profit by $1.7 million, compared to 2010.

·                  Kingston, Ontario:  In September 2011, we closed one of two facilities in Kingston, Ontario.  This was consistent with our strategy to right-size our North American delivery platform and exit facilities as lease terms expire and local economic conditions, prevailing wage rates, foreign exchange rates, or other factors negatively impact the long-term financial viability of a location.  The business that was serviced in this location was moved to another facility and, as such, this closure did not have an impact on revenue during 2011.  We incurred restructuring and impairment charges of approximately $0.8 million during the year ended December 31, 2011, of which approximately $0.6 million was for severance payments.

Other Events

In April 2011, we announced a reduction of business in our Cornwall, Ontario facility and consequently renegotiated the facility lease for a smaller portion of the space through June 30, 2012.  We incurred approximately $1.1 million in restructuring and impairments costs associated with the downsizing during the year ended December 31, 2011.

SUBSEQUENT EVENTS

In January 2012, we announced that we would be consolidating the business performed in Enid, Oklahoma into another U.S. facility.  The transition of the business is expected to be completed by the end of the first quarter of 2012.  We are actively marketing this capacity to other current and potential clients.  However, if we are not successful in doing so, we may decide to close the facility.  In that event, we would not expect to incur material impairment and restructuring charges.

In February 2012, we closed our facility in Collinsville, Virginia as a result of a customer notification, which we had announced in June 2011.  Since the announcement of this closure, we were under a month-to-month lease arrangement and do not expect to incur material impairment and restructuring charges associated with this closure.

In February 2012, we received written customer notification of an intent to reduce its business in our Decatur, Illinois and Jonesboro, Arkansas facilities.  The reduction is expected to occur during the first quarter of 2012 and the early part of the second quarter of 2012.  We are actively selling this capacity to other current and potential clients.  However, if we are not successful in doing so, we may decide to close one or both of these facilities. In that event, there could be impairment and restructuring charges which would depend on which facilities are closed and when.

On February 28, 2012, we terminated our $7.5 million secured line of credit with UMB Bank, which was effective through August 1, 2012, and replaced it with a secured revolving credit facility with Wells Fargo Bank (the “Credit Agreement”). The Credit Agreement is effective February 28, 2012 through February 28, 2015.  The amount we may borrow under the Credit Agreement is the lesser of the borrowing base calculation and $10 million, and, so long as no default has occurred, we may increase the maximum availability to $20 million in $2.5 million increments.  We may request letters of credit under the Credit Agreement in an aggregate amount equal to the lesser of the borrowing base calculation (minus outstanding advances) and $5 million. The borrowing base is generally defined as 85% of our eligible accounts receivable less reserves for foreign exchange forward contracts and other reserves as defined in the Credit Agreement.  Borrowings under the Credit Agreement bear interest at the daily three-month LIBOR index plus 2.50% to 3.00% depending on the calculation of the fixed charge coverage ratio, as defined in the Credit Agreement.  Until the first monthly report of the fixed charge coverage ratio, the interest rate will be the daily three-month LIBOR index plus 3.00%.  We will pay letter of credit fees on the average daily aggregate available amount of all letters of credit outstanding monthly at a rate per annum of 3.0% and a monthly unused fee at a rate per annum of 0.30% on the aggregate unused commitment under the Credit Agreement.  We granted Wells Fargo a security interest in all of our assets, including all cash and cash equivalents, accounts receivable, general intangibles, owned real property, equipment and fixtures.  In addition, under the Credit Agreement, we are subject to certain standard affirmative and negative covenants, including the following financial covenants: 1) maintaining a minimum adjusted EBITDA, as defined in the credit Agreement, of no less than the monthly minimum amounts set forth in the Credit Agreement and 2) limiting non-financed capital expenditures during 2012 to $6.5 million, provided that such expenditures would not cause the ratio of excess availability, as defined in the Credit Agreement, to aggregate non-financed capital expenditures to be less than 1:50 to 1:00.  The requirement for non-financed capital expenditures may be increased quarterly by an amount equal to 50% of any positive variance between budgeted and actual adjusted EBITDA results measured at the end of each quarter.  We and Wells Fargo are required to agree on financial covenants for the remaining term of the Credit Agreement beyond 2012, and any failure to do so will constitute an event of default. In connection with the termination of our secured line of credit with UMB Bank, we liquidated all of our outstanding hedge positions with UMB Bank as of this date, and replaced them with new hedges with Wells Fargo Bank, which resulted in a gain of approximately $0.2 million during the first quarter of 2012.

21

RESULTS OF OPERATIONS — YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010

The following table presents selected items from our Consolidated Statements of Operations in thousands of dollars and as a percentage of revenue for the periods indicated:

NM = not meaningful.

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

22

Revenue

Revenue decreased by $45.9 million, or 17.3%, from $265.4 million in 2010 to $219.5 million in 2011.  The decrease was driven by the U.S. and Canadian segments.  Revenue in the U.S. segment decreased by 32.9%, or $55.1 million, due in part to five site closures during 2010 and 2011, which resulted in $31.2 million less revenue in 2011 as compared to 2010.  In addition, our closure in Collinsville, Virginia in January 2012 resulted in $10.0 million less revenue in 2011 as compared to 2010 as these programs ramped down.  Other revenue decreased by $17.7 million driven by lower call volumes, partially offset by $3.8 million of incremental revenue from new business booked during 2011. Revenue from Canada decreased by $19.5 million, or 30.5%.  The decline was driven by the closure of three sites in Canada in 2010 and 2011 which contributed $13.6  million less revenue during 2011 as compared to 2010.  In addition, the downsizing of our facility in Cornwall, Ontario during 2011 resulted in approximately $9.8 million less revenue in 2011, as compared to 2010.  These declines were partially offset by greater call volumes at our other Canadian facilities.  Offshore revenue increased $28.8 million from $33.7 million to $62.5 million due primarily to two new facilities in 2010 and one new facility in 2011.  Our Costa Rica facility was opened in March 2010, our second site in the Philippines in April 2010 and a first site in Honduras in September 2011, which combined contributed $17.9 million in incremental revenue in 2011, compared to 2010. The remaining increase was driven primarily by new business resulting from an increase in full-time equivalent agents in our other Philippine location.  In the Offshore segment, there was $5.2 million of incremental revenue from new business booked during 2011.

Cost of Services and Gross Profit

Cost of services decreased by $41.2 million, or 17.3%, from $237.7 million in 2010 to $196.5 million in 2011.  Gross profit as a percentage of revenue increased slightly from 10.4% in 2010 to 10.5% in 2011.  Cost of services in the U.S. decreased by approximately $42.7 million, or 30.0%, of which $36.2 million related to the ramp-downs and site closures discussed above.  Gross profit as a percentage of revenue in the U.S decreased from 14.9% in 2010 to 11.2% in 2011, or $12.4 million.  The site closures and ramp downs accounted for $5.0 million of the decline in gross profit in 2011 compared to 2010.  Cost of services in Canada decreased by approximately $18.6 million, or 31.1%.  The decrease was driven by a decline of $21.9 million in 2011, compared to 2010, for the four sites that closed and downsized in Canada during 2010 and 2011, described above.  Gross profit as a percentage of revenue in Canada increased from 6.4% in 2010 to 7.1% in 2011, but in dollars decreased by $1.0  million.  The site closures and downsizing accounted for $1.6 million of the decline in gross profit, which was partially offset by improved gross profit at our other Canadian facilities due to higher volumes and better utilization.  The decrease in cost of services in the U.S and Canada were partially offset by greater cost of services in the Offshore segment, which increased by approximately $20.2 million, or 57.4%.  Gross profit as a percentage of revenue Offshore increased from (4.3%) in 2010 to 11.5% in 2011, or $8.6 million.  The new facilities opened in Costa Rica, the Philippines and Honduras in 2010 and 2011 contributed $15.7 million in incremental cost of services and $2.2 million of incremental gross profit as new business was ramped and utilization improved.  The remainder of the increase in cost of services and gross profit was driven by an increase in agents and better utilization due to the ramp-up of new business in the other Philippine location.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $0.8 million, or 1.9%, from $43.3 million in 2010 to $44.1 million in 2011.  As a percentage of revenue, selling, general and administrative expenses increased from 16.3% in 2010 to 20.1% in 2011.  Selling, general and administrative expenses were higher due to 1) approximately $2.4 million increase in severance in 2011 as compared to 2010 primarily for our former Chief Executive Officer and former Chief Financial Officer, 2) $0.9 million increase in commission expense related to increased new business, 3) $0.8 million increase in contract labor expenses and 4) approximately $0.8 million increase in legal fees due primarily to the $0.6 million settlement of an employee labor relations lawsuit.  These increases were partially offset by approximately $3.2 million less in payroll expense in 2011 due to selling, general and administrative headcount reductions and approximately $0.7 million decrease in bonus expense.

Impairment Losses and Restructuring Charges

Impairment losses and restructuring charges totaled $5.5 million and $2.8 million for the years ended December 31, 2011 and 2010, respectively.  Impairment losses were $2.4 million in 2011.  We recorded $1.1 million in impairment losses ($0.9 million in our U.S. segment and $0.2 million in our Canadian segment) during 2011 related to long-lived assets such as computer equipment, software, equipment and furniture and fixtures for which the future cash flows did not support the carrying value of the assets.  In addition, in our U.S. segment we recorded approximately $1.3 million of impairment losses on two buildings to reduce the carrying value to their fair value based upon third-party broker valuations.  Restructuring charges totaled $3.1 million in 2011 ($0.2 million in our U.S. segment and $2.9 million in our Canadian segment).  The charges were due to 1) approximately

23

$1.6 million related to statutorily required severance costs in Canada, 2) approximately $1.2 million to record an additional accrual on our closed Regina, Saskatchewan facility for an estimated buy-out of the lease and 3) approximately $0.3 million related to other lease related termination costs at closed facilities.

In 2010, we recorded $4.1 million in impairment charges related to our North American sites that we closed related to long-lived assets at these locations for which the carrying value is not recoverable and related to other sites in which future cash flows do not support the carrying value of the assets.  These charges totaled $3.2 million in our U.S. segment and $0.9 million in our Canadian segment.  We incurred approximately $0.5 million of restructuring charges, primarily in our U.S. segment, related to site closures.  The impairment losses and restructuring charges were offset by a $1.8 million reduction due to a change in the sublease estimate at one of our Canadian facilities.

Operating Loss

We incurred operating losses of approximately $26.6 million and $18.4 million for the years ended December 31, 2011 and 2010, respectively.  The increase in the loss period over period was driven by the decrease in revenue and gross profit, one time unusual selling, general and administrative expense items, and greater impairment losses and restructuring charges, as discussed previously.

Net Interest and Other Income

Net interest and other income was approximately $0.03 million and $0.3 million in 2011 and 2010, respectively.  The decrease was primarily due to the absence of a realized gain in 2010 of approximately $0.1 million for the partial recovery of a previously impaired investment.

Income Tax (Benefit) Expense

We recorded an income tax benefit of $0.1 million during 2011 and income tax expense of $1.2 million in 2010.  The income tax expense in 2010 reflected the establishment of a valuation allowance for substantially all of our U.S. net deferred tax assets during 2010.  As such, we did not record an income tax benefit related to our U.S. operations in 2010 or 2011 despite our loss from continuing operations during 2010 and 2011.  Until we generate U.S. income from continuing operations, we will be unable to utilize the tax benefit related to our net operating loss carryforwards.  The income tax benefit recorded during 2011 was primarily related to a taxable loss from our Canadian operations.  During 2011, we had income tax holidays in the Philippines, Costa Rica and Honduras.

Net Loss

Net loss was approximately $26.5 million and $19.4 million in 2011 and 2010, respectively.  The increase in the net loss was primarily due to lower revenue and gross margin, higher selling, general and administrative costs and greater impairment and restructuring charges, partially offset by lower income tax expense, as discussed previously.

RESULTS OF OPERATIONS — YEARS ENDED DECEMBER 31, 2010 AND DECEMBER 31, 2009

Due to the February 2009, sale of our subsidiary, Domain.com, the results of operations related to this line of business have been reported as discontinued operations for all periods presented below.

The following table presents selected items from our Consolidated Statements of Operations in thousands of dollars and as a percentage of revenue for the periods indicated:

24

NM = not meaningful.

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

Revenue

Revenue decreased by $23.6 million, or 8.2%, from $289.0 million in 2009 to $265.4 million in 2010.  The decrease was driven by the U.S. and Canadian segments.  Revenue in the U.S. segment decreased by 16.5%, or $33.1 million, due in part to three site closures during the year.  Our closures in the first quarter 2010 in Laramie, Wyoming and Victoria, Texas resulted in a decline in revenue of $12.2 million.  In addition, we ramped down two sites in 2010 due to the loss of certain wireline business with our

25

largest client.  The ramp-down of these programs resulted in $5.4 million less revenue in these sites during 2010, compared to 2009.  We also announced in the fourth quarter that we may close our Alexandria, Louisiana facility in February 2011 due to lower call volumes from our second largest client, the resulting ramp-down of this site resulted in $2.1 million less revenue in 2010, compared to 2009.  The remaining decrease of $13.4 million was driven by lower call volumes from our two largest wireless clients and wireline clients. Revenue from Canada decreased by $12.3 million, or 16.1%.  The decline was driven by the ramp-down and closure of three sites in Canada (Regina, Saskatchewan in February 2009, Thunder Bay, Ontario in March 2010 and Sarnia, Ontario in December 2010) which contributed $11.0 million less revenue during 2010, compared to 2009.  The remainder of the decrease in the Canadian segment was due to lower North American call volumes from our two largest clients.  Offshore revenue increased $21.8 million from $11.9 million to $33.7 million due primarily to two new facilities opened there in 2010.  In March 2010, we opened our site in Costa Rica and in April 2010, we opened our second site in the Philippines, which combined contributed $12.7 million in incremental revenue in 2010, compared to 2009. The remaining increase was driven by an increase in full-time equivalent agents in our other Philippine location.

Cost of Services and Gross Profit

Cost of services decreased by $2.2 million, or 0.9%, from $239.9 million in 2009 to $237.7 million in 2010.  Gross profit as a percentage of revenue decreased from 17.0% in 2009 to 10.4% in 2010.  Cost of services in the U.S. decreased by approximately $21.8 million, or 13.3%, of which $17.0 million related to the ramp-downs and site closures, discussed above.  Cost of services in Canada decreased by approximately $4.5 million, or 7.0%.  The decrease was driven by a decline of $8.7 million in 2010, compared to 2009, for the three sites that closed in Canada during 2009 and 2010, described above.  This decline was partially offset by an increase in cost of services of $4.1 million due to a weaker U.S. to Canadian dollar exchange rate in 2010, compared to 2009.  These decreases to cost of services were partially offset by greater cost of services in the Offshore segment, which increased by approximately $24.1 million.  The increase was primarily due to higher cost of services associated with our new sites in Costa Rica and the Philippines, which increased cost of services by approximately $15.5 million, and the ramp-up of our Makati, Philippine location which nearly doubled agent headcount in 2010, compared to 2009.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $0.1 million, or 0.2%, from $43.2 million in 2009 to $43.3 million in 2010.  As a percentage of revenue, selling, general and administrative expenses increased from 14.9% in 2009 to 16.3% in 2010.  Selling, general and administrative expenses were higher due to an approximately $3.0 million increase in base salary expense due in part to the hire of several executives and approximately $0.9 million in severance expense recorded during the fourth quarter of 2010.  These increases were partially offset by $0.6 million from the absence of expenses related to the settlement of a shareholder lawsuit in 2009, and declines of $0.9 million in hiring expense, $0.4 million in legal expense, $0.4 million in contract labor, and $1.4 million related to payroll processing, personnel expense, consulting fees, training and travel expenses.

Impairment Losses and Restructuring Charges

Impairment losses and restructuring charges totaled $2.8 million and $6.4 million for the years ended December 31, 2010 and 2009, respectively.  We recorded $4.1 million in impairment charges during 2010 related to our North American sites that we closed related to long-lived assets at these locations for which the carrying value is not recoverable and related to other sites in which future cash flows do not support the carrying value of the assets.  These charges totaled $3.2 million in our U.S. segment and $0.9 million in our Canadian segment.  We incurred approximately $0.5 million of restructuring charges, primarily in our U.S. segment, related to the above mentioned site closures.  The impairment losses and restructuring charges were offset by a $1.8 million reduction due to a change in the sublease estimate at one of our Canadian facilities.  We recorded approximately $1.7 million in impairment losses during 2009 in our Canadian segment due to the impairment of certain long-lived assets for which the carrying value of those assets is not recoverable and restructuring charges totaled $4.7 million in 2009, related primarily to the February 2009 closure of our Regina, Saskatchewan facility.

Operating Loss

We incurred operating losses of approximately $18.4 million and $0.5 million for the years ended December 31, 2010 and 2009, respectively.  The increase in the loss period over period was driven by the decrease in revenue and gross profit, partially offset by fewer impairment losses and restructuring charges, as discussed previously.

26

Net Interest and Other Income (Expense)

Net interest and other income was approximately $0.3 million in 2010, compared to net interest and other expense of $0.2 million in 2009.  The change was primarily due to a decrease in interest expense of approximately $0.2 million period over period due to the pay-off of certain notes payable in 2009, and a realized gain of approximately $0.1 million for the partial recovery of a previously impaired investment.

Income Tax Expense (Benefit)

The provision for income taxes of $1.2 million for the year ended December 31, 2010 reflects the establishment of a valuation allowance for substantially all of our U.S. net deferred tax assets.  During 2010, we evaluated all positive and negative evidence related to our ability to utilize our U.S. deferred tax assets and recorded a valuation allowance due to our three-year historical cumulative losses, recent operating losses and a 2010 U.S. pre-tax loss, which reduced the income tax benefit by $9.2 million in 2010.

Income from Discontinued Operations, net of tax

Income from discontinued operations was approximately $4.6 million in 2009.  In February 2009, we sold Domain.com, a then 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 $2.3 million, resulting in income of $4.6 million.

Net (Loss) Income

Net loss was approximately $19.4 million in 2010 and net income was approximately $4.6 million in 2009.  The change was primarily due to lower revenue and gross margin, the absence of income from discontinued operations and greater tax expense, partially offset by less impairment and restructuring charges, as discussed previously.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2011, working capital totaled $32.8 million and our current ratio was 2.40:1, compared to working capital of $50.2 million and a current ratio of 2.81:1 at December 31, 2010.  The decline in working capital of approximately $17.4 million from December 31, 2010 to December 31, 2011 was primarily due to a $9.0 million decline in cash and cash equivalents and a $9.3 million decline in accounts receivable.  The decrease in cash and cash equivalents is described in further detail below.  The decrease in accounts receivable was due primarily to lower revenue.  Our days sales outstanding (“DSO”) remained consistent at 68 days at December 31, 2011, compared to 67 days at December 31, 2010.  We compute DSO as follows:  period-end receivables, net of allowances, divided by the average daily revenue.  For the years ended December 31, 2011 and 2010, we made payments under our restructuring plans of $3.6 million and $2.5 million, respectively.  As of December 31, 2011, our remaining liability related to the restructuring plans was approximately $1.7 million.

We have historically financed our operations, liquidity requirements, capital expenditures, and capacity expansion primarily through cash flows from operations, and to a lesser degree, through various forms of debt and leasing arrangements. In addition to funding basic operations, our primary uses of cash typically relate to capital expenditures to upgrade our existing information technologies and service offerings and investments in our facilities.  During the years ended December 31, 2011, 2010 and 2009, we drew and re-paid approximately $2.8 million, $2.0 million and $22.2 million, respectively.  Due to the timing of our collections of large billings with our major customers, we have historically needed to draw on our line of credit for ongoing operating activities.

As of December 31, 2011, we had a $7.5 million secured line of credit with UMB Bank.  The amount available under the line was subject to adjustment for any proceeds received on the sale of our assets classified as held for sale on our Consolidated Balance Sheets but in no event would it fall below $5 million.  Borrowings bore interest, at our option at the time of borrowing, of the thirty, sixty or ninety day LIBOR index, plus 3.75% and the interest rate would never be less than 4.50% per annum.  UMB Bank retained a security interest in all of our present and future accounts receivable, general intangibles, and owned real property.  As of December 31, 2011, we were in compliance with our financial covenants and did not have any amount outstanding on the line credit.

27

On February 28, 2012, we terminated our secured line of credit with UMB Bank, which was effective through August 1, 2012 and replaced it with a secured revolving credit facility with Wells Fargo Bank.  The Credit Agreement is effective February 28, 2012 through February 28, 2015.  The amount that we may borrow under the Credit Agreement is subject to a borrowing base calculation, and has an initial availability of $10 million, with the flexibility to borrow up to $20 million at our option.  Borrowings under the Credit Agreement bear interest at the daily three-month LIBOR index plus 2.50% to 3.00% depending on the calculation of the fixed charge coverage ratio, as defined in the Credit Agreement.  We granted Wells Fargo a security interest in all of our cash and cash equivalents, accounts receivable, general intangibles, owned real property, equipment and fixtures.

As described further below, we had negative cash flows from operations during the year ended December 31, 2011.  The negative cash flows were primarily a result of our net loss during the period.  We have put into place cash management practices to limit discretionary spending and monitor our capital expenditures, which we believe will result in an improvement in cash flows in 2012.  We believe that the borrowing capacity under the new secured line of credit with Wells Fargo Bank, together with cash on hand and anticipated cash flow from operations, will be adequate to meet our working capital and capital expenditure requirements for the next year.  A decrease in demand for our services, particularly from any of our principal clients, which could arise from a number of factors, including, but not limited to, competitive pressures, adverse trends in the business process outsourcing market, industry consolidation, adverse circumstances with respect to the industries we service, and any of the other factors we describe more fully in Item 1A. “Risk Factors” of this Form 10-K could adversely affect our business and our liquidity position.

Our balance of cash and cash equivalents was $9.7 million at December 31, 2011, compared to a balance of $18.7 million at December 31, 2010.

CASH FLOWS — YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010

Operating Activities.  Net cash used in operating activities was $1.3 million in 2011, compared to net cash provided by operating activities of $14.7 million in 2010, representing a decrease of $16.0 million.  The decrease of $16.0 million in cash provided by operating activities was driven by the following: 1) $10.2 million increase in the net loss after impairment losses and depreciation expense over 2011 (net loss increased by $7.1 million and impairment losses and depreciation expense decreased by $3.1 million), 2) $6.1 million decline in the change in income tax receivable due to the absence of a large income tax refund collected in the first quarter of 2010, 3) $2.6 million decrease in the change in accounts payable due to timing of payments and 4) $1.4 million decrease in the change in deferred tax assets due to a larger decrease in deferred tax assets in 2010 related to the establishment of a valuation allowance that year.  These decreases to cash from operating activities were partially offset by a $4.6 million increase in collections of accounts receivable year over year due to the timing of collections.

Investing Activities.   Net cash used in investing activities was $8.3 million in 2011 and $16.1 million in 2010.  The decrease was primarily due to 1) a decrease of $8.0 million in purchases of property, plant and equipment as we limited our capital expenditures in our Honduran expansion, compared to the two new facilities we built out in Costa Rica and the Philippines in 2010 and 2) a decrease of $0.6 million in proceeds from the disposition of available for sale securities.

Financing Activities.   Net cash provided by financing activities was $0.1 million in 2011 and $0.3 million in 2010.  The decrease was primarily due to 1) $0.1 million fewer proceeds on the issuance of common stock due to fewer stock option exercises and purchases under our Employee Stock Purchase Plan and 2) $0.1 million decrease in payments on capital lease obligations.

28

CASH FLOWS — YEARS ENDED DECEMBER 31, 2010 AND DECEMBER 31, 2009

Operating Activities.    Net cash provided by operating activities from continuing operations decreased by $3.3 million from $18.0 million in 2009 to $14.7 million in 2010.  The decrease of $3.3 million in cash provided by operating activities from continuing operations was driven by the following decreases: 1) $19.4 million decrease in income from continuing operations, 2) $5.9 million in deferred income taxes and 3) $2.7 million decrease in the change in accrued liabilities due to fewer restructuring costs in 2010, compared to 2009.  These decreases to cash provided by operating activities from continuing operations were partially offset by the following increases:1) $9.3 million change due to a reduction in our income tax receivable year over year resulting primarily from a large income tax refund collected in the first quarter of 2010, 2) $4.2 million lower accounts receivable period over period due to timing of payments, 3) $4.1 million in higher accounts payable in 2010 compared to 2009 due to timing of payment and 4) $3.9 million greater change in prepaid expenses which was relatively flat in 2010 but increased by $3.4 million in 2009 due primarily to an increase in maintenance contracts in 2009.

Investing Activities.    Net cash used in investing activities was $16.1 million in 2010 compared to cash provided by investing activities of $0.4 million in 2009.  The increase was primarily due to 1) the absence of proceeds from the sale of Domain.com of $7.1 million recorded in 2009, 2) a $7.4 million decrease in the proceeds from the sale of investments and 3) an increase of $2.3 million in purchases of property, plant and equipment due to new site openings in Costa Rica in March 2010 and the Philippines in April 2010.

Financing Activities.   Net cash provided by financing activities was $0.3 million in 2010 compared to cash used in financing activities of $6.8 million in 2009.  The change was primarily due to the absence of payments on long-term debt which were $6.9 million in 2009 as we paid off two equipment loans in the second quarter of 2009.

CONTRACTUAL OBLIGATIONS

Other than operating leases for certain equipment and real estate and commitments to purchase goods and services in the future, in each case as reflected in the table below, we have no off-balance sheet transactions, unconditional purchase obligations or similar instruments and we are not a guarantor of any other entities’ debt or other financial obligations. The following table presents a summary (in thousands), by period, of our future contractual obligations and payments as of December 31, 2011:

(1)      We lease facilities and equipment under various non-cancelable operating leases.  As of December 31, 2011, there was $1.2 million of minimum rentals to be received in the future under non-cancelable subleases.

(2)      We lease equipment under certain capital lease agreements.

Line of Credit

On November 15, 2011, we entered into a business loan agreement and promissory note (together the “Agreement”) with UMB Bank Colorado, N.A. (“UMB Bank”) for a $7.5 million secured revolving line of credit.  The Agreement was effective November 8, 2011 through August 1, 2012.  This Agreement replaced our previous $7.5 million secured revolving line of credit with UMB Bank.  Under the Agreement, the amount available under the line of credit was to be reduced by the amount of any proceeds received on the sale of our assets classified as held for sale in our Consolidated Balance Sheets, but in no event would it fall below $5 million.  Borrowings under the Agreement bore interest at the thirty day LIBOR index, plus 3.75%.  The interest rate was to never be less than 4.50% per annum.  This was an increase from the terms of our previous agreement which were that borrowings bore interest, at our option at the time of the borrowing, of the thirty, sixty or ninety day LIBOR index, plus 3.25% and that the interest rate wouldn’t be less than 4.00% per annum.  Under the Agreement, UMB Bank maintained a security interest in all of our present and future accounts receivable, general intangibles, and owned real property.  In addition, under the Agreement, we were subject to certain financial covenants, which include maintaining 1) a tangible net worth of at least $75 million, 2) unencumbered liquid assets, defined as cash, certificates of deposit and marketable securities, of at least $6.5 million

29

measured on the last day of each fiscal quarter and 3) 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.  The definition of our tangible net worth requirement excluded the calculation of any gains or losses associated with our assets classified as held for sale on our Consolidated Balance Sheets.  As of December 31, 2011, we were in compliance with all of our debt covenants, including the tangible net worth requirement which after adding back our impairment loss on a held for sale facility was $75.4 million.

On February 28, 2012, we terminated our secured line of credit with UMB Bank, which was effective through August 1, 2012 and replaced it with a secured revolving credit facility with Wells Fargo Bank.  The Credit Agreement is effective February 28, 2012 through February 28, 2015.  The amount that we may borrow under the Credit Agreement is subject to a borrowing base calculation, and has an initial availability of $10 million, with the flexibility to borrow up to $20 million at our option.  Borrowings under the Credit Agreement bear interest at the daily three-month LIBOR index plus 2.50% to 3.00% depending on the calculation of the fixed charge coverage ratio, as defined in the Credit Agreement.  We will pay letter of credit fees on the average daily aggregate available amount of all letters of credit outstanding monthly at a rate per annum of 3.0% and a monthly unused fee at a rate per annum of 0.30% on the aggregate unused commitment under the Credit Agreement.  We granted Wells Fargo a security interest in all of our cash and cash equivalents, accounts receivable, general intangibles, owned real property, equipment and fixtures.  In addition, under the Credit Agreement, we are subject to certain financial covenants, which include 1) maintaining a minimum adjusted EBITDA, as defined in the Credit Agreement, of no less than the monthly minimum amounts set forth in the Credit Agreement and 2) limiting non-financed capital expenditures during 2012 to $6.5 million, provided that such expenditures would not cause the ratio of excess availability, as defined in the Credit Agreement, to aggregate non-financed capital expenditures to be less than 1:50 to 1:00.  The requirement for non-financed capital expenditures may be increased quarterly by an amount equal to 50% of any positive variance between budgeted and actual adjusted EBITDA results measured at the end of each quarter.

OTHER FACTORS IMPACTING LIQUIDITY

Effective November 4, 2004, our board of directors authorized purchases of up to $25 million of our common stock.  The repurchase program will remain in effect until terminated by the board of directors and will allow us to repurchase shares of our common stock from time to time on the open market, in block trades and in privately-negotiated transactions.  Repurchases will be implemented by the Chief Financial Officer consistent with the guidelines adopted by the board of directors from time to time and will depend on market conditions and other factors.  Any repurchased shares will be made in accordance with SEC rules.  We have not yet repurchased any shares pursuant to this board authorization.