<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998
REGISTRATION NO. 333-53619
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
CONVERGYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
OHIO 7389 31-1598292
(I.R.S. EMPLOYER IDENTIFICATION
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
201 EAST FOURTH STREET, CINCINNATI, OHIO 45202, (513) 397-5364
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM D. BASKETT III
SECRETARY & GENERAL COUNSEL
201 EAST FOURTH STREET
CINCINNATI, OHIO 45202, (513) 397-6870
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
NEIL GANULIN, ESQ. MARK KESSEL, ESQ.
FROST & JACOBS LLP JAMES S. SCOTT, SR., ESQ.
201 EAST FIFTH STREET SHEARMAN & STERLING
CINCINNATI, OHIO 45202 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED(1) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Shares, without par value............
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Total....................................... $425,000,000 $125,375
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</TABLE>
(1) Includes shares to be sold pursuant to the over-allotment option granted to
the U.S. Underwriters.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(o) promulgated under the Securities Act of 1933.
------------------------
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued July 17, 1998
18,000,000 SHARES
CONVERGYS CORPORATION
COMMON SHARES
------------------------
ALL OF THE COMMON SHARES (THE "COMMON SHARES") ARE BEING OFFERED BY THE COMPANY,
WHICH IS CURRENTLY A WHOLLY OWNED SUBSIDIARY OF CINCINNATI BELL INC. ("CBI"). OF
THE 18,000,000 COMMON SHARES OFFERED HEREBY, 14,400,000 COMMON SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U. S. UNDERWRITERS AND
3,600,000 COMMON SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES
AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." PRIOR TO THE
OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON SHARES. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $17 AND $19 PER
SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
AFTER THE OFFERING, CBI WILL OWN APPROXIMATELY 88.3% (86.8% IF THE UNDERWRITERS
EXERCISE THEIR OVER-ALLOTMENT OPTION IN FULL) OF THE COMMON SHARES. CBI HAS
ANNOUNCED ITS INTENTION, SUBJECT TO SATISFACTION OF CERTAIN CONDITIONS, TO
DIVEST ITS OWNERSHIP INTEREST WITHIN SIX MONTHS FOLLOWING THE OFFERING BY MEANS
OF A TAX-FREE DISTRIBUTION TO ITS SHAREHOLDERS. SEE "RELATIONSHIP BETWEEN THE
COMPANY AND CBI."
------------------------
THE COMMON SHARES HAVE BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "CVG."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
-------- -------------- -------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total(3)............................... $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at
$1,810,000.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
2,700,000 additional Common Shares at the price to public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option
in full, the total price to public, underwriting discounts and
commissions and proceeds to the Company will be $ , $ ,
and $ , respectively. See "Underwriters."
------------------------
The Common Shares are offered, subject to prior sale, when, as and if
accepted by the Underwriters named herein and subject to approval of certain
legal matters by Shearman & Sterling, counsel for the Underwriters. It is
expected that delivery of the Common Shares will be made on or about August ,
1998 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
BANCAMERICA ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
August , 1998
<PAGE> 3
THE CUSTOMER LIFECYCLE
CONVERGYS SERVES THE CUSTOMER AT EVERY STAGE
INFORMATION CUSTOMER
MANAGEMENT MANAGEMENT
o Lead Management o Market Research
o Credit Verification, Monitoring o Data Modeling
o Data Warehouse o Customer Segmenting
ACQUIRE
INFORMATION INFORMATION
MANAGEMENT MANAGEMENT
o Fraud/Churn Management Photo of o Rating o Collection
o Decision Support woman on o Remittance Processing
o Data Mining Phone o Bundled & Electronic
Billing
GROW BILL
CUSTOMER CUSTOMER
MANAGEMENT MANAGEMENT
o Data Modeling o Billing Inquiry
o Churn Intervention and Adjustments
o Cross Sell/ Up Sell o Collections
SERVE
INFORMATION CUSTOMER
MANAGEMENT MANAGEMENT
o Customer History o Customer Service
and Tracking o Technical Support
o Usage Monitoring o Business Sales Support
CONVERGYS INFORMATION AND CUSTOMER MANAGEMENT SOLUTIONS:
o Acquire customers more cost effectively
o Provide higher levels of service at lower cost
o Satisfy customers to enhance retention and loyalty
o Leverage interactions to broaden customer relationships CONVERGYS
<PAGE> 4
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
For investors outside the United States, no action has been or will be
taken in any jurisdiction by the Company or any Underwriter that would permit a
public offering of the Common Shares or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about, and
to observe any restrictions as to, the offering of the Common Shares and the
distribution of this Prospectus.
------------------------
Until , 1998 (25 days after commencement of the Offering), all
dealers effecting transactions in the Common Shares, whether or not
participating in this distribution, may be required to deliver a prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements............... 3
Prospectus Summary....................... 4
Risk Factors............................. 10
Use of Proceeds.......................... 16
Dividend Policy.......................... 16
Capitalization........................... 17
Dilution................................. 18
Selected Financial Data.................. 19
Unaudited Pro Forma Condensed
Consolidated Statements of Income...... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 23
Business................................. 39
Management............................... 49
</TABLE>
<TABLE>
<CAPTION>
PAGE
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Background of the Separation and
Distribution........................... 60
Relationship Between the Company and
CBI.................................... 61
Description of Capital Stock............. 67
Shares Eligible For Future Sale.......... 69
Certain United States Tax Consequences to
Non-United States Holders of Common
Shares................................. 70
Underwriters............................. 72
Legal Matters............................ 75
Experts.................................. 75
Additional Information................... 75
Company and Transtech Index to
Consolidated Financial Statements...... F-1
</TABLE>
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
SHARES. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR, AND PURCHASE, COMMON SHARES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
------------------------
Market data and certain industry forecasts used throughout this Prospectus
were obtained from market research, publicly available information and industry
publications.
This Prospectus contains trademarks, service marks or registered marks of
the Company, its subsidiaries, and other companies, as indicated.
------------------------
FORWARD-LOOKING STATEMENTS
Certain information contained in this Prospectus includes "forward-looking
statements." There are important factors that could cause actual results to
differ materially from those anticipated by the forward-looking statements.
Information on such important factors and other risks which could affect the
Company's financial results and the market value of the Common Shares is
included in this Prospectus and is summarized under the caption "Risk Factors."
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information set forth elsewhere in this
Prospectus. As used herein, references to the "Company" include the business of
the Company and its operating subsidiaries as of the date hereof. Unless
otherwise indicated, all data in this Prospectus are based on the assumption
that the Underwriters do not exercise their over-allotment option. Effective
February 28, 1998, the Company completed the acquisition of American Transtech,
Inc. and the assets of AT&T's Canadian customer care business ("Transtech") from
AT&T (the "Transtech Acquisition") for a purchase price of $625 million.
THE COMPANY
Convergys Corporation (the "Company") is a leading provider of outsourced
billing and customer management solutions. By leveraging the strengths of its
two operating subsidiaries, Cincinnati Bell Information Systems Inc. ("CBIS")
and MATRIXX Marketing Inc. ("MATRIXX"), the Company can serve as a single
provider capable of addressing a client's entire range of billing and customer
management needs. CBIS provides customized billing solutions utilizing
proprietary software, software development expertise and high volume processing
capabilities delivered through its data centers. MATRIXX provides value-added
customer management solutions that are designed to increase the effectiveness of
customer management programs and enhance customer satisfaction, loyalty and
retention. The Company focuses on developing long-term strategic relationships
with clients in industries with complex billing needs or intensive customer
service requirements, such as communications, technology, financial services and
consumer products. By providing value-added billing and customer management
solutions for its clients, generally pursuant to long-term relationships, the
Company has developed a large base of recurring revenues. The Company's revenues
increased from $569.9 million in 1994 to $1,389.9 million in 1997 (pro forma for
the Transtech Acquisition) and its operating income before special items
increased from $47.7 million in 1994 to $164.0 million in 1997 (pro forma for
the Transtech Acquisition).
CBIS is the leading outsourced provider of billing and information services
for the wireless communications market in North America, including cellular and
personal communications services ("PCS"). CBIS provides its billing solutions to
wireless carriers which serve approximately 30% of U.S. cellular subscribers. In
addition, CBIS has multi-year contracts with three of the largest PCS providers,
Sprint Spectrum, PrimeCo Personal Communications and AT&T Wireless. Combined,
these cellular and PCS clients serve customers in 49 of the top 50 U.S.
metropolitan areas, often with more than one client serving the same
metropolitan area. CBIS' proprietary software and data center capabilities allow
it to provide scalable billing solutions to match the rapid subscriber growth of
its clients. CBIS also provides professional and consulting services to tailor
solutions to its clients' specific marketing and business needs and, on a
limited basis, CBIS also licenses software to clients. CBIS has leveraged its
billing expertise in the wireless communications market to grow its cable
television industry billing market share to 18% during 1997, and the Company is
further expanding its billing solutions in the broadband services market (such
as cable telephony, satellite services and Internet services). In 1997 CBIS'
five largest clients were AT&T, 360 degrees Communications, Ameritech,
Cincinnati Bell Telephone ("CBT") and Comcast. CBIS has 2,800 employees and had
1997 revenues of $548.0 million and operating income of $104.7 million.
MATRIXX is the largest provider of outsourced customer management solutions
and serves leading companies in the communications, technology, financial
services and consumer products industries. In 1997, approximately 70% of
MATRIXX's revenues (pro forma for the Transtech Acquisition) were related to
providing value-added customer service, technical support and sales account
management primarily through personnel dedicated to a specific client
("dedicated services"). The remaining 30% of MATRIXX's 1997 revenues (pro forma
for the Transtech Acquisition) were derived from traditional campaign-based
inbound/outbound teleservices ("traditional teleservices"). Dedicated services,
as compared to traditional teleservices, are typically more complex, require
greater personnel training and generally have longer terms. In 1997 (pro forma
for the Transtech Acquisition), MATRIXX's five largest clients were AT&T,
DIRECTV(R), American Express, Gateway International and Lucent Technologies. In
1997 (pro forma for the Transtech
4
<PAGE> 6
Acquisition), MATRIXX handled approximately 400 million customer calls from its
15,000 production workstations and generated revenues of $850.0 million and
operating income before special items of $59.3 million.
Customer management has become an increasingly important competitive tool
in an environment characterized by heightened global competition, regulatory
changes and new technologies. Companies are increasingly outsourcing customer
management functions, including billing, in order to focus on their own core
competencies, benefit from the economies of scale and expertise that outsourcing
companies can provide and reduce investments in rapidly changing technologies.
According to G2R, the worldwide market for billing services for the
communications industry is expected to grow over 13% annually from an estimated
$17 billion in 1997 to $28 billion in 2001. Separately, Strategic TeleMedia
estimates that total teleservices expenditures in 1997 were $101 billion and are
expected to grow approximately 10% annually to $135 billion in 2000. Outsourced
teleservices revenues are expected to increase from 12% of total expenditures in
1997 (or $12 billion) to over 15% (or $21 billion) in 2000, resulting in a
compound annual growth rate in excess of 19%.
The Company also has a 45% limited partnership interest in Cincinnati SMSA
Limited Partnership (the "Cellular Partnership"), which operates a cellular
telecommunications business that provides service in central and southwestern
Ohio and northern Kentucky. The population of the territory served by the
Cellular Partnership is in excess of 5 million persons, and the Company's
proportionate share of this cellular market represents approximately 2.3 million
POPs.
COMPETITIVE STRENGTHS
The Company believes that its strengths position it to compete effectively
for outsourcing opportunities. These competitive strengths include its (i) focus
on strategic relationships with targeted industry leaders, (ii) breadth of
value-added services, (iii) size and scale and (iv) technological expertise. By
focusing on building long-term strategic relationships with targeted industry
leaders, the Company has developed industry expertise and an in-depth
understanding of the customer management needs of companies serving those
industries. To meet those needs, the Company has developed comprehensive billing
and customer management solutions that include targeting, acquiring, serving,
retaining and expanding the range of services provided to its clients'
customers. The Company's size and scale permit it to leverage its knowledge base
and cost structure to deliver cost-effective solutions and handle large
outsourcing opportunities. The Company's technological expertise enables it to
offer clients value-added solutions that are technologically advanced, scalable
and flexible.
GROWTH STRATEGY
The Company intends to leverage its competitive strengths and benefit from
further combining the capabilities of CBIS and MATRIXX to take advantage of
anticipated continued growth of outsourcing. The Company's growth strategy
includes:
- Expanding Existing Client Relationships -- When providing billing and
customer management solutions, the Company typically develops a strategic
relationship with its clients including a thorough understanding of its
clients' businesses and industries. As a result, the Company is well
positioned to identify additional outsourcing opportunities and client
needs that can be addressed with products or services offered by the
Company. In addition, the Company is positioned to grow with its clients
if they expand in their own markets and internationally.
- Leveraging Industry Experience to Develop New Relationships -- The
Company focuses on developing additional relationships with new clients
in its targeted industries, particularly with companies that have large
in-house billing or call center operations or are pursuing additional
opportunities as the voice, video and data communications markets
converge.
- Developing New Solutions to Provide Superior Value -- The Company's
ongoing investment in technology is designed to increase the value of a
client's billing and customer management processes. In addition to
continuing to advance the solutions currently offered separately by CBIS
and
5
<PAGE> 7
MATRIXX, the Company is developing next generation customer management
solutions that combine the software and information services capabilities
of CBIS with the customer contact expertise of MATRIXX. As an example,
CBIS and MATRIXX jointly developed a subscriber retention solution (which
is presently in trial) for wireless carriers which is designed to
increase the retention of subscribers by identifying those who may be at
risk of churning and initiating steps to contact, satisfy and retain
them.
- Entering Complementary Markets -- The Company will pursue opportunities
in industries that have large customer bases and, as a result of
deregulation or new and converging technologies, will require greater
focus on billing and customer management. For example, the Company
believes that deregulation, which led to substantially increased
competition in the communications sector, is likely to have a similar
effect on the utility industry and will create new opportunities for
outsourced billing and customer management services.
- Pursuing International Growth -- The Company currently provides billing
and customer management solutions in selected international markets. The
Company intends to leverage its leading U.S. market position and its
relationships with large international companies to expand its client
base outside the United States.
- Pursuing Strategic Acquisitions and Alliances -- The Company's historical
growth has been aided by numerous acquisitions and the Company believes
that consolidation in the billing and customer management industry will
continue. The Company will pursue acquisitions and alliances that expand
its client base, add new capabilities or enable it to accelerate domestic
and international expansion.
RECENT DEVELOPMENTS
Effective February 28, 1998, after a competitive bidding and negotiation
process, the Company completed the acquisition of Transtech from AT&T for a
purchase price of $625 million. The Transtech Acquisition nearly doubled the
size of MATRIXX, making it the largest provider of outsourced customer
management solutions. Transtech's customers were primarily in the communications
industry with AT&T accounting for approximately 70% of Transtech's 1997
revenues. As part of the Transtech Acquisition, the Company entered into an
eight-year contract with AT&T, a major user of outsourced teleservices, to
provide customer services, technical support and sales management services for
both consumer and business customers.
On July 16, 1998, the Company reported its results for the second quarter
of 1998. Consolidated revenues for the second quarter increased $120.5 million
(50%) to $363.6 million in 1998 from $243.1 million in the second quarter of
1997. The Transtech Acquisition and the Maritz Acquisition contributed $106.2
million to the revenue increase, with the remaining increase coming from
existing operations. Operating income for the second quarter of 1998 increased
to $41.6 million (9%) from $38.2 million in the second quarter of 1997. Year
2000 programming costs increased to $7.8 million in the second quarter of 1998
from $1.5 million in the second quarter of 1997. The Cellular Partnership
contributed earnings of $6.8 million in the second quarter of 1998, an increase
from $3.6 million in the second quarter of 1997. Earnings before interest and
income taxes (defined herein as operating income plus Cellular Partnership
earnings) increased to $48.4 million (16%) in the second quarter of 1998, from
$41.8 million for the same period in 1997. The Company's net income decreased to
$23.6 million for the second quarter of 1998 from $28.2 million in the second
quarter of 1997. The decrease in net income was largely attributable to $10
million of incremental interest costs resulting from the Transtech Acquisition
and Maritz Acquisition.
Revenues for CBIS increased $12.1 million (9%) to $146.1 million in the
second quarter of 1998 from $134.0 million in the second quarter of 1997.
Increased data processing revenues accounted for the majority of the revenue
gain. Operating income for CBIS increased to $27.6 million in the second quarter
of 1998 from $25.5 million in the second quarter of 1997. The increase in
operating income was generated despite an increase in CBIS' Year 2000 costs to
$5.0 million in the second quarter of 1998 from $1.5 million in the second
quarter of 1997.
6
<PAGE> 8
Revenues for MATRIXX increased $110.9 million (100%) to $222.1 million in
the second quarter of 1998 from $111.2 million in the second quarter of 1997.
The Transtech Acquisition and the Maritz Acquisition contributed $106.2 million
to the revenue increase. MATRIXX's operating income increased to $14.1 million
in the second quarter of 1998 from $12.6 million in the second quarter of 1997.
Operating income from the Transtech Acquisition and the Maritz Acquisition was
somewhat better than breakeven in the second quarter of 1998. MATRIXX incurred
$2.8 million in Year 2000 costs in the second quarter of 1998.
At June 30, 1998, the Company had approximately $756 million in outstanding
debt, of which approximately $752 million was intercompany debt payable to CBI.
The Company's outstanding debt increased by approximately $26 million in the
second quarter, primarily relating to increased working capital requirements
resulting from the Transtech Acquisition.
The Company's results for the second quarter of 1998 were adversely
impacted by lower than anticipated revenues from AT&T under the contract
associated with the Transtech Acquisition. Revenues from AT&T under that
contract totaled approximately $57 million for the second quarter of 1998, which
is below the level necessary to achieve the $300 million annual amount required
by the contract. MATRIXX continues to implement its restructuring program
adopted in the fourth quarter of 1997, which was designed to increase
productivity and improve service to clients. Separately, MATRIXX is
redistributing work and initiating salaried workforce reductions at Transtech to
achieve the anticipated scale benefits from integrating those operations into
MATRIXX. Additionally, CBIS and MATRIXX are evaluating opportunities to improve
efficiency and reduce costs by integrating certain operations, which could
potentially result in a charge later in 1998.
RELATIONSHIP WITH CBI
The Company is an Ohio corporation and, prior to the Offering, a direct
wholly owned subsidiary of CBI. Upon completion of the Offering, CBI will own
88.3% of the outstanding Common Shares (approximately 86.8% if the U.S.
Underwriters' over-allotment option is exercised in full). As long as CBI
beneficially owns a majority of the voting power, it will have the ability to
elect all of the members of the Board of Directors of the Company and ultimately
to control the management and affairs of the Company. See "Risk Factors --
Ongoing Relationship with CBI." It is CBI's intention to distribute to CBI
shareholders its remaining Common Share ownership within six months following
the Offering in a tax-free distribution (the "Distribution"). See "Risk
Factors -- Risk of Noncompletion of the Distribution." The Company and CBI have
entered into or will enter into, on or prior to the consummation of the Offering
(the "Closing Date"), certain agreements providing for the Offering and the
separation of the companies and governing various interim and ongoing
relationships between and among the companies, including the purchase of various
services. See "Relationship between the Company and CBI."
The Company's principal executive offices are located at 201 East Fourth
Street, Cincinnati, Ohio 45202. The telephone number is (513) 397-5364.
7
<PAGE> 9
THE OFFERING
Common Shares offered:
U.S. Offering............... 14,400,000 shares
International Offering...... 3,600,000 shares
Total....................... 18,000,000 shares
Common Shares to be
outstanding immediately after
the Offering................ 154,419,589 shares(1)
Common Shares to be held by
CBI immediately after the
Offering.................... 136,419,589 shares(1)(2)
Use of Proceeds............... The net proceeds to the Company from the
Offering are estimated to be approximately $300
million ($345 million if the U.S. Underwriters
exercise their over-allotment option in full)
(assuming an initial public offering price of
$18.00 per share, the mid-point of the range
set forth on the cover page of this
Prospectus). Such proceeds will be used to
repay CBI a portion of the Company's
indebtedness which was incurred primarily to
fund the Transtech Acquisition. See "Use of
Proceeds."
Dividend Policy............... The Company presently intends to retain
earnings, if any, for use in the operation of
its businesses, and therefore does not
anticipate paying any cash dividends in the
foreseeable future. See "Dividend Policy."
NYSE Symbol................... The Common Shares have been approved for
listing on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol "CVG."
- ---------------
(1) Based on the number of CBI common shares outstanding as of June 30, 1998 and
assuming a share split that will occur immediately prior to the Offering
thereby increasing CBI's ownership to 136,419,589 Common Shares. Does not
include up to 2,700,000 Common Shares which the U.S. Underwriters have the
option to purchase solely to cover over-allotments. If the U.S. Underwriters
exercise their over-allotment option in full, 157,119,589 Common Shares will
be outstanding after the Offering.
(2) Does not include approximately 7,979,699 Common Shares that will be issuable
for stock options and restricted share awards under the Company's 1998 Long
Term Incentive Plan (the "1998 LTIP") with respect to outstanding CBI Share
Awards (as defined herein), and 2,375,000 Common Shares that are expected to
be reserved for options and restricted shares to be granted to Company
employees and directors at the Closing Date and 19,645,301 Common Shares for
Company employees and directors subsequent to the Distribution. See
"Management -- Executive Compensation" and "Relationship Between the Company
and CBI -- Employee Benefits Agreement."
8
<PAGE> 10
SUMMARY FINANCIAL DATA
The Summary Financial Data presented in this table are derived from the
"Selected Financial Data", the historical financial statements and notes thereto
and the "Unaudited Pro Forma Condensed Consolidated Statements of Income,"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1993 1994 1995 1996 1997 1997 1997 1998 1998
------ ------ ------ ------ ------ ----------- ------ -------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................. $464.7 $569.9 $644.7 $842.4 $987.5 $1,389.9 $243.4 $308.6 $371.0
Costs and expenses........ 466.5 522.2 566.4 718.2 838.4 1,225.9 206.2 267.3 332.3
Special items
(credits)(1)............ 123.3 (2.0) 47.1 5.0 35.0 35.0 -- 42.6 --
Total costs and
expenses................ 589.8 520.2 613.5 723.2 873.4 1,260.9 206.2 309.9 332.3
Operating income
(loss)(2)............... (125.1) 49.7 31.2 119.2 114.1 129.0 37.2 (1.3) 38.7
Income (loss) before
income taxes(3)......... (133.6) 43.2 19.4 124.8 130.6 127.3 40.2 (3.7) 34.5
Net income (loss)(4)...... (109.2) 24.6 (3.5) 78.0 86.6 84.2 26.8 (2.3) 21.4
Earnings (loss) per
share:(5)
Basic................... $ (.80) $ .18 $ (.03) $ .57 $ .64 $ .55 $ .20 $ (.02) $ .14
Diluted................. (.80) .18 (.03) .56 .63 .54 .19 (.02) .14
Weighted average common
shares outstanding
including equivalents:
Basic................... 136.0 136.0 136.0 136.0 136.0 154.0 136.0 136.0 154.0
Diluted................. 136.0 136.2 136.0 139.3 138.5 156.5 138.7 138.6 156.6
OTHER DATA:
EBITDA(6)................. $ 54.7 $ 89.0 $133.0 $187.6 $224.8 $ 271.1 $ 54.0 $ 63.8 $ 68.6
Cash provided (used) by:
Operating activities.... 72.5 63.5 44.6 117.7 127.4 16.3 (3.6)
Investing activities.... (113.7) (5.4) (58.0) (118.6) (74.8) (8.7) (668.7)
Financing activities.... 56.3 (65.4) 13.4 3.2 (52.8) (6.1) 671.1
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA(7):
Total assets............................................ $1,358.8 $1,358.8
Total debt.............................................. 730.0 430.0
Shareowner's equity..................................... 429.7 729.7
</TABLE>
- ---------------
(1) The special item in the first quarter of 1998 was $42.6 million of
in-process research and development costs, which was expensed in connection
with the Transtech Acquisition. The special item in 1997 was a $35.0 million
charge associated with a restructuring of MATRIXX's operations. Special
items in 1996 of $5.0 million relate to in-process research and development
costs, which were expensed in connection with acquisitions by CBIS and
MATRIXX. Special items in 1995 consist of a $39.6 million goodwill
impairment charge at MATRIXX related to its operations in France and $7.5
million of in-process research and development costs which were expensed in
connection with acquisitions by CBIS. The special item in 1994 was a $2.0
million reversal of the 1993 CBIS restructuring reserve. The special items
in 1993 all related to CBIS and include a $101.6 million charge to
restructure CBIS' operations and dispose of certain business units, a $16.6
million charge to reduce the carrying value of certain capitalized software
costs to net realizable value and $5.1 million in costs to withdraw from
certain international contracts and services.
(2) Operating income (loss) includes special items as detailed in note (1)
above. Excluding special items, operating income (loss) was a loss of $1.8
million in 1993, and income of $47.7 million in 1994, $78.3 million in 1995,
$124.2 million in 1996 and $149.1 million in 1997. Operating income
excluding special items was $37.2 million and $41.3 million for the three
months ended March 31, 1997 and 1998, respectively.
(3) Includes a $13.3 million charge resulting from the termination of a currency
and interest rate swap agreement in 1995.
(4) Net income (loss) includes special items as detailed in note (1) above.
Excluding special items, net income (loss) was a loss of $7.0 million in
1993 and income of $23.4 million in 1994, $40.8 million in 1995, $81.1
million in 1996 and $109.6 million in 1997. Net income excluding special
items was $26.8 million and $24.1 million for the three months ended March
31, 1997 and 1998, respectively.
(5) Basic earnings (loss) per share has been calculated by dividing net income
(loss) for the period by the number of Common Shares that will be
outstanding as a result of a share split that will occur immediately prior
to the Offering. Diluted earnings (loss) per share has been calculated by
dividing net income (loss) for the period by the number of Common Shares
that will be outstanding immediately prior to the Offering plus the dilutive
effect of stock options that will be issued immediately prior to the
Distribution pursuant to a plan to grant such options to holders of CBI
options. Accordingly, the per share amounts are on a pro forma basis for all
periods,
(6) EBITDA is defined as operating income before special items, plus
depreciation and amortization expense and Cellular Partnership earnings.
EBITDA is presented here as an alternative measure of the Company's ability
to generate cash flow and should not be construed as an alternative to
operating income (as determined in accordance with generally accepted
accounting principles ("GAAP")) or to cash flows from operating activities
(as set forth in the consolidated statement of cash flows contained herein).
EBITDA is not calculated under GAAP and is not necessarily comparable to
similarly titled measures of other companies.
(7) Pro forma balance sheet data at March 31, 1998 reflect the use of an
estimated $300 million in net proceeds from the Offering to repay
intercompany debt to CBI.
9
<PAGE> 11
RISK FACTORS
Purchasers of Common Shares should carefully consider and evaluate all of
the information set forth in this Prospectus, including the risk factors set
forth below. The risk factors set forth below present important factors that
could cause actual results to differ from results referred to in the forward
looking statements contained herein. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business" and "Relationship
Between the Company and CBI" for a description of other factors generally
affecting the Company's business.
CLIENT CONCENTRATION
CBIS and MATRIXX rely on several significant clients for a large percentage
of their revenues. The Company's three largest clients, AT&T, DIRECTV(R) and 360
degrees Communications, represented approximately 53% of the Company's 1997 pro
forma revenues. The contracts with various AT&T operating units aggregated were
approximately 43% of the Company's 1997 pro forma revenues. These nine separate
contracts have varying expiration dates, payment provisions, termination
provisions and other terms and conditions, and the Company believes that each
such unit controls the continuation of the contractual relationship with the
Company. If an ATT unit were to fail to renew its contract because it was
dissatisfied with the Company's performance, the Company's relationship with the
other units could be adversely affected. However, the Company does not believe
that its business is substantially dependent on any particular contract with any
client.
In addition, two of the Company's clients have recently agreed to be
acquired. Alltel Corporation, a competitor of the Company in the billing
services area, recently agreed to acquire 360 degrees Communications, a client
of the Company that accounts for approximately 4% of the Company's 1997 pro
forma revenues. SBC Communications, which has an ownership interest in Amdocs, a
competitor of the Company in the billing services area, recently agreed to
acquire Ameritech, a client of the Company that accounts for approximately 4% of
the Company's 1997 pro forma revenues. If the Company is unable to retain its
client base, there could be a material adverse effect on the Company's business,
results of operations, financial condition and the value of the Common Shares.
The Company's client concentration makes the Company vulnerable to a
reduced need for the Company's services by the Company's client base. Thus, if
clients experience a significant decrease in their businesses, that decrease
could affect the Company's results and could have a material adverse effect on
the Company's business, results of operations, financial condition and the value
of the Common Shares. MATRIXX experienced a decrease in traditional teleservices
business from certain clients primarily in the third quarter of 1997, which led
to a decrease in MATRIXX's operating margin from 12.7% and 11.4% in the first
and second quarters to 6.0% in the third quarter of 1997. The Company believes
that the teleservices industry was generally affected by reduced demand in the
third quarter of 1997.
DIFFICULTIES OF COMPLETING AND INTEGRATING ACQUISITIONS; INTERNATIONAL
OPERATIONS
The Company's growth has been significantly enhanced through acquisitions
of other businesses (including Transtech), products and licenses and/or start-up
operations. Following the Offering, the Company intends to continue to pursue
strategic acquisitions. If the Company is unable to make appropriate
acquisitions on attractive terms (whether for cash, Company securities or both),
it may be more difficult for the Company to achieve growth.
Effective February 28, 1998, MATRIXX acquired Transtech. Transtech is being
integrated with MATRIXX's existing operations. The integration of Transtech as
well as any other acquired entity involves, among other things, integration of
technical, sales, marketing, billing, accounting, quality control, management,
personnel, payroll, and management information systems and operating hardware
and software, some of which may be incompatible. Due to a number of factors,
including accounting treatment, cost of borrowed funds to finance acquisitions
and integration issues, acquired businesses may be unprofitable for at least
some period of time after the acquisition. For example, during the first quarter
of 1998, after the Transtech Acquisition, Transtech generated revenues of $31.7
million, costs and expenses before special items
10
<PAGE> 12
of $31.8 million and a special item of $42.6 million. If the Company does not
successfully integrate Transtech (or any entity acquired by the Company in the
future) into its business, there could be a material adverse effect on the
Company's business, results of operations, financial condition and the value of
the Common Shares. Furthermore, employees and clients of acquired businesses
generally experience turnover at higher rates during and after an acquisition.
The Company operates businesses in several countries outside the United
States, including France and the United Kingdom, and intends to expand through
acquisitions and start-up operations into additional countries and regions. In
addition to the integration issues discussed above, there are certain risks
inherent in conducting business internationally, including exposure to currency
fluctuations, longer payment cycles, greater difficulties in accounts receivable
collection, difficulties in complying with a variety of foreign laws, unexpected
changes in regulatory requirements, difficulties in staffing and managing
foreign operations, political instability and potentially adverse tax
consequences. Furthermore, there can be no assurance that teleservices will be
successful in each jurisdiction outside of the United States. For example,
MATRIXX acquired a teleservices business in France in 1990 that has not
performed as well as expected. MATRIXX has recognized special charges totalling
$42.8 million (during 1995 and 1997) which represented a writedown of goodwill
related to this acquisition, due to underperformance. In addition, employment
laws in non-U.S. jurisdictions may make it more difficult for the Company to
reduce labor costs (which represent the most significant teleservices costs) if
there is a downturn in its business. There can be no assurance that one or more
of such factors will not have a material adverse effect on the Company's
international operations and, consequently, on the Company's business, results
of operations, financial condition and the value of the Common Shares.
FACTORS AFFECTING OPERATING RESULTS; RECENT DECLINES AND POTENTIAL FLUCTUATIONS
IN QUARTERLY RESULTS
The Company's future quarterly operating results may vary and reduced
levels of earnings or losses could be experienced in one or more quarters.
Fluctuations in the Company's quarterly operating results could result from a
variety of factors, including the timing of new product and service
announcements by the Company or its competitors, changes in pricing policies by
the Company or its competitors, market acceptance of new and enhanced versions
of the billing and customer management solutions of the Company or its
competitors, the size and timing of significant contracts, decisions by key
clients to curtail outsourcing activities, changes in the Company's strategy,
the introduction of alternative technologies, the effect of acquisitions and the
integration thereof and industry and general economic factors. In addition, the
businesses of the Company's clients are seasonal and vary by quarter. The
Company has limited or no control over many of these factors.
The Company's expense levels are based, in part, on its expectations as to
future revenues. If the Company loses one or more significant clients, or if the
revenues from any such client or clients decline, the Company's operating
results are likely to be adversely affected unless and until the Company is able
to reduce its expenses proportionally or successfully negotiates contracts with
new clients to generate additional revenues at a comparable level. For example,
MATRIXX experienced declining revenues during the third quarter of 1997, which
led to decreases in its operating income and operating margin. Consequently,
management adopted a restructuring plan in the fourth quarter of 1997.
Furthermore, the Company's second quarter 1998 results are expected to be
adversely impacted by (i) lower than expected revenues from AT&T under the
contract associated with the Transtech Acquisition and (ii) revenues slightly
below first quarter levels at certain of the Company's business units due to
seasonal and client-specific factors. As part of its plan to achieve its target
profit margins, MATRIXX is continuing to implement its restructuring program
adopted in the fourth quarter of 1997, which was designed to increase
productivity and improve service to clients. Separately, MATRIXX is
redistributing work and initiating salaried workforce reductions at Transtech to
achieve the anticipated scale benefits from integrating those operations into
MATRIXX. Additionally, CBIS and MATRIXX are evaluating opportunities to improve
efficiency and reduce costs by integrating certain operations, which could
potentially result in a charge later in 1998.
In addition, the Company has taken substantial charges for special items,
including $42.6 million in the first quarter of 1998, $35.0 million in 1997,
$5.0 million in 1996, $47.1 million in 1995 and $123.3 million in 1993. As a
result, the Company's operating performance has fluctuated from period to
period. See "Selected
11
<PAGE> 13
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
YEAR 2000 COMPLIANCE
The Company's business depends on its information systems software and
equipment and that of its vendors and its clients. As a participant in the
information services business, the Company is significantly exposed to Year 2000
risks. Although the Company has devoted significant time and resources to
resolve Year 2000 technology issues, there can be no assurance that the Company
will be successful in its compliance efforts or that its vendors and clients
will be successful in their efforts. Even if the Company is successful in such
compliance efforts, there can be no assurance that its vendors and clients will
be able to successfully integrate the Company's Year 2000 solutions with their
computer systems. To the extent that the Company or its major vendors and
clients experience Year 2000 software or hardware difficulties, such
difficulties could have a material adverse effect on the Company's business,
results of operations, financial condition and value of the Common Shares.
During 1998, the Company expects that its Year 2000 costs will range between $25
million and $30 million, with costs thereafter, principally during 1999,
estimated in the range of $10 million to $20 million. These expenses will
materially reduce earnings and cash flows from operations accordingly. No
assurance can be made that the Year 2000 costs incurred by the Company during
such periods will not be higher than these estimates.
RISK OF NONCOMPLETION OF THE DISTRIBUTION
CBI has announced that it intends to distribute to its shareholders within
six months following the Offering all of the Common Shares owned by CBI
following the Offering, subject to the following conditions, among others: (i) a
private letter ruling from the Internal Revenue Service (the "IRS") shall be in
effect, providing, among other things, that the Distribution will qualify as a
tax-free distribution for federal income tax purposes under Section 355 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the transfer to the
Company of all of the outstanding shares of CBIS and MATRIXX in connection with
the organization of the Company, the Offering and the Distribution
(collectively, the "Separation") will not result in any federal income tax for
CBI, the Company or their shareholders, and such ruling shall be in form and
substance satisfactory to CBI, in its sole discretion; (ii) any material
consents necessary to consummate the Distribution shall have been obtained and
shall be in full force and effect including consent of its lenders under its
loan agreements; (iii) no order, injunction, or decree or other legal restraint
or prohibition preventing the consummation of the Distribution shall be in
effect; and (iv) no other events or developments shall have occurred that, in
the judgment of the CBI Board of Directors, would result in the Distribution
having a material adverse effect on CBI or on the shareholders of CBI. On July
16, 1998, the Company received a favorable private letter ruling from the IRS.
Although the requirement to do so is not without question, after the Closing
Date and prior to the Distribution Date, CBI intends to file a petition with the
appropriate state regulatory commissions seeking consent to the Distribution. No
assurances can be given that such approval will be granted or that the
Distribution will not be delayed pending such approval. See "Background of the
Separation and Distribution -- Conditions to the Distribution" and "Relationship
Between the Company and CBI -- Plan of Reorganization and Distribution
Agreement." No assurance can be given that such conditions will be satisfied or
waived or that the Distribution will occur. Several of the Company's clients
compete with CBI, and, if the Distribution is not consummated, the Company's
relationships with these clients could be materially adversely effected.
Although CBI expects to effect the Distribution, the failure of the Distribution
to occur in the time frame contemplated or at all could have a material adverse
effect on the value of the Common Shares. See "Background of the Separation and
Distribution."
ONGOING RELATIONSHIP WITH CBI
The Company currently has, and after the Offering and the Distribution will
continue to have, a variety of contractual relationships with CBI and its
affiliates, including those under which CBT will remain one of the Company's
largest clients. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Background" and "Relationship Between the
Company and CBI."
12
<PAGE> 14
It is anticipated that prior to the Distribution all seven members of the
Board of Directors of the Company will be directors of CBI and five of the
executive officers of the Company will be executive officers of CBI. Directors
and executive officers of the Company, who also are directors and executive
officers of CBI, may have conflicts of interest with respect to matters
potentially or actually involving or affecting the Company and CBI, such as
acquisitions, financings and other corporate opportunities that may be suitable
for the Company and CBI. To the extent that such opportunities arise, such
directors and officers may consult with their legal advisors and make a
determination after consideration of a number of factors, including whether such
opportunity is presented to any such person in his or her capacity with the
Company, whether such opportunity is within the Company's or CBI's line of
business or consistent with its strategic objectives and whether the Company or
CBI will be able to undertake or benefit from such opportunity. Except as
otherwise provided in any of the ancillary agreements, in the Plan of
Reorganization and Distribution Agreement, the parties have agreed to procedures
for resolving disputes, controversies or claims between CBI and the Company and
any of their affiliates that may arise out of the Plan of Reorganization and
Distribution Agreement or the commercial or economic relationship of the
parties. See "Relationship Between the Company and CBI -- Plan of Reorganization
and Distribution Agreement." There can be no assurance that conflicts will be
resolved in favor of the Company.
DEPENDENCE ON PERSONNEL; LABOR COSTS
The Company's business is dependent upon its ability to attract and retain
highly qualified managerial, technical and key business personnel. Competition
for such personnel is intense, particularly for software professionals. As of
March 31, 1998, the Company employed over 2,100 software professionals. In
addition, the Company's software systems are highly complex and require
extensive training, thereby exacerbating the difficulty of replacing software
professionals. The demand for software professionals to address the Year 2000
issue could constrain the Company's ability to hire and retain sufficient
personnel and could lead to increased labor costs for software professionals. In
addition, MATRIXX's services are very labor intensive. Service quality depends
in part on its ability to control personnel turnover and MATRIXX's profitability
is affected by its ability to control its labor costs. Many of MATRIXX's
employees have sophisticated skills and must be paid attractive wages,
particularly as dedicated services have become an increasing portion of
MATRIXX's business. Since MATRIXX provides services to clients in competitive
industries, it has not always been able to fully pass along all wage increases
to its clients. Taken together with wage pressures in the U.S. economy
generally, this has resulted in labor costs increasing as a percentage of
MATRIXX's revenues in recent years. Direct labor costs were approximately 51% of
MATRIXX's revenue in the first quarter of 1998, as opposed to 49.6% in 1997 and
46.6% in 1996. There can be no assurance that the Company can retain its
managerial, technical and business personnel, or that it can attract, assimilate
or retain such personnel in the future. The inability of the Company to attract
and retain such personnel could have a material adverse effect on the Company's
business, results of operations, financial condition and the value of the Common
Shares.
CLIENT AND INDUSTRY SUCCESS; INDUSTRY CONCENTRATION
The revenues generated by CBIS and MATRIXX are dependent on the success of
their clients. If their clients are not successful, the amount of business that
such clients outsource may be diminished. Several of CBIS' and MATRIXX's current
clients participate in emerging industries, such as PCS, broadband services and
direct broadcast satellite. The extent to which products marketed by such
clients will be successful is not yet known. Thus, although CBIS and MATRIXX
have signed contracts to provide services to such clients, there can be no
assurance that the level of revenues to be received from such contracts will
meet expectations.
Several of the key industry segments in which the Company conducts its
businesses have grown significantly in the last several years. To the extent
that growth in these industry segments or other industry segments in which the
Company conducts its businesses in the future declines, such decline would
probably adversely affect the growth rate of the Company's business. In
addition, the possibility of continued growth in these segments could be
affected by the development of new products that provide alternatives to the
product offerings of the Company's clients.
13
<PAGE> 15
The principal source of the Company's revenues is from large clients in the
communications, technology, financial services and consumer products industries.
The Company's clients, particularly in the communications and technology
industries, have recently experienced substantial price competition. As a
result, the Company may face increasing price pressure from its clients.
Continued price pressure from the Company's clients could negatively affect the
Company's operating performance. A general economic downturn in any of these
industries or a slowdown or reversal of the trend in any of these industries to
outsource certain customer management services could have a material adverse
effect on the Company's business, results of operations, financial condition and
the value of the Common Shares.
Certain of the Company's contracts contain provisions that could limit its
growth opportunities. For example, some contracts restrict the Company's
provision of services to its clients' competitors. Although these provisions
have been avoided or waived in the past, there can be no assurance that they
will not interfere with the Company's growth in the future. Furthermore, certain
of the Company's contracts allow its clients to terminate the Company's services
by giving advance notice.
COMPETITION
The Company currently faces significant competition in its markets and
expects that the level of price, product and service competition will continue
to increase. The Company believes that the principal competitive factors in its
industry are service quality, sales and marketing skills, the ability to develop
customized solutions, price and technological expertise. As a result of the
trend toward international expansion by foreign and domestic competitors and
continuing technological changes, the Company anticipates that new and different
competitors will enter its markets. These competitors may include entrants from
the communications, teleservices, software and data networking industries.
Certain existing competitors have, and new competitors may have, greater
financial capabilities, more technological expertise and/or more recognizable
brand names. Depending on the continuing pace of international expansion by
domestic and foreign competitors, the nature of their product and service
offerings and pricing practices, as well as the new types of product offerings
from companies in other industries and the timing and circumstances of the entry
of these competitors into the Company's markets, the Company's market share may
be adversely affected. Consequently, there could be a material adverse effect on
the Company's business, results of operations, financial condition and the value
of the Common Shares. See "Business--Competition."
FUTURE CAPITAL REQUIREMENTS
The Company's working capital requirements and cash flow provided by
operating activities can vary greatly from quarter to quarter, depending on the
timing of the provision of services and the payment terms offered to clients. In
the past, the Company's working capital needs have been satisfied pursuant to
CBI's corporate-wide cash management policies. From the Closing Date until the
Distribution, the Company's working capital and other financing needs will be
provided by CBI at an interest rate equal to CBI's average short-term borrowing
cost or through external short-or long-term financing to be arranged by the
Company. However, CBI will not provide funds to finance the Company's operations
after the Distribution.
The Company believes that cash flows from operations, bank lines of credit
and long-and short-term debt financings, if necessary, will be sufficient to
satisfy its future working capital, capital expenditures, research and
development, debt service and other working capital requirements. Although the
Company believes that it will be able to obtain financing on terms and in
amounts that will be satisfactory, the Company has not been assigned a senior
debt rating by any nationally-recognized statistical rating organization. The
historical financial statements of the Company reflect a weighted average
interest rate applicable to the long- and short-term debt of CBI. When it
obtains financing independently, the weighted average rate at which the Company
borrows funds may be higher than that reflected in the Company's historical
financial statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The inability of the Company to satisfy its working capital requirements
could have a material adverse effect on the value of the Common Shares.
14
<PAGE> 16
RAPIDLY CHANGING TECHNOLOGY
The Company's business is subject to rapid and significant changes in
technology. The Company's businesses are highly dependent on its computer,
telecommunications and software systems. The Company's failure to maintain its
technological capabilities or to respond effectively to technological changes
could have a material adverse effect on the Company's business, results of
operations, financial condition and the value of the Common Shares. The
Company's future success also will be highly dependent upon its ability to
enhance existing services and introduce new services or products to respond to
changing technological developments. There can be no assurance that the Company
can successfully develop and bring to market any new services or products in a
timely manner, that such services or products will be commercially successful or
that competitors' technologies or services will not render the Company's
products or services noncompetitive or obsolete.
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
The financial information included herein may not necessarily reflect the
results of operations, financial position and cash flows of the Company in the
future or what the results of operations, financial position and cash flows
would have been had the Company been a separate, stand-alone entity during the
periods presented. The financial information included herein does not reflect
many significant changes that will occur in the funding and operations of the
Company as a result of the Separation, the Offering and the Distribution. As a
result of the foregoing factors, historical results of operations are not
necessarily indicative of future performance. See "Unaudited Pro Forma Condensed
Consolidated Statements of Income," including the discussion of the assumptions
reflected therein, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Background."
CERTAIN ANTITAKEOVER EFFECTS
Until the Distribution, a change in control will not be possible without
the approval of CBI. The Amended Articles of Incorporation of the Company (the
"Articles"), the Regulations of the Company (the "Regulations") and applicable
provisions of the Ohio General Corporation Laws (the "OGCL") contain several
provisions that may make more difficult the acquisition of control of the
Company without approval of the Company's Board of Directors. Certain provisions
of the Articles and the Regulations, among other things, limit the shareholders'
rights to elect and remove directors and call meetings of the shareholders. In
addition, the Company plans to adopt a shareholders' rights plan after the
Offering and prior to the Distribution which would contain provisions that may
make more difficult the acquisition of control of the Company without approval
of the Company's Board of Directors. With certain exceptions, OGCL Chapter 1704
imposes certain restrictions on mergers and other business combinations between
the Company and any holder of 10% or more of the Common Shares. Some of the OGCL
provisions described above do not apply to, or otherwise contain exceptions for,
CBI as long as CBI beneficially owns a majority of the Common Shares.
Furthermore, the Articles allow the Company's Board of Directors to issue up to
5,000,000 Preferred Shares, and to determine the rights and preferences thereof,
without the approval of the Company's shareholders. In addition, any debt the
Company incurs may provide for an event of default if there is a change in
control. Moreover, certain of the Company's contracts are terminable by its
clients if there is a "change in control," which in some cases is defined as any
person becoming the owner of 20% of the Common Shares or any competitor of the
client becoming the owner of 15% of the Common Shares. These antitakeover
effects could have a material adverse effect on the value of the Common Shares
and could prevent shareholders from receiving a premium on the sale of Common
Shares. See "Description of Capital Stock -- Limitations on Change in Control."
DILUTION
The public offering price is substantially higher than the net tangible
book value per share of the Company's Common Shares. Investors purchasing Common
Shares in the Offering will therefore incur immediate, substantial dilution of
approximately $18.09 per share, assuming an initial public offering price of
$18.00 per share (the mid-point of the range set forth on the cover page of this
Prospectus). See "Dilution."
15
<PAGE> 17
SHARES ELIGIBLE FOR FUTURE SALE
The planned Distribution would involve the distribution of an aggregate of
approximately 136,419,589 Common Shares to the shareholders of CBI within six
months following the Offering. Substantially all of such shares would be
eligible for immediate resale in the public market. The Company is unable to
predict whether substantial amounts of Common Shares will be sold in the public
market in anticipation of, or following, the Distribution. Any sales of
substantial amounts of Common Shares in the public market, or the perception
that such sales might occur, whether as a result of the Distribution or
otherwise, could materially adversely affect the market price of the Common
Shares. See "Shares Eligible for Future Sale."
The Company and CBI have agreed, subject to certain exceptions, not to
offer, sell, contract to sell or otherwise dispose of any Common Shares (other
than in the Distribution) or any securities convertible or exercisable or
exchangeable for Common Shares, for a period of 180 days after the date of this
Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated. Also, each of the directors, executive officers and certain other
shareholders of the Company have agreed not to sell or otherwise dispose of
Common Shares, for a period of 180 days after the date of this Prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated. See
"Underwriters" and "Shares Eligible for Future Sale."
ABSENCE OF A PUBLIC MARKET FOR THE COMMON SHARES; POSSIBLE VOLATILITY OF STOCK
PRICE
Prior to the Offering, there has been no public market for the Common
Shares. Although the Company intends to file an application to list the Common
Shares on the NYSE, there can be no assurance that an active public market for
the Common Shares will develop or that the price at which the Common Shares will
trade will not be lower than the initial public offering price. The initial
public offering price will be determined through negotiations between the
Company and the Underwriters. See "Underwriters." The Company does not
anticipate paying any cash dividends on the Common Shares in the foreseeable
future. The trading price of the Common Shares could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products, applications or
product enhancements by the Company or its competitors, changes in financial
estimates by securities analysts, the performance of, or announcements by, the
Company's competitors, general market conditions and other events or factors. In
particular, the realization of any of the risks described in these "Risk
Factors," including the possibility of substantial sales of Common Shares, could
have a significant and adverse impact on such market price. In addition, the
capital markets have experienced substantial volatility that is not necessarily
related to the performance of all of the affected companies. These broad market
fluctuations could have a material adverse effect on the value of the Common
Shares. See "Underwriters."
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $300 million ($345 million if the Underwriters exercise their
over-allotment option in full) after deducting estimated underwriting discounts
and commissions and offering expenses, assuming an initial public offering price
of $18.00 per share (the mid-point of the range set forth on the cover page of
this Prospectus). Such proceeds will be used to repay CBI a portion of the
Company's indebtedness which was incurred primarily to fund the Transtech
Acquisition. Such indebtedness to CBI matures on the date of the Distribution
and accrues interest at a floating interest rate, which as of June 30, 1998 is
5.75%.
DIVIDEND POLICY
The Company presently intends to retain earnings, if any, for use in the
operation of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Presently, there are no debt or other
covenants which restrict the payment of dividends by the Company; however, there
can be no assurances that such covenants will not exist in the future when the
Company seeks to obtain external financing from lenders.
16
<PAGE> 18
CAPITALIZATION
Set forth below is the short-term debt and capitalization of the Company at
March 31, 1998 (prepared as if the Company had all the assets and liabilities it
will receive prior to the Offering) and adjusted to give effect to the Offering
and the use of the proceeds thereof (assuming an initial public offering price
of $18.00 per share, the mid-point of the range set forth on the cover page of
this Prospectus). The unaudited pro forma capitalization table set forth below
should be read in conjunction with the "Unaudited Pro Forma Condensed
Consolidated Statements of Income" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Short-term debt............................................. $729.4 $429.4
====== ======
Long-term debt (including capital leases)................... $ 0.6 $ 0.6
Shareowner's equity......................................... 429.7 729.7
------ ------
Total capitalization........................................ $430.3 $730.3
====== ======
</TABLE>
17
<PAGE> 19
DILUTION
The net tangible book value of the Company as of March 31, 1998, was
$(313.5) million, or $(2.30) per Common Share. Net tangible book value per share
is determined by dividing the tangible net worth of the Company (total assets
less intangible assets and total liabilities) by the total number of Common
Shares that would have been outstanding on March 31, 1998, assuming that
136,419,589 Common Shares had been owned by CBI on that date. After giving
effect to the estimated net proceeds to the Company of the Offering, the pro
forma net tangible book value of the Company as of March 31, 1998 would have
been approximately $(13.5) million, or $(.09) per Common Share. This represents
an immediate increase in net tangible book value per share of $2.21 to CBI, the
sole shareholder of the Company, and an immediate dilution in net tangible book
value per share of $18.09 to purchasers of Common Shares in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $18.00
------
Net tangible book value per share at March 31, 1998......... $(2.30)
------
Increase in net tangible book value per share attributable
to new investors.......................................... $ 2.21
------
Pro forma net tangible book value per share after the
Offering.................................................. $ (.09)
------
Dilution per share to new investors......................... $18.09
------
</TABLE>
The following table summarizes, as of March 31, 1998, the difference
between CBI, the sole shareholder of the Company, and new investors purchasing
Common Shares in the Offering (at an assumed initial price to the public of
$18.00 per share, before deducting estimated underwriting discounts and
commissions and estimated offering expenses) with respect to the number of
Common Shares purchased from the Company, the total consideration paid and the
average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ------- ------------- ------- -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CBI................................. 136.4 88.3% $427.5 56.9% $ 3.13
New investors....................... 18.0 11.7 324.0 43.1 $18.00
----- ----- ------ -----
Total..................... 154.4 100.0% $751.5 100.0%
===== ===== ====== =====
</TABLE>
The foregoing table assumes no exercise of the U.S. Underwriters'
over-allotment option and no exercise of outstanding options. To the extent that
any of such options are exercised, there will be further dilution to new
investors.
The Company has reserved an aggregate of 30,000,000 Common Shares for
issuance upon exercise of awards under the 1998 LTIP. Assuming an initial public
offering price per share of $18.00 (the mid-point of the range set forth on the
cover page of this Prospectus), effective immediately after the Offering, there
will be outstanding options to purchase an aggregate of 2,375,000 Common Shares
under the 1998 LTIP, at an exercise price of $18.00 per share. Of the foregoing,
options to purchase an aggregate of 182,000 Common Shares will be immediately
exercisable. The number of options to be granted and the option price will be
adjusted to reflect the actual initial public offering price.
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following table presents summary selected historical financial data of
the Company. The information set forth below should be read in conjunction with
"Unaudited Pro Forma Condensed Consolidated Statements of Income," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements and notes thereto included elsewhere in this
Prospectus. The consolidated statement of operations data set forth below for
each of the three years ended December 31, 1995, 1996 and 1997, and the
consolidated balance sheet data at December 31, 1996 and 1997 are derived from,
and are qualified by reference to, the audited consolidated financial statements
included elsewhere in this Prospectus, and should be read in conjunction with
those financial statements and the notes thereto. The consolidated balance sheet
data at December 31, 1995 set forth below are derived from the audited
consolidated balance sheet of the Company at December 31, 1995, which is not
included in the Prospectus. The consolidated statement of operations data for
each of the two years ended December 31, 1993 and 1994, and the consolidated
balance sheet data at December 31, 1993 and 1994 and at March 31, 1997 are
derived from unaudited consolidated financial statements not included in this
Prospectus. The consolidated statement of operations data for the three months
ended March 31, 1997 and 1998 and the consolidated balance sheet data at March
31, 1998 are derived from unaudited consolidated financial statements included
elsewhere in this Prospectus.
The summary pro forma financial data make adjustments to the historical
balance sheet at March 31, 1998 for the Offering as if it had occurred on March
31, 1998, to the historical balance sheet at December 31, 1997 for the Transtech
Acquisition and the Offering as if these events had occurred on December 31,
1997 and to the historical statements of income for the year ended December 31,
1997 and for the three months ended March 31, 1998 for the Offering and the
Transtech Acquisition as if these events had occurred as of January 1, 1997.
The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate, stand-alone entity during the periods covered. See "Risk
Factors -- Limited Relevance of Historical Financial Information."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
AS AS
ADJUSTED ADJUSTED
1993 1994 1995 1996 1997 1997 1997 1998 1998
------- ------ ------ ------ ------ --------- ------ -------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 464.7 $569.9 $644.7 $842.4 $987.5 $1,389.9 $243.4 $ 308.6 $ 371.0
Costs and expenses:
Costs of products and services...... 279.0 340.7 365.2 470.0 532.3 811.2 134.4 175.2 219.0
Selling, general and administrative
expenses.......................... 102.2 124.9 123.9 142.8 158.7 229.7 39.0 48.9 60.9
Research and development costs...... 29.9 16.6 31.4 53.6 76.5 82.7 18.3 19.1 20.4
Depreciation and amortization....... 55.4 40.0 45.9 51.8 61.0 92.4 13.9 18.4 25.8
Year 2000 programming costs......... -- -- -- -- 9.9 9.9 0.6 5.7 6.2
Special items (credits)(1).......... 123.3 (2.0) 47.1 5.0 35.0 35.0 -- 42.6 --
------- ------ ------ ------ ------ -------- ------ -------- --------
Total costs and expenses............ 589.8 520.2 613.5 723.2 873.4 1,260.9 206.2 309.9 332.2
Operating income (loss)(2)............ (125.1) 49.7 31.2 119.2 114.1 129.0 37.2 (1.3) 38.7
Other income (expense), net(3)........ 1.0 2.9 (4.4) 11.6 21.9 23.0 4.3 4.0 4.0
Interest expense...................... 9.5 9.4 7.4 6.0 5.4 24.7 1.3 6.4 8.2
------- ------ ------ ------ ------ -------- ------ -------- --------
Income (loss) before income taxes..... (133.6) 43.2 19.4 124.8 130.6 127.3 40.2 (3.7) 34.5
Income taxes.......................... (24.4) 18.6 22.9 46.8 44.0 43.1 13.4 (1.4) 13.1
------- ------ ------ ------ ------ -------- ------ -------- --------
Net income (loss)(4).................. $(109.2) $ 24.6 $ (3.5) $ 78.0 $ 86.6 $ 84.2 $ 26.8 $ (2.3) $ 21.4
======= ====== ====== ====== ====== ======== ====== ======== ========
Earnings (loss) per share(5)
Basic............................... $ (.80) $ .18 $ (.03) $ .57 $ .64 $ .55 $ .20 $ (.02) $ .14
======= ====== ====== ====== ====== ======== ====== ======== ========
Diluted............................. $ (.80) $ .18 $ (.03) $ .56 $ .63 $ .54 $ .19 $ (.02) $ .14
======= ====== ====== ====== ====== ======== ====== ======== ========
Weighted average common shares
outstanding including equivalents:
Basic............................... 136.0 136.0 136.0 136.0 136.0 154.0 136.0 136.0 154.0
Diluted............................. 136.0 136.2 136.0 139.3 138.5 156.5 138.7 138.6 156.6
OTHER DATA:
EBITDA(6)............................. $ 54.7 $ 89.0 $133.0 $187.6 $224.8 $ 271.1 $ 54.0 $ 63.8 $ 68.6
Cash provided
(used) by:
Operating activities................ 72.5 63.5 44.6 117.7 127.4 16.3 (3.6)
Investing activities................ (113.7) (5.4) (58.0) (118.6) (74.8) (8.7) (668.7)
Financing activities................ 56.3 (65.4) 13.4 3.2 (52.8) (6.1) 671.1
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
------------------------------------------------------ -----------------------------
AS AS
ADJUSTED ADJUSTED
1993 1994 1995 1996 1997 1997 1997 1998 1998
------ ------ ------ ------ ------ --------- ------ -------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(7):
Total assets................ $532.2 $532.4 $517.8 $619.2 $654.4 $1,271.7 $603.7 $1,358.8 $1,358.8
Total debt.................. 147.5 82.1 89.2 94.7 60.3 395.0 67.0 730.0 430.0
Shareowner's equity......... 236.3 283.8 289.9 364.2 430.8 652.0 411.2 429.7 729.7
</TABLE>
- ---------------
(1) The special item in the first quarter of 1998 was $42.6 million of
in-process research and development costs, which was expensed in connection
with the Transtech Acquisition. The special item in 1997 was a $35.0 million
charge associated with a restructuring of MATRIXX's operations. Special
items in 1996 of $5.0 million relate to in-process research and development
costs which were expensed in connection with acquisitions by CBIS and
MATRIXX. Special items in 1995 consist of a $39.6 million goodwill
impairment charge at MATRIXX related to its operations in France and $7.5
million of in-process research and development costs which were expensed in
connection with acquisitions by CBIS. The special item in 1994 was a $2.0
million reversal of the 1993 CBIS restructuring reserve. The special items
in 1993 all related to CBIS and include a $101.6 million charge to
restructure CBIS' operations and dispose of certain business units, a $16.6
million charge to reduce the carrying value of certain capitalized software
costs to net realizable value and $5.1 million in costs to withdraw from
certain international contracts and discontinue certain services.
(2) Operating income (loss) includes special items as detailed in note (1)
above. Excluding special items, operating income (loss) was a loss of $1.8
million in 1993, and income of $47.7 million in 1994, $78.3 million in 1995,
$124.2 million in 1996 and $149.1 million in 1997. Operating income
excluding special items was $37.2 million and $41.3 million for the three
months ended March 31, 1997 and 1998, respectively.
(3) Includes a $13.3 million charge resulting from the termination of a currency
and interest rate swap agreement in 1995.
(4) Net income (loss) includes special items as detailed in note (1) above.
Excluding special items, net income (loss) was a loss of $7.0 million in
1993 and income of $23.4 million in 1994, $40.8 million in 1995, $81.1
million in 1996 and $109.6 million in 1997. Net income excluding special
items was $26.8 million and $24.1 million for the three months ended March
31, 1997 and 1998, respectively.
(5) Basic earnings (loss) per share has been calculated by dividing net income
(loss) for the period by the number of Common Shares that will be
outstanding as a result of a share split that will occur immediately prior
to the Offering. Diluted earnings (loss) per share has been calculated by
dividing net income (loss) for the period by the number of Common Shares
that will be outstanding immediately prior to the Offering plus the dilutive
effect of stock options that will be issued immediately prior to the
Distribution pursuant to a plan to grant such options to holders of CBI
options. Accordingly, the per share amounts are on a pro forma basis for all
periods.
(6) EBITDA is defined as operating income before special items, plus
depreciation and amortization expense and Cellular Partnership earnings.
EBITDA is presented here as an alternative measure of the Company's ability
to generate cash flow and should not be construed as an alternative to
operating income (as determined in accordance with GAAP) or to cash flows
from operating activities (as set forth in the consolidated statement of
cash flows included elsewhere in this Prospectus). EBITDA is not calculated
under GAAP and is not necessarily comparable to similarly titled items
presented by other companies.
(7) Pro forma balance sheet data at March 31, 1998 and December 31, 1997 reflect
the use of an estimated $300 million in net proceeds from the Offering to
repay intercompany debt to CBI.
20
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
The following Unaudited Pro Forma Condensed Consolidated Statements of
Income of the Company give effect to the Transtech Acquisition and the Offering.
The Unaudited Pro Forma Condensed Consolidated Statement of Income for the
year ended December 31, 1997 reflects the audited historical statement of income
for the Company and the audited historical statement of income of Transtech for
the year then ended as if the Transtech Acquisition and the Offering had
occurred on January 1, 1997. The Unaudited Pro Forma Condensed Consolidated
Statement of Income for the three months ended March 31, 1998 reflects the
unaudited historical statement of income for the Company and the unaudited
historical statement of income for Transtech for the two months ended February
28, 1998 as if the Transtech Acquisition and the Offering had occurred on
January 1, 1997.
The Unaudited Pro Forma Condensed Consolidated Statements of Income are a
presentation of the historical results with accounting and other adjustments.
The Unaudited Pro Forma Condensed Consolidated Statements of Income (i) do not
reflect the effects of any anticipated changes to be made by the Company to its
historical operations; (ii) are presented for informational purposes only; and
(iii) should not be construed to be indicative of actual results had the
Transtech Acquisition and the Offering occurred on the date indicated, or the
results of operations of the Company in the future.
The Unaudited Pro Forma Condensed Consolidated Statements of Income reflect
the Transtech Acquisition using the purchase method of accounting and the
resulting amortization of goodwill and other intangibles as well as the
financing of, and interest expense related to, the acquisition. The Unaudited
Pro Forma Condensed Consolidated Statements of Income also reflect the resulting
reduction of interest expense due to the use of the Offering's estimated net
proceeds of $300 million to repay outstanding debt.
The Unaudited Pro Forma Condensed Consolidated Statements of Income should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical financial statements of
the Company and of Transtech and the notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
----------------------------------------------------------------------------------------
HISTORICAL
HISTORICAL TRANSTECH ACQUISITION OFFERING PRO FORMA
CONVERGYS 1/1/98 - 2/28/98 ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
----------- ---------------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $308.6 $62.4 $ -- $371.0 $ -- $371.0
Costs and expenses...... 267.3 61.1 3.9(1) 332.3 -- 332.3
------ ----- ------ ------ ----- ------
Operating income........ 41.3 1.3 (3.9) 38.7 -- 38.7
Other income (expense),
net................... 4.0 -- -- 4.0 -- 4.0
Interest expense........ 6.4 -- 6.1(2) 12.5 (4.3)(4) 8.2
------ ----- ------ ------ ----- ------
Income before income
taxes................. 38.9 1.3 (10.0) 30.2 4.3 34.5
Income taxes............ 14.8 0.5 (3.8)(3) 11.5 1.6(4) 13.1
------ ----- ------ ------ ----- ------
Net income.............. $ 24.1 $ 0.8 $ (6.2) $ 18.7 $ 2.7 $ 21.4
====== ===== ====== ====== ===== ======
Earnings per share: (5)
Basic................. $ .18 $ .14 $ .14
====== ====== ======
Diluted............... $ .17 $ .13 $ .14
====== ====== ======
Weighted average common
shares outstanding
including equivalents:
Basic................. 136.0 136.0 154.0(6)
Diluted............... 138.6 138.6 156.6(6)
</TABLE>
See accompanying notes.
21
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------
HISTORICAL HISTORICAL ACQUISITION OFFERING PRO FORMA
CONVERGYS TRANSTECH ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $987.5 $402.4 $ -- $1,389.9 $ -- $1,389.9
Costs and expenses.................... 838.4 364.0 23.5(1) 1,225.9 -- 1,225.9
Special items......................... 35.0 -- -- 35.0 -- 35.0
------ ------ ------ -------- ------ --------
Operating income...................... 114.1 38.4 (23.5) 129.0 -- 129.0
Other income (expense), net........... 21.9 1.1 -- 23.0 -- 23.0
Interest expense...................... 5.4 0.2 36.3(2) 41.9 (17.2)(4) 24.7
------ ------ ------ -------- ------ --------
Income (loss) before income taxes..... 130.6 39.3 (59.8) 110.1 17.2 127.3
Income taxes.......................... 44.0 15.2 (22.6)(3) 36.6 6.5(4) 43.1
------ ------ ------ -------- ------ --------
Net income............................ $ 86.6 $ 24.1 $(37.2) $ 73.5 $ 10.7 $ 84.2
====== ====== ====== ======== ====== ========
Earnings per share: (5)
Basic............................... $ .64 $ .54 $ .55
====== ======== ========
Diluted............................. $ .63 $ .53 $ .54
====== ======== ========
Weighted average common shares
outstanding including equivalents:
Basic............................... 136.0 136.0 154.0(6)
Diluted............................. 138.5 138.5 156.5(6)
</TABLE>
- ---------------
1) The adjustments give effect to the amortization of intangible assets
acquired. The purchase price of $632.0 million was based on the contract
purchase price of $625.0 million in cash and other direct acquisition costs
estimated to be approximately $7.0 million. Any adjustment from these
acquisition cost estimates to actual costs will be recorded later in 1998 as
an adjustment to goodwill, as will any adjustment to the $625.0 million
purchase price that results from the settlement of the closing balance sheet
purchase price adjustment called for in the acquisition agreement. The
Company's allocation of the Transtech Acquisition purchase price of $632.0
million is as follows: acquired contracts -- $68.2 million; in-process
research and development -- $42.6 million; assembled workforce -- $11.4
million; internally-developed software -- $4.4 million; fair value of other
tangible net assets acquired -- $91.0 million; and goodwill -- $414.4
million. Assigned lives for the acquired assets are as follows: acquired
contracts -- eight years; assembled workforce -- fifteen years; and
goodwill -- thirty years. Assigned lives for property and equipment are as
follows: software and personal computers -- three years; equipment -- five
years; and buildings -- thirty years. The $42.6 million charge ($26.4 million
after tax) for acquired in-process research and development has been
excluded. Based upon currently available information, the final allocation of
purchase price should not result in material differences from amounts
included in the pro forma adjustments. The only anticipated adjustment to the
allocation is the recording of certain integration-related liabilities, which
may result in additional goodwill and, accordingly, additional goodwill
amortization. Management is currently evaluating its plans for their
integration activities. During the second quarter of 1998, the Company
recorded approximately $8 million in severance costs associated with the
integration plan for Transtech. The integration plan for facilities has not
been finalized. The amount of the additional amortization resulting from the
recording of the approximately $8 million in severance and from any other
potential adjustments is not expected to be material.
2) The acquisition and associated costs were financed entirely through
short-term variable rate commercial paper issued by CBI and allocated to the
Company. Interest expense on the debt has been recorded at the current rate
(5.75%) for the commercial paper that was issued to finance the acquisition.
A 1/8% change in the interest rate from that used in the pro forma
adjustment would change the related interest expense by $0.8 million for the
year based upon debt levels before the use of proceeds to repay indebtedness
to CBI. The Company's actual interest rate may be higher when it obtains
independent financing.
3) Adjustments reflect the income tax effect of pro forma adjustments recorded
at a statutory rate (federal and state) of 37.8%. A tax benefit is recorded
for the amortization of goodwill and other intangibles since the Company has
elected under Code Section 338(h)(10) to treat the Transtech Acquisition as
an asset acquisition.
4) These adjustments reflect the reduction in pro forma interest expense that
would result from the use of the estimated net proceeds of $300 million to
repay indebtedness to CBI assuming a 5.75% rate. The adjustment of income
taxes was recorded at a 37.8% rate.
5) Basic earnings (loss) per share has been calculated by dividing net income
(loss) for the period by the number of Common Shares that will be outstanding
as a result of a share split that will occur immediately prior to the
Offering. Diluted earnings (loss) per share has been calculated by dividing
net income (loss) for the period by the number of Common Shares that will be
outstanding immediately prior to the Offering plus the dilutive effect of
stock options that will be issued immediately prior to the Distribution
pursuant to a plan to grant such options to holders of CBI options.
6) Adjustment reflects the assumed 18.0 million Common Shares to be issued in
the Offering.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
The Company is currently a wholly owned subsidiary of CBI. Prior to April
27, 1998, CBI conducted the Company's businesses through its two subsidiaries,
CBIS and MATRIXX. On April 27, 1998, CBI announced the creation of the Company
to serve as a holding company for CBIS and MATRIXX.
The consolidated financial statements of the Company, which are discussed
below, reflect the results of operations, financial position and cash flows of
the businesses transferred to the Company by CBI and have been carved-out from
the financial statements of CBI using the historical results of operations and
the historical basis of the assets and liabilities of the businesses. Management
believes that the assumptions made in preparing the consolidated financial
statements of the Company on a carve-out basis are reasonable.
The financial information included herein, however, may not necessarily
reflect the results of operations, financial position and cash flows of the
Company in the future or what the result of operations, financial position or
cash flows would have been had the Company been a separate stand-alone entity
during the periods presented. This is due, in part, to the historical operation
and financing of the Company's businesses as part of CBI. The financial
information included herein does not reflect the changes that will occur in the
funding of the Company as a result of the Separation, the Offering and the
Distribution. In this regard, the Company is likely to incur somewhat higher
interest expense once it obtains external financing. In addition, certain
employees of the Company have participated in CBI's defined benefit pension
plans and its medical benefit plans, including plans that provide medical
benefits for retirees. When the Distribution occurs, the Company will establish
its own employee and retiree benefit plans, will assume responsibility for
certain benefits for employees that have retired from CBIS and MATRIXX and will
receive assets from CBI's plans. However, the Company and CBI have not had any
material discussions regarding the allocation of the assets of the CBI benefit
plans between CBI and the Company. Although the Company expects to receive an
equitable allocation of these assets, there can be no assurance in this regard.
In addition, when the Company sets up its benefit plans, it may provide
different benefits and may have different administrative expenses than those of
the CBI plans. Accordingly, the labor costs included herein should not be viewed
as necessarily indicative of the labor costs to be incurred by the Company
subsequent to the Distribution. With the exception of those items discussed
above, management does not expect any significant changes in the daily
operations of the Company's businesses in the near term. Management will
evaluate opportunities to change the operations of the businesses as warranted
to improve efficiency and client focus. These changes could include the
combination of certain business activities currently performed by CBIS and
MATRIXX.
The following discussion and the related consolidated financial statements
and accompanying notes contain certain forward-looking statements that involve
potential risks and uncertainties. The Company's future results could differ
materially from results discussed in such forward-looking statements. Important
factors that could cause or contribute to such differences are discussed herein
and in "Risk Factors."
OVERVIEW
The Company, through its two operating subsidiaries, CBIS and MATRIXX, is a
leading provider of outsourced billing and customer management solutions.
Revenues. The Company generates revenue primarily through CBIS' provision
of billing information services, generally charged on a monthly fee per
subscriber or per billing statement basis, and MATRIXX's provision of outsourced
customer management services, generally charged on a per employee hour basis. In
addition, the Company generates revenue from CBIS' provision of professional
services including consulting and applications development, generally charged on
a per hour or project basis, and software licensing to clients that use CBIS'
software on their own internal systems. A substantial portion of the Company's
revenues has been derived from its largest clients. See "Risk Factors--Client
Concentration."
23
<PAGE> 25
CBIS' billing services are provided in the Company's data centers using
proprietary software. Revenues from these services represented approximately 60%
of CBIS' 1997 revenues and are typically earned under multi-year contracts. Unit
prices for these services have declined over time, but revenues have increased
as a result of increases in client subscriber levels. Professional and
consulting revenues represented over 30% of CBIS' 1997 revenues and primarily
relate to ongoing programming enhancements for clients. License and other
revenues represented less than 10% of CBIS' 1997 revenue, relate to delivery of
software and fluctuate significantly from period to period.
MATRIXX's revenues primarily consist of dedicated services and traditional
teleservices. Approximately 70% of MATRIXX's 1997 revenues (pro forma for the
Transtech Acquisition) were from dedicated services generally under multi-year
contracts. Traditional teleservices, representing 30% of MATRIXX's 1997 revenues
(pro forma for the Transtech Acquisition), were generally provided on a
short-term basis and generate lower margins than dedicated services. MATRIXX's
growth strategy emphasizes the dedicated services portion of the market. Prices
have also been generally stable for traditional teleservices, although these
services tend to be more competitive than dedicated services. The existence of
excess capacity in the traditional teleservices industry has intensified the
competitive environment. Traditional teleservices revenue levels tend to
fluctuate more than dedicated services revenue levels because they relate to
campaign based client programs which may be shorter in term. The variability in
traditional teleservices revenues was demonstrated in the third quarter of 1997
as the teleservices industry, including MATRIXX, suffered revenue downturns when
certain major users of traditional teleservices reduced their overall marketing
activities with little to no advance notice. This led to significant shortfalls
in traditional teleservices revenues against anticipated levels.
In connection with the Transtech Acquisition, the Company entered into an
eight-year teleservices contract with AT&T. During the first three years of the
contract, AT&T has committed to outsource teleservices business to MATRIXX
valued at $300 million during each 12 month period from March 1 through February
28. Subject to certain exceptions, if there is a shortfall to the revenue
commitment, AT&T must pay 40% of the shortfall to the Company. Currently, AT&T's
level of outsourced business is at a run rate that is below the $300 million
annual revenue commitment. Additionally, throughout the term of the contract,
AT&T has agreed to maintain existing programs through their scheduled duration
as long as reasonable standards are maintained.
Cost of Products and Services. The principal components of the Company's
costs of products and services are labor costs, hardware and software costs,
including rental expense for equipment and facilities leased under operating
leases, and other costs directly associated with the operation of the Company's
data centers and 38 call centers. CBIS' costs, which include large components of
hardware, software and other equipment in addition to labor, tend to be more
fixed in nature, while MATRIXX's costs, primarily direct labor and
telecommunications costs, are largely variable with business volume. However,
MATRIXX is not always able to reduce its labor costs as quickly as its revenues
change. Employee costs associated with providing customer management services
have generally been under pressure as a result of limited labor supply in the
current healthy national economy. As of March 31, 1998, the Company employed
over 2,100 software professionals. In addition, the Company has experienced wage
pressures as a result of the increasing demand for software professionals.
As labor costs for teleservices have increased, the competitive nature of
this market, particularly for traditional teleservices, has limited MATRIXX's
ability to pass on increased costs to clients. In the third quarter of 1997,
MATRIXX did not decrease its costs in proportion to the decrease in revenues
from the traditional teleservices business, resulting in a decline in operating
income and operating margin. This is demonstrated in MATRIXX's operating margin
excluding special items, which was 12.4% in 1996, 12.7% in the first quarter of
1997, 11.4% in the second quarter of 1997, 6.0% in the third quarter of 1997 and
9.3% in the fourth quarter of 1997.
Selling, General, and Administrative Expenses. The principal components of
the Company's selling, general and administrative ("SG&A") expenses include
employee costs, facilities expenses and other costs related to sales and
marketing, executive management, and support functions such as human resources,
24
<PAGE> 26
accounting and finance. Included in SG&A expenses is an allocation of general
corporate expenses from CBI for corporate headquarters and common support
divisions. These expenses have been allocated to the Company based on the ratio
of the Company's revenues, assets and payroll to CBI's revenues, assets and
payroll. Management believes these allocations are reasonable. However, the
costs of these services charged to the Company by CBI are not necessarily
indicative of the costs that would have been incurred if the Company had
performed these functions as a stand-alone entity.
Research and Development. Research and development activities represent a
significant investment in the Company's future as these expenditures are made in
advance of the anticipated related revenues. CBIS' research and development
spending has focused in recent years on the Precedent 2000 billing solution
which was initially developed in 1996, and was modified and enhanced to meet the
needs of new PCS clients in 1996 and 1997. See "Business -- Technology, Research
and Development." Recent investments in development have increased Precedent
2000's efficiency and scale. Research and development activities have also
continued to enhance the Company's mainframe software and systems. Research and
development expenses associated with these activities and others generally
consist of salaries, recruiting and other personnel-related expenses, supplies,
travel and allocated facilities and communications costs.
Depreciation and Amortization Expense. The Company's property and
equipment is depreciated over lives ranging from three years for certain
purchased software and personal computers to thirty years for buildings.
Intangible assets, principally goodwill, are amortized over lives ranging from
five to forty years. Through 1997, depreciation and amortization expense also
included amortization of capitalized internally developed software. At December
31, 1997, the Company's internally-developed software was fully amortized.
Amortization of goodwill and other intangibles will become a significantly
larger non-cash expense for the Company as a result of the Transtech Acquisition
and the acquisition of the teleservices business of Maritz Inc. (the "Maritz
Acquisition"). The Company acquired these entities in the first quarter of 1998
and, as a result of the acquisitions, added over $500 million in goodwill and
other intangible assets. As of March 31, 1998, the Company had $709.6 million of
goodwill and other intangible assets.
Year 2000 Expenses. Beginning in 1997, the Company began to incur
significant expenditures to modify its systems and software for the Year 2000.
These direct expenditures totaled nearly $10 million in 1997 and are expected to
be in a range of $25 million to $30 million in 1998, with costs thereafter,
principally during 1999, estimated in the range of $10 million to $20 million.
See "Risk Factors -- Year 2000 Compliance."
Special Items. The Company has incurred special items in the last three
years and in the first quarter of 1998. A charge of $35.0 million was recorded
in the fourth quarter of 1997 for a restructuring plan at MATRIXX and a charge
of $39.6 million was recorded in 1995 to write down the carrying value of
goodwill associated with MATRIXX's operations in France. The Company expensed
in-process research and development costs of $5.0 million, $7.5 million and
$42.6 million during 1996, 1995 and the first quarter of 1998, respectively,
associated with acquisitions made in those periods.
The 1997 MATRIXX restructuring plan was developed in response to the
reduction in overall marketing activity in the second half of 1997 by certain
major users of traditional teleservices and the need to adjust MATRIXX's cost
structure to remove duplicate fixed costs in MATRIXX's decentralized
organization that had resulted from its significant growth through acquisitions.
Additionally, prior to the second half of 1997 downturn, MATRIXX had continued
to invest in new call centers to meet the expected continued growth of its
dedicated service businesses. In the fourth quarter of 1997, the Company
approved the plan which addressed three key areas: organization structure
changes to eliminate duplicate fixed costs, closing of small/outlying facilities
and the writedown of goodwill associated with two underperforming businesses
that were to be restructured.
Approximately $3 million of the goodwill writedown included in the 1997
restructuring charge was related to MATRIXX's operations in France. In 1995, the
Company had previously recorded a $39.6 million writedown of goodwill related to
those operations based upon management's view of discounted anticipated cash
flows, at that time. During 1997, these operations continued to underperform and
management's updated view of cash flows resulted in the writedown of the
remaining carrying value of the goodwill.
25
<PAGE> 27
The restructuring activities called for in the 1997 plan are expected to be
completed by the end of 1998, which will require cash outflows of approximately
$16 million. When fully implemented, the plan is expected to result in annual
cost savings of over $10 million.
Other Income and Expense, Net. Other income and expense, net consists
primarily of earnings from the Company's 45% limited partnership interest in the
Cellular Partnership that operates a cellular telecommunications business that
provides service in central and southwestern Ohio and northern Kentucky. The
Company accounts for the Cellular Partnership interest under the equity method
of accounting. In 1997, the Company's equity in the earnings of the Cellular
Partnership was $14.7 million and the Company received $11.8 million in
distributions from the Cellular Partnership. Other income (expense), net also
includes interest income associated with proceeds from the 1997 settlement of
federal tax audits for the 1989 through 1994 tax years, other miscellaneous
items and a loss resulting from the termination of a currency and interest rate
swap in 1995. See "Business -- Cellular Telephone Service Limited Partnership
Interest."
Interest Expense. The Company's consolidated financial statements include
an allocation of CBI's debt and the related interest expense, as well as any
direct outstanding indebtedness of the Company and its subsidiaries. The
allocation of CBI debt and interest expense is based on the capital structure of
the Company anticipated at the date of the Distribution and CBI's weighted
average interest rates. The weighted average interest rate at which the Company
borrows may be higher when it obtains financing independently.
Acquisitions. The Company's businesses have grown historically through a
combination of internal growth and acquisitions. It is anticipated that
acquisitions, potentially including international acquisitions, will continue to
play a role in the Company's strategy for future growth. The Company's
acquisitions have all been accounted for under the purchase method of accounting
which has created goodwill and other intangible asset amortization that impacts
future earnings. See "Risk Factors -- Difficulties of Completing and Integrating
Acquisitions; International Operations."
SECOND QUARTER 1998 RESULTS
On July 16, 1998, the Company reported its results for the second quarter
of 1998. Consolidated revenues for the second quarter increased $120.5 million
(50%) to $363.6 million in 1998 from $243.1 million in the second quarter of
1997. The Transtech Acquisition and the Maritz Acquisition contributed $106.2
million to the revenue increase, with the remaining increase coming from
existing operations. Operating income for the second quarter of 1998 increased
to $41.6 million (9%) from $38.2 million in the second quarter of 1997. Year
2000 programming costs increased to $7.8 million in the second quarter of 1998
from $1.5 million in the second quarter of 1997. The Cellular Partnership
contributed earnings of $6.8 million in the second quarter of 1998, an increase
from $3.6 million in the second quarter of 1997. Earnings before interest and
income taxes (defined herein as operating income plus Cellular Partnership
earnings) increased to $48.4 million (16%) in the second quarter of 1998, from
$41.8 million for the same period in 1997. The Company's net income decreased to
$23.6 million for the second quarter of 1998 from $28.2 million in the second
quarter of 1997. The decrease in net income was largely attributable to $10
million of incremental interest costs resulting from the Transtech Acquisition
and Maritz Acquisition.
Revenues for CBIS increased $12.1 million (9%) to $146.1 million in the
second quarter of 1998 from $134.0 million in the second quarter of 1997.
Increased data processing revenues accounted for the majority of the revenue
gain. Operating income for CBIS increased to $27.6 million in the second quarter
of 1998 from $25.5 million in the second quarter of 1997. The increase in
operating income was generated despite an increase in CBIS' Year 2000 costs to
$5.0 million in the second quarter of 1998 from $1.5 million in the second
quarter of 1997.
Revenues for MATRIXX increased $110.9 million (100%) to $222.1 million in
the second quarter of 1998 from $111.2 million in the second quarter of 1997.
The Transtech Acquisition and the Maritz Acquisition contributed $106.2 million
to the revenue increase. MATRIXX's operating income increased to $14.1 million
in the second quarter of 1998 from $12.6 million in the second quarter of 1997.
Operating income from the Transtech Acquisition and the Maritz Acquisition was
somewhat better than breakeven in the second quarter of 1998. MATRIXX incurred
$2.8 million in Year 2000 costs in the second quarter of 1998.
26
<PAGE> 28
At June 30, 1998, the Company had approximately $756 million in outstanding
debt, of which approximately $752 million was intercompany debt payable to CBI.
The Company's outstanding debt increased by approximately $26 million in the
second quarter, primarily relating to increased working capital requirements
resulting from the Transtech Acquisition.
The Company's results for the second quarter of 1998 were adversely
impacted by lower than anticipated revenues from AT&T under the contract
associated with the Transtech Acquisition. Revenues from AT&T under that
contract totaled approximately $57 million for the second quarter of 1998, which
is below the level necessary to achieve the $300 million annual amount required
by the contract. MATRIXX continues to implement its restructuring program
adopted in the fourth quarter of 1997, which was designed to increase
productivity and improve service to clients. Separately, MATRIXX is
redistributing work and initiating salaried workforce reductions at Transtech to
achieve the anticipated scale benefits from integrating those operations into
MATRIXX. Additionally, CBIS and MATRIXX are evaluating opportunities to improve
efficiency and reduce costs by integrating certain operations, which could
potentially result in a charge later in 1998.
RESULTS OF OPERATIONS
The Company's operating results are presented and discussed in summary form
immediately below the following table. Detailed period to period comparisons of
revenues and costs and expenses are presented in the discussion of the CBIS and
MATRIXX operating segments which follows the consolidated presentation.
The following table sets forth a summary of the Company's costs and
expenses as a percentage of revenues for the Company:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of products and services................... 56.6 55.8 53.9 55.2 56.8
Selling, general and administrative expenses..... 19.3 16.9 16.1 16.1 15.8
Research and development costs................... 4.9 6.4 7.7 7.5 6.2
Depreciation and amortization.................... 7.1 6.2 6.2 5.7 6.0
Year 2000 programming costs...................... -- -- 1.0 0.2 1.8
Special items.................................... 7.3 0.6 3.5 -- 13.8
----- ----- ----- ----- -----
Total costs and expenses......................... 95.2 85.9 88.4 84.7 100.4
Operating income (loss)............................ 4.8 14.1 11.6 15.3 (0.4)
Other income (expense), net........................ (0.7) 1.4 2.2 1.8 1.3
Interest expense................................... 1.1 0.7 0.6 0.6 2.1
----- ----- ----- ----- -----
Income (loss) before income taxes.................. 3.0 14.8 13.2 16.5 (1.2)
Income taxes....................................... 3.5 5.6 4.4 5.5 (0.5)
----- ----- ----- ----- -----
Net income (loss).................................. (0.5)% 9.2% 8.8% 11.0% (0.7)%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
The Company's revenues for the first quarter of 1998 were $308.6 million,
an increase of $65.2 million (27%) from $243.4 million for same period in 1997.
The Maritz Acquisition in January 1998 and the Transtech Acquisition in late
February 1998 contributed $43.8 million of the increase. Costs and expenses
excluding special items were $267.3 million, an increase of $61.1 million (30%)
from $206.2 million in the first quarter of 1997. The Maritz Acquisition and the
Transtech Acquisition contributed $43.9 million to this increase, including over
$2 million in additional amortization expense from goodwill and other intangible
assets resulting from the acquisitions. Operating income excluding special items
was $41.3 million, an increase
27
<PAGE> 29
of $4.1 million (11%) from $37.2 million in the first quarter of 1997. The
Maritz Acquisition and the Transtech Acquisition were primarily responsible for
the decrease in the Company's operating margin excluding special items to 13.4%
from 15.3% in the first quarter of 1997. Excluding special items and the impact
of the Maritz Acquisition and the Transtech Acquisition, the Company's operating
margin in the first quarter of 1998 would have been 15.6%. Net income excluding
special items was $24.1 million, a decrease of $2.7 million (10%) from $26.8
million in 1997. This decrease was the result of a significant increase in
interest expense in 1998 associated with the financing of the Maritz Acquisition
and the Transtech Acquisition.
The Company recorded a $42.6 million special item in the first quarter of
1998 related to the expensing of in-process research and development for the
Transtech Acquisition. This special item decreased net income by $26.4 million.
Other income and expense, net decreased to $4.0 million in the first
quarter of 1998 from $4.3 million in the first quarter of 1997 reflecting
interest income recorded in the first quarter of 1997 resulting from the
proceeds of the settlement of the CBI federal tax audits for 1989 through 1994.
This interest income exceeded the increase in the Company's portion of the
Cellular Partnership earnings in the first quarter of 1998 over the first
quarter of 1997.
Interest expense increased to $6.4 million in the first quarter of 1998
from $1.3 million in the first quarter of 1997 primarily as a result of
additional borrowings for the Maritz Acquisition and the Transtech Acquisition.
The increase in interest expense is attributable to the significant increase in
the level of debt allocated to the Company by CBI as a result of the $30 million
Maritz Acquisition in January 1998 and the $625 million Transtech Acquisition in
February 1998.
The Company's $1.4 million tax benefit for the first quarter of 1998 is the
result of the pre-tax loss caused by the write-off of $42.6 million of
in-process research and development costs associated with the Transtech
Acquisition. Excluding this special item, the effective tax rate for the three
months ended March 31, 1998 was 37.8%, which exceeded the 33.4% effective rate
for the same period in 1997 resulting from the 1997 settlement of federal tax
audits for CBI for tax years 1989 through 1994.
Including the special item, the Company recorded a net loss of $2.3 million
in the first quarter of 1998, which compares to net income of $26.8 million for
the same period in 1997. Results for the first quarter of 1998 reflect $5.7
million in costs to reprogram the Company's information systems and software for
the Year 2000 as compared to $0.6 million for the same period in 1997.
1997 COMPARED TO 1996
The Company's revenues were $987.5 million in 1997, an increase of $145.1
million (17%) from $842.4 million in 1996. Costs and expenses excluding special
items were $838.4 million, an increase of $120.2 million (17%) from $718.2
million in 1996. Operating income excluding special items increased to $149.1
million, a 15.1% margin, from $124.2 million, a 14.7% margin, in 1996. Excluding
special items, net income was $109.6 million in 1997, an increase of $28.5
million (35%) from $81.1 million in 1996.
The special item recorded by the Company in 1997 was a charge of $35.0
million at MATRIXX for a restructuring of divisions and facilities. Special
items in 1996 included charges of $5.0 million for the write-off of in-process
research and development costs from acquisitions at both CBIS and MATRIXX.
Other income (expense), net increased to $21.9 million in 1997 from $11.6
million in 1996 primarily resulting from increased earnings from the Cellular
Partnership interest, interest income associated with the settlement during 1997
of the 1989 through 1994 federal tax audits and other miscellaneous items.
Interest expense was $5.4 million in 1997 and $6.0 million in 1996. This
reflects a slight decline in the amount of debt in 1997, partially offset by a
modest increase in CBI's weighted average interest rate from 7.0% to 7.2%.
The 1997 effective tax rate was positively impacted by the extension of the
research and development tax credit and the conclusion of CBI's 1989 through
1994 federal tax return audits. These factors account for the
28
<PAGE> 30
reduced effective tax rate in 1997 as compared to 1996 as CBIS has historically
generated the majority of CBI's research and experimentation tax credit.
Including the special items, net income was $86.6 million in 1997 compared
to net income of $78.0 million in 1996. During 1997, the Company also began to
incur significant costs to reprogram its information systems and software for
the Year 2000. These costs amounted to $9.9 million in 1997.
1996 COMPARED TO 1995
The Company's revenues reached $842.4 million in 1996, an increase of
$197.7 million (31%) from $644.7 million in 1995. Costs and expenses excluding
special items were $718.2 million, an increase of $151.8 million (27%) from
$566.4 million in 1995. Operating income excluding special items increased to
$124.2 million in 1996, an increase of $45.9 million (59%), from $78.3 million
in 1995. Excluding special items, net income was $81.1 million in 1996 and $40.8
million in 1995.
Special items included $5.0 million and $7.5 million for the write-off of
in-process research and development costs from acquisitions at both CBIS and
MATRIXX in 1996 and at CBIS in 1995, respectively. Additionally, special items
in 1995 included a charge of $39.6 million for goodwill impairment at MATRIXX
related to its operations in France.
Other income (expense), net, was income of $11.6 million in 1996 and
expense of $4.4 million in 1995. The 1996 other income primarily reflects
Cellular Partnership income. The 1995 net expense was the result of a $13.3
million expense associated with the 1995 termination of a foreign currency
interest rate swap agreement and is net of Cellular Partnership earnings.
Interest expense decreased in 1996 to $6.0 million from $7.4 million in
1995 as a result of a restructuring of CBI's outstanding debt, which occurred in
late 1995 and early 1996. The restructuring of CBI's indebtedness included
repayment of certain higher rate notes and the termination of a foreign currency
interest rate swap agreement that increased CBI's weighted average cost of debt.
CBI's weighted average interest rate, the basis for allocating interest expense
to the Company, fell from 9.4% to 7.0% and the debt allocated to the Company by
CBI was largely unchanged during the year.
The change in the effective tax rate to 37.5% in 1996 from 118.0% in 1995
was caused by the 1995 impairment writedown of non-deductible goodwill
associated with MATRIXX's operations in France. Excluding the effect of this
special item in 1995, the effective tax rates in 1996 and in 1995 were
comparable.
Including special items, reported net income was $78.0 million in 1996
compared to a loss of $3.5 million in 1995.
DISCUSSION OF OPERATING SEGMENTS
CBIS
The following table presents revenues, costs and expenses and operating
income for CBIS, the Company's information systems segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ ---------------------------
PERCENT PERCENT PERCENT
CHANGE CHANGE CHANGE
1995 1996 96 VS. 95 1997 97 VS. 96 1997 1998 98 VS. 97
------ ------ --------- ------ --------- ------ ------ ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $373.9 $479.8 28% $548.0 14% $130.5 $143.9 10%
Costs of products and
services.................... 209.5 252.6 21 262.7 4 66.0 71.4 8
Selling, general and
administrative expenses..... 56.9 64.2 13 66.2 3 16.3 17.6 8
Research and development
costs....................... 31.2 52.3 68 71.2 36 17.1 16.5 (4)
Depreciation and
amortization................ 30.3 32.2 6 34.5 7 7.8 6.7 (14)
Year 2000 programming costs... -- -- -- 8.7 -- 0.6 4.7 --
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ ---------------------------
PERCENT PERCENT PERCENT
CHANGE CHANGE CHANGE
1995 1996 96 VS. 95 1997 97 VS. 96 1997 1998 98 VS. 97
------ ------ --------- ------ --------- ------ ------ ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Special items:
Acquired research and
development costs........ 7.5 3.0 (60) -- -- -- -- --
------ ------ ------ ------ ------
Operating income.............. $ 38.5 $ 75.5 96% $104.7 39% $ 22.7 $ 27.0 19%
</TABLE>
The following table sets forth a summary of costs and expenses as a
percentage of revenues for CBIS.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of products and services..................... 56.0 52.6 47.9 50.6 49.6
Selling, general and administrative expenses....... 15.2 13.4 12.1 12.5 12.2
Research and development costs..................... 8.4 10.9 13.0 13.1 11.5
Depreciation and amortization...................... 8.1 6.7 6.3 5.9 4.7
Year 2000 programming costs........................ -- -- 1.6 0.5 3.2
Special items:
Acquired research and development costs.......... 2.0 0.7 -- -- --
----- ----- ----- ----- -----
Operating income................................... 10.3% 15.7% 19.1% 17.4% 18.8%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
Revenues. CBIS' revenues increased $13.4 million (10%) to $143.9 million
in the first quarter of 1998 from $130.5 million in the first quarter of 1997.
Revenues from billing and related information system services increased $16.8
million (22%) to $92.0 million in the first quarter of 1998 from $75.2 million
in the first quarter of 1997, driven primarily by continued strong wireless
subscriber growth for CBIS' clients. Professional and consulting revenues
decreased $0.7 million (2%) to $34.3 million in the first quarter of 1998 from
$35.0 million in the first quarter of 1997. This slight decrease reflects a
considerable amount of contract development services rendered in the first
quarter of 1997 to ready the Precedent 2000 billing solution for PCS clients and
reductions in spending by a significant client. License and other revenues
decreased by $0.1 million (1%) to $6.8 million in the first quarter of 1998 from
$6.9 million in the first quarter of 1997. International revenues decreased $1.2
million in the first quarter of 1998 from the first quarter of 1997, reflecting
the winding down of a network provisioning system development contract for an
international client.
Costs and Expenses. CBIS' costs of products and services increased $5.4
million (8%) to $71.4 million in the first quarter of 1998 from $66.0 million in
the first quarter of 1997. Employee costs increased $1.3 million (5%) to $28.6
million in the first quarter of 1998 from $27.3 million in the first quarter of
1997, reflecting modest headcount increases for the increased volume of business
and increased wage rates. The remaining increase was from hardware and software
development cost increases and other direct cost increases caused by business
expansion.
CBIS' SG&A expenses increased by $1.3 million (8%) to $17.6 million in the
first quarter of 1998 from $16.3 million in the first quarter of 1997 with the
principal driver being the increased volume of CBIS' business.
Research and development costs decreased $0.6 million (4%) to $16.5 million
in the first quarter of 1998 from $17.1 million in the first quarter of 1997,
reflecting the deployment of certain development resources to the Year 2000
programming issue.
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<PAGE> 32
CBIS' depreciation and amortization expense decreased by $1.1 million (14%)
to $6.7 million in the first quarter of 1998 from $7.8 million in the first
quarter of 1997. The decrease was the result of the completion of the
amortization of CBIS' capitalized internally developed software by December 31,
1997.
CBIS incurred $4.7 million in expenses in the first quarter of 1998 to
reprogram its systems and software for the Year 2000. Expenses for this effort
in the first quarter of 1997 totaled $0.6 million.
Operating Income. CBIS' operating income increased to $27.0 million in the
first quarter of 1998 from $22.7 million in the first quarter of 1997 and its
operating margin increased to 18.8% in the first quarter of 1998 from 17.4% in
the first quarter of 1997. In addition to increased efficiencies associated with
revenue growth, as the network provisioning system development contract
described above nears completion, and contract performance uncertainties have
been removed, revenues have been recognized at higher margins than in previous
periods. The operating margin increase was achieved despite significant
increases in research and development spending and the beginning of significant
spending by CBIS to address the Year 2000 issue.
1997 COMPARED TO 1996
Revenues. CBIS' revenues increased $68.2 million (14%) to $548.0 million
in 1997 from $479.8 million in 1996. Revenues from billing and related
information systems services increased $57.0 million (20%) to $335.4 million in
1997 from $278.4 million in 1996, reflecting growth in cellular and PCS
subscribers. Wireless subscriber levels of CBIS' clients increased 29%. The
increase in billing and related information systems revenues attributable to the
growth in wireless subscribers was partially offset by a decline in the number
of subscribers for whom CBIS billed the long distance portion of cellular calls.
This decline resulted from the Telecommunications Act of 1996 opening the
provision of long distance services to competition. As a result, a CBIS client
lost market share to other long distance carriers. Professional and consulting
services increased $4.3 million (3%) to $131.9 million in 1997 from $127.6
million in 1996. This increase occurred entirely in the first half of 1997,
reflecting higher levels of development work for PCS clients and enhancement
requests from existing clients. Domestic license and other revenue increased
$6.3 million (25%) to $31.5 million in 1997 from $25.2 million in 1996 as a
result of software license and hardware sales to clients in the cable industry.
Most of the remaining revenue increase was from international revenues
associated with acquisitions made in the last half of 1996 and new international
clients.
Costs and Expenses. CBIS' costs of products and services increased $10.1
million (4%) to $262.7 million in 1997 from $252.6 million in 1996. The labor
component of the cost of products and services increased by $9.7 million (10%)
to $107.2 million in 1997 from $97.5 million in 1996, reflecting higher costs
associated with increased business volume, additional costs from companies
acquired in the second half of 1996 and wage pressure. Wage increases for
computer professionals were in excess of the national average, which is
consistent with information industry trends.
CBIS' SG&A expenses increased $2.0 million (3%) to $66.2 million in 1997
from $64.2 million in 1996, reflecting additional costs associated with higher
business volume.
Research and development costs increased $18.9 million (36%), rising to
$71.2 million in 1997 from $52.3 million in 1996. This increase reflected higher
development activity in 1997 to enhance the Precedent 2000 platform to provide
billing and related information systems services to PCS clients as well as
enhancements to existing mainframe systems.
CBIS' depreciation and amortization expense increased $2.3 million (7%) to
$34.5 million in 1997 from $32.2 million in 1996. This increase is the result of
increases in depreciable property and equipment balances during 1996 and 1997,
increased software amortization and a full year of goodwill amortization
associated with acquisitions made in 1996.
During 1997, CBIS began to incur costs to reprogram its systems and
software for the Year 2000. These costs totaled $8.7 million.
Operating Income. CBIS' operating income excluding special items increased
to $104.7 million in 1997 from $78.5 million in 1996 and its operating margin
increased to 19.1% in 1997 from 16.4% in 1996.
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<PAGE> 33
1996 COMPARED TO 1995
Revenues. CBIS' revenues increased $105.9 million (28%) to $479.8 million
in 1996 from $373.9 million in 1995. Excluding acquisitions made in late 1995
and during 1996, revenue increased by 21%. CBIS acquired Information Systems
Development Partnership ("ISD"), a cable TV billing software company in 1995 and
International Computer Systems, Inc. and Swift Management Services in 1996.
Domestic billing and related information systems revenues increased $31.2
million to $278.4 million in 1996 from $247.2 million in 1995, reflecting the
30% growth in cellular wireless subscribers partially offset by lower volume on
a residential long distance credit card contract. Professional and consulting
services revenues increased $36.7 million (40%) to $127.6 million in 1996 from
$90.9 million in 1995, reflecting a combination of additional work from existing
clients, development efforts for new PCS clients, and a full year of revenues of
ISD. License and other revenues increased by $17.9 million (245%) to $25.2
million in 1996 from $7.3 million in 1995, primarily as a result of a full year
of ISD revenues. International revenues increased $15.1 million due primarily to
improved performance on two contracts.
Costs and Expenses. CBIS' costs of products and services increased $43.1
million (21%) to $252.6 million in 1996 from $209.5 million in 1995. Employee
costs increased $10.9 million (12%) to $97.5 million in 1996 from $86.6 million
in 1995, reflecting a higher level of business volume and acquisitions made in
late 1995 and early 1996. Data center costs increased $11.2 million (27%) to
$52.3 million in 1996 from $41.1 million in 1995, reflecting, among other
things, the opening of a new data center during 1996. The remaining increase of
$21.0 million in costs of products and services was attributable to the higher
level of business volume in 1996, the new data center and acquisitions made in
late 1995 and early 1996.
CBIS' SG&A expenses increased by $7.3 million (13%) to $64.2 million in
1996 from $56.9 million in 1995. The increase was the result of increased
business volume and acquisitions made in late 1995 and early 1996.
Research and development costs increased $21.1 million (68%) to $52.3
million in 1996 from $31.2 million in 1995. The significant increase in research
and development spending in 1996 was the result of expanded efforts to complete
the initial release of Precedent 2000 and continuing enhancements to mainframe
systems.
CBIS' depreciation and amortization increased by $1.9 million (6%) to $32.2
million in 1996 from $30.3 million in 1995. The increase was caused by an
increase in depreciable property and equipment during 1995 and 1996 and the
amortization of goodwill associated with acquisitions made in late 1995 and
early 1996.
Special items of $3.0 million in 1996 and $7.5 million in 1995 related to
the expensing of in-process research and development costs associated with
acquisitions made in those years.
Operating Income. CBIS' operating income excluding special items increased
to $78.5 million in 1996 from $46.0 million in 1995 and its operating margin
excluding special items increased to 16.4% in 1996 from 12.3% in 1995. Certain
of CBIS' international contracts produced higher margins in 1996 than in 1995
because the revenues and contribution margin of the contracts were recognized at
a lower level in 1995 as a result of significant contract risks. As these
uncertainties were resolved and performance on the contracts improved, revenues
were recognized at a higher margin.
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MATRIXX
The following table presents the revenues, costs and expenses and operating
income of MATRIXX, the Company's customer management solutions segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- ----------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
CHANGE CHANGE CHANGE
1995 1996 96 VS. 95 1997 97 VS. 96 1997 1998 98 VS. 97
------ ------ ---------- ------ ---------- ------ ------ ----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $271.1 $367.1 35% $447.6 22% $115.2 $166.9 45%
Costs of products and
services................ 155.7 221.8 42 277.5 25 70.6 103.9 47
Selling, general and
administrative
expenses................ 67.3 78.7 17 92.7 18 22.7 33.5 48
Research and development
costs................... 0.2 1.3 550 5.3 308 1.2 2.6 117
Depreciation and
amortization............ 15.6 19.6 26 26.5 35 6.1 11.6 90
Year 2000 programming
costs................... -- -- -- 1.2 -- -- 1.0 --
Special items:
Restructuring........... -- -- -- 35.0 -- -- -- --
Acquired research and
development costs.... -- 2.0 -- -- -- -- 42.6 --
Goodwill impairment..... 39.6 -- -- -- -- -- -- --
------ ------ ------ ------ ------
Operating income (loss)... $ (7.3) $ 43.7 -- $ 9.4 (78) $ 14.6 $(28.3) --
</TABLE>
The following table sets forth a summary of costs and expenses as a
percentage of revenues for MATRIXX:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of products and services................. 57.4 60.4 62.0 61.3 62.2
Selling, general and administrative expenses... 24.9 21.5 20.7 19.7 20.1
Research and development costs................. -- 0.4 1.2 1.0 1.6
Depreciation and amortization.................. 5.8 5.3 5.9 5.3 6.9
Year 2000 programming costs.................... -- -- 0.3 -- 0.6
Special items:
Restructuring................................ -- -- 7.8 -- --
Acquired research and development costs...... -- 0.5 -- -- 25.6
Goodwill impairment.......................... 14.6 -- -- -- --
----- ----- ----- ----- -----
Operating income (loss)........................ (2.7)% 11.9% 2.1% 12.7% (17.0)%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
Revenues. MATRIXX's first quarter revenues increased by $51.7 million
(45%) to $166.9 million in 1998 from $115.2 million in 1997. The Maritz
Acquisition in January 1998 and the Transtech Acquisition at the end of February
1998 contributed revenues of $43.8 million. Excluding the impact of
acquisitions, MATRIXX's revenues increased by 7% for the quarter. Dedicated
services revenues (which include the majority of revenue contributions of both
Maritz and Transtech) increased $53.0 million (88%) to $113.4 million in the
first quarter of 1998 from $60.4 million in the first quarter of 1997. In
addition to the revenues of Maritz and Transtech, increased sales to
communications and technology clients contributed to this increase.
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<PAGE> 35
Traditional teleservices revenues decreased $1.9 million (4%) to $45.7 million
in the first quarter of 1998 from $47.6 million in the first quarter of 1997.
The traditional teleservices business continued to recover from the third
quarter 1997 downturn caused by a reduction in overall marketing efforts by
certain large clients. The $45.7 million in traditional teleservices revenues in
the first quarter of 1998 compares to revenues of $43.8 million in the fourth
quarter of 1997 and $34.7 million in the third quarter of 1997. MATRIXX's
international revenues increased $0.7 million (10%) to $7.9 million in the first
quarter of 1998 from $7.2 million in the first quarter of 1997.
Costs and Expenses. MATRIXX's operating expenses for the first quarter of
1998 increased $52.0 million (52%) to $152.6 million in 1998 from $100.6 million
in 1997. The operating expense increase occurred across all major cost
categories. The Maritz Acquisition and the Transtech Acquisition contributed
$43.9 million to this increase. Excluding the impact of the two acquisitions,
operating expenses increased by $7.1 million or 7%.
Costs of products and services increased $33.3 million (47%) to $103.9
million in the first quarter of 1998 from $70.6 million in the first quarter
1997, reflecting the Maritz Acquisition and the Transtech Acquisition. Labor
costs accounted for the vast majority of the increase, increasing $30.2 million
(54%) to $86.0 million in the first quarter of 1998 from $55.8 million in the
first quarter of 1997, reflecting the increased headcount at the acquired
companies. The remaining increase in cost of products and services included
telecommunications costs which increased by $0.8 million to $9.5 million, and
other direct costs of providing services, primarily reflecting the costs of the
facilities added by the two acquisitions.
SG&A expenses increased by $10.8 million (48%) to $33.5 million in 1998
from $22.7 million in 1997. The increase was principally the result of the two
acquisitions.
Depreciation and amortization expense increased $5.5 million (90%) to $11.6
million in the first quarter of 1998 from $6.1 million in the first quarter of
1997. Amortization of goodwill and other intangibles resulting from the Maritz
Acquisition and the Transtech Acquisition contributed over $2.0 million to this
increase, while the remaining increase is attributable to the depreciation of
the acquired businesses' assets and of MATRIXX's new call centers opened in
mid-1997. Amortization from the Maritz Acquisition and the Transtech Acquisition
is expected to be approximately $6.2 million per quarter (approximately $25
million per annum) going forward.
In connection with the Transtech Acquisition, MATRIXX expensed a special
item of $42.6 million of acquired in-process research and development costs in
the first quarter of 1998, which represented approximately 7% of the $625.0
million purchase price. The amount expensed was determined through an
independent valuation that the Company used to allocate the Transtech purchase
price to the acquired assets. The $42.6 million relates to two ongoing
development projects at Transtech that had not reached technological feasibility
at the time of the acquisition and had no alternative future use. The Company
intends to continue both of these development projects. One of these projects
was the development of proprietary technology for Transtech's employee care
business offering. The other project involved the development of technology to
provide billing detail to clients' customers that would allow those customers to
manipulate and analyze the billing information. The Company expects the employee
care proprietary technology project to be completed later in 1998 and that the
cost to complete the project will be less than $2 million. Management believes
this project will be successfully completed. The billing technology project has
been delayed based upon management's view of very recent changes in the demand
for the technology in the Company's market. Management's estimate of the cost to
complete this project is approximately $5 million. Management is uncertain
regarding the ultimate success of this project. Should the Company be
unsuccessful in completing these projects, the impact on the Company would
include lost opportunities for new business and the potential loss of existing
employee care clients if their business needs are not met.
Operating Income. MATRIXX's operating income excluding special items
decreased to $14.3 million in the first quarter of 1998 from $14.6 million in
the first quarter of 1997 and its operating margin excluding special items
decreased to 8.6% in the first quarter of 1998 from 12.7% in the first quarter
of 1997. The decrease in margin principally reflects the two acquisitions, which
generated a slight operating loss, and $43.8 million in revenues, and the
lingering effects of the business downturn in the third quarter of 1997.
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<PAGE> 36
Excluding the impact of the acquisitions, MATRIXX's core operating margin
excluding special items for the first quarter of 1998 was 11.7%.
1997 COMPARED TO 1996
During the second half of 1997, the teleservices industry was adversely
affected to a significant degree by a reduction in overall marketing activities
by certain large clients. MATRIXX's revenues were affected by this softness in
the market. The lower than expected level of business activity primarily
impacted traditional teleservices. Since the traditional teleservices market is
more susceptible to a downturn than the dedicated services market, MATRIXX
focuses on growth in the dedicated services portion of the teleservices market
where services are integrated with client activities that have a sustained
program such as customer support.
Revenues. Revenues increased $80.5 million (22%) to $447.6 million in 1997
from $367.1 million in 1996. Excluding the impact of the acquisitions of
Software Support Inc. ("SSI") and of certain assets of Scherers Communications,
Inc. ("Scherers") made in the second half of 1996, revenues increased 13% or
approximately $48 million. Dedicated services contributed revenue gains of $97.8
million (65%) to $247.9 million in 1997 from $150.1 million in 1996, primarily
as the result of strong sales to the technology and telecommunications industry
and the acquisitions made in the second half of 1996. Traditional teleservices
revenues decreased $20.7 million (11%) to $170.4 million in 1997 from $191.1
million in 1996 as a result of a reduction in overall marketing activities by
certain clients in the second half of the year, and general market softness.
Traditional teleservices revenues increased approximately 6% in the first half
of 1997, but decreased by approximately 20% in the second half of 1997 relative
to the comparable periods in 1996. MATRIXX's international revenues increased
$3.3 million (13%) to $29.3 million in 1997 from $26.0 million in 1996.
Costs and Expenses. Costs of products and services increased $55.7 million
(25%) to $277.5 million in 1997 from $221.8 million in 1996. Employee costs
increased $51.8 million (30%) to $221.9 million in 1997 from $170.1 million in
1996, reflecting increased staffing to meet anticipated increases in business
volume that did not materialize and wage increases. Despite the 22% increase in
revenues, telecommunications costs were unchanged between 1997 and 1996,
reflecting a favorable unit price trend for telecommunications costs. Other
costs of products and services increased $4.5 million (21%) to $26.1 million in
1997 from $21.6 million in 1996, reflecting cost increases that were
commensurate with the growth in volume of business.
MATRIXX's SG&A expenses increased by $14.0 million (18%) to $92.7 million
in 1997 from $78.7 million in 1996 reflecting increased costs from businesses
acquired in the second half of 1996 and increases associated with the higher
volume of business.
MATRIXX's depreciation and amortization expense increased $6.9 million
(35%) to $26.5 million in 1997 from $19.6 million in 1996, reflecting the
increase in the depreciable base of MATRIXX's assets and amortization of
goodwill associated with acquisitions made in the second half of 1996.
The special item recorded in 1997 was a $35.0 million fourth quarter
restructuring charge for the consolidation of certain operating divisions and
facilities. Components of the charge were $9.5 million in lease termination
costs related to facilitates to be closed, $7.5 million in severance pay under
existing severance plans, $7.6 million in non-cash goodwill writedowns
associated with operations to be restructured, $6.3 million in non-cash property
and equipment writedowns related to facilities to be closed and $4.1 million in
other restructuring costs. The plan is expected to be fully implemented by the
end of 1998. The 1996 special item was a $2.0 million charge for the write-off
of acquired in-process research and development costs related to acquisitions
made in 1996.
Operating Income. MATRIXX's operating income excluding special items
decreased to $44.4 million in 1997 from $45.7 million in 1996 and its operating
margin excluding special items decreased to 9.9% in 1997 from 12.4% in 1996. In
connection with the softness in traditional teleservices experienced in the
second half of 1997, MATRIXX did not reduce costs as quickly as the level of
revenues declined because the Company expected certain programs to materialize
which did not. During the third quarter, MATRIXX began to reduce costs to
provide better balance with new expected volumes, which helped to improve the
margin to 9.3% in the fourth quarter from 6.0% in the third quarter. In
addition, MATRIXX announced a restructuring plan in the
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<PAGE> 37
fourth quarter of 1997, which, when fully implemented in 1998, is expected to
help MATRIXX improve its productivity. The restructuring plan involves the
closure and consolidation of certain facilities.
1996 COMPARED TO 1995
Revenues. MATRIXX's revenues increased $96.0 million (35%) to $367.1
million in 1996 from $271.1 million in 1995. Dedicated services revenues
increased $63.2 million (73%) to $150.1 million in 1996 from $86.9 million in
1995, reflecting strong growth with a major client and other technology and
telecommunications industry clients. Acquisitions made in the second half of
1996 produced $6.0 million of the dedicated services revenue increase in 1996.
Traditional teleservices revenues increased $28.4 million (17%) to $191.1
million in 1996 from $162.7 million in 1995. MATRIXX's international revenues
increased $4.4 million (20%) to $25.9 million in 1996 from $21.5 million in
1995.
Costs and Expenses. MATRIXX's costs of products and services increased
$66.1 million (42%) to $221.8 million in 1996 from $155.7 million in 1995. The
labor component of costs of products and services increased $51.4 million (43%)
to $171.1 million in 1996 from $119.7 million in 1995. Labor costs grew at a
rate in excess of revenue growth reflecting wage increases that MATRIXX was
unable to fully pass on to clients in a competitive market. Telecommunications
costs increased $5.8 million. Telecommunication costs grew at a rate below that
of revenues because of lower unit costs associated with higher volumes and an
overall positive unit cost trend. The remaining $8.9 million increase in costs
of products and services was largely the result of higher facility costs
associated with new call centers to meet increased business volume.
MATRIXX's SG&A expenses increased by $11.4 million (17%) to $78.7 million
in 1996 from $67.3 million in 1995. The increase was almost entirely related to
the labor cost component of SG&A expenses, which increased principally as a
result of increased business volume.
Depreciation and amortization expense increased $4.0 million (26%) to $19.6
million in 1996 from $15.6 million in 1995, reflecting increases in depreciable
assets resulting from business expansion.
Special items in 1996 consisted of $2.0 million of in-process research and
development costs associated with acquisitions. The special item in 1995 was
$39.6 million related to the impairment of goodwill associated with MATRIXX's
operations in France, which had not performed as well as anticipated. See "Risk
Factors -- Difficulties of Completing and Integrating Acquisitions;
International Operations."
Operating Income. MATRIXX's operating income excluding special items
increased to $45.7 million in 1996 from $32.3 million in 1995 and its operating
margin excluding special items increased to 12.4% in 1996 from 11.9% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's businesses have historically required cash for expansion,
business development, acquisitions and working capital. These cash requirements
have been funded from the Company's operating cash flows as well as funds
provided by CBI. Operating cash flows have generally been sufficient to fund the
Company's cash needs, other than for acquisitions. During 1997 and 1996, cash
flow from operations was $127.4 million and $117.7 million, respectively, while
capital expenditures and acquisitions combined required cash of $74.8 million in
1997 and $118.6 million in 1996. The Transtech Acquisition and the Maritz
Acquisition in the first quarter of 1998 required over $660 million in cash and
approximately $50 million in working capital, which has been financed through
short-term debt issued by CBI and allocated to the Company. The proceeds from
the Offering will be used to repay a portion of this CBI-allocated indebtedness.
Until the Distribution is completed, the Company's principal source of
external funds will be its intercompany financing arrangement with CBI, which is
expected to be funded by CBI through commercial paper borrowings. The Company
will pay interest on its intercompany borrowings at an interest rate equal to
CBI's average short-term borrowing cost. Prior to the Distribution, the Company
intends to obtain its own external financing. Currently, the Company has not
explored external financing options with potential lenders. Although the Company
believes (based on preliminary discussions with potential lenders) it will have
little difficulty in obtaining external financing on acceptable terms, no
assurance can be given in this regard. The
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<PAGE> 38
weighted average interest rate at which the Company borrows may be higher when
it obtains financing independently.
Operating activities used $3.6 million in cash during the first quarter of
1998. This compares to cash provided by operating activities of $16.3 million in
the first quarter of 1997. The Transtech Acquisition and the Maritz Acquisition
in the first quarter of 1998 required a significant use of cash to finance
working capital, as accounts receivable for both acquired entities increased, as
expected, during the quarter from the levels at the acquisition date.
Cash provided by operating activities was $127.4 million in 1997 compared
to $117.7 million in 1996. The increase in cash flows from operations in 1997
was in large part the result of a nearly $8.6 million increase in the Company's
net income over 1996 and a $19.9 million increase in after tax, non-cash special
items in 1997 over 1996. The increase in operating cash flows caused by improved
operating results was partially offset by a $16 million increase in accounts
receivable caused by higher revenue levels and somewhat slower cash collections
and a nearly $23 million decrease in accounts payable and accrued expenses.
The Company's most significant investing activity in 1997 was capital
expenditures. Capital expenditures were approximately $61 million, up from
approximately $56 million in 1996. The Company's spending for acquisitions
totaled $13.9 million in 1997 and $62.4 million in 1996. In 1997, the Company's
capital spending with respect to acquisitions was primarily limited to the
Company's nearly 20% investment in Wiztec Solutions Ltd. ("Wiztec"). In 1996,
the Company's capital spending included payments for the 1996 acquisitions of
SSI, certain assets of Scherers, ICS and Swift, as well as a final payment
related to the 1995 acquisition of ISD.
The Company's capital expenditures excluding acquisitions are estimated to
be at least $100 million in 1998. Capital spending in 1998 for the Transtech
Acquisition in February 1998 and the Maritz Acquisition in January 1998 involved
over $660 million in capital spending, bringing estimated total capital
expenditures for the Company to over $750 million in 1998. This estimated amount
does not include any additional acquisitions that may occur in 1998, although
none has been identified to date.
In connection with a restructuring plan for MATRIXX, the Company recorded a
$35.0 million special charge. As of March 31, 1998, remaining cash outflows
under the plan are estimated to be approximately $16 million, substantially all
of which the Company expects to spend in 1998. As of December 31, 1997, the
Company had total minimum rental commitments under noncancelable leases of $82.8
million for 1998, $61.0 million for 1999, and a total of $122.4 million
thereafter.
BALANCE SHEET
The $74.6 million increase in accounts receivable from December 31, 1997 to
March 31, 1998 was largely attributable to receivables associated with Transtech
and Maritz. The decrease in deferred income taxes was principally the result of
the payment of 1997 bonuses during the first quarter of 1998. Increases in
property and equipment and goodwill and other intangibles were primarily caused
by the Transtech Acquisition and the Maritz Acquisition, as were the increases
in debt allocated by CBI and payables and other current liabilities. The
increase in deferred charges (benefits) and other current assets was the result
of the $16.2 million deferred tax benefit associated with the expensing of $42.6
million in research and development costs associated with the Transtech
Acquisition.
Accounts receivable increased by over $16 million in 1997 as a result of
higher revenue levels and slower collections. Goodwill and other intangibles
decreased $19.0 million during 1997 as a result of annual amortization and the
inclusion of goodwill writedowns in the restructuring charge at MATRIXX. The
investment by CBIS in Wiztec, a provider of subscriber management systems for
multi-channel subscription television, caused the majority of the $13.6 million
increase in investments in unconsolidated entities. The approximately $11
million increase in accounts payable and other current liabilities resulted from
the $35 million restructuring charge recorded in the fourth quarter of 1997 by
MATRIXX, offset by a reduction in certain accrued expenses. The remaining
balance of $24.9 million at December 31, 1997 related to this restructuring was
included in accounts payable and other current liabilities.
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<PAGE> 39
YEAR 2000 PROGRAMMING
The Company incurred $9.9 million in expenses in 1997 in order to prepare
its software and systems for the Year 2000. The estimate for total Year 2000
programming costs in 1998 is in a range of $25 million to $30 million, with
costs thereafter, principally during 1999, estimated in the range of $10 million
to $20 million. These expenses will materially reduce earnings and cash flows
from operations accordingly. If the Company were to be unsuccessful in readying
its software and systems for the Year 2000, this would have a material adverse
impact on the Company. The failure of one of the Company's significant clients
or suppliers to successfully modify its systems for the Year 2000 also could
have an adverse impact on the Company.
MARKET RISK
The Company is exposed to the impact of interest rate changes and, to a
lesser extent, foreign currency fluctuations. Interest rate and foreign currency
risks have historically been managed on a centralized basis by CBI. It has been
CBI's policy to enter into interest rate and foreign currency transactions only
to the extent considered necessary to meet its objectives. CBI has not entered
into interest rate or foreign currency transactions for speculative purposes.
The Transtech Acquisition in the first quarter of 1998 has significantly
increased the Company's exposure to interest rate risk. The Company's foreign
currency exposures were immaterial at March 31, 1998.
The Company's exposure to interest rate risk results from its variable rate
short-term intercompany debt payable to CBI. At March 31, 1998, the Company had
$724.7 million in intercompany debt payable to CBI bearing interest at a
variable rate, which is equal to CBI's average short-term borrowing rate. Prior
to the Distribution, the Company intends to obtain its own external financing.
The weighted average interest rate at which the Company borrows may be higher
when it obtains financing independently. Based upon the Company's level of
indebtedness at March 31, 1998, a one percentage point increase in the weighted
average interest rate would increase the Company's annual interest expense by
approximately $7.3 million.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced and in the future could experience quarterly
variations in revenues as a result of a variety of factors, many of which are
outside of the control of the Company. These factors include: the timing of new
contracts, the timing of increased expenses incurred in support of new business
and the somewhat seasonal pattern of the businesses served by the Company. See
"Risk Factors -- Factors Affecting Operating Results; Recent Declines or
Potential Fluctuations in Quarterly Results."
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2 "Software Revenue
Recognition," which is effective for transactions entered into fiscal years
beginning after December 15, 1997. SOP 97-2 revises certain standards for the
recognition of software revenue that will have to be adopted by CBIS with
respect to certain software development and licensing agreements. SOP 97-2 did
not have a material effect on the operating results of the Company for the three
months ended March 31, 1998; however, the effect of SOP 97-2 on the operating
results of the Company will be dependent on the nature and terms of the
individual software agreements entered into in future periods.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which is effective
for fiscal years beginning after December 15, 1998. SOP 98-1 requires the
capitalization of certain expenditures for software that is purchased or
internally developed for use in the business. Company management believes that
the prospective implementation of SOP 98-1 in 1999 is likely to result in some
additional capitalization of software expenditures in the future. However, the
amount of such additional capitalized software expenditures cannot be determined
at this time.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." The SOP provides guidance on financial reporting of costs
of start-up activities. SOP 98-5 requires such costs to be expensed instead of
being capitalized and amortized. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. The Company believes the implementation of
SOP 98-5 will not have a material impact on its financial reporting.
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BUSINESS
GENERAL
The Company is a leading provider of outsourced billing and customer
management solutions, which encompass activities such as targeting, acquiring,
serving and retaining customers on behalf of its clients. The Company focuses on
developing long-term strategic relationships with clients in customer-intensive
industries including communications, technology, financial services and consumer
products. The Company's relationships with its clients have enabled it to become
an integral component of the clients' customer management processes, often
including participation in the clients' related internal planning and operating
meetings. The breadth of the Company's service offerings enables it to serve as
the interface for all phases of a client's billing or customer management needs.
By providing value-added solutions through long-term relationships, the Company
has developed a large base of recurring revenues with its largest clients.
The Company serves its client base through its two operating subsidiaries:
(i) CBIS, which provides outsourced billing and information services for the
communications and broadband services industries; and (ii) MATRIXX, which
provides outsourced customer management services to its targeted industries. For
certain clients, CBIS and MATRIXX jointly provide a full range of billing and
customer management solutions. The Company's strategy is to more fully integrate
the strengths of CBIS and MATRIXX to provide next generation customer management
solutions.
The Company also has a 45% limited partnership in the Cellular Partnership
which operates a cellular telecommunications business that provides service in
central and southwestern Ohio and northern Kentucky. The population of the
territory served by the Cellular Partnership is in excess of 5 million persons,
and the Company's proportionate share of this cellular market represents
approximately 2.3 million POPs.
INDUSTRY OVERVIEW
Due to a broad combination of factors, including advances in technology,
globalization and deregulation, many markets are experiencing increased
competition. As a result, billing and customer management solutions, which
utilize software-based information processing systems and services to identify,
attract and retain customers, have become a strategic imperative for companies
seeking to remain competitive. Technological advances, such as relational
databases and predictive behavior software, are making it possible for companies
to analyze their customers' behavior and design products or marketing programs
which address specific customer needs or tendencies. In addition, particularly
in highly competitive industries such as communications, it is critical to have
robust systems and software which enable companies to respond rapidly to changes
in the market. However, such system requirements are increasing the costs and
complexity of maintaining in-house billing and customer management systems.
Additionally, with rapid technological change and the need to be Year 2000
compliant, companies are facing increased pressure to either invest heavily in
technology or seek an outsourcing solution to deliver high quality billing and
customer management. Many companies lack the in-house expertise to efficiently
collect, analyze and respond to the types of information that can be captured
with each customer interaction, which has resulted in outsourcing of billing and
customer management solutions as a strategic management tool.
The Company believes that the growth of customer management outsourcing is
expected to continue as companies focus on their core competencies and seek to
benefit from the advantages that outsourcing companies can provide, including:
(i) expertise to effectively target, acquire and retain customers; (ii) cost
savings resulting from economies of scale achieved by operating large data
processing facilities or call centers; (iii) technologically advanced systems
and software which enable rapid competitive response and (iv) improved
time-to-market for new products, services or marketing programs. According to
G2R and Strategic TeleMedia, both billing services and teleservices are expected
to enjoy double digit market growth over the next two years. According to G2R,
the worldwide market for billing services in the communications industry is
expected to grow over 13% annually from an estimated $17 billion in 1997 to $28
billion in 2001. Separately, Strategic TeleMedia estimates that total
teleservices expenditures in 1997 were $101 billion and are expected to grow
approximately 10% annually to $135 billion in 2000. Outsourced teleservices'
revenues are expected to increase from 12% of total expenditures in 1997 (or $12
billion) to over 15% (or $21 billion)
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in 2000, resulting in a compounded annual growth rate of 19%, although there can
be no assurances in this regard.
COMPETITIVE STRENGTHS
The Company believes that it has developed strengths that position it to
compete effectively for outsourcing opportunities. These competitive strengths
include its:
FOCUS ON STRATEGIC RELATIONSHIPS WITH TARGETED INDUSTRY LEADERS
The Company has developed strategic relationships with leading companies in
the communications, technology, financial services and consumer product
industries. Such relationships have enabled the Company to become an integral
component of its clients' customer management processes, often including
participation in the clients' related internal planning and operating meetings.
Long-term strategic relationships enable the Company to grow as its clients
grow, develop significant industry-specific expertise, and establish recurring
revenue streams. The Company's success in establishing these strategic
relationships is reflected in the nature of its relationships with its major
clients. CBIS' top seven clients, with relationships averaging over 10 years,
each provided at least $13 million in revenues in 1997. MATRIXX's top 20
clients, with relationships averaging over six years, each provided at least $5
million in revenues in 1997.
BREADTH OF VALUE ADDED SERVICES
The Company provides a broad array of billing and customer management
services including dedicated customer service, technical support, sales account
management and high volume consumer response, coupled with support services such
as market research, database management, interactive voice response and Internet
capabilities. By bundling these capabilities, the Company can serve as a single
source solution for the entire range of a client's billing and customer
management needs. The Company attempts to differentiate itself by providing best
in class performance in each of these areas and addressing the most complex
billing and customer management needs.
SIZE AND SCALE TO DELIVER COST EFFECTIVE SOLUTIONS AND HANDLE LARGE PROGRAMS
As the leading provider of outsourced billing and customer management
solutions in North America, the Company leverages its purchasing power and
spreads its significant research and development expenditures over a large
client base, thereby enabling it to develop and deliver cost-effective
solutions. Today its data centers produce over 16 million wireless communication
bills a month, and the Company has 38 call centers and 15,000 workstations. The
Company has the size and breadth of experience to design, develop and implement
large-scale, complex billing and customer management solutions that provide
superior value to its clients.
TECHNOLOGICAL EXPERTISE
With approximately 2,100 software professionals, the Company can provide
significant technical resources to develop customized solutions for its clients.
The Company spent $76.5 million (excluding Year 2000 costs) in existing and new
technologies and systems in 1997, and intends to continue its commitment to
research and development in order to enhance its ability to offer clients
innovative design, development and implementation of complex, scalable customer
management solutions.
GROWTH STRATEGY
The Company's growth strategy is designed to capitalize on the fundamental
trends supporting billing and customer management outsourcing while leveraging
the Company's competitive strengths to further its market leadership.
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EXPANDING EXISTING CLIENT RELATIONSHIPS
The majority of the Company's existing clients operate in industries marked
by some or all of the following trends: high growth, deregulation, converging
technologies, intense competition and increasing customer service needs. The
Company believes that these market trends will continue to provide significant
growth opportunities with its existing client base. These clients have
historically represented the bulk of the Company's internal growth. The
Company's strategy is to develop long-term strategic partnerships with targeted
market leaders and to expand its existing relationships as its clients continue
to grow within their own markets, both domestically and internationally,
outsource additional customer management functions and develop new products and
services to take to existing and new markets. Additionally, there are
opportunities to cross-sell CBIS and MATRIXX solutions to clients, as well as
opportunities to sell multiple services to multiple divisions within each
client.
LEVERAGING INDUSTRY EXPERIENCE TO DEVELOP NEW RELATIONSHIPS
By focusing on long-term strategic relationships within targeted
industries, the Company has developed industry expertise and an in-depth
understanding of the customer management needs of companies serving those
industries. The Company focuses on developing additional relationships in its
targeted industries, particularly with companies that have large in-house
billing or call center operations or are pursuing additional opportunities as
certain markets converge (such as communications and broadband services). The
Company believes that the combination of its industry expertise, size and
technology position it to compete effectively for these new outsourcing
opportunities.
DEVELOPING NEW SOLUTIONS TO PROVIDE SUPERIOR VALUE
The Company's significant ongoing investment in technology is designed to
increase the value of a client's billing and customer management processes. In
addition to continuing to advance the solutions currently offered separately by
CBIS and MATRIXX, the Company is developing next generation customer management
solutions that combine the software and information services capabilities of
CBIS with MATRIXX's expertise in strengthening clients' relationships with their
customers. As an example, CBIS and MATRIXX jointly developed a subscriber
retention solution (which is presently in trial) for wireless carriers which is
designed to increase the retention of subscribers by identifying those who may
be at risk of churning and taking steps to contact, satisfy and retain them.
ENTERING COMPLEMENTARY MARKETS
The Company will pursue opportunities in industries that have large
customer bases and, as a result of deregulation or new technologies, will
require greater focus on billing and customer management. For example, the
Company believes that deregulation, which led to substantially increased
competition in the communications sector, is likely to have a similar effect on
the utility industry and will create opportunities for outsourced customer
management services. See "Risk Factors -- Client and Industry Success; Industry
Concentration."
PURSUING INTERNATIONAL GROWTH
The Company presently provides its billing and customer management
solutions in selected international markets and believes significant growth
opportunities exist outside North America. The Company intends to leverage its
relationships with large international companies. The Company believes that
these clients will be better served by a single provider capable of delivering
billing and customer management solutions in multiple geographic markets. In
addition, the Company intends to expand its client base outside North America.
See "Risk Factors -- Difficulty of Completing and Integrating Acquisitions;
International Operations."
PURSUING STRATEGIC ACQUISITIONS AND ALLIANCES
Building upon a history of growth through acquisitions (25 acquisitions in
the past thirteen years), the Company will pursue additional acquisition and
alliance opportunities. The Company believes that
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consolidation in its industry will continue and the Company expects to pursue
acquisitions and alliances which expand its client base, add new capabilities or
enable it to accelerate international expansion. See "Risk Factors -- Difficulty
of Completing and Integrating Acquisitions; International Operations."
PRODUCTS AND SERVICES
CBIS
CBIS serves clients principally by providing and managing sophisticated
billing and information services primarily delivered through CBIS data centers.
CBIS' billing solutions address all segments of the communications industry,
including wireless, wireline, cable, broadband and Internet services. These
solutions consist of data processing services, professional and consulting
services and licensed software. CBIS software and data processing capabilities
enable it to activate services, capture usage information, calculate billing
charges, consolidate billing for multiple service or equipment features and
enable clients to use such data to target customers for new or expanded service
or product offerings. CBIS' professional and consulting services include its
customization of software to create, modify and enhance billing and other
related customer support solutions. On a more limited basis, CBIS licenses its
software to address the needs of those clients who prefer to conduct their
billing and information services in their own data centers.
During 1997, over 60% of CBIS' revenues were generated from recurring
monthly payments from its clients based upon the number of subscribers or bills
processed by CBIS. Professional and consulting services for software maintenance
and enhancements, a majority of which are based on hourly fees for work
performed, accounted for over 30% of CBIS' 1997 revenues. CBIS' remaining
revenues resulted from licensing fees for software and other miscellaneous
services.
CBIS' experience and size result in significant time to market, service and
cost advantages for clients. These advantages include rapid introduction of new
services, predictable costs, information management expertise, access to
advanced technology without high capital expenditures and a partner focused on
billing and customer management solutions. CBIS' leading market share in
wireless bill processing is driven by its ability to develop software and
systems capable of addressing the complexity of wireless billing and delivering
cost-effective solutions. Billing for wireless services is extremely complex for
a number of reasons including:
- Multitude of Pricing Plans -- Each wireless carrier offers hundreds of
pricing plans to subscribers. Those pricing plans are often tailored
individually to cover peak and non-peak per minute rates and minutes of
usage included in the monthly rate plan. Wireless providers demand the
flexibility to be able to change subscriber rates quickly in response to
competition.
- Roaming Charges -- Wireless phone users roam between markets served by
different carriers. When roaming, different rates and surcharges apply to
usage. Roaming also frequently involves entering multiple tax
jurisdictions and the tax rates vary by locale. Billing software must
accurately determine roaming and tax charges.
- Ability to Implement Strategic Marketing Programs -- Competition in the
wireless industry has resulted in a myriad of promotional activities that
complicate billing. For example, a wireless provider may offer free
wireless-to-wireless calls, free weekend calling or introductory pricing
packages that lapse after a given period of time. Capturing rate plan
data and applying customer usage data accurately is critical to wireless
providers and their subscribers.
- Multiple Services for a Subscriber -- Each subscriber may utilize
different features such as voice mail, call waiting, and voice activated
dialing. In addition, a subscriber may utilize more than one service,
such as wireless phone and paging services. The ability to consolidate
such services on one monthly bill and allowing for discounting the bundle
of services is increasingly viewed as a competitive requirement.
- Growth of Wireless Service -- The number of wireless subscribers in the
U.S. has grown at an average rate in excess of 30% annually since 1994.
In addition, minutes of usage per subscriber are expected to increase. As
a result, wireless billing systems must have the capability to handle
dynamic growth.
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In addition to processing bills in its data centers, CBIS performs a
significant amount of professional and consulting work for certain of its
clients to tailor solutions to each client's marketing objectives and regulatory
requirements. For example, CBIS developed real-time software that has made it
possible to offer wireless service with monthly account limits to customers that
otherwise might not have received credit authorization. The billing software
enables a wireless provider to notify customers as they approach approved
monthly spending limits. Subscribers then have the option of reducing usage
until the next monthly period or until they make a payment, frequently over the
phone with a credit card, to re-activate the limit.
CBIS has leveraged its billing expertise in the wireless communications
market to grow its cable television billing market share to 18% during 1997, and
the Company is further expanding its billing solutions in the broadband services
market. During 1997, CBIS entered into a strategic relationship with Wiztec
(which included acquiring a minority ownership interest in Wiztec with the
option to acquire a majority ownership interest in Wiztec), which added billing
and customer management capabilities in the direct broadcast satellite
marketplaces. In addition, CBIS entered into another strategic relationship to
provide billing and customer management for Internet service providers.
CBIS' solutions for wireline-based carriers include a range of billing,
information services and network management solutions. Current wireline CBIS
clients include CBT, and, on a more limited basis, AT&T, PTT Netherlands,
Swisscom, British Telecom and Telenor.
MATRIXX
MATRIXX creates comprehensive, outsourced customer management solutions for
its clients utilizing its advanced information systems capabilities, human
resource management skills and industry experience. In 1997 (pro forma for the
Transtech Acquisition), approximately 70% of MATRIXX's revenues were related to
dedicated services and 30% of its revenues were related to traditional
teleservices. While traditional teleservices programs require similar
technological capabilities, systems scale and human resource expertise as
dedicated services, they are generally short-term and require less experience
within the client's industry.
MATRIXX's dedicated services include:
- Customer Service -- MATRIXX handles customer contacts which range from
initial product information requests to customer retention initiatives.
These customer service calls involve a variety of activities including
gathering and analyzing customer information; describing product
features, capabilities and options; activating customer accounts or
renewing service; processing a product or service sale; and resolving
complaints and billing inquiries.
- Technical Support -- MATRIXX answers technical support inquiries for
consumers and business customers. Technical support ranges from simple
product installation or operating assistance for a variety of software
and hardware products to highly complex issues such as systems networking
configuration or software consultation.
- Sales Account Management -- For certain of its clients' business
customers, MATRIXX serves as a telephone-based sales force that can
provide more frequent and cost-effective account coverage than would be
possible with a traditional in-field sales force. MATRIXX is responsible
for managing the entire customer relationship including obtaining current
orders, increasing purchase levels, introducing new products,
implementing product initiatives and handling all inquiries related to
products, shipments and billing.
When developing a dedicated services solution, MATRIXX devotes significant
resources to understand a client's unique customer management needs and
collaborates to design a customized solution utilizing MATRIXX's broad array of
services. The solution design typically addresses the client's desired level and
types of customer interaction, anticipated call volumes, personnel hiring and
training requirements and technological requirements (including the interface
between a client's and MATRIXX's systems).
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MATRIXX's ability to deliver value-added solutions depends on its advanced
technology platforms and human resource management expertise. Sophisticated call
routing, computer telephony integration, logical call scripting and a graphical
user interface design, interactive voice response, relational database skills,
Internet capabilities and real-time call monitoring are all important elements
of MATRIXX's technology platform and permit efficient and cost-effective
customer management. Large customer management solutions are labor intensive
and, as a result, one of MATRIXX's core competencies is its ability to hire,
train and minimize turnover among its customer service representatives. Each
customer service representative receives extensive up-front training covering
general customer service skills and in-depth product or service training. Given
the wide range of services provided by MATRIXX personnel, many programs are
staffed with representatives possessing specialized skills, such as
multi-lingual fluency (for clients with multi-lingual customer bases) or
technological training (to service technical support programs for clients in the
technology industry). As the central interface for all customer interactions,
MATRIXX gathers data and by utilizing its database technology, MATRIXX can
analyze such data to provide valuable feedback to its clients, such as (i)
identifying potential customers, (ii) identifying a client's most profitable
customers thereby permitting targeted retention and loyalty programs, (iii)
assessing usage data to enable clients to develop targeted products and services
and (iv) identifying cross-selling opportunities for its clients.
MATRIXX generally receives a fee based on staffing hours for the customer
service representatives assigned to a program. Per hour charges for dedicated
services are usually higher than charges for traditional teleservices due to the
higher level of value-added activity associated with dedicated services.
Supplemental revenues can sometimes be earned depending on service levels or
achievement of certain sale targets. Additional fees are charged for service
enhancements or system upgrades added at a client's request. Since dedicated
services require MATRIXX to become an integral part of a client's customer
management function, these services are generally provided pursuant to
multi-year contracts.
INTEGRATED CUSTOMER MANAGEMENT SOLUTIONS
CBIS and MATRIXX are combining their strengths to provide next generation
customer management solutions. These solutions are designed to increase the
lifetime value, satisfaction and loyalty of its clients' customer relationships.
They utilize advanced technologies and analyze multiple sources of
customer-specific information (demographics, previous purchase and service
history, propensity to buy additional products and services) and provide
targeted, action-oriented information to a customer service representative who
can proactively contact the customer or be more effective when a customer calls.
An example is a subscriber retention solution, which is presently in trial, for
wireless carriers that was jointly developed by CBIS and MATRIXX. In this
solution, CBIS processes pricing plan and customer usage and service information
and MATRIXX adds its database analysis and customer contact skills. This
combined solution is designed to reduce the turnover of wireless carriers'
subscribers by identifying those who may be at risk of churning and proactively
take steps to contact, satisfy, and retain those subscribers.
CLIENTS
CBIS
CBIS generally has long-term relationships and multi-year contracts with
its clients. In many cases, CBIS is the client's exclusive provider of billing
services or the contract requires the client to fulfill minimum annual
commitments. CBIS billing and customer management solutions process billing
information for monthly customer statements for approximately 30% of U.S.
cellular subscribers. In addition, CBIS has multi-year contracts with three of
the largest PCS providers, Sprint Spectrum, PrimeCo Personal Communications and
AT&T Wireless. Combined, these clients serve customers in 49 of the top 50 U.S.
metropolitan areas, often with more than one client serving the same
metropolitan area. From 1994 to 1997, subscriber growth in domestic wireless
cellular services has averaged approximately 32% per year.
CBIS has leveraged its billing expertise in the wireless communications
market to grow its cable television industry billing market share to 18% during
1997, and the Company is further expanding its billing
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solutions in the broadband services market. CBIS' solutions also support bundled
telephone and entertainment services provided by cable television system
operators in the U.S. and Europe.
CBIS' top five clients in 1997 were AT&T, 360 degrees Communications,
Ameritech, CBT and Comcast, which collectively accounted for 74% of CBIS' 1997
revenues. See "Risk Factors -- Client Concentration."
MATRIXX
MATRIXX principally focuses on developing long-term strategic outsourcing
relationships with large clients in the communications, technology, financial
services and consumer products industries. MATRIXX focuses on clients in these
industries because of the complexity of services required, the anticipated
growth of their businesses and their continuing need for customer management
solutions. MATRIXX provides a full range of customer management services to
clients including AT&T, Sprint/Sprint Spectrum, DIRECTV(R), American Express,
Procter & Gamble and Microsoft. The Company provides technical support services
to leading technology companies such as Gateway International and Intel.
MATRIXX's top five clients in 1997 were AT&T, DIRECTV(R), American Express,
Gateway International and Lucent Technologies, which collectively accounted for
approximately 57% of MATRIXX's 1997 pro forma revenues. See "Risk
Factors -- Client Concentration."
SALES AND MARKETING
The Company has a direct sales force and sales support organization of
approximately 200 sales and marketing personnel, focused on the leading
companies in its target industries in both North America and Europe. The Company
uses a consultative approach to client sales and generally focuses its marketing
efforts at the senior executive levels where decisions are made with respect to
outsourcing critical billing and customer management functions. Once a client
has made the decision to outsource, the Company works closely with the client to
identify current and prospective needs and develop a solution, typically
customized, designed to address those needs and reduce the client's capital
investment and overall costs.
The Company's strategic relationships with clients are primarily conducted
pursuant to multi-year contracts which vary by client and generally contain
annual revenue commitments or exclusivity provisions, annual rate adjustments
based upon consumer price index increases, performance benchmarks,
renewal/extension options, limited termination provisions or renewal periods and
exit payments in the event of an early termination.
OPERATIONS
The Company operates three data centers in Orlando, Florida, Cincinnati,
Ohio, and Jacksonville, Florida, comprising approximately 150,000 square feet of
space. Approximately 76,000 terminals are connected via 40 external networks to
the Company's data centers. Over 400 data center operations and production
support employees service the Company's data centers.
The Company's technologically advanced data centers in Cincinnati, Ohio and
Orlando, Florida provide twenty-four hour per day, seven days a week
availability (with redundant power and communication feeds and emergency power
backup supplied by diesel generators) and are designed to withstand most
environmental disasters. Over 500 million on-line transactions are executed and
16 million bills are processed on a monthly basis from the Company's mainframe
and open systems facilities which can process over 3,400 million instructions
per second (MIPS), store over 16 terabytes (trillion bytes) of information and
provide back-up capacity in the unlikely event that any one data center become
inoperative.
The Company operates 34 U.S. and four international call centers
twenty-four hours per day, with seven days a week availability, averaging 66,750
square feet per center, with over 15,000 available production workstations.
These call centers handled approximately 400 million customer calls during 1997
(pro forma for the Transtech Acquisition).
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The capacity of the Company's data center and call center operations
coupled with the scalability of the Company's billing and customer management
systems enable the Company to meet initial and on-going needs of large scale and
rapidly growing projects. By employing the scale and efficiencies of common
application platforms, the Company is able to provide client specific
enhancements and modifications without incurring all the costs of a custom
application. This allows the Company to position itself as a low cost
value-added provider of billing and customer support solutions.
TECHNOLOGY, RESEARCH & DEVELOPMENT
The Company intends to continue to emphasize the design, development and
deployment of scalable, customer management systems to increase its market
share, both domestically and internationally. The Company intends to pursue this
objective by continuing its substantial investment in expanding and enhancing
its customer management solutions. During 1997, the Company spent $76.5 million
(excluding Year 2000 costs) for research and development to advance the
functionality, flexibility and scalability of its solutions portfolio.
The Company's Precedent 2000 billing solution employs advanced systems,
client/server technology for real-time customer activations, inquiries and
adjustments, call detail collection and rating, and on-demand bill processing.
Its three-tier distributed processing architecture utilizes advanced technology
for ease of information access, as well as an intuitive graphical user interface
for streamlined customer service that provides quick response and resolution.
The Company's technical capabilities are comprehensive, ranging from OS/390
COBOL based batch processing to open systems, client/server based real-time
processing applications. The Company is also investing in (i) object-oriented
analysis, design and programming technologies to achieve reuse, higher quality,
and faster time to market, and (ii) new development tools, such as Java, to
capitalize on advancements in the software industry.
The Company's call centers employ advanced technology that integrates
digital switching, intelligent call routing and tracking, proprietary workforce
management systems, proprietary software systems, interactive voice response
techniques, computer telephony integration and relational database management
systems. This technology enables the Company to improve its call handling and
personnel scheduling thereby increasing its efficiency and enhancing the quality
of the services it delivers to its clients and their customers. The Company also
provides services using electronic media such as e-mail and the Internet. The
Company had an estimated 600,000 Web-based e-mail contacts from clients'
customers in 1997.
The Company's intellectual property consists primarily of proprietary
software systems protected under copyright law and trademarks and service marks
registered in the U.S. Patent and Trademark Office. The Company also has
patents, granted and pending, covering certain advanced interactive voice
response inventions.
PERSONNEL AND TRAINING
The Company considers its employees to be a key component of its success.
Therefore, the Company is continually refining its systematic approach to
hiring, training and managing qualified personnel.
The Company offers extensive training, including leadership and management
seminars, for its personnel, including managers, customer service
representatives and software professionals. The Company conducts extensive
market, product and technology specific training for its customer service
representatives designed to make them proficient in representing a specific
client's products and services. In addition, the Company conducts extensive
technical training for its software development staff on topics ranging from
introductory systems development through application specific expertise. See
"Risk Factors -- Dependence on Personnel; Labor Costs."
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COMPETITION
The industries in which the Company competes are extremely competitive. The
Company's competitors include (i) existing clients and potential clients with
substantial resources and the ability to provide billing and customer management
solutions internally, (ii) other billing software and/or services companies such
as Alltel Corporation, Amdocs, CSG Systems International, Kenan Systems, LHS
Group, Saville Systems and USCS Corporation, (iii) other teleservices companies,
such as APAC Teleservices Inc., SITEL Corporation, Inc., Sykes International,
TeleTech Holdings, Inc. and West Teleservices Corporation and (iv) systems
integration companies, such as American Management Systems, Andersen Consulting,
EDS, and SEMA Group. In addition, niche providers or new entrants could capture
a segment of the market by developing new systems or services that could impact
the Company's market potential.
The Company believes that the principal competitive factors in its industry
are service quality, sales and marketing skills, the ability to develop
customized solutions, cost of services and technological expertise. The Company
differentiates itself from its competitors based on its size and scale, service
quality, breadth of services provided, industry and client focus, financial and
technical resources, cost of services and business reputation. See "Risk
Factors -- Competition."
YEAR 2000
The Company has devoted significant time and resources to achieve Year 2000
compliance. Accordingly, the Company will incur a substantial amount of Year
2000 programming costs to repair or replace non-compliant systems and
application software prior to the new millennium. The Company began its Year
2000 efforts by assessing the Year 2000 compliance of all of its information
systems in 1996. During 1997, the Company formalized its project plans for its
Year 2000 compliance efforts and assembled an operating committee which meets
regularly to direct and implement Year 2000 compliance. The Company expects
these costs in 1998 to be in the range of $25 million to $30 million with costs
thereafter, principally during 1999, estimated in the range of $10 million to
$20 million. One of the Company's major billing systems and several ancillary
systems are already Year 2000 compliant. Overall validation testing on certain
other systems began in 1997 and the remaining testing is expected to begin no
later than the first half of 1999. The demand for programming resources to
address the Year 2000 issue worldwide could constrain the Company's ability to
attract and retain the required resources and lead to increased labor costs for
programming talent.
In addition to its own operations, the Company's business depends on the
information systems software and equipment of its vendors and clients. The
Company is taking steps to test that the vendors' and clients' systems are Year
2000 compliant. To the extent that the Company's vendors and clients experience
Year 2000 technology difficulties which materially affect their business, such
difficulties could have a material adverse effect on the value of the Common
Shares. See "Risk Factors -- Year 2000 Compliance."
EMPLOYEES
The Company currently has over 21,300 employees, 400 independent
contractors and 8,000 individuals provided by employment service agencies in
more than eight countries. The Company may move the majority of the 8,000
individuals provided by employment service agencies to permanent employee status
over the remainder of 1998. The Company believes that the impact of this
movement to permanent employee status should improve efficiency and reduce
staffing costs. Of the U.S. employees, less than 0.5% are represented by the
Communication Workers of America. The Company's labor agreement with this union
expires in September 1999. The Company believes that it has good relations with
its employees. See "Risk Factors -- Dependence on Personnel; Labor Costs."
PROPERTIES
The Company leases space for offices, data centers and call centers on
commercially reasonable terms. Domestic facilities are located in Arizona,
California, Colorado, Florida, Georgia, Illinois, Missouri, Nebraska, North
Carolina, Ohio, Oklahoma, Tennessee, Texas, Utah, Virginia, Wisconsin.
International facilities are located in Paris, France, Newcastle, Slough, Romsey
and Bristol, England, Winnipeg and
47
<PAGE> 49
Halifax, Canada, Bern, Switzerland and Utrecht, The Netherlands. In addition,
the Company owns its operations and data center located in Jacksonville,
Florida. The total square footage of such properties is approximately 3.6
million square feet, and the average Company call center consists of 66,750
square feet and 400 workstations. Upon the expiration or termination of any such
leases, the Company expects that it could obtain comparable office space on
commercially reasonable terms. The Company also leases substantially all of the
computer hardware necessary to conduct its business pursuant to operating
leases.
The Company believes that its facilities and equipment are adequate and
have sufficient productive capacity to meet its current needs.
CELLULAR TELEPHONE SERVICE LIMITED PARTNERSHIP INTEREST
The Company has a 45% limited partnership interest in the Cellular
Partnership, which operates a cellular telecommunications business in central
and southwestern Ohio and northern Kentucky. The population of the territory
served by the Cellular Partnership is in excess of 5 million persons, and the
Company's proportionate share of this cellular market represents approximately
2.3 million POPs. The Company accounts for the partnership interest under the
equity method of accounting. In 1997, the Company's equity in earnings of the
Cellular Partnership was $14.7 million and the Company received $11.8 million in
distributions from the Cellular Partnership.
Ameritech Mobile Phone Service of Cincinnati, Inc. is the general partner
and a limited partner in the Cellular Partnership with a combined partnership
interest of approximately 53%; 360 degrees Communications Investment Company has
a 1.2% limited partnership interest; and GIT-Cell, Inc. has a 0.7% limited
partnership interest. The Company's beneficial ownership results from CBI's
transfer and assignment to the Company of all of its rights, interests and
obligations of a Voting Trust Agreement entered into as of April 1, 1998 between
CBI and an independent trustee, whereby all of the shares of Cincinnati Bell
Cellular Systems Inc. ("CBCS") were transferred to a trust. A CBI affiliate has
formed a joint venture with AT&T Wireless under which AT&T Wireless proposes to
transfer its PCS license for the Cincinnati/Dayton markets to the venture. The
CBCS shares were placed in the trust in order to satisfy the so-called "spectrum
cap" rules (Section 20.6) of the Federal Communications Commission which
restricts the amount of cellular and PCS spectrum which may be attributed to a
single provider. It is contemplated that when the Distribution has been
completed, the trust, under its terms, would terminate and the CBCS shares (and,
thus, the whole 45% limited partnership interest owned by CBCS) would revert to
the Company.
The Cincinnati SMSA Limited Partnership Agreement authorizes the general
partner to conduct and manage the business of the Partnership. Limited partners
are entitled to their percentage share of income and cash distributions and
shall meet capital calls or suffer a dilution of their interests. They may, if
acting unanimously, replace a general partner who withdraws from the Cellular
Partnership. All partners have the right to approve a transfer of a limited
partner's Cellular Partnership interest to unaffiliated parties and have a right
to purchase a limited partnership interest proposed to be transferred at the
offered price.
LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims. At the date hereof, none of those proceedings is
material to the Company's business, results of operations or financial
condition.
48
<PAGE> 50
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information concerning the executive officers of
the Company and concerning the individuals who are serving as directors of the
Company. The Articles require that directors be divided into three classes. At
each annual meeting of shareholders, directors constituting a class are elected
for a three-year term. Those individuals who are designated as Class I directors
will hold office until the first annual meeting of the Company's shareholders
after the Distribution, which is expected to be held in April 1999, those
individuals who are designated Class II directors will hold office until the
annual meeting of the shareholders in 2000 and those individuals who have been
designated as Class III directors will hold office until the annual meeting of
the shareholders in 2001. See "Description of Capital Stock -- Limitations on
Change in Control." All of the Company's directors and officers are also
directors and officers of CBI and will resign from those CBI positions on the
consummation date of the Distribution.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles S. Mechem, Jr. ................ 67 Chairman and Director -- Class II
James F. Orr........................... 52 President and Chief Executive Officer
and Director -- Class II
Robert J. Marino....................... 51 President -- Convergys Information
Management Group (CBIS)
David F. Dougherty..................... 41 President -- Convergys Customer
Management Group (MATRIXX)
William D. Baskett III................. 58 General Counsel and Secretary
Steven G. Rolls........................ 43 Chief Financial Officer of the Company
Brian C. Henry......................... 41 Chief Operating Officer of Convergys
Information Management Group (CBIS)
Robert P. Komin, Jr.................... 35 Vice President Finance and Treasurer of
the Company
Ronald E. Schultz...................... 43 Chief Operating Officer of Convergys
Customer Management Group (MATRIXX)
John F. Barrett........................ 48 Director -- Class II
Judith G. Boynton...................... 43 Director -- Class I
Roger L. Howe.......................... 63 Director -- Class III
Steven C. Mason........................ 62 Director -- Class III
Brian H. Rowe.......................... 66 Director -- Class I
</TABLE>
Charles S. Mechem, Jr. has been elected a Class II director of the Company
and Chairman of the Board of the Company. He has been the Chairman of the Board
of CBI since 1996. He is the Commissioner Emeritus of the Ladies Professional
Golf Association ("LPGA"). From 1991 to 1995, he was the Commissioner of the
LPGA. From 1993 to 1995, he was the Chairman of the United States Shoe
Corporation. He serves as a director of CBI, AGCO, Mead Corporation, Ohio
National Life Insurance Company, J. M. Smucker Company, Star Banc Corp. and its
subsidiary, Star Bank, N.A. He is the Chairman of the Executive Committee and
the Chairman of the Governance and Nominating Committee.
James F. Orr has been elected a Class II director of the Company and
President and Chief Executive Officer of the Company. He has been the Chief
Operating Officer of CBI since 1996. He has been Chairman of the Board of CBIS
since 1996. He has been Chairman of the Board of MATRIXX since 1997. From 1995
to 1996, he was the Executive Vice President of CBI and President and Chief
Executive Officer of CBIS. In 1994, he was the Chief Operating Officer of CBIS.
From 1993 to 1994, he was the President and Chief Executive Officer of MATRIXX.
He serves as a Director of CBI and Ohio National Life Insurance Company. He is a
member of the Executive Committee.
49
<PAGE> 51
Robert J. Marino has been elected President - Convergys Information
Management Group. He has been the President and Chief Executive Officer of CBIS
since 1996. From 1995 to 1996, he was the Chief Operating Officer of CBIS. From
1993 to 1995, he was the President of the Northeast region of Nextel
Communications.
David F. Dougherty has been elected President - Convergys Customer
Management Group. He has been the President and Chief Executive Officer of
MATRIXX since 1995. From 1993 to 1994, he was the Chief Operating Officer of
MATRIXX. From 1991 to 1993, he was the President of the Consumer Division of
MATRIXX. From 1990 to 1991, he was the Vice President of Marketing of MATRIXX.
William D. Baskett III has been elected General Counsel and Secretary of
the Company. He has been the Secretary of CBI since 1997. He has been the
General Counsel and Chief Legal Officer of CBI since 1993. From 1970 to 1997, he
was a partner of Frost & Jacobs LLP. From 1983 to 1993, he was the Chief Counsel
to CBI.
Steven G. Rolls has been elected Chief Financial Officer of the Company.
From 1993 until June, 1998, he was the Vice President and Controller of the B.F.
Goodrich Co. ("B.F. Goodrich"). From 1989 to 1993, he was Vice President Finance
and Chief Financial Officer of the Aerospace Segment of B.F. Goodrich.
Brian C. Henry has been elected Chief Operating Officer of Convergys
Information Management Group. Since April 1998, he has been the Chief Operating
Officer of CBIS. He has been the Executive Vice President and Chief Financial
Officer of CBI since 1993.
Robert P. Komin, Jr. has been elected Vice President Finance and Treasurer
of the Company. Since 1996, he has been the Vice President Finance and Planning
of CBI. From 1995 to 1996, he was the Director of Finance and Planning of CBI.
From 1994 to 1995, he was a Product Marketing Manager at Rogue Wave Software.
From 1993 to 1994, he was the Manager of Corporate Planning and Analysis for
Mentor Graphics Corp.
Ronald E. Schultz has been elected Chief Operating Officer of Convergys
Customer Management Group. He has been Chief Operating Officer of MATRIXX since
1996. For 1994 and 1995, he was the Managing Director of II Ventures. From 1990
to 1994, he was the Vice President of Strategic Business Development and
President, Central Area for Inacom, Inc.
John F. Barrett has been elected a Class II director of the Company. He has
been the President and Chief Executive Officer of The Western and Southern Life
Insurance Company ("Western and Southern") since 1994. From 1989 to 1994, he was
the President and Chief Operating Officer of Western and Southern. From 1987 to
1989, he was the Executive Vice President and Chief Financial Officer of Western
and Southern. He serves as a director of CBI, Western and Southern, Fifth Third
Bancorp and its subsidiary, The Fifth Third Bank, and The Andersons, Inc. He is
Chairman of the Audit and Finance Committee and a member of the Compensation and
Benefits Committee and the Executive Committee.
Judith G. Boynton has been elected a Class I director of the Company. She
has been the Chief Financial Officer of Polaroid Corporation since 1998. From
1996 to 1998, she was the Vice President and Controller of Amoco Corporation
("Amoco"). From 1994 to 1996, she was the General Manager-Auditing of Amoco.
From 1993 to 1994, she was the Controller of Amoco Oil Company. She serves as a
director of CBI. She is a member of the Audit and Finance Committee and the
Governance and Nominating Committee.
Roger L. Howe has been elected a Class III director of the Company. From
1988 to 1997, he was the Chairman of the Board of U.S. Precision Lens, Inc.
("Precision Lens"). From 1970 to 1998, he was the Chairman of the Board and
Chief Executive Officer of Precision Lens. He serves as a director of CBI,
Baldwin Piano & Organ Co., Cintas Corporation, and Star Banc Corp. and its
subsidiary Star Bank, N.A. He is a member of the Audit and Finance Committee and
the Governance and Nominating Committee.
Steven C. Mason has been elected a Class III director of the Company. From
1992 to 1997, he was the Chairman of the Board, Chief Executive Officer and
President of Mead Corporation. He serves as a director of CBI, PPG Industries,
Inc. and Elder Beerman Stores. He is the Chairman of the Compensation and
Benefits Committee and a member of the Executive Committee and the Governance
and Nominating Committee.
50
<PAGE> 52
Brian H. Rowe has been elected a Class I director of the Company. From 1993
to 1995, he was the Chairman of General Electric Aircraft Engines ("GEAE"). From
1979 to 1993, he was the President and Chief Executive Officer of GEAE. From
1979 to 1993, he was the Senior Vice President of the General Electric Company.
He serves as a director of CBI, Stewart & Stevenson Services, Inc., B/E
Aerospace, Textron Inc., The Fifth Third Bank and Canadian Marconi Company. He
is a member of the Audit and Finance Committee and the Compensation and Benefits
Committee.
ANNUAL MEETING
The Regulations provide that the annual meeting of shareholders will be
held at such place as may be designated in the notice of meeting and shall be
held in the fourth month following the Company's fiscal year end on such date as
the Board of Directors may from time to time determine. The first annual meeting
for which proxies will be solicited from shareholders will be held in April
1999.
COMMITTEES OF THE BOARD OF DIRECTORS
The Committees established by the Board of Directors to assist it in the
discharge of its responsibilities are described below. The biographical
information on each director which is set forth above, identifies the Committee
memberships currently held by each director.
The Executive Committee has four members, two of whom are officers of the
Company. The Committee meets on call whenever needed and has authority to act on
most matters during the intervals between Board meetings, except for those
matters reserved to the full Board of Directors by the OGCL.
The Audit and Finance Committee has four members, none of whom is an
officer of the Company. The Committee meets with management to consider the
adequacy of the internal controls and the objectivity of financial reporting.
The Committee also meets with the independent auditors and with appropriate
financial personnel and internal auditors of the Company regarding these
matters. The Committee recommends to the Company Board the appointment of the
independent accountants, subject to ratification by the shareholders at the
annual meeting. Both the internal auditors and the independent accountants
periodically will meet alone with the Committee and will have unrestricted
access to the Committee. In addition, the Committee reviews the capital
structure of the Company, short-term borrowing limits, proposed financings,
options available for the financing of all material acquisitions by the Company,
the Company's dividend policy, the Company's benefit plans, the performance of
the portfolio managers of such plans and pension plan funding. From time to
time, the Committee will make such reports and recommendations to the Board with
respect to the foregoing as it deems appropriate.
The Compensation and Benefits Committee has three members, none of whom is
an officer of the Company. It makes recommendations to the Company Board with
respect to the compensation of directors and executives of the Company. The
Compensation Committee also reviews and approves the Company's employee benefit
plans.
The Governance and Nominating Committee has four members, one of whom is an
officer of the Company. The Committee reviews the performance of senior
management, recommends candidates for director, monitors the scope and
performance of Board committees, and suggests to the Board shareholder concerns
to be addressed.
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company receive no remuneration for
serving as directors or committee members. Non-employee directors will receive
an annual retainer of $16,000 and a meeting fee of $1,000 for each Board or
committee meeting attended. The Chairmen of the Audit and Finance Committee and
the Compensation and Benefits Committee receive an additional fee of $3,000 per
year for serving as Chairmen of those committees. In lieu of the annual retainer
and individual meeting fees, Mr. Mechem, as Chairman of the Board, will receive
an annual fee of $300,000 and supplemental medical insurance, the cost of which
is approximately $1,941 per year.
51
<PAGE> 53
Directors may elect to defer the receipt of all or a part of their fees and
retainers under the Company Deferred Compensation Plan for Non-Employee
Directors (the "Directors Deferred Compensation Plan"). Amounts so deferred earn
interest, compounded quarterly, at a rate equal to the average interest rate for
ten-year United States Treasury notes for the previous quarter. Whether or not a
director elects to defer any fees or retainers, on each January 1 an amount
equivalent in value to a fixed number of Common Shares (which number has not yet
been determined) automatically will be credited to a share account under the
Directors Deferred Compensation Plan for each active director. Amounts credited
to a director's share account will be assumed to be invested and reinvested in
Common Shares. Accounts under the Directors Deferred Compensation Plan will be
paid out in cash, in one lump sum or up to ten annual installments, when the
director leaves the Board. However, amounts credited to a share account will be
subject to forfeiture if the director leaves the Board (other than by reason of
death) prior to completing at least five years service as a non-employee
director.
Non-employee directors also may receive awards of stock options (other than
incentive stock options) and restricted stock pursuant to the 1998 LTIP.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
No present or future officer or director currently owns any Common Shares
of the Company, all of which are currently owned by CBI. Such directors and
officers will receive Common Shares in the Distribution in respect of shares of
CBI common shares held by them on the record date for the Distribution.
Effective as of the Closing Date of the Offering, each officer and director of
the Company will be granted options to purchase Common Shares ("Company
Options") and certain officers will be granted restricted Common Shares
("Company Restricted Stock") under the 1998 LTIP. Other directors and officers
of the Company will receive Company Options and Company Restricted Stock in
respect of CBI Share Awards at the consummation date of the Distribution. For
purposes of this Prospectus, "CBI Share Awards" means options to purchase CBI
common shares ("CBI Options") and awards of CBI common shares which are subject
to restrictions ("CBI Restricted Stock") under the share-based plans heretofore
maintained by CBI for its directors and employees. See "Management -- Executive
Compensation" and "Relationship Between the Company and CBI -- Employee Benefits
Agreement." The following table sets forth the number of CBI common shares
beneficially owned on June 30, 1998 by each of the Company's directors and
director nominees, the executive officers named in the Summary Compensation
Table below and all directors
52
<PAGE> 54
and executive officers of the Company as a group. No individual director or
officer beneficially owned more than 1.0% of the CBI common shares outstanding.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AS OF PERCENT OF
NAME JUNE 30, 1998(1) COMMON SHARES
- ---- ------------------- -------------
<S> <C> <C>
John F. Barrett(2)(3)....................................... 40,768 *
William D. Baskett III...................................... 213,107 *
Judith G. Boynton........................................... 17,000 *
David F. Dougherty.......................................... 102,806 *
Brian C. Henry.............................................. 309,644 *
Roger L. Howe............................................... 60,000 *
Robert P. Komin, Jr. ....................................... 27,484 *
Robert J. Marino............................................ 121,180 *
Steven C. Mason............................................. 17,000 *
Charles S. Mechem, Jr. .................................... 33,175 *
James F. Orr................................................ 535,430 *
Steven G. Rolls............................................. 0 *
Brian H. Rowe............................................... 23,317 *
Ronald E. Schultz........................................... 72,838 *
------- ----
All Directors and Officers as a group (consisting of 14
persons, including those named above)..................... 1,573,749 1.14%
</TABLE>
- ------------
(1) Includes common shares subject to outstanding options under the CBI Long
Term Incentive Plan and the CBI Directors Stock Option Plan which are
exercisable by such individuals within 60 days. The following options are
included in the totals: 499,400 CBI common shares for Mr. Orr; 281,600 CBI
common shares for Mr. Henry; 191,000 CBI common shares for Mr. Baskett;
104,200 CBI common shares for Mr. Marino; 84,400 CBI common shares for Mr.
Dougherty; 62,600 CBI common shares for Mr. Schultz; 36,000 CBI common
shares for Mr. Barrett; 24,000 CBI common shares for Mr. Mechem; 20,000 CBI
common shares for each of Messrs. Howe and Rowe; 17,250 CBI common shares
for Mr. Komin; 16,000 CBI common shares for each of Mrs. Boynton and Mr.
Mason.
(2) Includes CBI common shares held directly by members of the director's or
officer's family who have the same home as the director or officer but as to
which the director or officer disclaims beneficial ownership: 1,568 for Mr.
Barrett and 2,107 for Mr. Baskett.
(3) Does not include CBI common shares held by The Western and Southern Life
Insurance Company of which Mr. Barrett is President and Chief Executive
Officer. Mr. Barrett disclaims beneficial ownership of those shares.
* Denotes beneficial ownership of less than 1%.
Options to purchase Common Shares may be granted to directors, officers and
other key employees of the Company in the future under the 1998 LTIP.
See -- "1998 LTIP."
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
chief executive officer and the four other executive officers of the Company as
of December 31, 1997 who, based on employment with CBI and its subsidiaries,
were the most highly compensated for the year ended December 31, 1997. All of
the information set forth in this table reflects compensation earned by such
individuals for services with CBI and its subsidiaries.
53
<PAGE> 55
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ----------------------- ----------
OTHER RESTRICTED SECURITIES LONG TERM
ANNUAL STOCK UNDERLYING INCENTIVE ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)(A)
- --------------------------- ---- ---------- --------- ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James F. Orr............... 1997 $370,000 $284,000 (b) $0 43,800 $0 $31,344
President & CEO
Brian C. Henry............. 1997 $320,000 $170,400 (b) $0 28,400 $0 $19,719
Chief Operating Officer --
Convergys Information
Management Group ("CBIS")
Charles S. Mechem, Jr. .... 1997 $300,000(c) $ 0 $0 $0 4,000 $0 $15,219
Chairman
Robert J. Marino........... 1997 $270,000 $177,601 (b) $0 27,000 $0 $ 9,500
President -- Convergys
Information Management
Group ("CBIS")
David F. Dougherty......... 1997 $240,000 $ 36,920 (b) $0 27,000 $0 $ 0
President -- Convergys
Customer Management Group
("MATRIXX")
</TABLE>
- ------------
(a) Represents CBI contributions to defined contribution savings plans and
deferred compensation plans.
(b) Does not include the value of perquisites and other personal benefits
because the total amount of such compensation, if any, does not exceed the
lesser of $50,000 or 10% of the total amount of the annual salary and bonus
for the individual for that year.
(c) For serving as Chairman of the Board of CBI.
GRANTS OF STOCK OPTIONS
The following table shows all individual grants of options to purchase CBI
common shares to the named executive officers during the fiscal year ended
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES OR BASE OPTION TERM(B)
GRANTED IN FISCAL PRICE EXPIRATION ------------------------------
NAME (#)(A) YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ---------- -------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
James F. Orr..................... 43,800 3.1% $30.188 1/2/07 $831,280 $2,149,911
Brian C. Henry................... 28,400 2.0% $30.188 1/2/07 $539,003 $1,366,125
Charles S. Mechem, Jr. .......... 4,000 0.3% $27.094 4/28/07 $176,436 $ 281,019
Robert J. Marino................. 27,000 1.9% $30.188 1/2/07 $512,433 $1,298,781
David F. Dougherty............... 27,000 1.9% $30.188 1/2/07 $512,433 $1,298,781
</TABLE>
- ------------
(a) The material terms of the options granted to officers other than Mr. Mechem
are: grant type, non-statutory; grant price, fair market value on grant
date; exercisable 25% after one year, an additional 25% after the second
year and the remaining 50% after the third year; term of grant, 10 years;
except in case of retirement, disability or death, any unexercised or
unexercisable options are cancelled upon termination of employment. The
material terms of the options granted to Mr. Mechem are: grant type,
non-statutory; grant price, fair market value on grant date; exercisable
immediately; term of grant, 10 years; any unexercised options are cancelled
six months after ceasing to be a director, except in case of retirement or
death.
(b) As required by rules of the Securities and Exchange Commission (the "SEC"),
potential values stated are based on the prescribed assumption that CBI's
common shares will appreciate in value from the date of grant to the end of
the option term (ten years from the date of grant) at annualized rates of 5%
and
54
<PAGE> 56
10% (total appreciation of 62.8% and 159.3%) resulting in values of
approximately $49.88 and $79.29 and $44.11 and $70.25 for all options
expiring on April 28, 2007. They are not intended, however, to forecast
possible future appreciation, if any, in the price of CBI's common shares.
The total of all stock options granted to employees, including executive
officers, during fiscal 1997 was approximately 1.57% of the total CBI common
shares outstanding during the year. As an alternative to the assumed
potential realizable values stated in the above table, the SEC rules would
permit stating the present value of such options at date of grant. Methods
of computing present values suggested by different authorities can produce
significantly different results. Moreover, since stock options granted by
CBI are not transferable, there are no objective criteria by which any
computation of present value can be verified. Consequently, CBI's management
does not believe there is a reliable method of computing the present value
of such stock options for proxy disclosure purposes.
AGGREGATE OPTION EXERCISES
The following table shows aggregate CBI option exercises in the last fiscal
year and fiscal year-end values:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($) (A)
SHARES ACQUIRED VALUE EXERCISABLE (E)/ EXERCISABLE (E)/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE (U) UNEXERCISABLE (U)
---- --------------- ------------ ----------------- --------------------
<S> <C> <C> <C> <C>
James F. Orr................ 70,000 $1,471,859 E 75,300 E$1,452,162
U439,700 U 1,268,604
Brian C. Henry.............. 110,000 $2,110,000 E 123,650 E$2,627,819
U128,400 U 126,160
Charles S. Mechem, Jr. ..... 0 $ 0 E 36,000 E$ 288,860
U 0 U 0
Robert J. Marino............ 0 $ 0 E 35,000 E$ 596,465
U 42,000 U 233,319
David F. Dougherty.......... 18,000 $ 443,529 E 37,550 E$ 782,332
U 49,650 U 341,130
</TABLE>
- ------------
(a) Values stated based on the fair market value (average of the high and low)
of $31.00 per share of the CBI common shares on the NYSE on December 31,
1997.
LONG TERM INCENTIVE PLAN AWARDS TABLE
Since no awards pursuant to any long-term incentive plans were made to any
named executive officer in the fiscal year ended December 31, 1997, no table has
been included.
PENSION PLANS
Prior to the Distribution, the Company's management employees will be
participants in both the CBI Management Pension Plan and a supplementary pension
plan known as the CBI Pension Program. Effective at the time of the
Distribution, the Company will adopt a pension plan (the "Company Pension Plan")
that will replicate, in all material respects, the CBI Management Pension Plan
and which will be a non-contributory pension plan which covers substantially all
eligible management and hourly employees of the Company, including Messrs. Orr,
Henry, Marino and Dougherty. The Company also will adopt a non-contributory
supplementary pension plan (the "Company Pension Program") that will replicate
in all material respects the CBI Pension Program and which will provide
supplementary pensions for designated senior managers of the Company, including
Messrs. Orr, Henry, Marino and Dougherty. Participants will be given full credit
under both the Company Pension Plan and the Company Pension Program for service
and compensation accrued under the CBI Management Pension Plan and the CBI
Pension Program, respectively.
Under the Company's Pension Program, a participant's pension at retirement
will be 50% of the participant's average monthly compensation for the high 36
month period during the 60 month period preceding retirement, reduced by
benefits payable under the Company's Pension Plan (including amounts
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which are intended to supplement or be in lieu of benefits under the Company's
Pension Plan) and Social Security benefits. There will be a reduction of 2.5%
for each year by which the sum of the participant's years of age and years of
service at retirement total less than 75 and, generally, no benefits will be
payable if the participant leaves prior to attaining age 55 and completing at
least 10 years of service.
The benefit formula under the Company's Pension Plan will be a cash balance
formula. Under this formula, each participant will have an account to which
pension credits will be allocated at the end of each year based upon the
participant's age and covered compensation for the year. To the extent that a
participant's covered compensation exceeds the Social Security wage base,
additional pension credits will be given for such excess compensation. The
following chart shows the pension credits which will be given at the ages
indicated:
<TABLE>
<CAPTION>
ATTAINED AGE PENSION CREDITS
------------ ---------------
<S> <C>
Less than 30 years 2.50% of total covered compensation plus 2.50% of excess
compensation
30 but less than 35 years 2.75% of total covered compensation plus 2.75% of excess
compensation
35 but less than 40 years 3.25% of total covered compensation plus 3.25% of excess
compensation
40 but less than 45 years 4.00% of total covered compensation plus 4.00% of excess
compensation
45 but less than 50 years 5.25% of total covered compensation plus 5.25% of excess
compensation
50 but less than 55 years 6.50% of total covered compensation plus 6.50% of excess
compensation
55 or more years 8.00% of total covered compensation plus 8.00% of excess
compensation
</TABLE>
At the end of each year, a participant's account also will be credited with
assumed interest at the rate of 8.125% per annum for 1998 and 4% per annum for
subsequent years.
If Messrs. Orr, Henry, Marino and Dougherty continue in employment and
retire at the normal retirement age of 65, based upon the minimum base salary
and bonus targets set forth in their employment agreements (see "Employment
Agreements" below), their estimated straight life annuity annual pension amounts
under both the Company Pension Plan and the Company Pension Program combined,
prior to deduction for Social Security benefits, would be: $544,000 for Mr. Orr,
$220,000 for Mr. Henry, $232,500 for Mr. Marino and $232,500 for Mr. Dougherty.
These annual pension amounts would be reduced: in the case of Mr. Orr (age 52
and nine years of service), if he retires prior to age 59; in the case of Mr.
Henry (age 41 and five years of service) if he retires prior to age 55; in the
case of Mr. Marino (age 50 and two years of service), if he retires prior of age
61; and in the case of Mr. Dougherty (age 41 and eight years of service), if he
retires prior to age 55.
Federal laws place limits on pensions that may be paid from the trust to be
established in conjunction with the Company's Pension Plan. Pension amounts
based on the Company Pension Plan formula which exceed the applicable
limitations, and all amounts payable under the Company Pension Program formula,
will be paid as operating expenses.
EMPLOYMENT AGREEMENTS
The Company has entered into an Employment Agreement with Mr. Orr which
provides for the employment and retention of Mr. Orr for a four year term
commencing on the Closing Date, subject to automatic one year extensions unless
terminated prior to the beginning of the final year. The Employment Agreement
provides for a minimum base salary of $660,000 per year; a minimum bonus target
of $429,000 per year; an initial grant of options to purchase 350,000 Common
Shares, vesting 25% after one year, 50% after two years, 75% after three years
and 100% after four years; a restricted stock grant of 150,000 Common Shares,
vesting 100% after four years; and annual grants of long-term incentives
(options and performance shares) with a present value of not less than
$1,353,000. If Mr. Orr's employment is terminated within two years after a
change in control or if Mr. Orr elects to leave within 90 days after a change in
control, he will receive a lump sum payment equal to three times the sum of his
base salary and bonus target and benefits will continue to be provided for three
years. If Mr. Orr's employment is terminated by the Company without cause, he
will receive a lump sum severance payment equal to his base salary and bonus
target for the remainder of the Employment Agreement term (but not less than two
times the sum of his base salary and bonus target) and benefits will continue to
be provided for the remainder of the Employment Agreement term (or, if longer,
for two years).
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<PAGE> 58
The Company has entered into an Employment Agreement with Mr. Marino which
provides for the employment and retention of Mr. Marino for a four year term
commencing on the Closing Date, subject to automatic one year extensions unless
terminated prior to the beginning of the final year. The Employment Agreement
provides for a minimum base salary of $305,000 per year; a minimum bonus target
of $160,000 per year; an initial grant of options to purchase 100,000 Common
Shares, vesting 25% after one year, 50% after two years, 75% after three years
and 100% after four years; a restricted stock grant of 50,000 Common Shares,
vesting 100% after four years; and annual grants of long-term incentives
(options and performance shares) with a present value of not less than $316,000.
If Mr. Marino's employment is terminated within two years after a change in
control or if Mr. Marino elects to leave within 90 days after a change in
control, he will receive a lump sum payment equal to three times the sum of his
base salary and target bonus and benefits will continue to be provided for three
years. If Mr. Marino's employment is terminated by the Company without cause, he
will receive a lump sum severance payment equal to his base salary and bonus
target for the remainder of the Employment Agreement term (but not less than two
times the sum of his base salary and bonus target) and benefits will continue to
be provided for the remainder of the Employment Agreement term (or, if longer,
for two years).
The Company has entered into an Employment Agreement with Mr. Dougherty
which provides for the employment and retention of Mr. Dougherty for a four year
term commencing on the Closing Date, subject to automatic one year extensions
unless terminated prior to the beginning of the final year. The Employment
Agreement provides for a minimum base salary of $305,000 per year; a minimum
bonus target of $160,000 per year; an initial grant of options to purchase
100,000 Common Shares, vesting 25% after one year, 50% after two years, 75%
after three years and 100% after four years; a restricted stock grant of 50,000
Common Shares, vesting 100% after four years; and annual grants of long-term
incentives (options and performance shares) with a present value of not less
than $316,000. If Mr. Dougherty's employment is terminated within two years
after a change in control or if Mr. Dougherty elects to leave within 90 days
after a change in control, he will receive a lump sum payment equal to three
times the sum of his base salary and bonus target and benefits will continue to
be provided for three years. If Mr. Dougherty's employment is terminated by the
Company without cause, he will receive a lump sum severance payment equal to his
base salary and bonus target for the remainder of the Employment Agreement term
(but not less than two times the sum of his base salary and target bonus) and
benefits will continue to be provided for the remainder of the Employment
Agreement term (or, if longer, for two years).
CBIS has entered into an Employment Agreement with Mr. Henry which provides
for the employment and retention of Mr. Henry for a four year term commencing on
the Closing Date, subject to automatic one year extensions unless terminated
prior to the beginning of the final year. The Employment Agreement provides for
a minimum base salary of $320,000 per year and a minimum bonus target of
$120,000 per year. If Mr. Henry's employment is terminated within two years
after a change in control or if Mr. Henry elects to leave within 90 days after a
change in control, he will receive a lump sum payment equal to 2.99 times his
base salary. If Mr. Henry's employment is terminated by the Company without
cause, he will receive a lump sum severance payment equal to two times his base
salary.
1998 LTIP
The Company intends to adopt, with the approval of CBI in its capacity as
the sole shareholder of the Company, the 1998 LTIP. The 1998 LTIP will be
administered by the Compensation and Benefits Committee. The following
description of the 1998 LTIP is qualified by reference to the full text thereof,
a copy of which will be filed as an exhibit to the Registration Statement.
PARTICIPANTS
The Compensation and Benefits Committee will select the employees who are
eligible to receive awards under the 1998 LTIP. No determination has yet been
made as to the number of employees of the Company who will be eligible to
participate in the 1998 LTIP. However, as described under Relationship Between
the Company and CBI -- Employee Benefits Agreement, persons holding options to
purchase CBI common shares granted under the CBI Long Term Incentive Plan
(approximately 415 persons as of March 31, 1998)
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<PAGE> 59
are expected to receive options for an equal number of Common Shares as of the
Distribution Date. In addition, persons holding CBI common shares issued as
restricted stock under the CBI Long Term Incentive Plans (approximately 32
persons as of March 31, 1998) are expected to receive grants of restricted
Common Shares under the Company's 1998 LTIP.
SHARES AVAILABLE
A total of 30,000,000 Common Shares may be issued under the 1998 LTIP. Of
this number, a maximum of 15,000,000 Common Shares may be issued in conjunction
with incentive stock options ("ISOs") and not more than 3,000,000 Common Shares
may be issued to any one person. Any Common Shares issued under the 1998 LTIP
may consist, in whole or in part, of authorized and unissued Common Shares or
Common Shares held as treasury shares or Common Shares purchased in the open
market. If any Common Shares subject to any award are forfeited or the award
terminates without the issuance of such Common Shares, the Common Shares subject
to such award, to the extent of any such forfeiture or termination, will again
be available for grant.
TYPES OF AWARDS
Awards under the 1998 LTIP may be in any one or a combination of the
following: (a) stock options, including ISOs, (b) stock appreciation rights
("SARs"), in tandem with stock options or free standing, (c) restricted stock,
(d) performance shares and performance units conditioned upon meeting certain
performance criteria and (e) other awards valued in whole or in part by
reference to or otherwise based on Common Shares or other securities of the
Company or any of its subsidiaries ("other stock unit awards"). In addition, in
connection with any award or deferred award, payments may also be made
representing dividends or interest or their equivalents.
STOCK OPTIONS
The 1998 LTIP will provide that the purchase price of Common Shares
purchasable under any stock option shall not be less than 100% of the fair
market value of the Common Shares on the date that the option is granted. The
purchase price of options issued in conjunction with the Offering will be the
Offering price. Payment of the purchase price for option shares must be made in
cash or by delivery of other Common Shares of the Company or other property, or
a combination thereof, having a fair market value equal to the purchase price of
the option shares.
The period of any option will be determined by the Compensation and
Benefits Committee, but no ISO may be exercised later than 10 years after the
date of grant. The aggregate fair market value, determined at the date of grant
of the ISO, of Common Shares for which ISOs are exercisable for the first time
during any calendar year as to any participant shall not exceed the maximum
limitation in Section 422 of the Code.
STOCK APPRECIATION RIGHTS
A SAR represents the right to receive payment of a sum not to exceed the
amount, if any, by which the fair market value of the Common Shares on the date
of exercise of the SAR exceeds the grant price of the SAR. The grant price
(which shall not be less than the fair market value of the Common Shares on the
date of the grant) and other terms of the SAR shall be determined by the
Compensation and Benefits Committee. A SAR may be granted free-standing or in
tandem with new options or after the grant of a related option which is not an
ISO. Upon the exercise of a SAR, payment may be made in cash, Common Shares or
other property, or a combination thereof, as the Compensation and Benefits
Committee shall determine.
RESTRICTED STOCK
Restricted stock will consist of Common Shares which are subject to such
conditions, restrictions and limitations as the Compensation and Benefits
Committee determines to be appropriate. Restricted stock will be awarded without
consideration other than the rendering of services or the payment of any minimum
amount required by law, unless the Compensation and Benefits Committee decides
otherwise. With respect to Common Shares awarded as restricted stock, the
recipient shall have all rights of a shareholder of the
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<PAGE> 60
Company, including the right to vote and the right to receive cash dividends,
unless the Compensation and Benefits Committee shall otherwise determine. Any
Common Shares issued with respect to restricted stock as a result of a stock
split, stock dividend or similar transaction shall be restricted to the same
extent as such restricted stock, unless otherwise determined by the Compensation
and Benefits Committee. Upon termination of the participant's employment during
the restriction period, all restricted stock shall be forfeited subject to such
exceptions, if any, as are authorized by the Compensation and Benefits Committee
as to termination of employment, retirement, disability, death or special
circumstances.
PERFORMANCE SHARES AND UNITS
The 1998 LTIP will permit the grant of performance shares and performance
units ("performance awards") as additional compensation to participants for
services to the Company or one of its subsidiaries based on performance periods
and performance goals established by the Compensation and Benefits Committee for
the Company or any subsidiary of the Company. Payment of performance awards may
be made in cash, Common Shares or other property, or a combination thereof, as
the Compensation and Benefits Committee shall determine. There may be more than
one award in existence at any one time and performance periods may differ.
Recipients of performance awards are not required to provide consideration other
than the rendering of service, unless the Compensation and Benefits Committee
decides otherwise.
OTHER STOCK UNIT AWARDS
The 1998 LTIP will permit the award of other stock unit awards, either
alone or in addition to other awards granted under the 1998 LTIP, subject to
such conditions, restrictions and limitations as the Compensation and Benefits
Committee determines to be appropriate. Other stock unit awards are awards of
Common Shares or other securities of the Company and other awards that are
valued in whole or in part by reference to, or are otherwise based on, Common
Shares or other securities of the Company. Other stock unit awards may be paid
in cash, Common Shares or other property, or a combination thereof, as the
Compensation and Benefits Committee shall determine.
GRANTS TO NON-EMPLOYEE DIRECTORS
Under the 1998 LTIP, awards of stock options (other than ISOs) and
restricted stock may be made to directors who are not employees of the Company.
With respect to any awards to non-employee directors, the Board of Directors
will exercise the powers otherwise reserved to the Compensation and Benefits
Committee under the 1998 LTIP, including the authority to select the
non-employee directors who will receive awards, to select the types of awards
and to impose limitations, conditions and restrictions on the awards as the
Board of Directors may deem appropriate.
CHANGE OF CONTROL
In order to maintain all of the participants' rights in the event of a
change in control (as defined in the 1998 LTIP) of the Company, the Compensation
and Benefits Committee, as constituted before such Change of Control, in its
sole discretion, may, as to any outstanding award, either at the time an award
is made or any time thereafter, take any one or more of the following actions:
(a) provide for the acceleration of any time periods relating to the exercise of
realization of any such award so that such award may be exercised or realized in
full on or before a date fixed by the Compensation and Benefits Committee; (b)
provide for the purchase of any such award by the Company, attained upon the
exercise of such award or realization of such participant's rights had such
awards been currently exercisable or payable; (c) make such adjustment to any
such award then outstanding as the Compensation and Benefits Committee deems
appropriate to reflect such change of control; or (d) cause any such award then
outstanding to be assumed, or new rights substituted therefor, by the acquiring
or surviving corporation in such change of control.
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AMENDMENT AND TERMINATION
The 1998 LTIP may be amended or terminated by the Board of Directors of the
Company, provided that no such action shall impair the rights of a participant
without the participant's consent and provided that no amendment shall be made
without shareholder approval which shall (a) increase the total number of Common
Shares reserved for issuance under the LTIP, the total number of Common Shares
which may be issued upon the exercise of ISOs or the total number of Common
Shares which may be issued to any one individual or (b) change the class of
employees eligible to participate.
BACKGROUND OF THE SEPARATION AND DISTRIBUTION
Beginning in 1983, CBI undertook to expand from a regulated and
geographically limited local telephone company into a diversified provider of
value-added communications services with international operations. CBI was
successful in expanding into the higher growth market segments in which CBIS and
MATRIXX operate. Recently, it has become apparent to the CBI Board of Directors
that the separation of the CBIS and MATRIXX businesses from the CBT business may
provide enhanced growth opportunities for each business. As a result, on April
27, 1998, CBI announced its intent, subject to the satisfaction of certain
conditions, to divest its ownership interest in the Company by means of the
Offering and the Distribution, which is intended to occur within six months
following the Offering. The Distribution would separate the billing services and
related information support services and customer management solutions
businesses from the telecommunications businesses. The CBI Board of Directors
believes that the Distribution would: (i) permit the management of the Company
and CBI to focus on their respective core businesses without regard to the
corporate objectives and policies of the other company; (ii) permit the
financial community to focus separately on the Company and CBI and their
respective business opportunities; and (iii) enable the Company to have greater
access to capital to finance its businesses.
After the completion of the Offering and prior to the Distribution, CBI
will own approximately 88.4% of the outstanding Common Shares (86.8% if the U.S.
Underwriters exercise their over-allotment option in full). The Company and CBI
have entered into certain agreements providing for the Separation and the
provision by each company of certain interim services to the other company. See
"Relationship Between the Company and CBI."
CONDITIONS TO THE DISTRIBUTION
The Distribution is subject to the satisfaction, or waiver by the Board of
Directors of CBI (the "CBI Board"), in its sole discretion, of the following
conditions: (i) a private letter ruling from the IRS shall be in effect,
providing, among other things, that the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Code, and
the transfer to the Company of all of the outstanding shares of CBIS and MATRIXX
in connection with the Separation will not result in any federal income tax for
CBI, the Company or CBI's or the Company's shareholders, and such ruling shall
be in form and substance satisfactory to CBI, in its sole discretion; (ii) any
material consents necessary to consummate the Distribution shall have been
obtained and shall be in full force and effect; (iii) no order, injunction or
decree or other legal restraint or prohibition preventing the consummation of
the Distribution shall be in effect; and (iv) no other events or developments
shall have occurred that, in the judgment of the CBI Board, would result in the
Distribution having a material adverse effect on CBI or on the shareholders of
CBI. On July 16, 1998, the Company received a favorable private letter ruling
from the IRS. The CBI Board will have the sole discretion to determine the date
of consummation of the Distribution (the "Distribution Date") at any time after
the Closing Date and on or prior to the date that is six months after the
Closing Date. Pursuant to the Plan of Reorganization and Distribution Agreement,
CBI is obligated to consummate the Distribution on or prior to the date that is
six months after the Closing Date, subject to the satisfaction, or waiver by the
CBI Board in its sole discretion, of the conditions set forth above. CBI may
terminate the Plan of Reorganization and Distribution Agreement, without
liability, at any time prior to the Closing Date, and the Plan of Reorganization
and Distribution Agreement may be terminated by mutual agreement of the parties
at any time prior to the Distribution Date. See "Risk Factors -- Risk of
Noncompletion of the Distribution" and "Relationship Between the Company and
CBI -- Plan of Reorganization and Distribution Agreement."
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RELATIONSHIP BETWEEN THE COMPANY AND CBI
Prior to this Offering, the Company has been a wholly owned subsidiary of
CBI. As the sole shareholder, CBI was responsible for providing the Company with
financial, management, administrative and other resources. Furthermore, CBI
maintained control over the operations of the Company. Accordingly, the Company
has had no history of operating as an independent entity.
Prior to this Offering, CBI provided the Company with significant
management functions and services, including treasury, accounting, tax, human
resources, employee benefits and other support services. The Company was charged
and/or allocated expenses of $6.1 million, $6.7 million and $7.7 million for the
years ended December 31, 1995, 1996 and 1997, respectively, and $1.9 million and
$2.7 million for the three months ended March 31, 1997 and 1998, respectively.
The costs of these services have been directly charged and/or allocated using
methods that the Company's management believes are reasonable. Such charges and
allocations are not necessarily indicative of the costs the Company would have
incurred to obtain these services had it been a separate entity. Neither CBI nor
the Company has conducted any study or obtained any estimates from third parties
to determine what the cost of obtaining such services from third parties may
have been. See Note 14 of Notes to Consolidated Financial Statements.
The Company and CBI have entered into or will enter into a number of
agreements for the purpose of defining their continuing relationship. These
agreements were negotiated in the context of a parent-subsidiary relationship
and therefore are not the result of negotiations between independent parties. It
is the intention of the Company and CBI that such agreements and the
transactions provided for therein, taken as a whole, should accommodate the
parties' interests in a manner that is fair to both parties, while continuing
certain mutually beneficial arrangements. The parties intend that such
agreements and transactions provide fair market value to them on terms no less
favorable to the Company as would otherwise be available from unaffiliated
parties. Due to the complexity of the various relationships between the Company
and CBI, however, there can be no assurance that each of such agreements, or the
transactions provided for therein, will be effected on terms at least as
favorable to the Company as could have been obtained from unaffiliated third
parties. The agreements summarized in this section have been filed as exhibits
to the Registration Statement of which this Prospectus forms a part, and the
following summaries are qualified in their entirety by reference to the
agreements as filed. While these agreements will provide the Company with
certain benefits, the Company may not enjoy benefits from its relationship with
CBI beyond the term of the agreements. There can be no assurance that upon
termination of such assistance from CBI, the Company will be able to provide
adequately such services internally or obtain favorable arrangements from third
parties to replace such services. See "Risk Factors -- Ongoing Relationship with
CBI."
Additional or modified arrangements and transactions may be entered into by
the Company and CBI following consummation of this Offering. Any such future
arrangements and transactions will be determined through negotiations between
the Company and CBI. The Company has adopted a policy that all future agreements
between the Company and CBI will be on terms that the Company believes are no
less favorable to the Company than the terms the Company believes would be
available from unaffiliated parties. However, there can be no assurance that any
such arrangements or transactions will be the same as that which would be
negotiated between independent parties. See "Risk Factors -- Ongoing
Relationship with CBI."
The following summary of certain aspects of the relationship between the
Company and CBI is materially complete but is subject to, and qualified in its
entirety by, the provisions of the Plan of Reorganization and Distribution
Agreement, the Employee Benefits Agreement, the Services Agreement, and the Tax
Separation and Allocation Agreement, which are included as exhibits to the
Registration Statement of which this Prospectus is a part.
PLAN OF REORGANIZATION AND DISTRIBUTION AGREEMENT
Capitalized terms used in this section and not otherwise defined herein
shall have their respective meanings set forth in the Plan of Reorganization and
Distribution Agreement (except that the term "Company" is used in lieu of the
term "Convergys").
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The Plan of Reorganization and Distribution Agreement sets forth the
agreements between the Company and CBI with respect to the principal corporate
transactions required to effect the Separation, the Offering and the
Distribution, and certain other agreements governing the relationship among the
parties thereafter. To effect the Separation, CBI contributed all of the
outstanding shares of CBIS and MATRIXX and the assets related to their
respective businesses to the Company, and the Company assumed certain
liabilities related to those businesses.
The Plan of Reorganization and Distribution Agreement provides that,
subject to the terms and conditions thereof, CBI and the Company will take all
reasonable steps necessary and appropriate to cause all conditions to the
Distribution to be satisfied and to effect the Distribution. The Directors of
CBI will have the sole discretion to determine the date of consummation of the
Distribution at any time after the Closing Date and on or prior to the date that
is six months after the Closing Date. Pursuant to the Plan of Reorganization and
Distribution Agreement, CBI is obligated to consummate the Distribution no later
than the date that is six months after the Closing Date, subject to the
satisfaction or waiver by its Board, in its sole discretion, of certain
conditions. In the event that any such condition shall not have been satisfied
or waived on or before such date, CBI shall consummate the Distribution as
promptly as practicable following the satisfaction or waiver of all such
conditions. See "Background of the Separation and Distribution; Conditions to
the Distribution."
The Company and CBI have agreed that, neither of the parties will take, or
permit any of their affiliates to take, any action which reasonably could be
expected to prevent the Distribution from qualifying as a tax-free distribution
within the meaning of Section 355 of the Code. The parties have also agreed to
take any reasonable actions necessary for the Distribution to qualify as a
tax-free distribution pursuant to Section 355 of the Code.
The Plan of Reorganization and Distribution Agreement also provides for a
full and complete release and discharge upon consummation of this Offering of
all liabilities existing or arising from all acts and events occurring or
failing to occur or alleged to have occurred or to have failed to occur and all
conditions existing or alleged to have existed on or before the Offering,
between or among the Company and its affiliates, on the one hand, and CBI and
its affiliates, on the other hand (including any contractual agreements or
arrangements existing or alleged to exist between or among them on or before the
Offering), except as expressly set forth in the Plan of Reorganization and
Distribution Agreement, the Employee Benefits Agreement, the Services Agreement
and the Tax Allocation Agreement.
The Company has agreed to indemnify, defend and hold CBI and its affiliates
harmless from and against all liabilities relating to, arising out of or
resulting from (i) the failure of the Company or any other person to pay,
perform or otherwise promptly discharge any Company liabilities in accordance
with their respective terms, (ii) the Company's business or any Company
Liabilities, (iii) any breach by the Company of the Plan of Reorganization and
Distribution Agreement or any ancillary agreements, and (iv) any untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, with respect to all information
contained in this Prospectus or the Registration Statement of which it forms a
part.
CBI has agreed to indemnify, defend and hold the Company and its affiliates
harmless from and against all liabilities relating to, arising out of or
resulting from (i) the failure of CBI or any other person to pay, perform or
otherwise promptly discharge any liabilities of CBI, (ii) the business of CBI or
any liability of CBI other than Company Liabilities, (iii) any breach by CBI or
any of its affiliates of the Plan of Reorganization and Distribution Agreement
or any ancillary agreements, and (iv) any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, with respect to all information about CBI contained in this
Prospectus or the Registration Statement of which it forms a part.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers or persons controlling the Company, the
Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is therefore unenforceable.
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The Plan of Reorganization and Distribution Agreement provides that as to
inter-company debt payable to CBI by the Company, the Company's obligation will
be to repay to CBI on the Distribution Date the amount reflected in its balance
sheet dated March 31, 1998 ($724.7 million) adjusted for the net cash flows
resulting from the Company's operating and investing activities for the period
April 1, 1998 to the date of repayment and for any other repayments made to CBI
in that period. Upon the Closing Date, the Company shall apply all the net
proceeds of the Offering to reduce the Company's portion of its inter-company
debt. For the period between the Closing Date through the day preceding the
Distribution Date, CBI shall continue to provide the Company with working
capital funding pursuant to the existing inter-company arrangements at an
interest rate equal to CBI's average short-term borrowing cost or through
external short- or long-term financing to be arranged by CBI; provided, however,
that the Company may obtain and procure its own separate funding with such third
parties as it deems in its sole discretion appropriate and at its own expense.
CBI shall cooperate with the Company in its efforts to obtain such financing.
In the Plan of Reorganization and Distribution Agreement, the Company and
CBI have agreed that each of them or their applicable subsidiaries will execute
and deliver deeds, lease assignments and assumptions, leases or subleases to be
mutually agreed upon for properties identified in the agreement and have agreed
on the method of determining whether tenant improvements, fixtures, furniture,
office equipment and other tangible property located on any of the subject real
property shall be transferred or retained.
The Plan of Reorganization and Distribution Agreement provides for
indemnification by the Company and CBI with respect to Contingent Liabilities
primarily relating to their respective businesses or otherwise assigned to them
("Exclusive Contingent Liabilities"). The Plan of Reorganization and
Distribution Agreement also provides for the sharing of Shared Contingent
Liabilities and Shared Contingent Gains. With respect to any Shared Contingent
Liability and Shared Contingent Gains, the parties have agreed that CBI will be
responsible for or receive the benefit of 50% and the Company will be
responsible for or receive the benefits of 50% of such Shared Contingent
Liability or Shared Contingent Gains, as the case may be.
The Plan of Reorganization and Distribution Agreement provides that the
Company and CBI will have the exclusive right to any benefit received with
respect to any Contingent Gain that primarily relates to the business of, or
that is expressly assigned to, the Company or CBI, respectively (an "Exclusive
Contingent Gain"). Each of the Company and CBI will have sole and exclusive
authority to manage, control and otherwise determine all matters whatsoever with
respect to an Exclusive Contingent Gain that primarily relates to its respective
business. The parties have agreed that CBI will have the sole and exclusive
authority to manage, control and otherwise determine all matters whatsoever with
respect to any Shared Contingent Gain.
The Plan of Reorganization and Distribution Agreement contains provisions
that govern, except as otherwise provided in any ancillary agreement, the
resolution of disputes, controversies or claims that may arise between or among
the parties. These provisions contemplate that efforts will be made to resolve
disputes, controversies and claims by escalation of the matter to senior
management (or other mutually agreed) representatives of the parties. If such
efforts are not successful, any party may submit the dispute, controversy or
claim to mandatory, binding arbitration, subject to the provisions of the Plan
of Reorganization and Distribution Agreement. The Plan of Reorganization and
Distribution Agreement contains procedures for the selection of a sole
arbitrator of the dispute, controversy or claim and for the conduct of the
arbitration hearing, including certain limitations on discovery rights of the
parties. These procedures are intended to produce an expeditious resolution of
any such dispute, controversy or claim.
In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $25 million, or in the event that an arbitration
award in excess of $25 million is issued in any arbitration proceeding commenced
under the Plan of Reorganization and Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent jurisdiction and the arbitration provisions contained in the Plan
of Reorganization and Distribution Agreement will not apply. In the event that
the parties do not agree that the amount in controversy is in excess of $25
million, the Plan of Reorganization and Distribution Agreement provides for
arbitration of such disagreement.
The Plan of Reorganization and Distribution Agreement may be terminated at
any time after the Closing Date and prior to the Distribution Date by the mutual
consent of CBI and the Company, or by CBI at any
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time prior to the Closing Date. If the Plan of Reorganization and Distribution
Agreement is terminated prior to the Closing Date, no party thereto (or any of
its respective directors or officers) will have any liability or further
obligation to the other party. In the event of any termination of the Plan of
Reorganization and Distribution Agreement on or after the Closing Date, only the
provisions of the Plan of Reorganization and Distribution Agreement that
obligate the parties to pursue the Distribution will terminate, and the other
provisions of the Plan of Reorganization and Distribution Agreement and each
Ancillary Agreement will remain in full force and effect.
The Plan of Reorganization and Distribution Agreement also provides that
during the period prior to the Distribution, the Company will reimburse CBI for
its proportionate share of premiums paid or accrued on insurance policies under
which the Company continues to have coverage.
EMPLOYEE BENEFITS AGREEMENT
Prior to the Offering, the Company and CBI will enter into an Employee
Benefits Agreement that will govern certain employee benefits obligations of the
Company. Under the Employee Benefits Agreement, the Company will assume and
agree to pay all liabilities relating to (a) those employees of CBI or its
subsidiaries who will become employed by the Company or its subsidiaries at or
prior to the Distribution, (b) those directors of CBI who will become directors
of the Company and (c) those former employees who are assigned to the Company
for purposes of allocating employee benefit obligations.
Effective immediately after the Distribution, the Company will establish
the Company Pension Plan, which generally will be the same as the CBI pension
plans which cover employees of CBIS and MATRIXX prior to the Distribution. The
Company Pension Plan will assume all liabilities under the CBI pension plans for
those employees and former employees who are employed by or transferred to the
Company. The assets of the trust established in conjunction with the CBI pension
plans will be divided between the trust for the CBI pension plans and the trust
for the Company Pension Plan in the manner agreed to by CBI and the Company.
With respect to each CBI Option outstanding at the time of the
Distribution, each optionee will receive a Company Option to purchase an equal
number of Common Shares under the Company's 1998 LTIP. The exercise price of
each outstanding CBI Option will be adjusted, and the exercise price of each new
Company Option will be determined, so that (a) the sum of the exercise prices of
the new Company Option and the CBI Option after the adjustment will be equal to
the exercise price of the CBI Option prior to the adjustment and (b) the ratio
of the exercise prices of each Company Option and CBI Option after the
adjustment will be equal to the ratio of the fair market values of each Common
Share and CBI common share after the adjustment. The terms of each Company
Option will be the same as the terms of each outstanding CBI Option, except that
termination of employment shall mean (a) for each CBI Option held by an employee
of the Company, termination of employment with the Company and (b) for each
Company Option held by an employee of CBI, termination of employment with CBI.
With respect to any outstanding CBI common share issued under the CBI Long
Term Incentive Plan which are subject to restrictions at the time of
Distribution, each shareholder shall receive a Common Share under the 1998 LTIP
which shall be subject to the same restrictions, except that termination of
employment shall mean (a) for each restricted CBI common share held by an
employee of the Company, termination of employment with the Company, and (b) for
each restricted Common Share held by an employee of CBI, termination of
employment with CBI.
SERVICES AGREEMENT
The Company and CBI will enter into a services agreement (the "Services
Agreement") upon consummation of this Offering, pursuant to which CBI will
continue to provide corporate support services to the Company through the
Distribution Date and the Company may provide similar services to CBI after the
Distribution Date, including treasury, accounting, tax, human resources
functions, food services, transportation services and insurance and employee
benefit program administration.
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The term of the Service Agreement shall begin on the Closing Date and
continue until a date that is six months after the Distribution Date unless
terminated earlier (i) by the mutual consent of the parties, (ii) by the
receiving party terminating any or all of the services that it is receiving upon
30 days, written notice to the providing party of such services, or (iii) by the
non-defaulting party if the other party is in material default under this
Agreement and fails to cure such default within the cure period. The charges for
the services described in the Services Agreement will be the cost actually
incurred by the providing party or such other charges as the parties may agree.
In the Services Agreement, CBI has agreed that, to the extent that CBI is
providing indemnification (through insurance or otherwise) to any "Covered
Individual" at any time prior to the Distribution Date for such individual's
acts and omissions in any capacity, CBI shall continue to provide such
indemnification, for any acts or omissions occurring prior to the Distribution
Date, through the last day of the five-year period commencing on the
Distribution Date. To the extent that such indemnification is being provided
through insurance, any premiums for such insurance payable after the
Distribution Date shall be shared equally by CBI and the Company. For purposes
of this paragraph, "Covered Individual" means an officer, director or employee
of CBI or a CBI affiliate (and, where appropriate, their spouses, estates,
heirs, legal representatives and assigns) (i) who is insured, in any capacity,
under CBI's Directors and Officers and Company Reimbursement Policy at any time
prior to the Distribution Date and (ii) who is an officer, director or employee
of the Company or a Company affiliate on the day immediately following the
Distribution Date. The above-stated CBI obligations survive the termination of
the Services Agreement.
The Services Agreement provides that, to the extent that at the
Distribution Date, the Cincinnati Bell Foundation has assets in excess of its
commitments, the parties shall cause such Foundation's trustees to contribute
half of such excess to a foundation established by the Company which qualifies
as a charitable entity under Section 501(c)(3) of the Internal Revenue Code. See
"Risk Factors -- Limited Relevance of Historical Financial Information."
TAX ALLOCATION AGREEMENT
The Company and CBI will enter into a Tax Separation and Allocation
Agreement (the "Tax Allocation Agreement"), pursuant to which the Company will
make a payment to CBI, or CBI will make a payment to the Company, as
appropriate, of an amount in respect of taxes shown as due attributable to the
operations of the Company on the consolidated federal income tax return and
combined or consolidated state income or franchise tax returns filed by CBI for
the period commencing on January 1, 1998 and ending on the date on which the
Company ceases to be a member of the CBI consolidated group. In addition, each
party has agreed to indemnify the other party and its subsidiaries for (i) any
liability for taxes arising from or attributable to any of the transactions that
are directly related to the Distribution failing to quality under Section 355 of
the Internal Revenue Code, but only if such failure (A) was caused by an act
that occurred after the Distribution in which such party participated or (B) was
otherwise attributable to certain representations and warranties contained in
the Tax Allocation Agreement failing to be true as of the date of the agreement,
(ii) any liability or damage resulting from a breach by such party of any
representation or covenant contained in the Tax Allocation Agreement, (iii) any
tax liability resulting from the Distribution and attributable to any action of
such party and (iv) all liabilities, costs, expenses (including attorneys' fees
and expenses), losses, damages, settlements or judgments arising out of or
incident to the imposition, assertion or assessment of any tax liability or
damage described in the preceding subclauses. The Tax Allocation Agreement also
sets forth procedures for dealing with audits, settlements, the payment of taxes
and tax deficiencies, the recovery of refunds and the filing of tax returns by
the parties.
CBIS/CBT CONTRACT
CBIS and CBT have a 10 year contract which remains in effect until November
30, 2006. CBIS is the primary provider of data processing and professional and
consulting services for CBT's billing and customer management systems. CBIS also
provides these services for selected operational support systems in the areas of
repair, provisioning, and miscellaneous operational functions. Data processing
services consists of operating and maintaining the computer programs comprising
the CBT systems. Professional and consulting services
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consists of developing, testing and implementing enhancements to the CBT systems
based on CBT requests. Rates for all data processing services and professional
and consulting services have been developed to comply with all regulatory
affiliate transaction rules. In 1997, CBT paid CBIS approximately $41 million
for those services, and CBIS paid CBT approximately $1 million for
telecommunications services.
MATRIXX/CBT RELATIONSHIP
MATRIXX provides several dedicated services to CBT. MATRIXX acts as CBT's
sales account management team to sell CBT's complete product line (including
Lucent Technologies telephone systems, AT&T network services and CBT local
services) to approximately 35,000 small business market customers. MATRIXX also
provides customer management services to support CBT's credit and collections
functions, satellite television operations, wireless communications operations
and Internet (FUSE(R)) marketing initiatives. MATRIXX functions as CBT's help
desk to support FUSE service start-up and on-going services. In 1997, CBT paid
MATRIXX approximately $8 million for these services, and MATRIXX paid CBT
approximately $.2 million for telecommunications services.
RELATIONSHIP WITH AT&T
AT&T is the Company's largest client and accounted for approximately 43% of
the Company's pro forma revenues in 1997. The Company's relationship with AT&T
is evidenced by a series of contracts between the Company and various operating
units within AT&T, which contracts have varying expiration dates, payment
provisions, termination provisions and other terms and conditions. The longest
of the contracts is the eight year agreement ending in 2006 which the Company
entered into with AT&T as part of the Transtech Acquisition. Negotiations for
these contracts occurred with each separate AT&T unit, and the Company believes
that each such unit controls the continuation of the contractual relationship
with the Company.
PRINCIPAL SHAREHOLDERS
Prior to the Offering, all of the outstanding Common Shares will be owned
by CBI. After the Offering, CBI will own approximately 88.3% of the Common
Shares then outstanding (86.8% if the Underwriters' over-allotment options is
exercised in full). Except as described above, the Company is not aware of any
person or group who will beneficially own more than 1% of the Common Shares
following the Offering. The address for CBI is 201 East Fourth Street,
Cincinnati, Ohio 45202.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 500,000,000 Common
Shares, without par value, and 5,000,000 preferred shares, without par value
(the "Preferred Shares"), of which 4,000,000 are voting preferred shares.
The following summary of certain provisions of the Company's capital stock
does not purport to be complete and is subject to, and qualified in its entirety
by, the provisions of the Articles, which is included as an exhibit to the
Registration Statement of which this Prospectus is a part, and by the provisions
of applicable law.
All Common Shares of the Company are entitled to participate equally in
such dividends as may be declared by the Board of Directors of the Company and
upon liquidation of the Company, subject to the prior rights of any Preferred
Shares. All Common Shares are fully paid and nonassessable.
Each shareholder has one vote for each Common Share registered in the
shareholder's name. The Board of Directors is divided into three classes as
nearly equal in size as the total number of directors constituting the Board
permits. The number of directors may be fixed or changed from time to time by
the shareholders or the directors.
The Board of Directors is authorized to issue the Preferred Shares from
time to time in series and to fix the dividend rate and dividend dates,
liquidation price, redemption rights and redemption prices, sinking fund
requirements, conversion rights, covenants, and certain other rights,
preferences and limitations. Each series of Preferred Shares would rank, with
respect to dividends and redemption and liquidation rights, senior to the Common
Shares. It is not possible to state the actual effect of the authorization of
any series of Preferred Shares upon the rights of holders of the Common Shares
until the Board of Directors determines the rights of the holders of one or more
series of Preferred Shares. However, such effects could include (a) restrictions
on dividends on the Common Shares, (b) dilution of the voting power of the
Common Shares to the extent that the voting Preferred Shares have voting rights
or (c) inability of the Common Shares to share in the Company's assets upon
liquidation until satisfaction of any liquidation preference granted to the
Preferred Shares.
No holders of shares of any class of the Company's capital stock have
pre-emptive rights nor the right to exercise cumulative voting in the election
of directors.
LIMITATIONS ON CHANGE IN CONTROL
The following provisions of the Articles and Ohio law might have the effect
of delaying, deferring or preventing a change in control of the Company and
would operate only with respect to an extraordinary corporate transaction, such
as a merger, reorganization, tender offer, sale or transfer of assets or
liquidation involving the Company and certain persons described below.
Ohio law provides that the approval of two-thirds of the voting power of a
corporation is required to effect mergers and similar transactions, to adopt
amendments to the articles of incorporation of a corporation and to take certain
other significant actions. Although under Ohio law the articles of incorporation
of a corporation may permit such actions to be taken by a vote that is less than
two-thirds (but not less than a majority), the Articles do not contain such a
provision. The two-thirds voting requirement tends to make approval of such
matters, including further amendments to the Articles, relatively difficult, and
a vote of the holders of in excess of one-third of the outstanding Common Shares
of the Company would be sufficient to prevent implementation of any of the
corporate actions mentioned above. In addition, Article Fifth classifies the
Board of Directors into three classes of directors with staggered terms of
office and the Regulations provide certain limitations on the removal from and
filling of vacancies in the office of director.
Article Sixth of the Articles requires that certain minimum price
requirements and procedural safeguards be observed by a person or entity after
he or it becomes the holder of 10% or more of the voting shares of the Company
if such person or entity seeks to effect mergers or certain other business
combinations ("Business Combinations") that could fundamentally change or
eliminate the interests of the remaining shareholders. If
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such requirements and procedures are not complied with, or if the proposed
Business Combination is not approved by at least a majority of the members of
the Board of Directors who are unaffiliated with the new controlling person or
entity (taking into account certain special quorum requirements), the proposed
Business Combination must be approved by the holders of 80% of the outstanding
Common Shares and outstanding voting Preferred Shares of the Company
(collectively, "Voting Shares"), voting together as a class, notwithstanding any
other class vote required by law or by the Articles. In the event the price
criteria and procedural requirements are met or the requisite approval by such
unaffiliated directors (taking into account certain special quorum requirements)
is given with respect to a particular Business Combination, the normal voting
requirements of Ohio law would apply.
In addition, Article Sixth of the Articles provides that the affirmative
vote of the holders of 80% of the Voting Shares, voting as a single class, shall
be required to amend or repeal, or adopt any provisions inconsistent with,
Article Sixth. An 80% vote is not required to amend or repeal, or adopt a
provision inconsistent with, Article Sixth if the Board of Directors has
recommended such amendment or other change and if, as of the record date for the
determination of shareholders entitled to vote thereon, no person is known by
the Board of Directors to be the beneficial owner of 10% or more of the Voting
Shares, in which event the affirmative vote of the holders of two-thirds of the
Voting Shares, voting as a single class, shall be required to amend or repeal,
or adopt a provision inconsistent with, Article Sixth.
Ohio, the state of the Company's incorporation, has enacted Ohio Revised
Code Section 1701.831, a "control share acquisition" statute, and Chapter 1704,
a "merger moratorium" statute. The control share acquisition statute basically
provides that any person acquiring shares of an "issuing public corporation"
(which definition the Company meets) in any of the following three ownership
ranges must seek and obtain shareholder approval of the acquisition transaction
that first puts such ownership within each such range: (i) more than 20% but
less than 33 1/3%; (ii) 33 1/3% but not more than 50%; and (iii) more than 50%.
The merger moratorium statute provides that, unless a corporation's
articles of incorporation or regulations otherwise provide, an "issuing public
corporation" (which definition the Company meets) may not engage in a "Chapter
1704 transaction" for three years following the date on which a person acquires
more than 10% of the voting power in the election of directors of the issuing
corporation, unless the "Chapter 1704 transaction" is approved by the
corporation's board of directors prior to such voting power acquisition. A
person who acquires such voting power is an "interested shareholder", and
"Chapter 1704 transactions" involve a broad range of transactions, including
mergers, consolidations, combination, liquidations, recapitalization and other
transactions between an "issuing public corporation" and an "interested
shareholder" if such transactions involve 5% of the assets or shares of the
"issuing public corporation" or 10% of its earning power. After the initial
three year moratorium, Chapter 1704 prohibits such transactions absent approval
by disinterested shareholders or the transaction meeting certain statutorily
defined fair price provisions.
Ohio has also enacted a "greenmailer disgorgement" statute which provides
that a person who announces a control bid must disgorge profits realized by that
person upon the sale of any equity securities within 18 months of the
announcement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Shares is The
Fifth Third Bank, Corporate Trust Services, 38 Fountain Square Plaza,
Cincinnati, Ohio 45236.
LISTING
The Common Shares have been approved for listing on the NYSE under the
symbol "CVG."
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SHARES ELIGIBLE FOR FUTURE SALE
The 18,000,000 Common Shares sold in the Offering (20,700,000 if the U.S.
Underwriters exercise their over-allotment option in full) will be freely
tradeable without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), except for any such shares which may be acquired by an
"affiliate" of the Company (an "Affiliate") as that term is defined in Rule 144
("Rule 144") promulgated under the Securities Act, which shares will remain
subject to the resale limitations of Rule 144.
The approximately 136,419,589 Common Shares that will continue to be held
by CBI after the offering constitute "restricted securities" within the meaning
of Rule 144, and will be eligible for sale by CBI in the open market after the
Offering, subject to certain contractual lockup provisions and the applicable
requirements of Rule 144, both of which are described below.
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" Common Shares for at least one year will be entitled to sell on the
open market in broker's transactions within any three month period a number of
shares that does not exceed the greater of (a) 1% of the then outstanding Common
Shares and (b) the average weekly trading volume in the Common Shares on the
open market during the four calendar weeks preceding such sale. Sales under Rule
144 are also subject to certain notice requirements and the availability of
current public information about the Company.
In the event that any person other than CBI who is deemed to be an
Affiliate purchases Common Shares pursuant to the Offering or acquires Common
Shares pursuant to an employee benefit plan of the Company, the shares held by
such person are required under Rule 144 to be sold in broker's transactions,
subject to the volume limitations described above. Shares properly sold in
reliance upon Rule 144 to persons who are not Affiliates are thereafter freely
tradable without restriction or registration under the Securities Act.
Sales of substantial amounts of the Common Shares in the open market, or
the availability of such shares for sale, could adversely affect prevailing
market prices. CBI has advised the Company that, subject to certain conditions,
CBI intends to distribute its ownership interest in the Company to CBI's
shareholders in late 1998. The shares to be distributed by CBI will be eligible
for immediate resale in the public market without restrictions by persons other
than Affiliates of the Company because, while no registration of such shares
will be made, holders who are not Affiliates will be able to sell their shares
without restriction pursuant to Section 4(1) of the Securities Act. Any
Affiliates would be subject to the restrictions of Rule 144 other than the one
year holding period requirement.
CBI, the Company, the directors, executive officers and certain other
shareholders of the Company have agreed, subject to certain exceptions, not to
offer, sell, contract to sell or otherwise dispose of any shares of Common
Shares, or any securities convertible into or exercisable or exchangeable for
shares of Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated. See "Underwriters."
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CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON SHARES
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Shares by a beneficial owner that, for United States federal income tax
purposes, is a non-resident alien individual, a foreign corporation, a foreign
partnership, a foreign estate or a foreign trust (a "non-U.S. holder"). This
discussion does not consider the specific facts and circumstances that may be
relevant to particular holders and does not address the treatment of non-U.S.
holders under the laws of any state, local or foreign taxing jurisdiction.
Further, the discussion is based on provisions of the Code, existing and
proposed Treasury regulations thereunder, and administrative and judicial
interpretations thereof, all as in effect on the date hereof and all of which
are subject to change on a possibly retroactive basis. Each prospective holder
is urged to consult a tax advisor with respect to the United States federal tax
consequences of acquiring, holding and disposing of Common Shares, as well as
any tax consequences that may arise under the laws of any state, local or
foreign taxing jurisdiction.
DIVIDENDS
At present, the Company does not intend to pay dividends on the Common
Shares. In the event that the Company does pay a dividend, such dividends paid
to a non-U.S. holder of Common Shares will be subject to withholding of United
States federal income tax at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty, unless the dividends are effectively
connected with the conduct by such non-U.S. holder of a trade or business within
the United States and, if a tax treaty applies, are attributable to a United
States permanent establishment of such holder. Such "effectively connected"
dividends generally are subject to tax at rates applicable to United States
residents, and provided the non-U.S. holder provides the Company with an
Internal Revenue Service Form 4224 (or applicable successor form), generally are
not subject to withholding. Any such effectively connected dividends received by
a non U.S. holder that is a corporation may also, under certain circumstances,
be subject to an additional "branch profits tax" at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty.
Under currently effective Treasury regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country (unless the payor has knowledge to the contrary) for purposes of the
withholding discussed above and, under the current interpretation of Treasury
regulations, for purposes of determining the applicability of a tax treaty rate.
Because, however, Treasury regulations released on October 6, 1997 (the "New
Regulations") and effective for payments made after December 31, 1999, abolish
this presumption, backup withholding at a rate of 31% generally will apply,
rather than withholding at the 30% or lower treaty rate, unless the non-U.S.
holder receiving the dividend satisfies applicable United States Internal
Revenue Service certification requirements. Certification and disclosure
requirements relating to the exemption from withholding under the effectively
connected income exemption discussed above are slightly modified under the New
Regulations with respect to payments made after December 31, 1999.
A non-U.S. holder of Common Shares that is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the United States Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON SHARES
A non-U.S. holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of Common Shares
except in the following circumstances: (1) the gain is effectively connected
with a trade or business conducted by the non-U.S. holder in the United States
(and is attributable to a permanent establishment maintained in the United
States by such non-U.S. holder if an applicable income tax treaty so requires as
a condition for such non-U.S. holder to be subject to United States taxation on
a net income basis in respect of gain from the sale or other disposition of the
Common Shares); (2) in the case of a non-U.S. holder who is an individual and
holds the Common Shares as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the sale and certain other
conditions are met; or (3) the Company is or has been a "United States real
property holding
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corporation" for United States federal income tax purposes and, assuming that
the Common Shares are "regularly traded on an established securities market" for
such purposes, the non-U.S. holder held, directly or indirectly at any time
during the five-year period ending on the date of disposition, more than 5% of
the Common Shares (and is not eligible for any treaty exemption). Effectively
connected gains realized by a corporate non-U.S. holder may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty. The
Company has not been, is not, and does not anticipate becoming a "United States
real property holding corporation" for federal income tax purposes.
FEDERAL ESTATE TAXES
Common Shares held by an individual who is a non-resident for United States
federal estate tax purposes at the time of death will be included in such
individual's gross estate for United States federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Internal Revenue Service and to
each non-U.S. holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends. These information reporting
requirements apply regardless of whether withholding is required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the non-U.S. holder
resides under the provisions of an applicable income tax treaty.
Under currently effective Treasury regulations, United States backup
withholding tax generally will not apply to dividends paid to non-U.S. holders
that are either subject to the 30% withholding discussed above or that are
subject to a reduced rate or withholding under an applicable tax treaty.
However, as discussed above, backup withholding of United States federal income
tax at a rate of 31% rather than the 30% or lower treaty rate discussed above
generally will apply to dividends paid after December 31, 1999 with respect to
Common Shares to holders that are not "exempt recipients" and that fail to
provide certain information (including the holder's United States taxpayer
identification number).
In general, United States information reporting and backup withholding
requirements will not apply to a payment made outside the United States of the
proceeds of a sale of Common Shares through an office outside the United States
of a non-United States broker. However, United States information reporting (but
not backup withholding) requirements will apply to a payment made outside the
United States of the proceeds of a sale of Common Shares through an office
outside the United States of a broker that is a United States person, a foreign
person that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, a "controlled foreign
corporation" for United States federal income tax purposes, or, effective after
December 31, 1999, through a foreign office of certain other persons, unless the
broker has documentary evidence in its records that the holder or beneficial
owner is a non-United States person or the holder or beneficial owner otherwise
establishes an exemption. Payment of the proceeds of the sale of Common Shares
to or through a United States office of a broker is currently subject to both
United States backup withholding and information reporting unless the holder
certifies as to its non-United States status under penalties of perjury or
otherwise establishes an exemption.
A non-United States holder generally may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below, for whom Morgan Stanley & Co. Incorporated and Smith
Barney Inc. are acting as U.S. Representatives, and the International
Underwriters named below, for whom Morgan Stanley & Co. International Limited
and Smith Barney Inc. are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective number of Common Shares set forth opposite the names
of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.........................
Smith Barney Inc. ........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................
BancAmerica Robertson Stephens............................
Bear, Stearns & Co. Inc. .................................
----------
Subtotal.................................................. 14,400,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited................
Smith Barney Inc. ........................................
Merrill Lynch International...............................
BancAmerica Robertson Stephens............................
Bear, Stearns International Limited ......................
----------
Subtotal.................................................. 3,600,000
----------
Total............................................. 18,000,000
==========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the Common Shares offered hereby are subject
to the approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all of the Common
Shares offered hereby (other than those covered by the U.S. Underwriters'
over-allotment option described below) if any such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Common Shares for the account of anyone other than a
United States or Canadian Person (as defined herein) and (ii) it has not offered
or sold, and will not offer or sell, directly or indirectly, any Common Shares
or distribute any prospectus relating to the Common Shares outside the United
States or Canada or to anyone other than a United States or Canadian Person.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Common Shares for the account of any
United States or Canadian Person and (ii) it has not offered or sold, and will
not offer or sell, directly or indirectly, any Common Shares or distribute any
prospectus relating to the Common Shares in the United States or Canada or to
any United States or Canadian Person. With respect to any Underwriter that is a
U.S. Underwriter and an International Underwriter, the foregoing representations
and agreements (i) made by it in its capacity as a U.S. Underwriter apply only
to it in its capacity as a U.S. Underwriter and (ii) made by it in its capacity
as an International Underwriter apply only to it in its capacity as an
International Underwriter. The foregoing limitations do not apply to
stabilization transactions or to certain other transactions specified in the
Agreement between U.S. and International Underwriters. As used herein, "United
States or Canadian Person" means any national or resident of the United States
or Canada, or any corporation, pension, profit-sharing or other trust or other
entity organized under the laws of the United States or Canada or of any
political subdivision thereof (other than a branch located outside the United
States and Canada of any United States or Canadian Person),
72
<PAGE> 74
and includes any United States or Canadian branch of a person who is otherwise
not a United States or Canadian Person.
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of Common Shares as may be mutually agreed. The per share price of
any Common Shares so sold shall be the public offering price set forth on the
cover page hereof, in United States dollars, less an amount not greater than the
per share amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Common Shares, directly or indirectly, in any province
or territory of Canada or to, or for the benefit of, any resident of any
province or territory of Canada in contravention of the securities laws thereof
and has represented that any offer or sale of Common Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus in
the province or territory of Canada in which such offer or sale is made. Each
U.S. Underwriter has further agreed to send to any dealer who purchases from it
any of the Common Shares a notice stating in substance that, by purchasing such
Common Shares, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any of such Common
Shares in any province or territory of Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer or sale of Common Shares in Canada
will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer or sale is
made, and that such dealer will deliver to any other dealer to whom it sells any
of such Common Shares a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Common Shares to the International Underwriters, will not offer or sell, any
Common Shares to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Common Shares in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it in
connection with the offering of the Common Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan, or
to or for the account of any resident thereof, any of the Common Shares acquired
in connection with the distribution contemplated hereby, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and Exchange
Law and otherwise in compliance with applicable provisions of Japanese law. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of the Common Shares a notice stating in substance that, by
purchasing such Common Shares, such dealer represents and agrees that it has not
offered or sold, and will not offer or sell, any of such Common Shares, directly
or indirectly, in Japan or to or for the account of any resident thereof except
for offers or sales to Japanese International Underwriters or dealers and except
pursuant to any exemption from the registration requirements of the Securities
and Exchange Law and otherwise in compliance with applicable provisions of
Japanese law, and that such dealer will send to any other dealer to whom it
sells any of such Common Shares a notice containing substantially the same
statement as is contained in this sentence.
The Underwriters initially propose to offer part of the Common Shares
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price that represents a concession not
in excess of $ a share under the public offering price. Any Underwriter may
allow, and
73
<PAGE> 75
such dealers may reallow, a concession not in excess of $ a share to other
Underwriters or to certain dealers. After the initial offering of the Common
Shares, the offering price and other selling terms may from time to time be
varied by the Representatives.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
2,700,000 additional Common Shares at the public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The U.S.
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the Common
Shares offered hereby. To the extent such option is exercised, each U.S.
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional Common Shares as the number
set forth next to such U.S. Underwriter's name in the preceding table bears to
the total number of Common Shares set forth next to the names of all U.S.
Underwriters in the preceding table.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of Common
Shares offered by them.
The Common Shares have been approved for listing on the NYSE under the
symbol "CVG". In order to meet the requirements for listing the Common Shares,
the Underwriters will undertake to sell lots of 100 or more shares to a minimum
of 2,000 beneficial owners.
Each of the Company and the directors, executive officers and certain other
shareholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of this Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer, lend or dispose of, directly or indirectly, any
Common Shares or any securities convertible into or exercisable or exchangeable
for Common Shares or (ii) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Common Shares, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Shares or such other
securities, in cash or otherwise. The restrictions described in this paragraph
do not apply to (x) the sale of Shares to the Underwriters, (y) the issuance by
the Company of Common Shares upon the exercise of an option or a warrant or the
conversion of a security outstanding on the date of this Prospectus of which the
Underwriters have been advised in writing or (z) transactions by any person
other than the Company relating to Common Shares or other securities acquired in
open market transactions after the completion of the offering of the Shares.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 1,000,000 Common Shares offered hereby
for directors, officers, employees, business associates and related persons of
the Company. The number of Common Shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby. All purchasers of the Common Shares reserved pursuant to this paragraph
who are also directors or senior officers of the Company will be required to
enter into agreements identical to those described in the immediately preceding
paragraph restricting the transferability of such shares for a period of 180
days after the date of this Prospectus.
In order to facilitate the offering of the Common Shares, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Shares. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Shares for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Shares, the Underwriters may bid for, and purchase, shares
of Common Shares in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Shares in the Offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Shares above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
74
<PAGE> 76
In the ordinary course of their respective businesses, certain of the
Underwriters and their respective affiliates have engaged in and may in the
future engage in commercial and investment banking transactions with the Company
and CBI.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price will be determined by negotiations
between the Company and the U.S. Representatives. Among the factors to be
considered in determining the initial public offering price will be the future
prospects of the Company and its industry in general, sales, earnings and
certain other financial operating information of the Company in recent periods,
and the price-earnings ratios, price-sales ratios, market prices of securities
and certain financial and operating information of companies engaged in
activities similar to those of the Company. The estimated initial public
offering price range set forth on the cover page of this Preliminary Prospectus
is subject to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Frost & Jacobs LLP, Cincinnati, Ohio and for the Underwriters by
Shearman & Sterling, New York, New York. Shearman & Sterling will rely on Frost
& Jacobs LLP as to matters under Ohio law.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996, and the
consolidated statements of income, shareowner's equity and cash flows for each
of the three years in the period ended December 31, 1997 of the Company and
Transtech and the schedule as of December 31, 1997, 1996 and 1995 included in
this Prospectus and the Registration Statement have been included herein in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the Common Shares offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. Certain items are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Shares, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract of
other document referred to are not necessarily complete, and in each instance,
if such contract or document is filed as an exhibit, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite
1300, New York, New York 10048, and copies of all or any part, the Registration
Statement may be obtained from such office upon the payment of fees prescribed
by the Commission. Such material may also be accessed electronically by means of
the Commission's home page on the Internet at http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing financial statements which will be audited by its independent
auditors, and such other periodic reports as the Company may determine to be
appropriate or as may be required by law.
75
<PAGE> 77
COMPANY AND TRANSTECH
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONVERGYS CORPORATION
AUDITED --
Report of Independent Accountants...................... F-2
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997..................... F-3
Consolidated Balance Sheets at December 31, 1996 and
1997.................................................. F-4
Consolidated Statements of Shareowner's Equity for the
years ended
December 31, 1995, 1996 and 1997..................... F-5
Consolidated Statements of Cash Flows for the years
ended
December 31, 1995, 1996 and 1997..................... F-6
Notes to Financial Statements.......................... F-7
UNAUDITED --
Condensed Consolidated Statements of Income and
Comprehensive Income for the
three months ended March 31, 1997 and 1998........... F-25
Condensed Consolidated Balance Sheets at December 31,
1997 and March 31, 1998............................... F-26
Condensed Consolidated Statements of Shareowner's
Equity for the three months ended March 31, 1997 and
1998.................................................. F-27
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1998........... F-28
Notes to Financial Statements.......................... F-29
AT&T SOLUTIONS CUSTOMER CARE (TRANSTECH)
AUDITED --
Report of Independent Accountants...................... F-34
Balance Sheets at December 31, 1997 and 1996........... F-35
Statements of Income for the years ended
December 31, 1997, 1996 and 1995..................... F-36
Statements of Shareowner's Investment for the years
ended
December 31, 1997, 1996 and 1995..................... F-37
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995..................... F-38
Notes to Financial Statements.......................... F-39
</TABLE>
F-1
<PAGE> 78
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowner of Convergys Corporation:
We have audited the accompanying consolidated balance sheets of Convergys
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareowner's equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Convergys
Corporation as of December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
May 18, 1998
F-2
<PAGE> 79
CONVERGYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
(MILLIONS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES.................................................... $644.7 $842.4 $987.5
Costs and expenses
Costs of products and services............................ 365.2 470.0 532.3
Selling, general and administrative expenses.............. 123.9 142.8 158.7
Research and development costs............................ 38.9 58.6 76.5
Depreciation and amortization............................. 45.9 51.8 61.0
Year 2000 programming costs............................... -- -- 9.9
Special charges........................................... 39.6 -- 35.0
------ ------ ------
Total costs and expenses............................... 613.5 723.2 873.4
------ ------ ------
OPERATING INCOME............................................ 31.2 119.2 114.1
Other income (expense), net................................. (4.4) 11.6 21.9
Interest expense............................................ 7.4 6.0 5.4
------ ------ ------
Income before income taxes.................................. 19.4 124.8 130.6
Income taxes................................................ 22.9 46.8 44.0
------ ------ ------
NET INCOME (LOSS)........................................... $ (3.5) $ 78.0 $ 86.6
====== ====== ======
Net income (loss) per common share:
Basic..................................................... $ $ $
====== ====== ======
Diluted................................................... $ $ $
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 80
CONVERGYS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1996 1997
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 2.3 $ 2.1
Receivables, net of allowances of $6.5 and $6.4........... 206.7 222.9
Deferred income tax benefits.............................. 8.1 13.7
Prepaid expenses and other current assets................. 17.7 27.1
------ ------
Total current assets................................... 234.8 265.8
Property and equipment, net................................. 123.0 130.0
Goodwill and other intangibles, net......................... 196.6 177.6
Investment in unconsolidated entities....................... 59.1 72.7
Deferred charges and other assets........................... 5.7 8.3
------ ------
Total assets...................................... $619.2 $654.4
====== ======
LIABILITIES AND SHAREOWNER'S EQUITY
CURRENT LIABILITIES
Debt maturing within one year............................. $ 8.4 $ 6.1
Intercompany debt payable to CBI.......................... 78.0 53.0
Payables and other current liabilities.................... 146.0 157.5
------ ------
Total current liabilities.............................. 232.4 216.6
Long-term debt.............................................. 8.3 1.2
Other long-term liabilities................................. 14.3 5.8
------ ------
Total liabilities...................................... 255.0 223.6
------ ------
Commitments and contingencies
SHAREOWNER'S EQUITY
Shareowner's net investment............................... 360.2 428.4
Currency translation adjustments.......................... 4.0 2.4
------ ------
Total shareowner's equity.............................. 364.2 430.8
------ ------
Total liabilities and shareowner's equity......... $619.2 $654.4
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 81
CONVERGYS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREOWNER'S EQUITY
<TABLE>
<CAPTION>
CURRENCY
SHAREOWNER'S TRANSLATION
TOTAL INVESTMENT ADJUSTMENTS
------ ------------ -----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1995................................. $283.8 $282.8 $ 1.0
Net loss................................................. (3.5) (3.5) --
Transfers from CBI, net.................................. 6.2 6.2 --
Currency translation adjustments......................... 3.4 -- 3.4
------ ------ -----
BALANCE AT DECEMBER 31, 1995............................... 289.9 285.5 4.4
Net income............................................... 78.0 78.0 --
Transfers to CBI, net.................................... (3.3) (3.3) --
Currency translation adjustments......................... (0.4) -- (0.4)
------ ------ -----
BALANCE AT DECEMBER 31, 1996............................... 364.2 360.2 4.0
Net income............................................... 86.6 86.6 --
Transfers to CBI, net.................................... (18.4) (18.4) --
Currency translation adjustments......................... (1.6) -- (1.6)
------ ------ -----
BALANCE AT DECEMBER 31, 1997............................... $430.8 $428.4 $ 2.4
====== ====== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 82
CONVERGYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------ ------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (3.5) $ 78.0 $ 86.6
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 45.9 51.8 61.0
Special charges........................................ 39.6 -- 35.0
Provision for loss on receivables...................... 7.0 1.0 4.2
Charges for acquired research and development.......... 7.5 5.0 --
Undistributed earnings of unconsolidated entities...... (5.6) (5.1) (2.1)
Other, net............................................. 4.4 (0.4) (1.7)
Change in assets and liabilities net of effects from
acquisitions and disposals:
Increase in receivables................................ (21.7) (44.3) (20.4)
Increase in other current assets....................... (3.3) (1.5) (9.3)
Increase (decrease) in accounts payable and accrued
liabilities.......................................... (17.9) 17.5 (22.8)
Increase in other current liabilities.................. -- 8.2 4.8
Decrease in deferred income taxes...................... (11.2) (0.7) (12.6)
Decrease in other assets and liabilities, net.......... 3.4 8.2 4.7
------ ------- ------
Net cash provided by operating activities.............. 44.6 117.7 127.4
------ ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- other............................. (26.6) (56.2) (60.9)
Acquisitions, net of cash acquired........................ (31.4) (62.4) (13.9)
------ ------- ------
Net cash used in investing activities..................... (58.0) (118.6) (74.8)
------ ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt................................ 21.6 -- --
Repayment of long-term debt............................... (2.4) (8.5) (9.4)
Change in intercompany debt payable to CBI................ (12.0) 15.0 (25.0)
Transfers from (to) CBI, net.............................. 6.2 (3.3) (18.4)
------ ------- ------
Net cash provided (used) in financing activities.......... 13.4 3.2 (52.8)
------ ------- ------
Net increase (decrease) in cash and cash equivalents........ -- 2.3 (0.2)
Cash and cash equivalents at beginning of year.............. -- -- 2.3
------ ------- ------
Cash and cash equivalents at end of year.................... $ -- $ 2.3 $ 2.1
====== ======= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 83
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
The Company is currently a wholly owned subsidiary of CBI. CBI's intention
is to contribute to the Company the outstanding common shares of CBIS, MATRIXX
and Cincinnati Bell Cellular Systems Inc. ("CBCS"). CBI also has announced its
intention to distribute to its shareholders within six months following the
Offering, subject to certain conditions, all of its interest in the Company
following the Offering.
Basis of Presentation
The consolidated financial statements reflect the results of operations,
financial position, changes in shareowner's equity and cash flows of the
businesses that will be transferred to the Company from CBI in the Separation
(the "Company Businesses") as if the Company were a separate entity for all
periods presented. The consolidated financial statements have been prepared
using the historical basis in the assets and liabilities and historical results
of operations related to the Company Businesses. Changes in shareowner's equity
represent the net income of the Company, currency translation adjustments
related to the Company's international operations and net cash transfers to or
from CBI. Additionally, the financial statements include the allocation of
certain expenses relating to the Company from CBI principally for corporate
overhead items such as executive salaries, fees for accounting, tax, treasury,
risk management and audit services and certain insurance coverage obtained on a
combined basis. These allocated expenses are included in selling, general and
administrative expenses in the accompanying financial statements. Management
believes these allocations are reasonable. All material intercompany
transactions and balances between the Company and its subsidiaries have been
eliminated.
The liabilities of the Company include outstanding direct third-party
indebtedness and the amounts of debt and related interest expense determined
based upon the capital structure that is anticipated at the Distribution (See
Note 6 to the Financial Statements). Interest expense shown in the consolidated
financial statements reflects the interest expense associated with the allocated
borrowings for each period presented using the weighted average interest rate of
CBI and the interest rate associated with any direct outstanding indebtedness of
the Company and its subsidiaries. General corporate overhead related to CBI's
corporate headquarters and common support divisions has been allocated to the
Company based on the ratio of the Company's revenues, assets and payroll to
CBI's revenues, assets and payroll. Management believes these allocations are
reasonable. However, the costs of these services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the Company
had performed these functions as a stand-alone entity. Subsequent to the
Distribution, the Company will perform these functions using its own resources
or purchased services and will be responsible for the costs and expenses
associated with the management of a public corporation. Management believes the
allocation of these expenses included herein is reasonable. Management has not
determined an estimate of the Company's expenses for these items had it been an
unaffiliated stand-alone entity; however, management expects that the Company's
expenses for these items may be slightly higher in future periods. Additionally,
income taxes are presented as if calculated on a separate tax return basis.
The Company's financial statements include the costs experienced by the CBI
pension and postretirement benefit plans for employees for whom the Company will
assume responsibility.
The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in shareowner's
equity and cash flows of the Company in the future or what they would have been
had it been a separate, stand-alone entity during the periods presented.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per Common Share will be included based upon the number of
shares outstanding immediately prior to the Offering.
F-7
<PAGE> 84
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTING POLICIES
CONSOLIDATION -- The consolidated financial statements include the accounts
of the Company Businesses. These businesses will be wholly owned subsidiaries of
the Company. The Company operates in two principal industry segments. CBIS
provides information systems and billing services for the communications and
broadband services industries. MATRIXX, provides a full range of outsourced
marketing and customer management solutions to large corporations. CBCS owns a
45% limited partnership interest in the Cellular Partnership, a cellular
communications services provider in southwestern and central Ohio and northern
Kentucky. The partnership interest is accounted for under the equity method with
earnings included in other income (expense), net. Summarized financial
information for the partnership is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Current assets........................................... $ 24.8 $ 35.7 $ 42.6
Non-current assets....................................... 105.2 103.1 107.9
Current liabilities...................................... 18.2 17.7 24.3
Non-current liabilities.................................. 2.2 2.1 2.0
Revenues................................................. $121.7 $165.9 $189.7
Operating income......................................... 19.5 23.8 37.8
Net income............................................... 19.5 23.9 33.2
</TABLE>
USE OF ESTIMATES -- Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported. Actual results could differ
from those estimates.
CASH EQUIVALENTS -- Cash equivalents consist of short-term, highly liquid
investments with original maturities of three months or less.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost.
Purchased software used in the Company's business is capitalized at cost. The
Company's provision for depreciation is based on the straight-line method over
the estimated useful life of the assets. Buildings are depreciated over a
thirty-year life, software over a three-to-five year life and equipment
generally over a five-year life. For property and equipment retired or sold, the
gain or loss is recognized in other income.
SOFTWARE DEVELOPMENT COSTS -- Research and development expenditures are
charged to expense as incurred. The development costs of software to be marketed
are charged to expense until technological feasibility is established. After
that time, the remaining software development costs are capitalized and recorded
in property, plant and equipment. Amortization of the capitalized amounts is
computed on a product-by-product basis using the greater of the ratio that
current gross revenues for a product bears to the total current and anticipated
future gross revenues for that product or the straight-line method over the
remaining estimated economic life of the product, generally not exceeding four
years. At December 31, 1996, the carrying value of capitalized software to be
marketed was $9.5 million. This amount was fully amortized at December 31, 1997.
Year 2000 programming costs are expensed as incurred.
GOODWILL AND OTHER INTANGIBLES -- Goodwill resulting from the purchase of
businesses and other intangibles are recorded at cost and amortized on a
straight-line basis over lives ranging from 5 to 40 years. Goodwill and other
intangibles are evaluated periodically if events or circumstances indicate a
possible inability to recover their carrying amount. Such evaluation is based on
various analyses, including cash flow and profitability projections. If future
expected undiscounted cash flows are insufficient to recover the carrying amount
of the asset, then an impairment loss is recognized based upon the excess of the
carrying value of the asset over the anticipated cash flows on a discounted
basis.
F-8
<PAGE> 85
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION -- CBIS' revenues primarily consist of data processing
and professional consulting revenues which are recognized as services are
performed. On certain long-term communications systems development contracts,
the percentage of completion method is used to recognize revenues, with progress
towards completion measured on a cost-to-cost basis. Because the percentage of
completion method requires estimates of costs to complete contracts, it is
possible that estimated costs to complete contracts will be revised in the
future. Revenues from software maintenance agreements are deferred and are
recognized over the maintenance period. Software licensing revenues are
recognized when delivery and client acceptance of the software occurs if the
Company does not have to provide additional significant service under the
contract and collectability is probable. The effect of contract revisions are
recorded in the period the changes become known. All other revenues are
recognized when the services are performed.
INCOME TAXES -- Historically, the Company's operations have been included
in the consolidated income tax returns filed by CBI. Income tax expense in the
Company's consolidated financial statements has been calculated on a separate
tax return basis. The provision for income taxes consists of an amount for taxes
currently payable and a provision for tax consequences deferred to future
periods using the liability method.
STOCK-BASED COMPENSATION -- Compensation cost associated with CBI stock
options issued to Company employees is measured under the intrinsic value
method. Pro forma disclosures of net income and earnings per share are presented
as if the fair value method had been applied.
CURRENCY TRANSLATION -- Assets and liabilities of foreign operations, where
the functional currency is the local currency, are translated to U.S. dollars at
year-end exchange rates. Translation adjustments are accumulated and reflected
as adjustments to shareowner's equity. Revenue and expenses are translated at
average exchange rates for the year.
FINANCIAL INSTRUMENTS -- In the normal course of business, the Company may
employ a small number of financial instruments to manage its exposure to
fluctuations in interest rates and foreign currency exchange rates. The Company
does not hold or issue derivative financial instruments for trading purposes.
3. SPECIAL ITEMS
SPECIAL CHARGES -- BUSINESS RESTRUCTURINGS
In the fourth quarter of 1997, a restructuring plan for MATRIXX was
approved. The restructuring plan will result in the consolidation of certain
MATRIXX operating divisions and facilities. MATRIXX recorded a special charge of
$35.0 million which reduced net income by $23.0 million. The charge included
$9.5 million in lease termination costs, $7.5 million in severance pay under
existing severance plans, $7.6 million in non-cash goodwill writedowns
associated with operations to be restructured, $6.3 million in non-cash property
and equipment writedowns related to facilities to be closed and $4.1 million in
other restructuring costs.
During 1997, cash payments applied to the restructuring liability were $1.4
million, principally for severance pay. Also during 1997, $8.7 million in
non-cash items were charged against the reserve, which included a $7.6 million
writedown for goodwill. The accrued restructuring reserve liability at December
31, 1997 was $24.9 million, which is primarily for lease termination costs,
severance pay and additional non-cash writedowns. Remaining cash outflows under
the plan are estimated to be $17.3 million and management expects the
restructuring plan activities to be substantially completed by December 31,
1998.
In December 1993, CBIS announced a plan to dispose of certain lines of
business and to restructure the remainder of its operations. At December 31,
1997, 1996 and 1995, the balance of the 1993 CBIS restructuring and disposal
reserve was $1.1 million, $2.6 million and $6.3 million, respectively. Charges
for discontinued products and contingencies related to the business that were
sold under the plan reduced the reserve by $1.5 million, $3.7 million and $4.8
million during 1997, 1996 and 1995, respectively.
F-9
<PAGE> 86
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SPECIAL CHARGE -- GOODWILL IMPAIRMENT
In December 1995, the Company recognized an impairment loss of $39.6
million resulting from the writedown of goodwill related to MATRIXX's operations
in France. The Company determined that the estimated undiscounted cash flows of
the operations were less than the carrying value of the related goodwill.
OTHER NON-RECURRING ITEMS
In 1996, costs and expenses include $5.0 million of in-process research and
development costs which were expensed in connection with acquisitions by CBIS
and MATRIXX. This reduced net income by $3.1 million.
In 1995, costs and expenses include $7.5 million of in-process research and
development costs which were expensed in connection with CBIS acquisitions. This
reduced net income by $4.6 million.
In 1995, other income (expense), net includes a $13.3 million loss,
resulting from the 1995 termination of an interest rate and currency swap
agreement, which was used to hedge MATRIXX's investment in its operations in
France. The charge reduced net income by $8.5 million.
4. INCOME TAXES
The Company's provision for income taxes, calculated on a separate tax
return basis, consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
----- ----- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Current:
Federal.................................................. $22.4 $40.5 $ 46.0
State and local.......................................... 3.3 6.5 11.0
----- ----- ------
Total current......................................... 25.7 47.0 57.0
Deferred................................................... (2.8) (0.2) (13.0)
----- ----- ------
Total...................................................... $22.9 $46.8 $ 44.0
===== ===== ======
</TABLE>
F-10
<PAGE> 87
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1996 1997
-------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Deferred tax asset:
Restructuring charges..................................... $ 0.9 $ 11.1
Loss carryforwards........................................ 26.0 26.0
Other..................................................... 12.8 9.8
------ ------
39.7 46.9
Valuation allowance....................................... (21.0) (21.0)
------ ------
Total deferred tax asset.................................. 18.7 25.9
------ ------
Deferred tax liability:
Depreciation and amortization............................. 9.6 4.6
Other..................................................... 1.5 1.1
------ ------
Total deferred tax liability.............................. 11.1 5.7
------ ------
Net deferred tax asset.................................... $ 7.6 $ 20.2
====== ======
</TABLE>
The following is a reconciliation of the statutory Federal income tax rate
with the effective tax rate for each year:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
U.S. Federal statutory rate................................. 35.0% 35.0% 35.0%
Amortization and writedown of intangible assets............. 79.3 1.2 2.4
State and local income taxes, net of federal income tax
benefit................................................... 9.8 3.2 4.3
Research tax credits........................................ (10.2) (1.5) (10.4)
Taxes related to prior years................................ 3.8 -- 2.1
Other differences........................................... 0.3 (0.4) 0.3
----- ----- -----
Effective rate.............................................. 118.0% 37.5% 33.7%
===== ===== =====
</TABLE>
The 1997 resolution of CBI's federal tax return audits for 1989 through
1994, which included the IRS's consideration of refund claims related to the
research and experimentation credit in those return years, resulted in the
recognition of a significant amount of such credits in 1997.
The writedown of non-deductible goodwill resulted in the Company's unusual
effective tax rate in 1995. The 1995 effective tax rate excluding special items
was 39.2%.
The Company had U.S. capital loss carryforwards at both December 31, 1997
and 1996 of approximately $62.0 million. Utilization of these capital losses is
dependent upon the generation of future capital gains with the carryforwards
expiring December 31, 1999 and, accordingly, a valuation allowance has been
established for the related deferred tax asset.
F-11
<PAGE> 88
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles, net of accumulated amortization, consist of
the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1996 1997
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Balance -- beginning of year................................ $163.9 $196.6
Additions................................................... 43.4 1.1
Writedown................................................... -- (7.6)
Amortization................................................ (10.3) (12.5)
Other....................................................... (0.4) --
------ ------
Balance -- end of year...................................... $196.6 $177.6
====== ======
Accumulated amortization -- end of year..................... $ 91.3 $101.0
====== ======
</TABLE>
Additions to goodwill and other intangibles were the result of business
acquisitions accounted for using the purchase method of accounting.
The 1997 restructuring plan for MATRIXX included significant changes to the
operations of two divisions which had previously been acquired. The Company has
determined that the estimated undiscounted operating cash flows of these two
restructured businesses over the expected life of the businesses' long-lived
assets will be less than the carrying value of these assets. As a consequence,
the Company recognized a non-cash goodwill impairment loss of $7.6 million as
part of the 1997 MATRIXX restructuring charge.
6. DEBT
As discussed in Note 1, the Company's consolidated financial statements
include an allocation of CBI's consolidated debt and the related interest
expense. The allocation was based on the capital structure of the Company
anticipated at the date of the Distribution. At or before that date, the Company
will repay its indebtedness to CBI. An allocation methodology was used to
reflect the capital structure through each historic period presented based on
cash flows for those periods adjusted for interest expense.
Amounts shown as intercompany debt payable to CBI were $53.0 million and
$78.0 million at December 31, 1997 and 1996, respectively. Such amounts were
classified as short-term given the Company's plans to repay the amount to CBI at
or before the Distribution.
Interest expense of $5.4 million, $6.0 million and $7.4 million for the
years ended December 31, 1997, 1996 and 1995, respectively, was determined based
on the weighted average interest rate for CBI short-term and long-term debt of
7.2%, 7.0% and 9.4% for each of the respective years and the interest rate of
the direct indebtedness of the Company and its subsidiaries. The Company
believes these allocations are reasonable estimates of the cost of financing the
Company's assets and operations in the past. However, the Company may not be
able to obtain financing with interest rates as favorable as those enjoyed by
CBI, with the result that the Company's cost of capital will be higher than that
reflected in its historical consolidated financial statements.
The Company and its subsidiaries also had outstanding direct indebtedness,
principally capital leases, of $7.3 million and $16.7 million at December 31,
1997 and 1996, respectively. The current portion of this debt outstanding at
December 31, 1997 and 1996, was $6.1 million and $8.4 million, respectively.
F-12
<PAGE> 89
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RETIREMENT PLANS
PENSIONS
Certain Company employees participate in three noncontributory CBI defined
benefit pension plans: one for eligible management employees, one for
nonmanagement employees and one supplementary, nonqualified, unfunded plan for
certain senior managers. The pension benefit formula for the management plan is
a cash balance plan where the pension benefits are determined by a combination
of compensation based credits and annual guaranteed interest credits. The
nonmanagement pension is also a cash balance plan with benefits that are
determined by a combination of service and job classification based credits and
annual interest credits. Benefits for the supplementary plan are based on years
of service and eligible pay.
Funding of the CBI management and nonmanagement plans has been achieved
through contributions made by CBI to an irrevocable trust fund. The
contributions have been determined using the aggregate cost method.
CBI uses the projected unit credit cost method for determining pension cost
for financial reporting purposes. The accompanying financial statements of the
Company reflect expenses of $1.8 million, $1.9 million and $1.0 million in 1997,
1996 and 1995, respectively, related to the Company employees that participate
in the CBI pension plans.
Immediately following the Distribution, the Company will establish separate
defined benefit plans for certain eligible employees of the Company. Pension
assets will be transferred from the CBI pension trusts to the Company's plans.
The amount of the transfer has not been determined at this time.
The following information relates to the entire CBI non-contributory
defined benefit plans. The Company's share of the amounts shown below for
pension cost, actuarial present value of the accumulated plan benefit
obligation, plan assets at fair value and prepaid (accrued) pension expense has
not been determined at this time.
CBI pension cost includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Service cost (benefits earned during the period)...... $ 6.9 $ 7.2 $ 8.5
Interest cost on projected benefit obligation......... 48.9 35.3 37.6
Actual return on plan assets.......................... (185.6) (147.1) (108.1)
Amortization and deferrals -- net..................... 131.5 112.6 64.3
Special termination benefits.......................... 58.8 -- --
Curtailment loss...................................... 4.9 -- --
Settlement gains...................................... (5.9) (27.4) (21.0)
------- ------- -------
Pension cost (income)................................. $ 59.5 $ (19.4) $ (18.7)
======= ======= =======
</TABLE>
F-13
<PAGE> 90
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the CBI pension plans' funded status:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation
including vested benefits of $518.8 million and $461.5
million, respectively..................................... $ 549.9 $ 495.6
------- -------
Plan assets at fair value (primarily listed stocks, bonds
and real estate, including $43.0 million and $43.2
million, respectively, in common shares of CBI)........... $ 698.6 $ 700.0
Actuarial present value of projected benefit obligation..... (587.3) (514.9)
------- -------
Plan assets over projected benefit obligation............... 111.3 185.1
Unrecognized prior service cost............................. 21.9 23.8
Unrecognized transition asset............................... (25.8) (18.7)
Unrecognized net gain....................................... (114.6) (162.7)
Recognition of minimum liability............................ (6.7) (6.8)
------- -------
Prepaid (accrued) pension expense........................... $ (13.9) $ 20.7
======= =======
</TABLE>
CBI used the following rates in determining the actuarial present value of
the projected benefit obligation and pension cost for the three CBI pension
plans:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate -- projected benefit obligation.............. 7.00% 7.25% 7.00%
Future compensation growth rate............................ 4.00% 4.00% 4.00%
Expected long-term rate of return on plan assets........... 8.25% 8.25% 8.25%
</TABLE>
SAVINGS PLANS
The Company sponsors defined contribution plans covering substantially all
employees. The Company's contributions to the plans are based on matching a
portion of the employee contributions or on a percentage of employee earnings or
net income for the year. Total Company contributions to the defined contribution
plans were $5.8 million, $6.2 million and $7.0 million for 1997, 1996 and 1995,
respectively.
8. EMPLOYEE POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain Company employees participate in CBI plans offering health care and
group life insurance benefits for participants that retire with a pension
benefit under the CBI pension plans. CBI funds its group life insurance benefits
through Retirement Funding Accounts (RFAs) and funds health care benefits using
Voluntary Employee Benefit Association (VEBA) trusts. It is CBI's practice to
fund amounts as deemed appropriate from time to time. Contributions are subject
to IRS limitations developed using the aggregate cost method. The associated
plan assets are primarily equity securities and fixed income investments.
Immediately following the Distribution, the Company will establish separate
postretirement health and life insurance plans for certain eligible employees.
The Company recorded postretirement benefit expense of $1.8 million, $1.6
million and $1.1 million in 1997, 1996 and 1995, respectively, related to the
Company employees that participate in the CBI postretirement benefit plans.
The following information relates to the CBI postretirement health care and
life insurance benefit plans in their entirety. The Company's share of the
amounts shown below for postretirement benefit cost,
F-14
<PAGE> 91
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
accumulated postretirement benefit obligation, plan assets at fair value and
accrued postretirement benefit liability has not been determined at this time.
The components of postretirement benefit cost for CBI are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Service cost (benefits earned during the period)............ $ 1.6 $ 1.8 $ 2.1
Interest cost on accumulated postretirement benefit
obligation................................................ 15.2 15.6 16.1
Actual return on plan assets................................ (4.7) (5.7) (7.4)
Amortization and deferrals -- net........................... 5.5 5.3 5.3
Curtailment loss............................................ 53.8 -- --
----- ----- -----
Postretirement benefit cost................................. $71.4 $17.0 $16.1
===== ===== =====
</TABLE>
The aggregate funded status of the CBI plans is:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1996 1997
------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents..................................... $191.6 $ 199.0
Fully eligible active participants.......................... 6.6 6.5
Other active participants................................... 29.1 31.2
------ -------
227.3 236.7
Plan assets at fair value................................... (95.1) (116.8)
------ -------
Accumulated postretirement benefit obligation in excess of
plan assets............................................... 132.2 119.9
Unrecognized prior service cost............................. (3.3) (3.1)
Unrecognized transition obligation.......................... (82.4) (77.3)
Unrecognized net gain....................................... 5.2 15.3
------ -------
Accrued postretirement benefit liability.................... $ 51.7 $ 54.8
====== =======
</TABLE>
The transition obligation is being amortized by CBI over twenty years.
CBI used the following rates in determining the actuarial present value of
the accumulated postretirement benefit obligation (APBO) and postretirement
benefit costs:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate -- APBO...................................... 7.00% 7.25% 7.00%
Expected long-term rate of return for VEBA assets.......... 8.25% 8.25% 8.25%
Expected long-term rate of return for RFA assets........... 8.00% 8.00% 8.00%
</TABLE>
The assumed health care cost trend rate used to measure the CBI
postretirement health benefit obligation at December 31, 1997, was 5.8% and is
assumed to decrease gradually to 4.3% by the year 2005. A one percentage point
increase in the assumed health care cost trend rate would have increased the
aggregate of the service and interest cost components of the 1997 CBI
postretirement health benefits by approximately $.9 million, and would increase
the CBI accumulated postretirement benefit obligation as of December 31, 1997,
by approximately $10.5 million.
F-15
<PAGE> 92
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which an estimate is practicable.
Cash and cash equivalents and short-term debt -- the carrying amount
approximates fair value because of the short-term maturity of these instruments.
Debt -- the carrying value of the intercompany debt payable to CBI
approximates the fair value of such debt, as the interest rate on the debt
fluctuates with the rate on CBI's commercial paper borrowings.
Foreign exchange risk management -- The foreign currency risk of the
Company has historically been managed by CBI on a centralized basis. It has been
CBI's policy to enter into foreign currency transactions to the extent
considered necessary to meet its objectives. CBI has not entered into foreign
currency transactions for speculative purposes. Generally, foreign currency
instruments and forwards are valued relative to the period-ending spot rate.
Gains and losses applicable to those instruments are recorded to income
currently with the exception of amounts related to foreign currency instruments
that have been designated as a hedge of a net investment in a foreign
subsidiary. These hedge results are excluded from income and recorded as
adjustments to shareowner equity until the related subsidiary is sold or
liquidated. The interest elements of these foreign instruments are recognized to
income ratably over the life of the contract. The interest rate differential to
be paid or received on interest rate swap agreements and related foreign
currency transactions gains and losses are accrued as interest rates change and
are recognized as an adjustment to interest expense.
In December 1995, CBI terminated an interest rate and currency swap
agreement that was entered into in 1990 to hedge MATRIXX's investment in its
operations in France. The agreement effectively converted $41.7 million of CBI's
short-term variable rate borrowings to long-term French franc
fixed-interest-rate debt. While the swap was in place, currency gains and losses
were reflected in shareowner's equity. The Company recorded a charge of $13.3
million in other income (expense), net in 1995 related to the termination.
10. STOCK-BASED COMPENSATION PLANS
CBI has two plans which allow for the granting of CBI stock options and
other CBI stock-based awards to officers, directors and certain key employees of
CBI, including those of the Company. The options are granted at no less than
market value of the stock at the grant date. CBI granted options to purchase
952,000, 1,039,000 and 1,153,000 shares of CBI stock to employees of the Company
in 1997, 1996 and 1995, respectively. Generally, stock options have a ten-year
term and vest within three years of grant. There were no CBI stock appreciation
rights granted or outstanding during the three-year period ended December 31,
1997.
The Company follows the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
All share prices herein are for CBI shares. If the Company had elected to
recognize compensation cost for the issuance of CBI options to Company employees
(and for an allocation of the options issued to CBI employees who provide
administrative services to the Company) based on the fair value
F-16
<PAGE> 93
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
at the grant dates for awards under those plans consistent with the method
prescribed by SFAS No. 123, net income and earnings per share would have been
impacted as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
-------- --------
(MILLIONS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net income
As reported............................................... $ 78.0 $ 86.6
Pro forma compensation expense, net of tax benefit........ (1.7) (3.8)
------ ------
Pro forma................................................. $ 76.3 $ 82.8
====== ======
Diluted earnings per share
As reported............................................... $ $
Pro forma................................................. $ $
</TABLE>
The pro forma effect on net income for 1997 and 1996 is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.
The weighted average fair value at the date of grant for the CBI options
granted to Company employees during 1997, 1996 and 1995 were $9.64, $4.60 and
$1.79, respectively, and were estimated using the Black-Scholes option pricing
model. The following weighted average assumptions were used to value the CBI
options -- expected dividend yield: 1.8% in 1997 and 3.5% in 1996; expected
volatility: 29.9% in 1997 and 29.2% in 1996; risk-free interest rate: 6.2% in
1997 and 5.5% in 1996; and, an expected holding period of 4 years in both 1997
and 1996.
Presented below is a summary of the status of the outstanding CBI stock
options issued to the Company's employees and the related transactions for the
years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning
of year.............. 2,245 2,406 2,564
Granted................ 1,153 $ 9.40 1,039 $20.20 956 $30.01
Exercised.............. (544) $ 9.31 (716) $ 9.45 (573) $10.08
Cancelled.............. (448) $11.50 (491) $13.76 (119) $23.90
Transfers from other
CBI companies........ -- 326 $13.02 --
----- ----- -----
Outstanding -- end of
year................. 2,406 $ 9.63 2,564 $13.14 2,828 $17.16
===== ===== =====
Options
exercisable -- end of
year................. 1,205 $ 9.67 1,046 $ 9.89 1,264 $10.82
===== ===== =====
</TABLE>
F-17
<PAGE> 94
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarized the status of the outstanding CBI stock
options outstanding and exercisable at December 31, 1997 that are held by
employees of the Company:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------ ------ ---------------- -------------- ------ --------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$6.00 -- $12.16........ 1,332 5.4 $ 9.35 1,062 $ 9.35
$12.18 -- $24.06....... 624 7.8 $16.73 164 $16.47
$24.19 -- $32.31....... 872 9.0 $29.50 38 $26.76
----- -----
2,828 1,264
===== =====
</TABLE>
11. LEASE COMMITMENTS
The Company leases certain facilities and equipment used in its operations
under operating leases. Total rental expense was approximately $94.8 million,
$76.6 million and $60.8 million in 1997, 1996 and 1995, respectively.
At December 31, 1997, the total minimum rental commitments under
noncancelable leases are as follows:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
---------------------
<S> <C>
1998....................................... $ 82.8
1999....................................... 61.0
2000....................................... 41.4
2001....................................... 20.1
2002....................................... 12.7
Thereafter................................. 48.2
------
Total............................ $266.2
======
</TABLE>
F-18
<PAGE> 95
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
All adjustments necessary for a fair statement of income for each period
have been included.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Revenues............................. $243.4 $243.2 $238.5 $262.4 $987.5
Operating income..................... $ 37.2 $ 38.1 $ 34.5 $ 4.3 $114.1
Net income........................... $ 26.8 $ 28.2 $ 26.3 $ 5.3 $ 86.6
Earnings per share:
Basic..............................
Diluted............................
1996
Revenues............................. $184.2 $193.7 $219.0 $245.5 $842.4
Operating income..................... $ 27.1 $ 28.5 $ 30.1 $ 33.5 $119.2
Net income........................... $ 17.0 $ 19.1 $ 20.5 $ 21.4 $ 78.0
Earnings per share:
Basic..............................
Diluted............................
</TABLE>
In the fourth quarter of 1997, MATRIXX recorded a charge for restructuring
of its operations. The restructuring charge reduced operating income by $35.0
million and net income by $23.0 million. In the fourth quarter of 1996,
expensing of acquired research and development costs decreased operating income
by $3.0 million and net income by $1.8 million. In the third quarter of 1996,
expensing of acquired in-process research and development costs decreased
operating income by $2.0 million and net income by $1.3 million.
F-19
<PAGE> 96
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. ADDITIONAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1996 1997
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
BALANCE SHEET
RECEIVABLES:
Billed.................................................... $123.0 $130.4
Unbilled.................................................. 86.3 93.6
Other..................................................... 3.9 5.3
------ ------
Total.................................................. 213.2 229.3
Less allowances........................................... 6.5 6.4
------ ------
Total receivables...................................... $206.7 $222.9
====== ======
PROPERTY AND EQUIPMENT, NET:
Buildings................................................. $ 7.2 $ 7.0
Leasehold improvements.................................... 29.4 38.5
Equipment................................................. 155.1 175.3
Software.................................................. 98.8 108.7
Construction in progress and other........................ 7.0 11.5
------ ------
Total property and equipment........................... 297.5 341.0
Less: accumulated depreciation............................ 174.5 211.0
------ ------
Property and equipment, net............................ $123.0 $130.0
====== ======
PAYABLES AND OTHER CURRENT LIABILITIES:
Accounts payable.......................................... $ 34.6 $ 42.5
Accrued expenses.......................................... 84.0 62.9
Accrued taxes............................................. 9.3 16.9
Restructuring............................................. 2.6 26.0
Advance billing and customers' deposits................... 15.5 9.2
------ ------
Total.................................................. $146.0 $157.5
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
STATEMENT OF CASH FLOWS
CASH PAID FOR:
Interest.................................................. $ 7.4 $ 6.0 $ 5.4
Income taxes (net of refunds)............................. $39.0 $38.4 $47.9
</TABLE>
14. TRANSACTIONS WITH CBI
In 1997, 1996 and 1995, the Company had $49.6 million, $45.0 million, and
$41.6 million, respectively, in revenues resulting from information systems and
billing services and customer management solutions provided to CBI and its
subsidiaries. At December 31, 1997 and 1996, the related receivables amounted to
$5.3 million and $4.4 million, respectively.
CBI has allocated general corporate overhead expenses amounting to $7.7
million, $6.7 million and $6.1 million in 1997, 1996 and 1995, respectively. The
allocation of general corporate overhead expenses to the
F-20
<PAGE> 97
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company by CBI has been based on the ratio of the Company's revenues, assets and
payroll to CBI's revenue assets and payroll. Additionally, the Company incurred
expenses for communications and other services provided by CBI and its
subsidiaries of $18.6 million, $6.2 million and $14.9 million in 1997, 1996 and
1995, respectively. Amounts payable to CBI and its subsidiaries were $1.6
million and $0.7 million at December 31, 1997 and 1996, respectively.
15. INDUSTRY SEGMENT AND GEOGRAPHIC OPERATIONS
Industry Segment Information
The Company operates in two industry segments. CBIS is principally engaged
in providing information systems and billing services to the communications and
broadband services industries. MATRIXX provides a full range of customer
management solutions to large corporations.
F-21
<PAGE> 98
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's business segment information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Revenues
CBIS................................................... $373.9 $479.8 $548.0
MATRIXX................................................ 271.1 367.1 447.6
Intersegment........................................... (0.3) (4.5) (8.1)
------ ------ ------
Total............................................... $644.7 $842.4 $987.5
====== ====== ======
Intersegment revenues
CBIS................................................... $ 0.2 $ 4.4 $ 7.9
MATRIXX................................................ 0.1 0.1 0.2
------ ------ ------
Total............................................... $ 0.3 $ 4.5 $ 8.1
====== ====== ======
Special items(1)
CBIS
Acquired research and development................... $ 7.5 $ 3.0 $ --
MATRIXX
Restructuring....................................... -- -- 35.0
Acquired research and development................... -- 2.0 --
Goodwill impairment................................. 39.6 -- --
------ ------ ------
Total............................................... $ 47.1 $ 5.0 $ 35.0
====== ====== ======
Operating income (as reported)
CBIS................................................... $ 38.5 $ 75.5 $104.7
MATRIXX................................................ (7.3) 43.7 9.4
------ ------ ------
Total............................................... $ 31.2 $119.2 $114.1
====== ====== ======
Assets
CBIS................................................... $268.2 $270.2 $283.6
MATRIXX................................................ 235.6 299.5 283.4
Other and eliminations................................. 14.0 49.5 87.4
------ ------ ------
Total............................................... $517.8 $619.2 $654.4
====== ====== ======
Capital additions (including acquisitions)
CBIS................................................... $ 32.0 $ 49.2 $ 36.0
MATRIXX................................................ 26.0 69.4 38.8
------ ------ ------
Total............................................... $ 58.0 $118.6 $ 74.8
====== ====== ======
Depreciation and amortization
CBIS................................................... $ 30.3 $ 32.2 $ 34.5
MATRIXX................................................ 15.6 19.6 26.5
------ ------ ------
Total............................................... $ 45.9 $ 51.8 $ 61.0
====== ====== ======
</TABLE>
- ---------------
(1) Special items related to acquired research and development expense are
included in research and development costs in the Consolidated Statements of
Income. All other special items are included in Special Charges in the
Consolidated Statements of Income.
Certain corporate administrative expenses have been allocated to segments
based upon the nature of the expense. Assets are those assets used in the
operations of the segment.
F-22
<PAGE> 99
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Capital additions for 1997, 1996 and 1995 include $13.9 million, $62.4
million and $31.4 million, respectively, from acquisitions.
Geographic Operations
The following table presents certain information regarding the Company's
domestic and international operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Revenues
United States.......................................... $568.7 $745.6 $888.0
International.......................................... 76.0 96.8 99.5
------ ------ ------
Total............................................... $644.7 $842.4 $987.5
====== ====== ======
Operating income (loss)
United States.......................................... $ 85.7 $110.3 $107.6
International.......................................... (54.5) 8.9 6.5
------ ------ ------
Total............................................... $ 31.2 $119.2 $114.1
====== ====== ======
Assets
United States.......................................... $445.1 $539.2 $585.7
International.......................................... 72.7 80.0 68.7
------ ------ ------
Total............................................... $517.8 $619.2 $654.4
====== ====== ======
</TABLE>
16. MAJOR CUSTOMER
Both of the Company's segments derive significant revenues from AT&T and
its affiliates (AT&T) by providing information systems and billing services and
customer management solutions. Revenues from AT&T were 30.1%, 34.7% and 35.8% of
the Company's consolidated revenues for 1997, 1996, and 1995, respectively.
Related amounts receivable from AT&T totaled $54.1 million and $64.5 million at
December 31, 1997 and 1996, respectively.
17. CONTINGENCIES
The Company is from time to time subject to routine complaints incidental
to the business. The Company believes that the results of any complaints and
proceedings will not have a materially adverse effect on the Company's financial
condition.
18. RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2 "Software Revenue Recognition,"
which is effective for transactions entered into fiscal years beginning after
December 15, 1997. SOP 97-2 revises certain standards for the recognition of
software revenue that will have to be adopted by CBIS with respect to certain
software development and licensing agreements. The effect of SOP 97-2 on the
operating results of the Company will be dependent on the nature and terms of
the individual software agreements entered into in 1998 and beyond.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which is effective
for fiscal years beginning after December 15, 1998. SOP 98-1 requires the
capitalization of certain expenditures for software that is purchased or
internally developed for use in the business. Company management believes that
the prospective implementation of SOP 98-1 in 1999 is likely to result in some
additional capitalization of software expenditures in the future. However, the
amount of such additional capitalized software expenditures can not be
determined at this time.
F-23
<PAGE> 100
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." The SOP provides guidance on financial reporting of costs
of start-up activities. SOP 98-5 requires such costs to be expensed instead of
being capitalized and amortized. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. The Company believes the implementation of
SOP 98-5 will not have a material impact on its financial reporting.
19. ACQUISITIONS
Effective February 28, 1998, MATRIXX acquired Transtech from AT&T for
approximately $625 million in cash. The acquisition will be accounted for under
the purchase method of accounting. The acquisition was financed through
short-term, variable rate debt issued by CBI, which was allocated to the Company
by CBI. In the first quarter of 1998, the Company recorded a charge of $42.6
million to expense in-process research and development costs associated with the
acquisition. The amount expensed relates to two ongoing development projects at
Transtech that had not reached technological feasibility at the time of the
acquisition and had no alternative future use. The Company intends to continue
both projects. The Company allocated $68.2 million of the purchase price to an
eight-year contract under which the Company will provide teleservices to AT&T,
$11.4 million to the assembled Transtech workforce which will be amortized over
a fifteen-year useful life, $4.4 million to capitalized software to be amortized
over a four-year useful life and $91.0 million to the fair value of the acquired
tangible net assets. The fair values of the acquired assets were determined by
an independent valuation. The assembled workforce asset will be amortized on a
straight-line basis and the capitalized software will be amortized in accordance
with the Company's methodology for internally-developed software as discussed in
Note 2 to the financial statements. The excess of the purchase price and
acquisition costs over the fair value of the assets acquired, approximately $415
million, is goodwill, which will be amortized on a straight-line basis over a
thirty-year life. The Company is currently evaluating its integration plan for
the acquisition and expects to incur integration liabilities, including
severance pay and lease termination costs. Such liabilities would result in
additional goodwill which would be amortized over a thirty-year life. In the
second quarter of 1998, the Company recorded approximately $8 million in
severance costs related to the integration plan for Transtech primarily for
management employees. Of this amount approximately $3 million has been paid in
the second quarter of 1998, with the remainder expected to be paid in the third
quarter of 1998. The integration plan has not been finalized, awaiting
determination of the facilities portion of the plan which could result in
additional severance liabilities and lease termination costs. The severance
costs recorded in the second quarter and any additional costs for severance or
lease termination resulting from the finalization of the facilities integration
plan will result in additional goodwill. Any subsequent adjustments to these
costs will be reflected as adjustments to goodwill.
On January 8, 1998, MATRIXX acquired the teleservices business of Maritz
Inc. for approximately $30 million in cash. The acquisition agreement contains
provisions that could increase the purchase price by up to $20 million. The
transaction will be accounted for under the purchase method of accounting.
F-24
<PAGE> 101
CONVERGYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
-------- --------
(MILLIONS OF DOLLARS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
REVENUES.................................................... $243.4 $308.6
Costs and expenses
Costs of products and services............................ 134.4 175.2
Selling, general and administrative expenses.............. 39.0 48.9
Research and development costs............................ 18.3 61.7
Depreciation and amortization............................. 13.9 18.4
Year 2000 programming costs............................... 0.6 5.7
------ ------
Total costs and expenses............................... 206.2 309.9
------ ------
OPERATING INCOME (LOSS)..................................... 37.2 (1.3)
Other income (expense), net................................. 4.3 4.0
Interest expense............................................ 1.3 6.4
------ ------
Income (loss) before income taxes........................... 40.2 (3.7)
Income taxes................................................ 13.4 (1.4)
------ ------
NET INCOME (LOSS)........................................... $ 26.8 $ (2.3)
====== ======
Other comprehensive income, net of tax
Foreign currency translation adjustments.................. (1.4) (0.2)
------ ------
COMPREHENSIVE INCOME (LOSS)................................. $ 25.4 $ (2.5)
====== ======
Net income (loss) per common share:
Basic..................................................... $ $
====== ======
Diluted................................................... $ $
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE> 102
CONVERGYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1997 AND MARCH 31, 1998
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 2.1 $ 0.9
Receivables, net of allowance of $6.4 and $10.6........... 222.9 297.5
Deferred income tax benefits.............................. 13.7 5.9
Prepaid expenses and other current assets................. 27.1 31.0
------ --------
Total current assets................................... 265.8 335.3
Property and equipment, net................................. 130.0 209.4
Goodwill and other intangibles.............................. 177.6 709.6
Investment in unconsolidated entities....................... 72.7 76.8
Deferred charges and other assets........................... 8.3 27.7
------ --------
Total assets...................................... $654.4 $1,358.8
====== ========
LIABILITIES AND SHAREOWNER'S EQUITY
CURRENT LIABILITIES
Debt maturing within one year............................. $ 6.1 $ 4.7
Intercompany debt payable to CBI.......................... 53.0 724.7
Payables and other current liabilities.................... 157.5 192.5
------ --------
Total current liabilities.............................. 216.6 921.9
Long-term debt.............................................. 1.2 0.6
Other long-term liabilities................................. 5.8 6.6
------ --------
Total liabilities................................. $223.6 $ 929.1
------ --------
Commitments and contingencies
SHAREOWNER'S EQUITY
Shareowner's net investment............................... 428.4 427.5
Accumulated other comprehensive income, net of tax........ 2.4 2.2
------ --------
Total shareowner's equity.............................. 430.8 429.7
------ --------
Total liabilities and shareowner's equity......... $654.4 $1,358.8
====== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 103
CONVERGYS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREOWNER'S EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
SHAREOWNER'S EQUITY AT JANUARY 1............................ $364.2 $430.8
Net income (loss)......................................... 26.8 (2.3)
Transfers from CBI, net................................... 21.6 1.4
Other comprehensive income, net of tax.................... (1.4) (0.2)
------ ------
SHAREOWNER'S EQUITY AT MARCH 31............................. $411.2 $429.7
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 104
CONVERGYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
-------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 26.8 $ (2.3)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization.......................... 13.9 18.4
Acquired research and development costs................ -- 42.6
Provision for loss on receivables...................... 0.9 3.6
Undistributed earnings of unconsolidated entities...... (2.9) (4.0)
Change in assets and liabilities net of effects from
acquisitions and disposals:
Decrease (increase) in receivables..................... 12.8 (27.4)
Decrease in other current assets....................... 1.6 5.5
Decrease in accounts payable and accrued liabilities... (20.8) (12.7)
Decrease in other current liabilities.................. (9.3) (4.1)
Increase (decrease) in deferred income taxes........... (3.0) 0.9
Increase in other assets and liabilities, net.......... (3.7) (24.1)
------ -------
Net cash provided (used) by operating activities....... 16.3 (3.6)
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- other............................. (8.7) (10.4)
Acquisitions, net of cash acquired........................ -- (658.3)
------ -------
Net cash used in investing activities.................. (8.7) (668.7)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt............................... (2.7) (2.0)
Change in intercompany debt payable to CBI................ (25.0) 671.7
Transfers from CBI, net................................... 21.6 1.4
------ -------
Net cash provided (used) in financing activities.......... (6.1) 671.1
------ -------
Net increase (decrease) in cash and cash equivalents........ 1.5 (1.2)
Cash and cash equivalents at beginning of period............ 2.3 2.1
------ -------
Cash and cash equivalents at end of period.................. $ 3.8 $ 0.9
====== =======
Supplemental cash flow information
Cash paid for interest................................. $ 6.4 $ 1.1
====== =======
Cash paid for income taxes............................. $ 6.4 $ 9.9
====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 105
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
The Company is currently a wholly owned subsidiary of CBI. CBI's intention
is to contribute to the Company the outstanding common shares of CBIS, MATRIXX
and Cincinnati Bell Cellular Systems Inc. ("CBCS"). CBI also has announced its
intention to distribute to its shareowners within six months following the
Offering, subject to certain conditions, all of its interest in the Company
following the Offering.
BASIS OF PRESENTATION
The consolidated financial statements reflect the results of operations,
financial position, changes in shareowner's equity and cash flows of the
businesses that will be transferred to the Company from CBI in the Separation as
if the Company were a separate entity for all periods presented. The
consolidated financial statements have been prepared using the historical basis
in the assets and liabilities and historical results of operations related to
the Company Businesses. Changes in shareowner's equity represent the net income
of the Company, currency translation adjustments related to the Company's
international operations and net cash transfers to or from CBI. Additionally,
the financial statements include the allocation of certain expenses relating to
the Company from CBI. Management believes these allocations are reasonable. All
material intercompany transactions and balances between the Company and its
subsidiaries have been eliminated.
The liabilities of the Company include outstanding direct third-party
indebtedness and the amounts of debt and related interest expense determined
based upon the capital structure that is anticipated at the Distribution.
Interest expense shown in the consolidated financial statements reflects the
interest expense associated with the allocated borrowings for each period
presented using the weighted average interest rate of CBI, and the interest rate
associated with any direct outstanding indebtedness of the Company and its
subsidiaries. General corporate overhead related to CBI's corporate headquarters
and common support divisions has been allocated to the Company based on the
ratio of the Company's revenues, assets and payroll to CBI's revenues, assets
and payroll. Management believes these allocations are reasonable. However, the
costs of these services charged to the Company are not necessarily indicative of
the costs that would have been incurred if the Company had performed these
functions as a stand-alone entity. Subsequent to the Distribution, the Company
will perform these functions using its own resources or purchased services and
will be responsible for the costs and expenses associated with the management of
a public corporation. Additionally, income taxes are presented as if calculated
on a separate tax return basis.
The Company's financial statements include the costs experienced by the CBI
pension and postretirement benefit plans for employees and retirees for whom the
Company will assume responsibility.
The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in stockowner's
equity and cash flows of the Company in the future or what they would have been
had it been a separate, stand-alone entity during the periods presented.
The consolidated financial statements of the Company have been prepared
pursuant to the rules and regulations of the SEC, and in the opinion of
Management, include all adjustments necessary for a fair presentation of the
results of operations, financial position and cash flows for each period shown.
All adjustments are of a normal and recurring nature except for those outlined
in Notes 2 and 3. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. The December 31, 1997 condensed balance sheet was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. It is suggested that these financial
statements be read in conjunction with financial statements and notes thereto
included elsewhere in the Prospectus.
F-29
<PAGE> 106
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. STATUS OF BUSINESS RESTRUCTURINGS
In the fourth quarter of 1997, the Company approved a restructuring plan
for MATRIXX. The restructuring plan will result in the consolidation of certain
operating divisions and facilities. A charge of $35.0 million was recorded which
reduced net income by $23.0 million. At December 31, 1997, the balance of the
restructuring reserve was $24.9 million. During the first quarter of 1998,
MATRIXX recorded cash expenditures of $1.5 million, primarily for severance pay,
and recorded non-cash asset writedowns of $2.6 million that reduced the
restructuring liability to $20.8 million at March 31, 1998. Management expects
the restructuring plan activities to be completed by December 31, 1998.
3. ACQUISITIONS
Effective February 28, 1998, MATRIXX acquired Transtech from AT&T for
approximately $625 million in cash. The acquisition was accounted for under the
purchase method of accounting. The acquisition was financed through short-term,
variable rate debt issued by CBI, which was allocated to the Company by CBI. In
the first quarter of 1998, the Company recorded a charge of $42.6 million to
expense in-process research and development costs associated with the
acquisition. The amount expensed relates to two ongoing development projects at
Transtech that had not reached technological feasibility at the time of the
acquisition and had no alternative future use. The Company intends to continue
both of these development projects. The Company allocated $68.2 million of the
purchase price to an eight-year contract under which the Company will provide
customer management solutions services to AT&T, $11.4 million to the assembled
workforce which will be amortized over a fifteen-year useful life, $4.4 million
to capitalized software to be amortized over a four-year useful life and $91.0
million to the fair value of the acquired tangible net assets. The fair values
of the acquired assets were determined by an independent valuation. The
assembled workforce asset will be amortized on a straight-line basis and the
capitalized software will be amortized in accordance with the Company's
methodology for internally-developed software. The excess of the purchase price
and acquisition costs over the fair value of the assets acquired, approximately
$415 million, was recorded as goodwill, which will be amortized on a straight
line basis over a thirty-year life. The Company is currently evaluating its
integration plan for the Transtech Acquisition and may incur integration
liabilities, including severance pay and lease termination costs. Such
liabilities may result in additional goodwill which would be amortized over a
thirty-year life. In the second quarter of 1998, the Company recorded
approximately $8 million in severance costs related to the integration plan for
Transtech, primarily for management employees. Of this amount approximately $3
million has been paid in the second quarter of 1998, with the remainder expected
to be paid in the third quarter of 1998. The integration plan has not been
finalized, awaiting determination of the facilities portion of the plan which
could result in additional severance and lease termination costs. The severance
cost recorded in the second quarter and any additional costs for severance or
lease termination costs resulting from the finalization of the facilities
integration plan will result in additional goodwill. Any subsequent adjustments
of these costs will be reflected as adjustments to goodwill. The following
unaudited pro forma data summarizes the combined results of operations of the
Company and Transtech as though the acquisition had occurred as of the beginning
of each period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Revenues................................................... $340.9 $371.0
Net income (loss).......................................... $ 25.4 $ (7.7)
Earnings (loss) per share:
Basic.................................................... $ $
====== ======
Diluted.................................................. $ $
====== ======
</TABLE>
F-30
<PAGE> 107
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma loss for 1998 includes the expensing of $42.6 million ($26.4
million after tax) of acquired research and development costs associated with
the Transtech Acquisition.
On January 8, 1998, MATRIXX acquired the teleservices business of Maritz
Inc. for approximately $30 million in cash. The acquisition agreement contains
provisions that could increase the purchase price by up to $20 million. The
transaction was accounted for under the purchase method of accounting. The
acquisition of Maritz did not have a material effect on the operating results of
the Company.
5. TRANSACTIONS WITH CBI
During the three months ended March 31, 1998 and 1997, the Company had
$13.9 million, and $11.2 million, respectively, in revenues resulting from
information systems and billing services and customer management solutions
provided to CBI and its subsidiaries. The related receivables amounted to $5.1
million and $5.3 million at March 31, 1998 and December 31, 1997, respectively.
CBI has allocated general corporate overhead expenses amounting to $2.7
million and $1.9 million for the three months ended March 31, 1998 and 1997,
respectively. The allocation of general corporate overhead expenses to the
Company by CBI has been based on the ratio of the Company's revenues, assets and
payroll to CBI's revenue assets and payroll. Additionally, the Company incurred
expenses for communications and other services provided by CBI and its
subsidiaries of $3.0 million and $3.2 million for the three months ended March
31, 1998 and 1997, respectively. Amounts payable to CBI and its subsidiaries
were $1.5 million and $1.6 million at March 31, 1998 and December 31, 1997,
respectively.
6. AT&T RELATIONSHIP
Both of the Company's subsidiaries derives significant revenues from AT&T
and its affiliates (AT&T) by providing information systems and billing services
and customer management solutions. Revenues from AT&T were 31.4% and 32.5% of
the Company's consolidated revenues for the three month periods ended March 31,
1998 and 1997, respectively. Related amounts receivable from AT&T totaled $75.9
million and $54.1 million at March 31, 1998 and December 31, 1997, respectively.
7. CONTINGENCIES
The Company is from time to time subject to routine complaints incidental
to the business. The Company believes that the results of any complaints and
proceedings will not have a materially adverse effect on the Company's financial
condition.
8. NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires the capitalization of certain expenditures for
software that is purchased or internally developed for use in the business.
Company management believes that the prospective implementation of SOP 98-1 in
1999 is likely to result in some capitalization of software expenditures in the
future. However, the amount of such capitalized software expenditures can not be
determined at this time.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." The SOP provides guidance on financial reporting of costs
of start-up activities. SOP 98-5 requires such costs to be expensed instead of
being capitalized and amortized. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. The Company believes the implementation of
SOP 98-5 will not have a material impact on its financial reporting.
F-31
<PAGE> 108
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1998, the Company implemented SOP 97-2, "Software
Revenue Recognition." SOP 97-2 revises standards for the recognition of software
revenue in connection with certain software development and licensing
arrangements. SOP 97-2 did not have a material effect on the Company's results
of operations for the three months ended March 31, 1998; however, its effect on
future operating results will be dependent on the nature and terms of the
Company's individual software agreements.
The Company has implemented Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income" in the first quarter of 1998.
SFAS 130 establishes standards for the reporting and display of comprehensive
income and its components. The objective of SFAS 130 is to report a measure of
all changes in the equity of an enterprise that result from transactions of the
period other than transactions with shareowners.
9. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Segment Information
The Company operates in two industry segments. CBIS is principally engaged
in providing information systems and billing services to the communications and
broadband services industries. MATRIXX provides a full range of customer
management solutions to large companies. The Company's business segment
information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
-------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
REVENUES
CBIS...................................................... $130.5 $ 143.9
MATRIXX................................................... 115.2 166.9
Intersegment.............................................. (2.3) (2.2)
------ --------
Total.................................................. $243.4 $ 308.6
====== ========
INTERSEGMENT REVENUES
CBIS...................................................... $ 2.2 $ 2.1
MATRIXX................................................... 0.1 0.1
------ --------
Total.................................................. $ 2.3 $ 2.2
====== ========
SPECIAL ITEM(1)
MATRIXX................................................... $ -- $ 42.6
------ --------
Total.................................................. $ -- $ 42.6
====== ========
OPERATING INCOME (LOSS)
CBIS...................................................... $ 22.7 $ 27.0
MATRIXX................................................... 14.6 (28.3)
Eliminations.............................................. (0.1) --
------ --------
Total.................................................. $ 37.2 $ (1.3)
====== ========
ASSETS
CBIS...................................................... $259.0 $ 280.5
MATRIXX................................................... 270.7 981.4
Other and eliminations.................................... 74.0 96.9
------ --------
Total.................................................. $603.7 $1,358.8
====== ========
</TABLE>
F-32
<PAGE> 109
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) The special item for acquired research and development costs is included in
research and development costs in the Condensed Consolidated Statements of
Income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
-------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
CAPITAL ADDITIONS (INCLUDING ACQUISITIONS)
CBIS...................................................... $ 3.1 $ 5.6
MATRIXX................................................... 5.6 663.1
------ --------
Total.................................................. $ 8.7 $ 668.7
====== ========
DEPRECIATION AND AMORTIZATION
CBIS...................................................... $ 7.7 $ 6.7
MATRIXX................................................... 6.2 11.7
------ --------
Total.................................................. $ 13.9 $ 18.4
====== ========
</TABLE>
Certain corporate administrative expenses have been allocated to segments
based upon the nature of the expense. Assets are those assets used in the
operations of the segment.
Geographic Information
The following table presents certain information regarding the Company's
domestic and international operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
-------- ----------
(MILLIONS OF DOLLARS)
----------------------
<S> <C> <C>
REVENUES
United States............................................. $218.2 $ 285.8
International............................................. 25.2 22.8
------ --------
Total.................................................. $243.4 $ 308.6
====== ========
OPERATING INCOME (LOSS)
United States............................................. $ 36.1 $ (1.6)
International............................................. 1.1 0.3
------ --------
Total.................................................. $ 37.2 $ (1.3)
====== ========
ASSETS
United States............................................. $522.5 $1,291.7
International............................................. 81.2 67.1
------ --------
Total.................................................. $603.7 $1,358.8
====== ========
</TABLE>
F-33
<PAGE> 110
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowner and Board of Directors of
American Transtech Inc., doing business as
AT&T Solutions Customer Care:
We have audited the accompanying balance sheets of AT&T Solutions Customer Care
as of December 31, 1997 and 1996, and the related statements of income, changes
in shareowner's investment, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AT&T Solutions Customer Care as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
AT&T Solutions Customer Care has a significant number of transactions with AT&T
and other AT&T subsidiaries, as discussed in Notes 2, 6 and 11.
Coopers & Lybrand L.L.P.
Jacksonville, Florida
May 1, 1998
F-34
<PAGE> 111
AT&T SOLUTIONS CUSTOMER CARE
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARES)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ -- $ --
Accounts receivable -- trade, net of allowance for
doubtful accounts of $563 and $300..................... 39,370 24,841
Amounts due from AT&T and AT&T subsidiaries, net.......... 24,096 31,990
Prepaid expenses and other receivables.................... 2,208 3,025
Deferred income taxes..................................... 789 4,930
-------- --------
Total current assets.............................. 66,463 64,786
Property and equipment, net................................. 87,211 85,481
-------- --------
$153,674 $150,267
======== ========
LIABILITIES AND SHAREOWNER'S INVESTMENT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 33,225 $ 24,271
Accrued payroll and related benefits...................... 17,039 10,883
Cash overdrafts........................................... 8,690 10,047
Obligations under capital leases, current portion......... 190 --
-------- --------
Total current liabilities......................... 59,144 45,201
Deferred income taxes....................................... 16,903 14,649
Obligations under capital leases, less current portion...... 2,563 --
-------- --------
Total liabilities................................. 78,610 59,850
-------- --------
SHAREOWNER'S INVESTMENT:
Common stock, $1 par value; 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in capital................................ 51,850 51,850
Retained earnings......................................... 24,113 37,979
Cumulative translation adjustments........................ (900) 587
-------- --------
Total shareowner's investment..................... 75,064 90,417
-------- --------
Total liabilities and shareowner's investment..... $153,674 $150,267
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE> 112
AT&T SOLUTIONS CUSTOMER CARE
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUE:
AT&T and AT&T Subsidiaries................................ 288,107 267,541 250,440
Other..................................................... 114,264 80,042 83,359
-------- -------- --------
Total operating revenue........................... 402,371 347,583 333,799
-------- -------- --------
Operating expenses:
Costs of services......................................... 285,015 232,464 228,784
Selling, general and administrative expenses.............. 71,095 67,174 65,142
Depreciation and amortization............................. 7,875 9,449 11,878
Restructuring charge...................................... -- -- 22,265
-------- -------- --------
Total operating expenses(1)....................... 363,985 309,087 328,069
-------- -------- --------
OPERATING INCOME............................................ 38,386 38,496 5,730
-------- -------- --------
Other income (expense):
Interest expense.......................................... (159) -- --
Net other expense/income.................................. 1,105 2,876 459
-------- -------- --------
Other income (expense)................................. 946 2,876 459
-------- -------- --------
Income before income taxes.................................. 39,332 41,372 6,189
Provision for income taxes.................................. 15,198 16,044 2,479
-------- -------- --------
NET INCOME.................................................. $ 24,134 $ 25,328 $ 3,710
======== ======== ========
</TABLE>
- ---------------
(1) Includes $38,670, $47,783 and $57,842 for communications and other services
provided by AT&T in 1997, 1996 and 1995, respectively.
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE> 113
AT&T SOLUTIONS CUSTOMER CARE
STATEMENTS OF CHANGES IN SHAREOWNER'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN RETAINED TRANSLATION SHAREOWNER'S
STOCK CAPITAL EARNINGS ADJUSTMENTS INVESTMENT
------ ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994......... $1 $51,850 $ 39,741 $ -- $91,592
Dividends declared and paid........ -- -- (21,300) -- (21,300)
Net income......................... -- -- 3,710 -- 3,710
-- ------- -------- ------- -------
BALANCE, DECEMBER 31, 1995......... 1 51,850 22,151 -- 74,002
Dividends declared and paid........ -- -- (9,500) -- (9,500)
Accumulated translation
adjustment....................... -- -- -- 587 587
Net income......................... -- -- 25,328 -- 25,328
-- ------- -------- ------- -------
BALANCE, DECEMBER 31, 1996......... 1 51,850 37,979 587 90,417
Dividends declared and paid........ -- -- (38,000) -- (38,000)
Accumulated translation
adjustment....................... -- -- -- (1,487) (1,487)
Net income......................... -- -- 24,134 -- 24,134
-- ------- -------- ------- -------
BALANCE, DECEMBER 31, 1997......... $1 $51,850 $ 24,113 $ (900) $75,064
== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE> 114
AT&T SOLUTIONS CUSTOMER CARE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 24,134 $ 25,328 $ 3,710
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 7,875 9,449 11,878
Business restructuring reserve for fixed assets........ -- -- 11,500
Provision for doubtful accounts........................ 263 (5) 201
Change in assets and liabilities:
Accounts receivable.................................. (14,793) 12,952 (15,439)
Transfers from AT&T, net............................. 7,894 (6,093) 11,381
Prepaid expenses and other receivables............... 816 (331) 3,182
Accounts payable and accrued liabilities............. 8,954 (383) 7,437
Payroll and accrued benefits......................... 6,156 (17,532) 6,525
Deferred income taxes................................ 6,395 11,375 (2,887)
-------- -------- --------
Total adjustments................................. 23,560 9,432 33,778
-------- -------- --------
Net cash provided by operating activities......... 47,694 34,760 37,488
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (6,581) (37,937) (11,433)
Decrease in long-term notes receivable.................... -- 2,043 334
-------- -------- --------
Net cash used in investing activities............. (6,581) (35,894) (11,099)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations........ (269) -- --
Cash overdrafts........................................... (1,357) 10,047 --
Dividends paid............................................ (38,000) (9,500) (21,300)
-------- -------- --------
Net cash used in financing activities............. (39,626) 547 (21,300)
-------- -------- --------
Effect of exchange rate changes on cash..................... (1,487) 587 --
-------- -------- --------
Net increase in cash and cash equivalents................... -- -- 5,089
Cash and cash equivalents, beginning of year................ -- -- (5,089)
-------- -------- --------
Cash and cash equivalents, end of year...................... $ -- $ -- $ --
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest...................... $ 105 $ -- $ --
======== ======== ========
Non-cash investing activities:
During 1997, Solutions entered into capital lease arrangements totaling $3,022.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE> 115
AT&T SOLUTIONS CUSTOMER CARE
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION:
AT&T Solutions Customer Care (Solutions) is the customer care business of
American Telephone and Telegraph Company (AT&T) that includes American
Transtech, Inc. (Transtech), a wholly owned subsidiary of AT&T, and the Canadian
customer care business of AT&T. Solutions provides customer care and employee
care teleservices to AT&T and other Global 2000 companies. These financial
statements consist of the accounts of Transtech and the assets, liabilities and
operations of the Canadian customer care business of AT&T.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION -- The financial statements reflect the financial
position, results of operations, changes in shareowner's investment and cash
flows of Solutions, as if Solutions were a separate entity for all periods
presented. The financial statements have been prepared using the historical
basis in the assets and liabilities and historical results of operations related
to Solutions.
AT&T uses a centralized approach to cash management and the financing of
its operations. As a result, cash and cash equivalents and debt were not
allocated to Solutions in the financial statements. Solution's financing
requirements are represented by cash transactions with AT&T and are reflected in
the "Amounts due from AT&T" account. Assets and liabilities of AT&T relating to
certain employee benefits have not been allocated to Solutions. However, AT&T
charges Solutions, and other AT&T subsidiaries, their allocated share of the
annual expenses related to these employee benefits. Activity in the Amounts due
from AT&T account relates to net cash flows of Solutions as well as changes in
the assets and liabilities not allocated to Solutions.
General corporate overhead related to AT&T's corporate headquarters and
common support functions has been allocated to Solutions, to the extent such
amounts are applicable to Solutions, based on the ratio of Solutions' external
costs and expenses to AT&T's external costs and expenses. Management believes
these allocations are reasonable. However, the costs of these services charged
to Solutions are not necessarily indicative of the costs that would have been
incurred if Solutions had performed these functions as a stand-alone entity.
Management has not determined an estimate of the Company's expenses for these
items had it been an unaffiliated stand-alone entity; however, management
believes that the allocation of these expenses included herein is reasonable.
The financial information included herein may not necessarily reflect the
financial position, results of operations, changes in shareowner's investment
and cash flows of Solutions in the future or amounts that would have been
reported had it been a separate, stand-alone entity during the periods
presented.
CASH -- Solutions places its cash with what it believes to be high credit
quality institutions. At times, such deposits may be in excess of the Federal
Deposit Insurance Corporation limit.
REVENUE RECOGNITION -- Solutions recognizes revenue as services are
performed.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost, less
accumulated depreciation and amortization. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets. Maintenance
and repair costs are expensed as incurred. Equipment under capital leases is
recorded at the present value of minimum lease payments. Amortization is
calculated on a straight-line basis over the lease term. For property and
equipment retired or sold, the gain or loss is recognized in other income.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Actual results could
differ from those estimates.
F-39
<PAGE> 116
AT&T SOLUTIONS CUSTOMER CARE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
INCOME TAXES -- Deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amounts and tax basis of
assets and liabilities as measured by the enacted tax rates which will be in
effect when these differences reverse. A deferred tax valuation allowance is
established if it is more likely than not that all or a portion of Solutions'
deferred tax assets will not be realized.
DIVIDEND POLICY -- Dividend amounts may be reduced to preserve or build up
a retained earnings level of 5% of total equity. Regular dividends are declared
and payable within 45 days of the end of the corresponding net income reporting
period. In general, dividend payments will be made annually, based on annual
actual net income. However, if the annual budgeted net income exceeds a
threshold of $200, dividend payments that year will be made quarterly, based on
quarterly actual net income.
SOFTWARE DEVELOPMENT COSTS -- Research and development expenditures are
charged to expense as incurred. The Company capitalizes certain internal-use
software costs which are amortized using the straight-line method over the
economic lives of the related software, not to exceed four years. At December
31, 1997 and 1996 the cost of capitalized software was $6,273 and $6,273,
respectively. Accumulated amortization was $5,234 and $4,196 as of December 31,
1997 and 1996, respectively.
CURRENCY TRANSLATION -- Assets and liabilities of foreign operations, where
the functional currency is the local currency, are translated to U.S. dollars at
year-end exchange rates. Translation adjustments are accumulated and reflected
as a separate component of shareowner's investment. Revenue and expenses are
translated monthly using the exchange rate on the last day of the month.
3. INCOME TAXES:
Deferred income tax liabilities represent federal and state income taxes
the Company expects to pay in future periods. Similarly, deferred tax assets are
recorded for expected reductions in income taxes payable in future periods.
Deferred income taxes arise because of differences in the book and tax bases of
certain assets and liabilities, primarily the allowance for credit losses.
The following table shows the principal reasons for the difference between
the effective tax rate and the United States federal statutory income tax rate
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Federal income tax at statutory rate of 35%............... $13,766 $14,480 $2,166
State income taxes, net of federal income tax effect...... 1,363 1,434 215
Other..................................................... 69 130 98
------- ------- ------
$15,198 $16,044 $2,479
======= ======= ======
Effective income tax rate................................. 39% 39% 40%
======= ======= ======
</TABLE>
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Currently payable:
Federal................................................... $ 7,582 $ 4,023 $4,622
State..................................................... 1,220 647 744
------- ------- ------
8,802 4,670 5,366
Deferred federal and state provision...................... 6,396 11,374 (2,887)
------- ------- ------
Provision for income taxes................................ $15,198 $16,044 $2,479
======= ======= ======
</TABLE>
F-40
<PAGE> 117
AT&T SOLUTIONS CUSTOMER CARE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The amounts of the net deferred tax assets and liabilities at December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Allowance and reserves................................... $ (789) $ (4,930)
Property and equipment................................... 16,903 14,649
------- --------
Deferred income tax liabilities, net..................... $16,114 $ 9,719
======= ========
</TABLE>
The Company's operations are included in AT&T's consolidated tax return.
Under a tax-sharing arrangement between AT&T and its affiliates, the amount of
tax due AT&T is based on the contribution each company makes to AT&T's
consolidated taxable income as if it was a stand-alone company. The current
liability is netted against amounts due from AT&T.
A valuation allowance against deferred tax assets must be recorded if,
based on available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. No valuation allowance has been
recorded as of December 31, 1997 and 1996.
4. PROPERTY AND EQUIPMENT:
Details of property and equipment at December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Machinery, electronic and other equipment................. $106,321 $99,720
Computer software development cost........................ 6,273 6,273
Furniture and fixtures.................................... 20,069 19,226
Land and improvements..................................... 4,670 4,670
Buildings and leasehold improvements...................... 47,229 45,070
-------- -------
184,562 174,959
Less: Accumulated depreciation and amortization........... (97,351) (89,478)
-------- -------
Property and equipment, net............................... $ 87,211 $85,481
======== =======
</TABLE>
5. LEASE COMMITMENTS:
Solutions leases certain facilities and equipment used in its operations
under noncancelable leases which expire at various dates through December 31,
2008.
Solutions also leases its office building in Jacksonville, Florida; Ft.
Lauderdale, Florida; Tucson, Arizona; San Jose, California; Jacksonville, North
Carolina; Chattanooga, Tennessee; Lubbock, Texas; Killeen, Texas; Willowdale,
Ontario Canada; and Nova Scotia, Canada, under noncancelable operating leases
expiring through December 31, 2008.
F-41
<PAGE> 118
AT&T SOLUTIONS CUSTOMER CARE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
At December 31, 1997, the total minimum rental commitments under
noncancelable leases were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998....................................................... $ 447 $11,854
1999....................................................... 447 12,453
2000....................................................... 447 10,574
2001....................................................... 447 7,728
2002....................................................... 447 6,734
Thereafter................................................. 2,016 22,296
------- -------
Total minimum lease payments..................... 4,251 $71,639
=======
Amounts representing interest.............................. (1,498)
-------
Present value of net minimum lease payment................. $ 2,753
=======
</TABLE>
Total rental expense recorded under noncancelable operating leases was
$18,376, $15,580 and $13,891 in 1997, 1996 and 1995, respectively. Total lease
payments made under capital lease obligations were approximately $269, $0 and $0
in 1997, 1996 and 1995, respectively.
6. TRANSACTIONS WITH AT&T AND AT&T SUBSIDIARIES:
AT&T and AT&T subsidiaries provided approximately 69%, 71% and 74% in 1997,
1996 and 1995, respectively, of Solutions' total operating revenues primarily
through customer care and employee care teleservices. Allocated operating
expenses to Solutions from AT&T and AT&T subsidiaries were approximately 7%, 7%,
and 3% of total operating expenses in 1997, 1996 and 1995, respectively. Those
allocated operating expenses were for telecommunication services, property
management and office rental, employee benefits and purchasing services.
7. CONTINGENCIES:
With respect to lawsuits, proceedings and other claims pending at year-end,
it is the opinion of management, based upon the advice of counsel, that after
final disposition, any monetary liability or financial impact to Solutions
beyond that provided at year-end would not be material to its financial position
or results of operations.
8. SALE OF AT&T SOLUTIONS CUSTOMER CARE:
Effective February 28, 1998, AT&T sold all of the shares of Solutions to
MATRIXX Marketing Inc. (MATRIXX), a subsidiary of Cincinnati Bell Inc.
9. EMPLOYEE BENEFIT PLANS:
The following employee benefit plans represent the plans sponsored by AT&T
at December 31, 1997:
PENSION PLAN -- The Company's employees participate in a noncontributory
defined benefit pension plan sponsored by AT&T. Benefits for management
employees are principally based on career-average pay while benefits for
occupational employees are not directly related to pay. Pension contributions
are principally determined using the aggregate cost method and are primarily
made to trust funds held for the sole benefit of plan participants. The Company
is allocated its portion of the expense annually. Information regarding the
portion of the plan attributable to the Company is not available.
F-42
<PAGE> 119
AT&T SOLUTIONS CUSTOMER CARE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
SAVINGS PLANS -- The Company, through AT&T, sponsors savings plans for the
majority of employees. The plans allow employees to contribute a portion of
their pretax and/or after-tax income in accordance with specified guidelines.
AT&T matches a percentage of the employee contributions up to certain limits.
The Company is allocated its portion of the expense annually. Information
regarding the portion of the plan attributable to the Company is not available.
POSTRETIREMENT BENEFITS -- The Company, through AT&T, provides
postretirement benefits including health care benefits, life insurance coverage
and telephone concessions for certain of its employees. The Company is allocated
its portion of the expense annually. Information regarding the portion of the
plan attributable to the Company is not available.
POSTEMPLOYMENT BENEFITS -- The Company, through AT&T, provides estimated
future postemployment benefits, including separation payments, during the years
employees are working and accumulating these benefits, and for disability
payments when the disabilities occur for certain of its employees. AT&T has
recognized an accumulated liability, however, the Company is allocated its
portion of the expense annually.
10. BUSINESS RESTRUCTURING:
In the fourth quarter of 1995, AT&T approved a restructuring plan for
Solutions. The restructuring plan resulted in the reorganization of management
functions at certain operating divisions and facilities. Solutions recorded a
special charge which reduced net income by $22,300. The charge included $11,500
in non-cash property and equipment write-downs related to certain operating
facilities and $10,800 in severance pay under existing severance plans. All
charges were paid during 1996.
11. AMOUNTS DUE FROM AT&T:
The amounts due from AT&T for the years 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Inter entity revenues............................... $ 288,107 $ 267,541 $ 250,440
Inter entity expenses............................... (38,670) (43,783) (57,842)
Income taxes due to parent.......................... (18,838) (10,035) (5,366)
Net cash received................................... (206,503) (181,733) (161,335)
--------- --------- ---------
$ 24,096 $ 31,990 $ 25,897
========= ========= =========
</TABLE>
F-43
<PAGE> 120
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the SEC registration fee and NYSE listing (entry) fee. All of the
expenses below will be paid by the Company.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ----------
<S> <C>
Securities Act Registration fee............................. $ 125,375
NYSE listing (entry) fees................................... 613,000
Blue Sky qualification fees and expenses.................... 5,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 250,000
Transfer agent and registrar fees........................... 15,000
Printing expenses........................................... 435,000
Miscellaneous............................................... 16,625
----------
Total.............................................. $1,810,000
==========
</TABLE>
- ---------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
There are no provisions in the Articles by which an officer or director may
be indemnified against any liability which he or she may incur in his or her
capacity as such. However, the Company has indemnification provisions in its
Regulations which provide the Company will, to the full extent permitted by Ohio
law, indemnify all persons whom it may indemnify under such law.
Reference is made to Section 1701.13(E) of the Ohio Revised Code which
provides for indemnification of directors and officers in certain circumstances.
The foregoing references are necessarily subject to the complete text of
the Regulations and the statute referred to above and are qualified in their
entirety by reference thereto.
Liability insurance for its directors and officers for certain losses
arising from certain claims and charges, including claims and charges under the
Securities Act, which may be made against such persons while acting in their
capacities as directors and officers of the Company, is provided until the
Distribution under a CBI insurance policy as a result of the Company being a
subsidiary of CBI. After the Distribution, the Company intends to obtain and
provide comparable liability insurance for its directors and officers.
The Underwriting Agreement, the form of which is filed as Exhibit 1 to the
Registration Statement, provides for the indemnification of the directors and
officers of the Company against certain liabilities, including liabilities
arising under the Securities Act.
The above discussion of the Articles, Regulations, Underwriting Agreement
and Section 1701.13(E) of the Ohio Revised Code is not intended to be exhaustive
and is respectively qualified in its entirety by the Articles, Regulations,
Underwriting Agreement and such statute.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its incorporation and organization, on May 8, 1998 the
Company issued 100 Common Shares to CBI in consideration of a cash payment of
$100.00. Based on the relationship between the Company and CBI and other
factors, the Company believes that this issuance was exempt from registration
under Section 4(2) of the Securities Act.
II-1
<PAGE> 121
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <S>
1 Form of Underwriting Agreement.++
3.1 Amended Articles of Incorporation of the Company.++
3.2 Regulations of the Company.++
4 Form of the Company's Common Share certificate.++
5 Opinion regarding legality of shares being registered.+
10.1 Form of Plan of Reorganization and Distribution Agreement by
and between the Company and CBI, dated as of ,
1998.++
10.2 Form of Employee Benefits Agreement by and between the
Company and CBI, dated as of , 1998.++
10.3 Form of Services Agreement by and between the Company and
CBI, dated as of , 1998.++
10.4 Form of Tax Separation and Allocation Agreement by and
between the Company and CBI, dated as of , 1998.++
10.5 Form of 1998 Long Term Incentive Plan.++
21 Subsidiaries of the Company.+
23.1 Consent of PricewaterhouseCoopers LLP.+
23.2 Consent of PricewaterhouseCoopers LLP.+
23.3 Consent of Frost & Jacobs (contained in Exhibit 5).+
24.1 Powers of Attorney.++
27 Financial Data Schedule.++
</TABLE>
- ---------------
+ Filed herewith
* To be filed by amendment
++ Previously filed
(b) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
UNDERTAKINGS
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreements certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted as to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court
II-2
<PAGE> 122
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus as filed as part
of the registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(l)
or (4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide the
underwriters at the closing as specified in the underwriting agreements,
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser.
II-3
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Cincinnati, State of Ohio, on the 17th day of July, 1998.
CONVERGYS CORPORATION
By: /s/ JAMES F. ORR
------------------------------------
James F. Orr
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the 17th day of July, 1998 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE
---------
<S> <C>
/s/ JAMES F. ORR Principal Executive Officer; President,
- --------------------------------------- Chief Executive Officer
James F. Orr and Director
/s/ STEVEN G. ROLLS Principal Financial Officer
- --------------------------------------- and Principal Accounting Officer;
Steven G. Rolls Chief Financial Officer
/s/ CHARLES S. MECHEM, JR.* Chairman of the Board
- --------------------------------------- and Director
Charles S. Mechem Jr.
/s/ JOHN F. BARRETT* Director
- ---------------------------------------
John F. Barrett
/s/ JUDITH G. BOYNTON* Director
- ---------------------------------------
Judith G. Boynton
/s/ ROGER L. HOWE* Director
- ---------------------------------------
Roger L. Howe
/s/ STEVEN C. MASON* Director
- ---------------------------------------
Steven C. Mason
/s/ BRIAN H. ROWE* Director
- ---------------------------------------
Brian H. Rowe
* /s/ WILLIAM D. BASKETT III
-------------------------------------
William D. Baskett III,
as attorney-in-fact
</TABLE>
II-4
<PAGE> 124
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareowner of Convergys Corporation:
In connection with our audits of the consolidated financial statements of
Convergys Corporation as of December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, which financial statements
are included in the Prospectus, we have also audited the financial statement
schedule listed in Item 16 herein.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
May 18, 1998
II-5
<PAGE> 125
SCHEDULE II
CONVERGYS
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ---------- --------------------- ---------- ---------
ADDITIONS
---------------------
(1) (2)
BALANCE AT CHARGED BALANCE
BEGINNING CHARGED TO TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year 1997................................. $ 6.5 $4.5 $ .5(a) $5.1(b) $ 6.4
Year 1996................................. $13.6 $1.7 $(5.6)(a) $3.2(b) $ 6.5
Year 1995................................. $ 9.2 $5.8 $ 1.2(a) $2.6(b) $13.6
</TABLE>
- ---------------
(a) Includes amounts previously written off which were credited directly to this
account when recovered and other adjustments.
(b) Primarily includes amounts written off as uncollectible.
DEFERRED TAX ASSET VALUATION ALLOWANCE
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ---------- --------------------- ---------- ---------
ADDITIONS
---------------------
(1) (2)
BALANCE AT CHARGED BALANCE
BEGINNING CHARGED TO TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year 1997................................. $21.0 -- -- -- $21.0
Year 1996................................. $21.0 -- -- -- $21.0
Year 1995................................. $21.0 -- -- -- $21.0
</TABLE>
II-6
<PAGE> 126
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)[ALTERNATE]
Issued July 17, 1998
18,000,000 SHARES
CONVERGYS CORPORATION
COMMON SHARES
------------------------
ALL OF THE COMMON SHARES (THE "COMMON SHARES") ARE BEING OFFERED BY THE COMPANY,
WHICH IS CURRENTLY A WHOLLY OWNED SUBSIDIARY OF CINCINNATI BELL INC. ("CBI"). OF
THE 18,000,000 COMMON SHARES OFFERED HEREBY, 3,600,000 COMMON SHARES ARE BEING
OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS, AND 14,400,000 COMMON SHARES ARE BEING OFFERED INITIALLY IN THE
UNITED STATES AND CANADA BY THE U. S. UNDERWRITERS. SEE "UNDERWRITERS." PRIOR TO
THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON SHARES. IT IS
CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $17
AND $19 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED
IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
AFTER THE OFFERING, CBI WILL OWN APPROXIMATELY 88.3% (86.8% IF THE UNDERWRITERS
EXERCISE THEIR OVER-ALLOTMENT OPTION IN FULL) OF THE COMMON SHARES. CBI HAS
ANNOUNCED ITS INTENTION, SUBJECT TO SATISFACTION OF CERTAIN CONDITIONS, TO
DIVEST ITS OWNERSHIP INTEREST WITHIN SIX MONTHS FOLLOWING THE OFFERING BY MEANS
OF A TAX-FREE DISTRIBUTION TO ITS SHAREHOLDERS. SEE "RELATIONSHIP BETWEEN THE
COMPANY AND CBI."
------------------------
THE COMMON SHARES HAVE BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "CVG."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
-------- -------------- -------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total(3)............................... $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at
$1,810,000.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
2,700,000 additional Common Shares at the price to public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option
in full, the total price to public, underwriting discounts and
commissions and proceeds to the Company will be $ , $ ,
and $ , respectively. See "Underwriters."
------------------------
The Common Shares are offered, subject to prior sale, when, as and if
accepted by the Underwriters named herein and subject to approval of certain
legal matters by Shearman & Sterling, counsel for the Underwriters. It is
expected that delivery of the Common Shares will be made on or about August ,
1998 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
BA ROBERTSON STEPHENS INTERNATIONAL LIMITED
BEAR, STEARNS INTERNATIONAL LIMITED
August , 1998
<PAGE> 1
Exhibit 5
[FROST & JACOBS LETTERHEAD]
NEIL GANULIN
[email protected]
(513)651-6882
July 17, 1998
Convergys Corporation
Atrium One
201 E. Fourth Street, 102-2000
Cincinnati, Ohio 45202
Ladies and Gentlemen:
We are counsel for Convergys Corporation (the "Company") and are acting
as such in connection with the registration of 18,000,000 common shares, without
par value, of the Company (the "Common Shares") under the Securities Act of
1933, as amended, on Form S-1 Registration Statement ("Registration No.
333-53619), as amended, which was originally filed with the Securities and
Exchange Commission on May 26, 1998.
With respect to the Common Shares registered pursuant to the
Registration Statement as filed (and as it may be amended), this is to advise
that it is our opinion that the Company is duly organized as an Ohio
corporation and is in good standing, and that the Common Shares to be
registered, when sold, will be validly issued, fully paid and non-assessable
under the laws of the State of Ohio.
We hereby give our written consent to the filing of this opinion as an
Exhibit to the Registration Statement and to the use of our name wherever it
appears in such Registration Statement.
Very truly yours,
/s/ Frost & Jacobs LLP
<PAGE> 1
EXHIBIT 21
SUBSIDIARY STATE OF INCORPORATION
- ---------- ----------------------
Cincinnati Bell Information Systems Inc. Ohio
MATRIXX Marketing Inc. Ohio
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-53619) of our report dated May 18, 1998, on our audits of the
financial statements and financial statement schedule of Convergys Corporation.
We also consent to the references to our firm under the captions "Experts."
PricewaterhouseCoopers LLP
Cincinnati, Ohio
July 17, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-53619) of our report dated May 1, 1998, on our audits of the
financial statements of AT&T Solutions Customer Care. We also consent to the
references to our firm under the captions "Experts."
PricewaterhouseCoopers LLP
Jacksonville, Florida
July 17, 1998
