<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998
REGISTRATION NO. 333-53619
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
CONVERGYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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
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<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
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<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.
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<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 , 1998
SHARES
CONVERGYS CORPORATION
COMMON SHARES
------------------------
All of the common shares, without par value (the "Common Shares"), are being
offered by the Company, which is currently a wholly owned subsidiary of
Cincinnati Bell Inc. ("CBI"). Of the Common Shares offered hereby,
Common Shares are being offered initially in the United States and
Canada by the U. S. Underwriters and 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 $ and $ 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 % ( % 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 $ .
(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
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
, 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.
, 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
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<CAPTION>
PAGE
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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
% of the outstanding Common Shares (approximately % 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............... shares
International Offering...... shares
Total....................... shares
Common Shares to be
outstanding immediately after
the Offering................ shares(1)
Common Shares to be held by
CBI immediately after the
Offering.................... shares(1)(2)
Use of Proceeds............... The net proceeds to the Company from the
Offering are estimated to be approximately
$ million ($ million if the U.S.
Underwriters exercise their over-allotment
option in full). 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) Does not include up to 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, Common
Shares will be outstanding after the Offering.
(2) Does not include approximately 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 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 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
Pro forma earnings (loss)
per share:(5)
Basic...................
Diluted.................
Weighted average common
shares outstanding
including equivalents:
Basic...................
Diluted.................
OTHER DATA:
EBITDA(5)............... $ 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 (6):
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) 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.
(6) 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 of
10
<PAGE> 12
$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. 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
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 per share. See "Dilution."
15
<PAGE> 17
SHARES ELIGIBLE FOR FUTURE SALE
The planned Distribution would involve the distribution of an aggregate of
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 $ million ($ 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 $ per share. 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 , 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 , 1998, was
$ , or $ 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 outstanding on , 1998. 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 , 1998 would have been approximately $ ,
or $ per Common Share. This represents an immediate increase in net
tangible book value per share of $ to CBI, the sole shareholder of the
Company, and an immediate dilution in net tangible book value per share of
$ 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............. $
--------
Net tangible book value per share at , 1998....... $
--------
Increase in net tangible book value per share attributable
to new investors.......................................... $
--------
Pro forma net tangible book value per share after the
Offering.................................................. $
--------
Dilution per share to new investors......................... $
--------
</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
$ 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
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
CBI...............................
New investors.....................
-------- -------- -------- --------
Total...................
</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 Common Shares for issuance
upon exercise of outstanding options and future awards under the 1998 LTIP. As
of , 1998, there were outstanding options to purchase an aggregate of
Common Shares under the 1998 LTIP, at a weighted average of $ per
share. Of the foregoing, options to purchase an aggregate of Common
Shares were exercisable as of , 1998.
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>
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
======= ====== ====== ====== ====== ======== ====== ======== ========
Pro forma earnings (loss) per share(5)
Basic............................... $ $ $ $ $ $ $ $ $
======= ====== ====== ====== ====== ======== ====== ======== ========
Diluted............................. $ $ $ $ $ $ $ $ $
======= ====== ====== ====== ====== ======== ====== ======== ========
Weighted average common shares
outstanding including equivalents:
Basic...............................
Diluted.............................
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) 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.
(6) 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:
Basic................. $ $ $
====== ====== ======
Diluted............... $ $ $
====== ====== ======
Weighted average common
shares outstanding
including equivalents:
Basic.................
Diluted...............
</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:
Basic......................... $ $ $
====== ======== ========
Diluted....................... $ $ $
====== ======== ========
Weighted average common shares
outstanding including
equivalents:
Basic.........................
Diluted.......................
</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.
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
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<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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<PAGE> 34
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
35
<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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<PAGE> 40
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 consolida-
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tion 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 Halifax,
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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.
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
49
<PAGE> 51
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 Common Shares 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 will receive stock options pursuant to the 1998
LTIP. Each non-employee director of the Company upon his or her initial
appointment or election as a director will receive an option to purchase
Common Shares. (The initial stock option grants will be
Common Shares for Mr. Mechem and Common Shares for Messrs. Barrett,
Howe, Mason and Rowe and Mrs. Boynton.) On the date of each annual shareholder
meeting subsequent to a director's initial election or appointment, he or she
will receive an option to purchase Common Shares, provided that such
non-employee director continues in office subsequent to that year's annual
meeting of shareholders. The exercise price for each option granted is 100% of
the fair market value of the Common Shares on the date of grant.
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. In
addition, effective as of the Closing Date of the Offering, Messrs. Orr, Marino,
Dougherty, Baskett, Rolls, Henry, Schultz and Komin will be granted options to
purchase Common Shares ("Company Options") and 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 , 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
55
<PAGE> 57
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 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 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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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 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 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
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 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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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 Common Shares may be issued under the 1998 LTIP. Of this
number, a maximum of Common Shares may be issued in conjunction with
incentive stock options ("ISOs") and not more than 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, except
that, in the case of an option which is not an ISO, the purchase price may be
less than 100% of the fair market value of the Common Shares on the date 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
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Common Shares awarded as restricted stock, the recipient shall have all rights
of a shareholder of the 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, (b) change the class of
employees eligible to participate or (c) change any of the provisions of the
1998 LTIP relating to grants of options to non-employee directors.
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 % of the outstanding Common Shares ( % 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. 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 , 199 . CBI intends to consummate the
Distribution within six months following the Offering, 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 % of the Common
Shares then outstanding ( % 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 Common
Shares, without par value, and preferred shares, without par value
(the "Preferred Shares"), of which million 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 Common Shares sold in the Offering ( 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 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..................................................
-----------
International Underwriters:
Morgan Stanley & Co. International Limited................
Smith Barney Inc. ........................................
Merrill Lynch International...............................
BancAmerica Robertson Stephens............................
Bear, Stearns International Limited ......................
-----------
Subtotal..................................................
-----------
Total.............................................
===========
</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), and includes any
United States or Canadian branch of a person who is otherwise not a United
States or Canadian Person.
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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 such dealers may reallow, a concession not in excess of $ a share
to other Underwriters or to certain
73
<PAGE> 75
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
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 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-24
Condensed Consolidated Balance Sheets at December 31,
1997 and March 31, 1998............................... F-25
Condensed Consolidated Statements of Shareowner's
Equity for the three months ended March 31, 1997 and
1998.................................................. F-26
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1998........... F-27
Notes to Financial Statements.......................... F-28
AT&T SOLUTIONS CUSTOMER CARE (TRANSTECH)
AUDITED --
Report of Independent Accountants...................... F-33
Balance Sheets at December 31, 1997 and 1996........... F-34
Statements of Income for the years ended
December 31, 1997, 1996 and 1995..................... F-35
Statements of Shareowner's Investment for the years
ended
December 31, 1997, 1996 and 1995..................... F-36
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995..................... F-37
Notes to Financial Statements.......................... F-38
</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
====== ====== ======
Unaudited pro forma 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
------ ------ ------
<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.
F-8
<PAGE> 85
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-9
<PAGE> 86
CONVERGYS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
Pro forma 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
Pro forma 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)
====== ======
Unaudited pro forma 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............................. $ *
NYSE listing (entry) fees................................... *
Blue Sky qualification fees and expenses.................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Directors and officers insurance............................ *
Miscellaneous............................................... *
Total............................................. $ *
</TABLE>
- ---------------
* To be completed by amendment.
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.*
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 , 1998
SHARES
CONVERGYS CORPORATION
COMMON SHARES
------------------------
All of the common shares, without par value (the "Common Shares"), are being
offered by the Company, which is currently a wholly owned subsidiary of
Cincinnati Bell Inc. ("CBI"). Of the Common Shares offered hereby,
Common Shares are being offered initially outside the United States
and Canada by the International Underwriters, and 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 $ and $ 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 % ( % 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."
------------------------
Application will be made to list the Common Shares 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 $ .
(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
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
, 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
, 1998
<PAGE> 1
Exhibit 1
_______________ SHARES
CONVERGYS CORPORATION
__ COMMON SHARES, WITHOUT PAR VALUE
UNDERWRITING AGREEMENT
<PAGE> 2
_____ __, 1998
Morgan Stanley & Co. Incorporated
Smith Barney Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
BancAmerica Robertson Stephens
Bear, Stearns & Co. Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Smith Barney Inc.
Merrill Lynch International
BancAmerica Robertson Stephens
Bear, Stearns International Limited
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
Convergys Corporation (the "COMPANY"), an Ohio corporation and
a wholly owned subsidiary of Cincinnati Bell Inc., an Ohio corporation ("CBI"),
proposes to issue and sell to the several Underwriters (as defined below)
________________ common shares, without par value (the "FIRM SHARES").
It is understood that, subject to the conditions hereinafter
stated, ____________ Firm Shares (the "U.S. FIRM SHARES") will be sold to the
several U.S. Underwriters named in Schedule I hereto (the "U.S. UNDERWRITERS")
in connection with the offering and sale of such U.S. Firm Shares in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement Between U.S. and International Underwriters of even
date herewith), and _________ Firm Shares (the "INTERNATIONAL SHARES") will be
sold to the several International Underwriters named in Schedule II hereto (the
"INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such
International Shares outside the United States and
<PAGE> 3
Canada to persons other than United States and Canadian Persons. Morgan Stanley
& Co. Incorporated and Smith Barney Inc., Merrill Lynch, Pierce Fenner & Smith
Incorporated, BancAmerica Robertson Stephens, and Bear, Stearns & Co. Inc. shall
act as representatives (the "U.S. REPRESENTATIVES") of the several U.S.
Underwriters, and Morgan Stanley & Co. International Limited and Smith Barney
Inc., Merrill Lynch International, BancAmerica Robertson Stephens, and Bear,
Stearns International Limited shall act as representatives (the "INTERNATIONAL
REPRESENTATIVES") of the several International Underwriters. The U.S.
Underwriters and the International Underwriters are hereinafter collectively
referred to as the Underwriters.
The Company also proposes to issue and sell to the several
U.S. Underwriters not more than an additional __________ common shares, without
par value (the "ADDITIONAL SHARES"), if and to the extent that the U.S.
Representatives shall have determined to exercise, on behalf of the U.S.
Underwriters, the right to purchase such common shares granted to the U.S.
Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "SHARES". The common shares, without
par value, of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "COMMON SHARES".
The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement relating to the Shares.
The registration statement contains two prospectuses to be used in connection
with the offering and sale of the Shares: the U.S. prospectus, to be used in
connection with the offering and sale of Shares in the United States and Canada
to United States and Canadian Persons, and the international prospectus, to be
used in connection with the offering and sale of Shares outside the United
States and Canada to persons other than United States and Canadian Persons. The
international prospectus is identical to the U.S. prospectus except for the
outside front cover page. The registration statement as amended at the time it
becomes effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "PROSPECTUS". If the
Company has filed an abbreviated registration statement to register additional
Common Shares pursuant to Rule 462(b) under the Securities Act (the "RULE 462
REGISTRATION STATEMENT"), then any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462 Registration Statement.
As part of the offering contemplated by this Agreement, Morgan Stanley
& Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the Shares
set forth opposite its name on Schedule II to this Agreement, up to
________________ shares, for sale to the Company's employees, officers, and
directors [and other parties associated with the Company] (collectively,
"Participants"), as set forth in the Prospectus under the heading "Underwriting"
(the "Directed Share Program"). The Shares to be sold by Morgan Stanley pursuant
to the Directed Share Program (the "Directed Shares") will be sold by Morgan
Stanley pursuant to this Agreement at the public offering price. Any Directed
2
<PAGE> 4
Shares not orally confirmed for purchase by any Participants by the end of the
business day on which this Agreement is executed will be offered to the public
by Morgan Stanley as set forth in the Prospectus.
1. REPRESENTATIONS AND WARRANTIES. The Company, CBI, MATRIXX
Marketing Inc., an Ohio corporation ("MATRIXX"), and Cincinnati Bell Information
Systems Inc., an Ohio corporation ("CBIS"), jointly and severally, represent and
warrant to and agree with each of the Underwriters that:
(a) The Registration Statement has become effective;
no stop order suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for such purpose are pending
before or threatened by the Commission.
(b) (i) The Registration Statement, when it became
effective, did not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) the
Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with
the Securities Act and the applicable rules and regulations of the
Commission thereunder and (iii) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, except that the representations
and warranties set forth in this paragraph do not apply to statements
or omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to
3
<PAGE> 5
be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
all of the issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and are owned directly by the Company, free and
clear of all liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed
and delivered by each of the Company, CBI, MATRIXX and CBIS.
(f) The authorized capital stock of the Company
conforms as to legal matters to the description thereof contained in
the Prospectus.
(g) The Common Shares outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and nonassessable.
(h) The Shares have been duly authorized and, when
issued and delivered in accordance with the terms of this Agreement,
will be validly issued, fully paid and nonassessable, and the issuance
of such Shares will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company, CBI,
MATRIXX and CBIS of, and the performance by the Company, CBI, MATRIXX
and CBIS of their respective obligations under, this Agreement will not
contravene any provision of applicable law or the articles of
incorporation or the regulations of the Company, CBI, MATRIXX or CBIS
or any agreement or other instrument binding upon the Company, CBI,
MATRIXX or CBIS or any of their respective subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or to
CBI and its subsidiaries, taken as a whole, in the case of CBI, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over CBI or the Company or their respective
subsidiaries, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company, CBI, MATRIXX or CBIS of their respective
obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states in connection with
the offer and sale of the Shares.
(j) There has not occurred any material adverse
change, or any development involving a prospective material adverse
change, in the condition, financial or otherwise, or in the earnings,
business or operations of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement).
(k) There are no legal or governmental proceedings
pending or threatened to which the Company or any of its subsidiaries
is a party or to which any of the properties
4
<PAGE> 6
of the Company or any of its subsidiaries is subject that are required
to be described in the Registration Statement or the Prospectus and are
not so described or any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to
the offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended.
(n) The Company and its subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received
all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses
and (iii) are in compliance with all terms and conditions of any such
permit, license or approval; except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(o) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for cleanup, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(p) There are no contracts, agreements or
understandings between the Company and any person granting such person
the right to require the Company to file a registration statement under
the Securities Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(q) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
(i) the Company and its subsidiaries have
5
<PAGE> 7
not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the
ordinary course of business; (ii) the Company has not purchased any of
its outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (iii) there has not been any
material change in the capital stock, short-term debt or long-term debt
of the Company and its subsidiaries, except in each case as described
in the Prospectus.
(r) The Company and its subsidiaries have good and
marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is
material to the business of the Company and its subsidiaries, in each
case free and clear of all liens, encumbrances and defects except such
as are described in the Prospectus or such as do not materially affect
the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its subsidiaries, in
each case except as described in the Prospectus.
(s) The Company and its subsidiaries own or possess,
or can acquire on reasonable terms, all material patents, patent
rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service
marks and trade names currently employed by them in connection with the
business now operated by them, and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict
with asserted rights of others with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on
the Company and its subsidiaries, taken as a whole.
(t) No material labor dispute with the employees of
the Company or any of its subsidiaries exists, except as described in
the Prospectus, or, to the knowledge of the Company, is imminent; and
the Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(u) The Company and its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; neither the Company nor any of
its subsidiaries has been refused any insurance coverage sought or
applied for; and neither the Company nor any of its subsidiaries has
any reason to believe that it will not
6
<PAGE> 8
be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would not have
a material adverse effect on the Company and its subsidiaries, taken as
a whole, except as described in the Prospectus.
(v) The Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
their respective business, and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect on the Company and its subsidiaries, taken as a whole, except as
described in the Prospectus.
(w) The Company and each of its subsidiaries maintain
a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations; (ii) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(x) PricewaterhouseCoopers LLP. whose reports appear
in the Registration Statement, are independent public accountants with
respect to the Company and its subsidiaries as required by the
Securities Act and the Rules and regulations thereunder.
(y) The historical consolidated financial statements
(including the related notes) included in the Registration Statement
present fairly the consolidated financial position of the Company and
its consolidated subsidiaries as of the dates indicated and the results
of operations and changes in financial condition for the periods
specified; such financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis throughout the periods involved; and the supporting schedules
included in the Registration Statement present fairly the information
required to be stated therein. The selected historical consolidated
financial data included in the Prospectus present fairly the
information shown therein and have been complied on a basis consistent
with that of the related historical consolidated financial statements
included in the Registration Statement.
(z) (i) The Registration Statement, the Prospectus
and any preliminary prospectus comply, and any further amendments or
supplements thereto will comply, with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus or any
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<PAGE> 9
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and that
(ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental
instrumentality or court, other than such as have been obtained, is
necessary under the securities laws and regulations of foreign
jurisdictions in which the Directed Shares are offered outside the
United States.
(aa) The Company has not offered, or caused the Underwriters to offer,
Shares to any person pursuant to the Directed Share Program with the specific
intent to unlawfully influence (i) a customer or supplier of the Company to
alter the customer's or supplier's level or type of business with the Company,
or (ii) a trade journalist or publication to write or publish favorable
information about the Company or its products.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees
to sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
hereto opposite its names at U.S.$_____ a share ("PURCHASE PRICE").
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Company agrees
to sell to the U.S. Underwriters the Additional Shares, and the U.S.
Underwriters shall have a onetime right to purchase, severally and not jointly,
up to __________ Additional Shares at the Purchase Price. If the U.S.
Representatives, on behalf of the U.S. Underwriters, elect to exercise such
option, the U.S. Representatives shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the U.S. Underwriters and the
date on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
overallotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each U.S. Underwriter agrees, severally
and not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I
hereto opposite the name of such U.S. Underwriter bears to the total number of
U.S. Firm Shares.
The Company and CBI, each hereby agree 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
the 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, lend, or otherwise transfer or dispose of,
directly or indirectly, any common shares, without par value, of the Company or
any securities convertible into or
8
<PAGE> 10
exercisable or exchangeable for common shares, without par value, of the Company
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 any common
shares, without par value, of the Company whether any such transaction described
in clause (i) or (ii) above is to be settled by delivery of common shares,
without par value, of the Company or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold
hereunder, (B) the common shares, without par value, of the Company to be
distributed and the options to be granted as described under the caption
"Management--Stock Ownership of Directors and Executive Officers" (C) the Common
Shares to be distributed as described under the caption "Background of the
Separation and Distribution" or (D) the issuance by the Company of common
shares, without par value, of the Company upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof of which
the Underwriters have been advised in writing.
3. TERMS OF PUBLIC OFFERING. The Company is advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable. The Company is
further advised by you that the Shares are to be offered to the public initially
at U.S.$_____ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of
U.S.$____ a share under the Public Offering Price, and that any Underwriter may
allow, and such dealers may reallow, a concession, not in excess of U.S.$____ a
share, to any Underwriter or to certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be
made to the Company in Federal or other funds immediately available in New York
City against delivery of such Firm Shares for the respective accounts of the
several Underwriters at a closing to be held at the offices of Shearman &
Sterling, 599 Lexington Avenue, New York, New York 10:00 a.m., New York City
time, on _____, 1998, or at such other time on the same or such other date, not
later than ____ __, 1998, as shall be designated in writing by you. The time and
date of such payment are hereinafter referred to as the "CLOSING DATE".
Payment for any Additional Shares shall be made to the Company
in Federal or other funds immediately available in New York City against
delivery of such Additional Shares for the respective accounts of the several
Underwriters at a closing to be held at the offices of Shearman & Sterling, 599
Lexington Avenue, New York, New York 10:00 a.m., New York City time, on the date
specified in the notice described in Section 2 or at such other time on the same
or on such other date, in any event not later than _______, 1998, as shall be
designated in writing by the U.S. Representatives. The time and date of such
payment are hereinafter referred to as the "OPTION CLOSING DATE".
Certificates for the Firm Shares and Additional Shares shall
be in definitive form and registered in such names and in such denominations as
you shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you
9
<PAGE> 11
on the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The
obligations of the Company to sell the Shares to the Underwriters and the
several obligations of the Underwriters to purchase and pay for the Shares on
the Closing Date are subject to the condition that the Registration Statement
shall have become effective not later than [_______] (New York City time) on the
date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date:
(i) there shall not have occurred any
downgrading, nor shall any notice have been given of any
intended or potential downgrading or of any review for a
possible change that does not indicate the direction of the
possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule
436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any
change, or any development involving a prospective change, in
the condition, financial or otherwise, or in the earnings,
business or operations of CBI and its subsidiaries, taken as a
whole, or of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of
this Agreement) that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated
in the Prospectus.
(b) The Underwriters shall have received on the
Closing Date a certificate, dated the Closing Date and signed by an
executive officer of each of the Company, CBI, MATRIXX and CBIS, to the
effect set forth in Section 5(a)(i) above and to the effect that the
representations and warranties of the Company, CBI, MATRIXX and CBIS
contained in this Agreement are true and correct as of the Closing Date
and that each of the Company, CBI, MATRIXX and CBIS has complied with
all of the agreements and satisfied all of the conditions on its part
to be performed or satisfied hereunder on or before the Closing Date.
The officers signing and delivering such certificates
may rely upon the best of his or her knowledge as to proceedings
threatened.
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<PAGE> 12
(c) The Underwriters shall have received on the
Closing Date an opinion of Frost & Jacobs LLP, outside counsel for the
Company and CBI, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated,
is validly existing as a corporation in good standing under
the laws of Ohio, has the corporate power and authority to own
its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is
in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries,
taken as a whole;
(ii) each of CBIS and MATRIXX has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is
in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries,
taken as a whole;
(iii) the authorized capital stock of the
Company conforms as to legal matters to the description
thereof contained in the Prospectus;
(iv) the Common Shares outstanding prior to
the issuance of the Shares have been duly authorized and are
validly issued, fully paid and nonassessable;
(v) all of the issued shares of capital
stock of each of CBIS and MATRIXX have been duly and validly
authorized and issued, are fully paid and non-assessable and
are owned directly by the Company, free and clear of any
perfected security interest and, to such counsel's knowledge,
after due inquiry, any other security interests, claims, liens
or encumbrances;
(vi) the Shares have been duly authorized
and, when issued and delivered in accordance with the terms of
this Agreement, will be validly issued, fully paid and
nonassessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights;
(vii) this Agreement has been duly
authorized, executed and delivered by each of the Company,
CBI, MATRIXX and CBIS;
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<PAGE> 13
(viii) the execution and delivery by the
Company, CBI, MATRIXX and CBIS of, and the performance by the
Company, CBI, MATRIXX and CBIS of their respective obligations
under, this Agreement will not contravene any provision of
applicable law or the articles of incorporation or the
regulations of the Company, CBI, MATRIXX or CBIS or, to the
best of such counsel's knowledge, any agreement or other
instrument binding upon the Company, CBI, MATRIXX or CBIS or
any of its respective subsidiaries that is material to the
Company and its subsidiaries, taken as a whole, or to CBI and
its subsidiaries, taken as a whole, in the case of CBI, or, to
the best of such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having
jurisdiction over CBI or the Company or their respective
subsidiaries, and no consent, approval, authorization or order
of, or qualification with, any governmental body or agency is
required for the performance by the Company, CBI, MATRIXX or
CBIS of their respective obligations under this Agreement,
except such as may be required by the securities or Blue Sky
laws or regulatory commissions of the various states in
connection with the offer and sale of the Shares by the U.S.
Underwriters;
(ix) the statements (A) in the Prospectus
under the captions "Relationship between the Company and CBI,"
"Description of Capital Stock, and "Background of the
Separation and Distribution" and (B) in the Registration
Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present
the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein;
(x) the statements in the Prospectus under
the caption "Certain Federal Income Tax Consequences to
Non-United States Holders," insofar as such statements
constitute a summary of the United States federal tax laws
referred to therein, are accurate and fairly summarize in all
material respects the United States federal tax laws referred
to therein;
(xi) after due inquiry, such counsel does
not know of any legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is
a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and
are not so described or of any statutes, regulations,
contracts or other documents that are required to be described
in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement that are not
described or filed as required;
(xii) the Company is not and, after giving
effect to the offering and sale of the Shares and the
application of the proceeds thereof as described in the
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<PAGE> 14
Prospectus, will not be an "investment company" as such term
is defined in the Investment Company Act of 1940, as amended;
(xiii) the Company and its subsidiaries (A)
are in compliance with any and all applicable Environmental
Laws, (B) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws
to conduct their respective businesses and (C) are in
compliance with all terms and conditions of any such permit,
license or approval; except where such noncompliance with
Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals
would not, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole;
and
(xiv) such counsel (A) is of the opinion
that the Registration Statement and Prospectus (except for
financial statements and schedules and other financial and
statistical data included therein as to which such counsel
need not express any opinion) comply as to form in all
material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder, (B) has no
reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which
such counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading and (C) has no reason to
believe that (except for financial statements and schedules
and other financial and statistical data as to which such
counsel need not express any belief) the Prospectus as of its
issue date contained or as of the Closing Date contains any
untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading.
With respect to paragraph (xiv) above, Frost & Jacobs
LLP may state that its opinion and belief are based upon its
participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check
or verification, except as specified in paragraphs (ix) and (x).
With respect to paragraph (ix) above, the
Underwriters shall have also received on the Closing Date an opinion of
William D. Baskett III, General Counsel of the Company, dated the
Closing Date, to the effect that the statements in the Prospectus under
the captions "Business - Cellular Telephone Service Limited Partnership
Interest" and "Legal Matters", insofar as such statements constitute
summaries of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with
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<PAGE> 15
respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein.
The opinion of Frost & Jacobs LLP described in
Section 5(c) above shall be rendered to the Underwriters at the request
of the Company and shall so state therein.
In rendering such opinion, such counsel may rely as to matters
of fact, to the extent they deem proper, on certificates of responsible
officers of the Company, CBI, MATRIXX and CBIS and public officials.
(d) The Underwriters shall have received on the
Closing Date an opinion of Shearman & Sterling, counsel for the
Underwriters, dated the Closing Date, in form and substance
satisfactory to you.
(e) The Underwriters shall have received, on each of
the date hereof and the Closing Date, a letter dated the date hereof or
the Closing Date, as the case may be, in form and substance
satisfactory to the Underwriters, from PricewaterhouseCoopers LLP.,
independent public accountants for the Company, containing statements
and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the
Registration Statement and the Prospectus; provided that the letter
delivered on the Closing Date shall use a "cut-off date" not earlier
than the date hereof.
(f) The Underwriters shall have received, on the date
hereof, a letter dated the date hereof in form and substance
satisfactory to the Underwriters, from PricewaterhouseCoopers LLP.,
independent public accountants for American Transtech, Inc. prior to
the acquisition of it by MATRIXX, containing statements and information
of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus.
(g) The "lockup" agreements, each substantially in
the form of Exhibit A hereto, between you and CBI relating to sales and
certain other dispositions of common shares, without par value, of the
Company or certain other securities, delivered to you on or before the
date hereof, shall be in full force and effect on the Closing Date.
(h) The several obligations of the U.S. Underwriters
to purchase Additional Shares hereunder are subject to the delivery to
the U.S. Representatives on the Option Closing Date of such documents
as they may reasonably request with respect to the good standing of the
Company, the due authorization and issuance of the Additional Shares
and other matters related to the issuance of the Additional Shares.
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<PAGE> 16
(i) The Common Shares shall have been approved for
listing on the New York Stock Exchange ("NYSE"), subject only to
official notice of issuance.
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company and, with respect
to paragraph (f) below, CBI, MATRIXX and CBIS, covenant with each Underwriter as
follows:
(a) To furnish to you, without charge, [_____] signed
copies of the Registration Statement (including exhibits thereto) and
for delivery to each other Underwriter a conformed copy of the
Registration Statement (without exhibits thereto) and to furnish to you
in New York City, without charge, prior to 10:00 a.m. New York City
time on the business day next succeeding the date of this Agreement and
during the period mentioned in Section 6(c) below, as many copies of
the Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed
pursuant to such Rule.
(c) If, during such period after the first date of
the public offering of the Shares as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company)
to which Shares may have been sold by you on behalf of the Underwriters
and to any other dealers upon request, either amendments or supplements
to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not, in the light of the circumstances
when the Prospectus is delivered to a purchaser, be misleading or so
that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and
sale under the securities or Blue Sky laws of such jurisdictions as you
shall reasonably request.
(e) To make generally available to the Company's
security holders and to you as soon as practicable an earning statement
covering the twelve-month period ending [________], 1999 that satisfies
the provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
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<PAGE> 17
(f) Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, to pay
or cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees,
disbursements and expenses of the Company's counsel and the Company's
accountants in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in
connection with the preparation and filing of the Registration
Statement, any preliminary prospectus, the Prospectus and amendments
and supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof
to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and
delivery of the Shares to the Underwriters, including any transfer or
other taxes payable thereon, (iii) the cost of printing or producing
any Blue Sky or Legal Investment memorandum in connection with the
offer and sale of the Shares under state securities laws and all
expenses in connection with the qualification of the Shares for offer
and sale under state securities laws as provided in Section 6(d)
hereof, including filing fees and the reasonable fees and disbursements
of counsel for the Underwriters in connection with such qualification
and in connection with the Blue Sky or Legal Investment memorandum,
(iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association
of Securities Dealers, Inc., (v) all fees and expenses in connection
with the preparation and filing of the registration statement on Form
8-A relating to the Common Shares and all costs and expenses incident
to listing the Shares on the NYSE, (vi) the cost of printing
certificates representing the Shares, (vii) the costs and charges of
any transfer agent, registrar or depositary, (viii) the costs and
expenses of the Company relating to investor presentations on any "road
show" undertaken in connection with the marketing of the offering of
the Shares, including, without limitation, expenses associated with the
production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with
the prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants,
and the cost of any aircraft chartered in connection with the road
show, (ix) all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp
duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program and (x) all
other costs and expenses incident to the performance of the obligations
of the Company hereunder for which provision is not otherwise made in
this Section. It is understood, however, that except as provided in
this Section, Section 7 entitled "Indemnity and Contribution", and the
last paragraph of Section 9 below, the Underwriters will pay all of
their costs and expenses, including fees and disbursements of their
counsel, stock transfer taxes payable on resale of any of the Shares by
them and any advertising expenses connected with any offers they may
make.
(g) that in connection with the Directed Share Program, the
Company will ensure that the Directed Shares will be restricted to the
extent required by the National Association of
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<PAGE> 18
Securities Dealers, Inc. (the "NASD") or the NASD rules from sale,
transfer, assignment, pledge or hypothecation for a period of three
months following the date of the effectiveness of the Registration
Statement. Morgan Stanley will notify the Company as to which
Participants will need to be so restricted. The Company will direct the
transfer agent to place stop transfer restrictions upon such securities
for such period of time.
(h) Furthermore, the Company covenants with Morgan Stanley
that the Company will comply with all applicable securities and other
applicable laws, rules and regulations in each foreign jurisdiction in
which the Directed Shares are offered in connection with the Directed
Share Program.
7. INDEMNITY AND CONTRIBUTION. (a) The Company, CBI, MATRIXX
and CBIS, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(b) The Company agrees to indemnify and hold harmless Morgan Stanley
and each person, if any, who controls Morgan Stanley within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act
("Morgan Stanley Entities"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in the prospectus wrapper material
prepared by or with the consent of the Company for distribution in foreign
jurisdictions in connection with the Directed Share Program attached to the
Prospectus or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein, when considered in conjunction with the
Prospectus or any applicable preliminary prospectus, not misleading; (ii) caused
by the failure of any Participant to pay for and accept delivery of the shares
which, immediately following the effectiveness of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or (iii) related to,
arising out of, or in connection with the Directed Share Program, provided that,
the Company shall not
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be responsible under this subparagraph (iii) for any losses, claims, damages or
liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith or gross negligence of Morgan
Stanley Entities.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, CBI, MATRIXX and CBIS and each person, if any, who
controls the Company, CBI, MATRIXX or CBIS within the meaning of either Section
15 of the Securities Act or Section 20 of the Exchange Act to the same extent as
the foregoing indemnity from the Company, CBI, MATRIXX and CBIS to such
Underwriter, but only with reference to information relating to such Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 7(a), 7(b) or (c), such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to Section
7(b) hereof in respect of such action or proceeding, then in addition to such
separate firm for the indemnified parties, the indemnifying party shall be
liable for the reasonable fees and expenses of not more than one separate firm
(in addition to any local counsel) for Morgan Stanley for the defense of any
losses, claims, damages and liabilities arising out of the Directed Share
Program, and all persons, if any, who control Morgan Stanley within the meaning
of either Section 15 of the Act or Section 20 of the Exchange Act. Such firm
shall be designated in writing by Morgan Stanley & Co. Incorporated, in the case
of parties indemnified pursuant to Sections 7(a) and 7(b), and by the Company or
CBI in the case of parties indemnified pursuant to Section 7(c). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such
18
<PAGE> 20
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(e) To the extent the indemnification provided for in Section
7(a), (b) or 7(c) is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, CBI, MATRIXX and CBIS on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause 7(e)(i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause 7(e)(i) above but also the relative fault of the Company,
CBI, MATRIXX and CBIS on the one hand and of the Underwriters on the other hand
in connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company, CBI, MATRIXX and
CBIS on the one hand and the Underwriters on the other hand in connection with
the offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by the Company and the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover of the Prospectus, bear to the aggregate Public Offering
Price of the Shares. The relative fault of the Company, CBI, MATRIXX and CBIS on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, CBI, MATRIXX or CBIS or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the respective number of Shares they have purchased
hereunder, and not joint.
19
<PAGE> 21
(f) The Company, CBI, MATRIXX, CBIS and the Underwriters agree
that it would not be just or equitable if contribution pursuant to this Section
7 were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in Section 7(e).
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 7 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in
this Section 7 and the representations, warranties and other statements of the
Company, CBI, MATRIXX and CBIS contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any termination of this
Agreement, (ii) any investigation made by or on behalf of any Underwriter or any
person controlling any Underwriter or by or on behalf of the Company, its
officers or directors or any person controlling the Company and (iii) acceptance
of and payment for any of the Shares.
8. TERMINATION. This Agreement shall be subject to termination
by notice given by you to the Company, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of CBI or of the Company shall have been suspended on any exchange or
in any over-the- counter market, (iii) a general moratorium on commercial
banking activities in New York shall have been declared by either Federal or New
York State authorities or (iv) there shall have occurred any outbreak or
escalation of hostilities or any change in financial markets or any calamity or
crisis that, in your judgment, is material and adverse and (b) in the case of
any of the events specified in clauses 8(a)(i) through 8(a)(iv), such event,
singly or together with any other such event, makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
20
<PAGE> 22
9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement
shall become effective upon the execution and delivery hereof by the parties
hereto.
If, on the Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares that it has or they have agreed to purchase hereunder on such
date, and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I or Schedule
II bears to the aggregate number of Firm Shares set forth opposite the names of
all such nondefaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 9 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any nondefaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on the
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional Shares
that such non-defaulting Underwriters would have been obligated to purchase in
the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company, CBI,
MATRIXX and CBIS to comply with the terms or to fulfill any of the conditions of
this Agreement, or if for any reason the Company, CBI, MATRIXX or CBIS shall be
unable to perform its obligations under this Agreement, the Company, CBI,
MATRIXX or CBIS will reimburse the Underwriters or such Underwriters as have so
terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
21
<PAGE> 23
10. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
12. HEADINGS. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
Very truly yours,
CONVERGYS CORPORATION
By:
-----------------------
Name:
Title:
CINCINNATI BELL INC.
By:
-----------------------
Name:
Title:
MATRIXX MARKETING INC.
By:
-----------------------
Name:
Title:
CINCINNATI BELL INFORMATION
SYSTEMS INC.
By:
-----------------------
Name:
Title:
22
<PAGE> 24
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
SMITH BARNEY INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH
BEAR, STEARNS & CO. INC.
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
---------------------------
Name:
Title:
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
SMITH BARNEY INC.
MERRILL LYNCH INTERNATIONAL
BANCAMERICA ROBERTSON STEPHENS
BEAR, STEARNS INTERNATIONAL LIMITED
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By: Morgan Stanley & Co. International Limited
By:
----------------------------
Name:
Title:
23
<PAGE> 25
SCHEDULE I
U.S. UNDERWRITERS
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
Morgan Stanley & Co. Incorporated
BancAmerica Robertson Stephens
Smith Barney Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Bear, Stearns & Co. Inc.
---------------
Total U.S. Firm Shares ..............
===============
<PAGE> 26
SCHEDULE II
INTERNATIONAL UNDERWRITERS
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
Morgan Stanley & Co. International Limited
Smith Barney Inc.
Merrill Lynch International
BancAmerica Robertson Stephens
Bear, Stearns International Limited
---------------
Total International Firm Shares ......
===============
<PAGE> 27
EXHIBIT A
[FORM OF LOCK-UP LETTER]
____________, 1998
Morgan Stanley & Co. Incorporated
Bancamerica Robertson Stephens
Smith Barney Inc.
Merrill Lynch, Pierce, Fenner & Incorporated
Bear, Stearns & Co. Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Smith Barney Inc.
Merrill Lynch International
BancAmerica Robertson Stephens
Bear, Stearns International Limited
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") and Morgan Stanley & Co. International Limited ("MSIL")
propose to enter into an Underwriting Agreement (the "UNDERWRITING AGREEMENT")
with Convergys Corporation, an Ohio corporation (the "COMPANY"), Cincinnati Bell
Inc., MATRIXX Marketing Inc. and Cincinnati Bell Information Systems Inc.
providing for the public offering (the "PUBLIC OFFERING") by the several
Underwriters, including Morgan Stanley and MSIL (the "UNDERWRITERS") of ___
common shares, without par value, of the Company (the "COMMON SHARES").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the
<PAGE> 28
prior written consent of Morgan Stanley on behalf of the Underwriters, it will
not, during the period commencing on the date hereof and ending 180 days after
the date of the final prospectus relating to the Public Offering (the
"PROSPECTUS"), (1) 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, lend, or otherwise transfer or dispose of,
directly or indirectly, Common Shares or any securities convertible into or
exercisable or exchangeable for Common Shares, or (2) 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 (1) or (2) above is to be settled by delivery of
Common Shares or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (a) the sale of any Shares to the Underwriters
pursuant to the Underwriting Agreement, (b) transactions relating to Common
Shares or other securities acquired in open market transactions after the
completion of the Public Offering or (c) to the Distribution as such term is
defined in the Prospectus. In addition, the undersigned agrees that, without the
prior written consent of Morgan Stanley on behalf of the Underwriters, it will
not, during the period commencing on the date hereof and ending 180 days after
the date of the Prospectus, make any demand for or exercise any right with
respect to, the registration of any Common Shares or any security convertible
into or exercisable or exchangeable for Common Shares.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
-------------------------
(Name)
-------------------------
(Address)
A-2
<PAGE> 1
Exhibit 3.1
AMENDED ARTICLES OF INCORPORATION
OF
CONVERGYS CORPORATION
FIRST: The name of the corporation is CONVERGYS CORPORATION.
SECOND: The place in Ohio where its principal office is located is
Cincinnati, Hamilton County.
THIRD: The purpose for which the corporation is formed is to engage in
any lawful act or activity for which corporations may be formed under Sections
1701.01 to 1701.98, inclusive, of the Ohio Revised Code.
FOURTH: The number of shares that the corporation is authorized to have
outstanding is 500,000,000 common shares, without par value (classified as
"Common Shares"), 4,000,000 voting preferred shares, without par value
(classified as "Voting Preferred Shares") and 1,000,000 non-voting preferred
shares, without par value (classified as "Non-Voting Preferred Shares"). The
preferred shares of both classes are collectively referred to herein as
"Preferred Shares". The express terms of the shares of each of such classes are
as follows:
1. Preferred Shares may be issued from time to time in one or more
series. All Preferred Shares of all series shall rank equally and be
identical in all respects except that only Voting Preferred Shares
shall be voting shares and except that the board of directors is
authorized to adopt amendments to the Amended Articles in respect of
any unissued or treasury Preferred Shares and thereby to fix or change,
to the full extent now or hereafter permitted by the laws of Ohio, the
division of such shares into series and the designation and authorized
number of shares of each series and, subject to the provisions of this
Article Fourth, the relative rights, preferences and limitations of
each series and the variations in such rights, preferences and
limitations as between series and specifically is authorized to fix or
change with respect to each series:
(a) the dividend rate on the shares of such series, the dates of
payment of such dividends, and the date or dates from which such
dividends shall be cumulative;
(b) the times when, the prices at which, and all other terms and
conditions upon which, shares of such series shall be redeemable;
(c) the amounts which the holders of shares of such series shall be
entitled to receive upon the liquidation, dissolution or winding up
of the corporation, which amounts may vary depending on whether
1
<PAGE> 2
such liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates;
(d) whether or not the shares of such series shall be subject to the
operation of a purchase, retirement or sinking fund and, if so, the
extent to and manner in which such purchase, retirement or sinking
fund shall be applied to the purchase or redemption of the shares of
such series for retirement or for other corporate purposes and the
terms and provisions relative to the operation of such fund or
funds;
(e) whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other class or series and, if
so, the price or prices or the rate or rates of conversion or
exchange and the method, if any, of adjusting the same;
(f) the restrictions, if any, upon the payment of dividends or
making of other distributions on, and upon the purchase or other
acquisition of, Common Shares;
(g) the restrictions, if any, upon the creation of indebtedness, and
the restrictions, if any, upon the issue of shares of such series or
of any additional shares ranking on a parity with or prior to the
shares of such series in addition to the restrictions provided for
in this Article Fourth; and
(h) such other rights, preferences and limitations as shall not be
inconsistent with this Article Fourth.
All shares of any particular series shall rank equally and be
identical in all respects except that shares of any one series
issued at different times may differ as to the date from which
dividends shall be cumulative.
2. Dividends on Preferred Shares of each series shall be cumulative
from the date or dates fixed with respect to such series and shall be
paid or declared or set apart for payment for all past dividend periods
and for the current dividend period before any dividends (other than
dividends payable in Common Shares) shall be declared or paid or set
apart for payment on Common Shares. Whenever, at any time, full
cumulative dividends for all past dividend periods and for the current
dividend period shall have been paid or declared and set apart for
payment on all then outstanding Preferred Shares and all requirements
with respect to any purchase, retirement or sinking fund or funds for
all series of Preferred Shares shall have been complied with, the board
of directors may declare dividends on Common Shares, and Preferred
Shares shall not be entitled to share therein.
2
<PAGE> 3
3. Upon any liquidation, dissolution or winding up of the corporation,
the holders of Preferred Shares of each series shall be entitled to
receive the amounts to which such holders are entitled as fixed with
respect to such series, including all dividends accumulated to the date
of final distribution, before any payment or distribution of assets of
the corporation shall be made to or set apart for the holders of Common
Shares, and after such payments shall have been made in full to the
holders of Preferred Shares, the holders of Common Shares shall be
entitled to receive any and all assets remaining to be paid or
distributed to shareholders, and the holders of Preferred Shares shall
not be entitled to share therein. For the purposes of this paragraph,
the voluntary sale, conveyance, lease, exchange or transfer of all or
substantially all the property or assets of the corporation or a
consolidation or merger of the corporation with one or more other
corporations (whether or not the corporation is the corporation
surviving such consolidation or merger) shall not be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary.
4. Each outstanding Common Share and each outstanding Voting Preferred
Share shall entitle the holder thereof to one vote on each matter
properly submitted to the shareholders for their vote, consent, waiver,
release or other action, subject to the provisions of law from time to
time in effect with respect to cumulative voting. Except as otherwise
required by law or by this Article Fourth, Non-Voting Preferred Shares
shall not entitle the holders thereof to vote, consent, waive, release
or otherwise act on any question or in any proceeding or to be
represented at or receive notice of any meeting of shareholders.
5. So long as any Preferred Shares are outstanding, the corporation
will not (a) without the affirmative vote or consent of the holders of
at least two-thirds of all Preferred Shares at the time outstanding,
(1) authorize shares ranking prior to Preferred Shares or (2) change
any provision of this Article Fourth so as to affect adversely
Preferred Shares; (b) without the affirmative vote or consent of the
holders of at least two-thirds of any series of Preferred Shares at the
time outstanding, change any of the provisions of such series so as to
affect adversely the shares of such series; or (c) without the
affirmative vote or consent of the holders of at least a majority of
all Preferred Shares at the time outstanding, (1) increase the
authorized number of Preferred Shares or (2) authorize shares of any
other class ranking on a parity with Preferred Shares.
6. Whenever, at any time or times, dividends payable on Preferred
Shares shall be in default in an aggregate amount equivalent to six
full quarterly dividends on any series of Preferred Shares at the time
outstanding, the number of directors then constituting the board of
directors of the corporation shall ipso facto be increased by two, and
the outstanding Preferred Shares shall, in addition to any other voting
rights, have the exclusive right, voting separately as a class and
without regard to series, to elect two directors of the corporation to
fill such newly created directorships, and such right shall continue
until such time as all dividends accumulated on all Preferred Shares to
the latest dividend payment date shall have been paid or declared and
set apart for payment.
3
<PAGE> 4
7. If the amounts payable with respect to any requirement to retire
Preferred Shares are not paid in full with respect to all series as to
which such requirement exists, the number of shares to be retired in
each series shall be in proportion to the amounts which would be
payable on account of such requirement if all amounts payable were paid
in full.
8. No holder of shares of any class shall have any preemptive rights.
FIFTH: The number of directors of the corporation shall be fixed from
time to time by its Regulations and may be increased or decreased as therein
provided, but the number of directors shall in no event be fixed at less than
three. The board of directors shall be divided into three classes, as nearly
equal in number as the then fixed number of directors permits, with the term of
office of one class expiring each year. At the annual meeting of shareholders in
1999 and each annual meeting of shareholders thereafter, the successors to that
class of directors whose term then expires shall be elected to hold office for a
term expiring at the third succeeding annual meeting. In the event of any
increase in the number of directors of the corporation, the additional directors
shall be similarly classified in such a manner that each class of directors
shall be as equal in number as possible. In the event of any decrease in the
number of directors of the corporation, such decrease shall be effected in such
a manner that each class of directors shall be as equal in number as possible.
SIXTH: 1. (a) In addition to any affirmative vote required by law or
by these Amended Articles, and except as otherwise expressly provided in
paragraph 2 of this Article Sixth:
(1) any merger or consolidation of the corporation or
of any Subsidiary (as hereinafter defined) with (A)
any Interested Shareholder (as hereinafter defined) or
(B) any other corporation (whether or not itself an
Interested Shareholder) which is, or after such merger
or consolidation would be, an Affiliate (as
hereinafter defined) of an Interested Shareholder; or
(2) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a
series of transactions) to or with any Interested
Shareholder or any Affiliate of any Interested
Shareholder of any assets of the corporation or of any
Subsidiary having an aggregate Fair Market Value (as
hereinafter defined) of $5,000,000 or more; or
(3) the issuance or transfer by the corporation or by
any Subsidiary (in one transaction or a series of
transactions) of any securities of the corporation or
of any Subsidiary to any Interested Shareholder or to
any Affiliate of any Interested Shareholder in
exchange for
4
<PAGE> 5
cash, securities or other property (or combination
thereof) having an aggregate Fair Market Value of
$5,000,000 or more; or
(4) the adoption of any plan or proposal for the
liquidation or dissolution of the corporation proposed
by or on behalf of an Interested Shareholder or any
Affiliate of any Interested Shareholder; or
(5) any reclassification of securities (including any
reverse stock split), or recapitalization of the
corporation, or any merger or consolidation of the
corporation with any Subsidiary or any other
transaction (whether or not with or into or otherwise
involving an Interested Shareholder) which has the
effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any
class of equity or convertible securities of the
corporation or of any Subsidiary which is directly or
indirectly owned by any Interested Shareholder or any
Affiliate of any Interested Shareholder;
shall require the affirmative vote of the holders of at least 80% of
the then outstanding Common Shares and Voting Preferred Shares of the
corporation entitled to a vote (the "Voting Shares"), voting as a
single class at a meeting of shareholders called for such purpose. Such
affirmative vote shall be required notwithstanding that no vote may be
required, or that a lesser percentage may be specified, by law or in
any agreement with any national securities exchange or otherwise.
(b) The term "Business Combination" as used in this Article
Sixth shall mean any transaction referred to in any one or
more of clauses (1) through (5) of subparagraph (a) of this
paragraph 1.
2. The provisions of paragraph 1 of this Article Sixth shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote as is required by
law and by any other provision of these Amended Articles, if all of the
conditions specified in either of the following subparagraphs (a) or
(b) are met:
(a) The Business Combination shall have been approved by a
majority of the Continuing Directors (as hereinafter defined)
of the corporation; provided, however, that such approval
shall be effective only if obtained at a meeting at which a
Continuing Director Quorum (as hereinafter defined) is
present.
(b) All of the following conditions shall have been met:
(1) The aggregate amount of (x) cash and (y) Fair Market
Value (determined as of the date of the consummation of
the Business
5
<PAGE> 6
Combination) of consideration other than cash, to be
received per share by holders of Common Shares in such
Business Combination shall be at least equal to the
highest amount determined under subclauses (A), (B) and
(C) below:
(A) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting
dealers' fees, if any) paid by the Interested
Shareholder for any Common Share acquired by it (i)
within the two-year period immediately prior to the
first public announcement of the proposal of the
Business Combination (the "Announcement Date") or (ii)
in the transaction in which it became an Interested
Shareholder, whichever is higher;
(B) the Fair Market Value per Common Share on the
Announcement Date or on the date on which the
Interested Shareholder became an Interested
Shareholder (the "Determination Date"), whichever is
higher; and
(C) the price per Common Share equal to the Fair
Market Value per Common Share determined pursuant to
subparagraph (b)(1)(B) above, multiplied by the ratio
of (i) the highest per share price (including
brokerage commissions, transfer taxes and soliciting
dealers' fees, if any) paid by the Interested
Shareholder for any Common Share acquired by it within
the two-year period immediately prior to the
Announcement Date to (ii) the Fair Market Value per
Common Share on the first day in such two-year period
on which the Interested Shareholder acquired any
Common Share.
(2) The aggregate amount of (x) cash and (y) Fair Market
Value (determined as of the date of the consummation of
the Business Combination) of consideration other than
cash, to be received per share by holders of any class of
Preferred Shares shall be at least equal to the highest
amount determined under subclauses (A), (B), (C) and (D)
below:
(A) the highest per share price (including brokerage
commissions, transfer taxes and soliciting dealers'
fee, if any) paid by the Interested Shareholder for
any shares of such class of Preferred Shares acquired
by it (i) within the two-year period immediately prior
to the Announcement Date or (ii) in the transaction in
which it became an Interested Shareholder, whichever
is higher;
(B) the highest preferential amount per share to which
the holders of such class of Preferred Shares would be
entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up
6
<PAGE> 7
of the affairs of the corporation regardless of
whether the Business Combination to be consummated
constitutes such an event;
(C) the Fair Market Value per share of such class of
Preferred Shares on the Announcement Date or on the
Determination Date, whichever is higher; and
(D) the price per Preferred Share equal to the Fair
Market Value per share of such class of Preferred
Shares determined pursuant to subparagraph (b)(2)(C)
above, multiplied by the ratio of (i) the highest per
share price (including brokerage commissions, transfer
taxes and soliciting dealers' fees, if any) paid by
the Interested Shareholder for any shares of such
class of Preferred Shares acquired by it within the
two-year period immediately prior to the Announcement
Date to (ii) the Fair Market Value per share of such
class of Preferred Shares on the first day in such
two-year period on which the Interested Shareholder
acquired any share of such class of Preferred Shares.
The provisions of this subparagraph (b)(2) shall be
required to be met with respect to every class of
outstanding Preferred Shares, whether or not the
Interested Shareholder has previously acquired any shares
of a particular class of Preferred Shares.
(3) The consideration to be received by holders of Common
Shares or of a particular class of Preferred Shares shall
be in cash or in the same form as the Interested
Shareholder has previously paid for shares of each such
class of Common Shares or Preferred Shares, respectively.
If the Interested Shareholder has paid for shares of any
class of Common Shares or Preferred Shares, respectively,
with varying forms of consideration, the form of
consideration for such class shall be either cash or that
form used to acquire the largest number of shares of such
class previously acquired by the Interested Shareholder.
(4) After such Interested Shareholder has become an
Interested Shareholder and prior to the consummation of
such Business Combination: (A) except as approved by a
majority of the Continuing Directors, there shall have
been no failure to declare and pay at the regular date
therefor any full quarterly dividends (whether or not
cumulative) on outstanding Preferred Shares; (B) except as
approved by a majority of the Continuing Directors, there
shall have been (i) no reduction in the annual rate of
dividends paid on Common Shares (except as necessary to
reflect any subdivision of the Common Shares); and (ii) an
increase in such annual rate of dividends as necessary to
reflect any reclassification (including any reverse stock
split), recapitalization, reorganization or any
7
<PAGE> 8
similar transaction which has the effect of reducing the
number of outstanding Common Shares; and (C) such
Interested Shareholder shall not have become the
beneficial owner of any additional Common or Preferred
Shares of the corporation except as part of the
transaction which results in such Interested Shareholder
becoming an Interested Shareholder. The approval by a
majority of the Continuing Directors of any exception to
the requirements set forth in clauses (A) and (B) above
shall be effective only if obtained at a meeting at which
a Continuing Director Quorum is present.
(5) After such Interested Shareholder has become an
Interested Shareholder, such Interested Shareholder shall
not have received the benefit, directly or indirectly
(except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages
provided by the corporation, whether in anticipation of or
in connection with such Business Combination or otherwise.
(6) A proxy or information statement describing the
proposed Business Combination and complying with the
requirements of the Securities Exchange Act of 1934 and
the rules and regulations thereunder (or any subsequent
provisions amending or replacing such Act, rules or
regulations) shall be mailed to all shareholders of the
corporation at least 30 days prior to the consummation of
such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to
such Act, rules, regulations or subsequent provisions).
3. For the purposes of this Article Sixth:
(a) The term "person" shall mean any individual, firm, partnership,
corporation or other entity.
(b) The term "Interested Shareholder" shall mean any person (other
than the corporation or any Subsidiary and other than any
profit-sharing, employee stock ownership or other employee benefit
plan of the corporation or of any Subsidiary or any trustee of or
fiduciary with respect to any such plan when acting in such
capacity) who or which:
(1) is the beneficial owner (as hereinafter
defined) of 10% or more of the outstanding Voting
Shares; or
(2) is an Affiliate (as hereinafter defined) of
the corporation and at any time within the
two-year period immediately prior to the date in
question was the beneficial owner of 10% or more
of the outstanding Voting Shares; or
8
<PAGE> 9
(3) is an assignee of or has otherwise succeeded
to any outstanding Voting Shares which were at
any time within the two-year period immediately
prior to the date in question beneficially owned
by any Interested Shareholder, if such assignment
or succession shall have occurred in the course
of a transaction or series of transactions not
involving a public offering within the meaning of
the Securities Act of 1933.
(c) A person shall be deemed the "beneficial owner" of any Voting
Shares:
(1) which such person or any of its Affiliates or
Associates (as hereinafter defined) beneficially
owns, directly or indirectly; or
(2) which such person or any of its Affiliates or
Associates has, directly or indirectly, (A) the
right to acquire (whether such right is
exercisable immediately or only after the passage
of time), pursuant to any agreement, arrangement
or understanding or upon the exercise of
conversion rights, exchange rights, warrants or
options, or otherwise, or (B) the right to vote
pursuant to any agreement, arrangement or
understanding; or
(3) which are beneficially owned, directly or
indirectly, by any other person with which such
person or any of its Affiliates or Associates has
any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or
disposing of any Voting Shares.
(d) For the purposes of determining whether a person is an
Interested Shareholder pursuant to subparagraph (b) of this
paragraph 3, the number of Voting Shares deemed to be outstanding
shall include shares deemed owned through application of
subparagraph (c) of this paragraph 3 but shall not include any other
Voting Shares which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
(e) The terms "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule l2b-2 of the General Rules
and Regulations promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as in effect
on March 1, l984.
(f) The term "Subsidiary" means any corporation of which a majority
of any class of equity security is owned, directly, or indirectly,
by the corporation; provided, however, that for the purposes of the
definition of
9
<PAGE> 10
Interested Shareholder set forth in subparagraph (b) of this
paragraph 3, the term "Subsidiary" shall mean only a corporation of
which a majority of each class of equity security is owned, directly
or indirectly, by the corporation.
(g) The term "Continuing Director" means any member of the board of
directors of the corporation who is unaffiliated with the Interested
Shareholder and was a member of the board of directors prior to the
time that the Interested Shareholder became an Interested
Shareholder, and any successor of a Continuing Director who is
unaffiliated with the Interested Shareholder and is either
recommended or elected to succeed a Continuing Director by a
majority of Continuing Directors, provided that such recommendation
or election shall be effective only if made at a meeting at which a
Continuing Director Quorum is present.
(h) The term "Continuing Director Quorum" means that number of
Continuing Directors constituting at least two-thirds of the whole
authorized number of directors of the corporation capable of
exercising the powers conferred upon them under the provisions of
these Amended Articles or the Regulations of the corporation or by
law.
(i) The term "Fair Market Value" means: (1) in the case of shares,
the highest closing sale price of a share during the 30-day period
immediately preceding the date in question on the Composite Tape for
New York Stock Exchange-Listed Stocks, or, if the sale price of such
share is not quoted on the Composite Tape, on the New York Stock
Exchange, or, if such shares are not listed on such Exchange, on the
principal United States securities exchange registered under the
Securities Exchange Act of 1934 on which such shares are listed, or,
if such shares are not listed on any such exchange, the highest
closing bid quotation with respect to a share during the 30-day
period preceding the date in question on the National Association of
Securities Dealers, Inc. Automated Quotations System or any system
then in use, or, if no such quotations are available, the fair
market value on the date in question of such share as determined by
the board of directors of the corporation in good faith; and (2) in
the case of property other than cash or shares, the fair market
value of such property on the date in question as determined in good
faith by a majority of Continuing Directors, provided that such
determination shall be effective only if made at a meeting at which
a Continuing Director Quorum is present.
(j) The term "Common Shares" shall mean Common Shares of the
corporation.
10
<PAGE> 11
(k) The term "Preferred Shares" shall mean Voting Preferred Shares,
Non-Voting Preferred Shares and any other class of Preferred Shares
which may from time to time be authorized in or by these Amended
Articles and which by the terms of its issuance is specifically
designated "Preferred Shares" for purposes of this Article Sixth.
(l) In the event of any Business Combination in which the
corporation survives, the phrase "consideration, other than cash, to
be received " as used in subparagraphs (b)(1) and (2) of paragraph 2
of this Article Sixth shall include Common Shares and/or any other
Voting Shares retained by the holders of such shares.
4. Nothing contained in this Article Sixth shall be construed to
relieve any Interested Shareholder from any fiduciary obligation
imposed by law.
5. Notwithstanding any other provisions of these Amended Articles or
the Regulations of the corporation (and notwithstanding that a lesser
percentage may be specified by law, these Amended Articles or the
Regulations of the corporation), the affirmative vote of the holders of
at least 80% of the then outstanding Voting Shares, voting as a single
class at a meeting of shareholders called for such purpose, shall be
required to amend or repeal, or adopt any provisions of these Amended
Articles inconsistent with, this Article Sixth; provided, however, that
if the board of directors of the corporation has recommended such
amendment, repeal or adoption, 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 an Interested Shareholder, then
the affirmative vote of the holders of only two-thirds of the then
outstanding Voting Shares, voting as a single class at a meeting of
shareholders called for such purpose, shall be required to amend or
repeal, or adopt any provisions inconsistent with, this Article Sixth.
SEVENTH: The corporation, by action of the board of directors and without
action by the shareholders, may purchase its shares of any class for the
purposes and to the extent permitted by law.
EIGHTH: Notwithstanding any provision of the General Corporation Law of
Ohio now or hereafter in effect, no shareholder shall have the right to vote
cumulatively in the election of directors. Without limiting the generality of
the preceding sentence, no shareholder shall have the right at any time in the
election of directors either to give one candidate as many votes as the number
of directors to be elected multiplied by the number of his votes equals or to
distribute his votes on the same principle among two or more candidates.
11
<PAGE> 12
NINTH: These Amended Articles of Incorporation supersede and take the place
of the existing Articles of Incorporation.
12
<PAGE> 1
Exhibit 3.2
REGULATIONS
CONVERGYS CORPORATION
ARTICLE I - MEETINGS
SECTION 1. ANNUAL MEETING. The annual meeting of shareholders of the corporation
shall be held in the fourth month following the close of the corporation's
fiscal year on such date as the board of directors may from time to time
determine.
SECTION 2. PLACE OF MEETINGS. All meetings of shareholders shall be held at such
place within or without the State of Ohio as may be designated in the notice of
the meeting.
SECTION 3. QUORUM. At all meetings of shareholders the holders of a majority of
the shares issued and outstanding and entitled to vote at such meeting, present
in person or by proxy, shall constitute a quorum, but no action required by law,
the Amended Articles or the Regulations to be authorized or taken by the holders
of a designated proportion of the shares of any particular class or of each
class, may be authorized or taken by a lesser proportion.
SECTION 4. SPECIAL MEETINGS. Special meetings of shareholders for any purpose or
purposes may be called by the chairman of the board, by the president, by the
vice president authorized to exercise the authority of the president in case of
the president's absence, death or disability, by resolution of the directors or
by resolution of the holders of not less than one-half of the outstanding voting
power of the corporation.
ARTICLE II - BOARD OF DIRECTORS
SECTION 1. NUMBER. The number of directors of the corporation, which shall be
not less than three nor more than seventeen, shall be seven until increased or
decreased by the affirmative vote of two-thirds of the whole authorized number
of directors or by the affirmative vote of the holders of at least two-thirds of
the outstanding voting power of the corporation voting as a single class at a
meeting of shareholders called for the purpose of electing directors. No
reduction in the number of directors shall have the effect of shortening the
term of any incumbent director.
SECTION 2. MEETINGS. An organization meeting of the board of directors may be
held, without notice, immediately after the annual meeting of shareholders for
the purpose of electing officers,
<PAGE> 2
creating an executive committee and attending to such other business as may
properly come before the meeting. Additional regular meetings shall be held at
such times as the board of directors may from time to time determine.
SECTION 3. PLACE OF MEETINGS. All meetings of the board of directors shall be
held at such place within or without the State of Ohio as may be designated in
the notice of the meeting.
SECTION 4. REMOVAL. Any director may be removed from office, without assigning
cause, by the affirmative vote of the holders of at least two-thirds of the
outstanding voting power of the corporation voting as a single class at a
meeting of shareholders called for such purpose.
SECTION 5. VACANCIES. Any vacancy on the board of directors, whether created by
an increase in the number of directors, removal of a director, death or
resignation of a director or otherwise, may be filled by the remaining
directors, though less than a majority of the whole authorized number of
directors, by a majority vote, or by the affirmative vote of the holders of at
least two-thirds of the outstanding voting power of the corporation voting as a
single class at a meeting of shareholders called for such purpose.
ARTICLE III - EXECUTIVE AND OTHER COMMITTEES
SECTION 1. ELECTION AND POWERS. The board of directors shall create an executive
committee of not less than three directors, including the chairman of the board,
if one has been elected, and the president. The board of directors may appoint
one or more directors as alternate members of the executive committee, who may
take the place of any absent member or members at any meeting of the executive
committee. Subject to such limitations as the board of directors may from time
to time prescribe, the executive committee shall have all the powers of the
board of directors in the intervals between meetings of the board, other than
that of filling vacancies among the directors or in any committee of the
directors.
SECTION 2. MEETINGS AND QUORUM. Regular meetings of the executive committee
shall be held at such times as the executive committee may from time to time
determine, and special meetings of the executive committee may be called by the
chairman of the board, if one has been elected, or the president to be held at
any time and place and shall be called when any two members of the executive
committee so request in writing specifying the purpose of the meeting. A
majority of the executive committee shall constitute a quorum for a meeting, and
the act of a majority of the members of the executive committee present at a
meeting at which a quorum is present shall be the act of the executive
committee.
<PAGE> 3
SECTION 3. RECORDS. The executive committee shall keep a full record of its
proceedings, and all action by the executive committee shall be reported to the
board of directors at its next meeting.
SECTION 4. OTHER COMMITTEES. The board of directors may create such other
standing or special committees, to consist of not less than three directors, as
it deems desirable. Each such committee shall have such powers and perform such
duties as may be delegated to it by the board of directors. A majority of any
such committee shall constitute a quorum for a meeting, and the act of a
majority of the members of the committee present at a meeting at which a quorum
is present shall be the act of the committee.
ARTICLE IV - OFFICERS
SECTION 1. POWERS AND DUTIES. Subject to such limitations as the board of
directors may from time to time prescribe, the officers shall each have such
powers and perform such duties as generally pertain to their respective offices
and such further powers and duties as may be conferred from time to time by the
board of directors or, in the case of all officers other than the chief
executive officer, by the chief executive officer. The president shall be the
chief executive officer except that whenever a chairman of the board is elected,
the board of directors shall designate either the chairman or the president as
the chief executive officer.
SECTION 2. BONDS. Any officer or employee may be required to give bond for the
faithful discharge of his duties in such sum and with such surety or sureties as
the board of directors may from time to time determine. The premium on any such
bond or bonds shall be paid by the corporation.
ARTICLE V - INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The corporation shall, to the full extent permitted by the General Corporation
Law of Ohio, indemnify all persons whom it may indemnify pursuant thereto.
ARTICLE VI - CERTIFICATES FOR SHARES
If any certificate for shares of the corporation is lost, stolen or destroyed, a
new certificate may be issued upon such terms or under such rules as the board
of directors may from time to time determine or adopt.
<PAGE> 4
ARTICLE VII - SEAL
The seal of the corporation shall be in such form as the board of directors may
from time to time determine.
ARTICLE VIII - ALTERATION,
AMENDMENT OR REPEAL
These Regulations may be altered, amended or repealed only by the affirmative
vote of the holders of at least two-thirds of the outstanding voting power of
the corporation voting as a single class at a meeting of shareholders called for
such purpose, unless such alteration, amendment or repeal is recommended by the
affirmative vote of two-thirds of the whole authorized number of directors, in
which case these Regulations may be altered, amended or repealed by the
affirmative vote of the holders of a majority of the outstanding voting power of
the corporation voting as a single class at a meeting of shareholders called for
such purpose.
<PAGE> 1
Exhibit 4
Temporary Certificate--Exchangeable for Definitive Engraved Certificate
When Ready for Delivery
NUMBER SHARES
[ ] [ ]
CONVERGYS
COMMON STOCK COMMON STOCK
CONVERGYS CORPORATION
INCORPORATED UNDER THE LAWS CUSIP
OF THE STATE OF OHIO
THIS CERTIFICATE IS TRANSFERABLE
IN NEW YORK, NY OR CINCINNATI, OH
THIS CERTIFIES THAT SEE REVERSE FOR
CERTAIN DEFINITIONS
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE, OF
CONVERGYS CORPORATION
transferable on the books of the Corporation by the holder hereof in person, or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
Witness the facsimile signature of the duly authorized officers.
Dated:
/s/ WILLIAM D. BASKETT /s/ JAMES F. ORR
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
FIFTH THIRD BANK TRANSFER AGENT
(Cincinnati, Ohio) AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
CONVERGYS CORPORATION
The Corporation will furnish without charge to each stockholder who so
requests a copy of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof of the Corporation and the qualifications, limitations or restrictions
of such preferences and/or rights. Such requests may be made to the Secretary of
the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- __________ Custodian _________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the Common Stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
- ---------------------------------------------------------------------- Attorney
to transfer the said Shares on the books of the within named Corporation will
full power of substitution in the premises.
Dated , 19 .
------------------- ----
-----------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED
- -------------------------------------------------
The signature should be guaranteed by a
brokerage firm or a financial institution that
is a member of a securities approved Medallion
program, such as Securities Transfer Agents
Medallion Program (STAMP), Stock Exchange
Medallion Program (SEMP) or New York Stock
Exchange, Inc. Medallion Signature Program (MSP).
<PAGE> 1
Exhibit 10.1
PLAN OF REORGANIZATION AND DISTRIBUTION AGREEMENT
THIS PLAN OF REORGANIZATION AND DISTRIBUTION AGREEMENT (the
"Agreement") is made and entered into this ___ day of ___________, 1998, by and
between CINCINNATI BELL INC., an Ohio corporation ("CBI"), and CONVERGYS
CORPORATION, an Ohio corporation ("CONVERGYS").
PRELIMINARY STATEMENT
CBI is the sole shareholder of CONVERGYS. The Board of Directors of CBI
has determined that it is in the best interest of CBI and its shareholders to
separate the billing and information services segment and the customer
management solutions segment of its business from the telephone operations
segment of its business. It is the intention of CBI to contribute to CONVERGYS
all of the outstanding shares of Cincinnati Bell Information Systems Inc.
("CBIS"), a wholly owned subsidiary of CBI, and of MATRIXX Marketing Inc.
("MATRIXX"), a wholly owned subsidiary of CBI, and certain assets and to assign
certain liabilities, and to make other arrangements to establish CONVERGYS as a
separate enterprise for the purpose of engaging in the billing and information
services and the customer management solutions businesses (the "Business").
CBI's Board of Directors has determined that CBI will cause CONVERGYS
to make an initial public offering (the "IPO") of up to 19.9% of its outstanding
common shares, without par value (the "Common Shares"), and, subsequent to the
IPO and subject to certain conditions, distribute to CBI's shareholders all of
the outstanding shares of CONVERGYS owned by CBI through a spinoff (the
"Distribution"). The IPO and the Distribution are together referred to herein as
the "Separation" and will result in the total and complete separation of the
Business and CONVERGYS from CBI at the time of the Distribution (the
"Distribution Date"); provided, however, that CONVERGYS may continue to provide
services to CBI and CBI may provide services to CONVERGYS pursuant to a services
agreement, after the Distribution Date.
The parties hereto have determined that it is necessary and desirable
to set forth in this Agreement and in other agreements, instruments,
understandings and assignments entered into in
<PAGE> 2
connection with the transactions contemplated hereby, including, without
limitation, a Services Agreement (the "Services Agreement"), a Tax Separation
and Allocation Agreement (the "Tax Allocation Agreement") and an Employee
Benefits Agreement ("the Employee Benefits Agreement") (collectively, the
"Ancillary Agreements"), all such agreements being between CONVERGYS and CBI,
the principal corporate transactions determined by CBI and CONVERGYS to be
appropriate to effect the Separation and that will govern certain other matters
between the date hereof and the Distribution and following the Distribution.
Simultaneously with the execution of this Agreement, CBI and CONVERGYS
are entering into the Ancillary Agreements.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual representations, warranties, covenants and agreements contained herein,
other good and valuable consideration, the sufficiency and receipt of which is
hereby acknowledged, the parties do hereby agree as follows:
ARTICLE 1
THE TRANSFER
1.1 TRANSFER OF ASSETS. On the terms and subject to the conditions set
forth in this Agreement, and the other agreements and instruments of conveyance
contemplated hereunder, simultaneously with the execution and delivery of this
Agreement, CBI has heretofore transferred, assigned and conveyed to CONVERGYS
all of CBI's right, title, and interest in the CONVERGYS Assets, and CONVERGYS
hereby acknowledges its receipt of the CONVERGYS Assets. CONVERGYS Assets means
any:
(a) All of the issued and outstanding shares of CBIS and MATRIXX;
(b) Any and all assets that are expressly contemplated by this
Agreement or any other agreement or document contemplated by this Agreement (or
any Schedule hereto or thereto) as assets to be transferred to CONVERGYS; and
(c) All assets reflected in the CONVERGYS balance sheet dated March
31, 1998 as assets of CONVERGYS, subject to any dispositions of such assets
subsequent to the date of such balance sheet.
2
<PAGE> 3
1.2 ASSUMPTION OF LIABILITIES. On the terms and subject to the
conditions set forth in this Agreement and the other agreements and instruments
of conveyance contemplated hereunder, simultaneous with the execution and
delivery of this Agreement, CONVERGYS hereby assumes and agrees faithfully to
perform and fulfill all of the CONVERGYS Liabilities, in accordance with their
respective terms. CONVERGYS shall be responsible for all the CONVERGYS
Liabilities, regardless of when or where such liabilities arose or arise, or
whether the facts on which they are based occurred prior to or subsequent to the
date hereof, regardless of where or against whom such liabilities are asserted
or determined or whether asserted or determined prior to the date hereof.
CONVERGYS Liabilities means
(a) Any and all liabilities set forth on Schedule 1.2 attached
hereto, including those liabilities reflecting any inter-company indebtedness;
(b) Any and all liabilities that are expressly contemplated by this
Agreement or any other agreement or document contemplated by this Agreement or
otherwise (or the Schedules hereto or thereto) as liabilities to be assumed by
CONVERGYS; and
(c) All liabilities reflected as liabilities or obligations of
CONVERGYS in its balance sheet dated March 31, 1998, subject to any discharge of
such liabilities subsequent to the date of such balance sheet.
1.3 FURTHER ASSURANCES. In the event that at any time or from time to
time (whether prior to or after the Distribution Date), any party hereto shall
receive or otherwise possess any asset that is allocated to any other Person
pursuant to this Agreement or any Ancillary Agreement, such party shall promptly
transfer, or cause to be transferred, such asset to the Person so entitled
thereto. Prior to any such transfer, the Person receiving such asset shall hold
such asset in trust for any such other Person.
1.4 DOCUMENTS RELATING TO TRANSFER OF REAL PROPERTY INTERESTS AND
TANGIBLE PROPERTY LOCATED THEREON.
(a) In furtherance of the assignment, transfer and conveyance of
the Assets and the assumption of Liabilities set forth in Sections 1.1 and 1.2,
simultaneously with the execution and delivery hereof or as promptly as
practicable thereafter, each of CBI and
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CONVERGYS, or their applicable subsidiaries, is executing and delivering or will
execute and deliver deeds, lease assignments and assumptions, leases or
subleases to be mutually agreed to by CBI and CONVERGYS, with such changes as
may be necessary to conform to any laws, regulations or usage applicable in the
jurisdiction in which the relevant real property is located. Set forth in or
referenced by Schedule 1.4 attached hereto is, among other things, a summary of
each property or interest therein to be conveyed, assigned, leased or subleased,
the applicable entities relevant to each property and their capacities with
respect to each property (e.g., as transferor, transferee, assignor, assignee,
lessor, lessee, sub-lessor, or sub-lessee), and any terms applicable to each
property that are not specified in the forms of deed, lease assignment and
assumption, lease or sublease (e.g., rent and term).
(b) Except as otherwise expressly provided in this Agreement, all
tenant improvements, fixtures, furniture, office equipment, servers, private
branch exchanges, and other tangible property [(other than equipment subject to
capital or operating equipment leases, which will be transferred or retained
based on whether the associated capital or operating equipment lease is or is
not held pursuant to a contract of CBI)] located as of the Closing Date on any
real property that is referred to in Section 1.4(a), including the Schedules
thereto, shall, except to the extent expressly set forth on a Schedule referred
to in Section 1.4(a), be transferred or retained as follows:
(i) Deeds And Assignments. In the case of any real property or
leasehold interests set forth on Schedule 1.4 that is covered by a deed or lease
assignment and assumption, all such tangible property will be transferred to the
transferee or assignee of the applicable real property or leasehold interest;
(ii) Shared Facilities With Third Party Leases. In the case of
any real property or leasehold interests covered by a lease, all such tangible
property will be retained by the lessor under the applicable lease, except that
any such tangible property (other than tenant improvements, fixtures and
furniture) used exclusively by the lessee shall be transferred to, or retained
by, the lessee.
(iii) Shared Domestic Facilities With Third Party Leases. In
the case of any real property or leasehold interests covered by a sublease, all
such tangible property will be
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retained by the sub-lessor under the applicable sublease, except that any such
tangible property (other than tenant improvements and fixtures), including
furniture used exclusively by the sub-lessee shall be transferred to, or
retained by, such sub-lessee.
In the case of this Section 1.4, all determinations as to exclusive use by any
member of a Group shall be made without regard to infrequent and immaterial use
by the members of any other Group, if the transfer of such Asset to, or the
retention of such Asset by, such first Group would not interfere in any material
respect with either the business or operations of any such other Group.
(c) In the case of any real property or leasehold interest that
is covered by Section 1.4(b)(i) and any of Section 1.4(b)(ii) or (iii), all such
tangible property shall first be allocated pursuant to the provisions of Section
1.4(b)(i) and thereafter pursuant to whichever of such other clauses is
applicable.
1.5 DOCUMENTS RELATING TO OTHER TRANSFERS OF ASSETS AND ASSUMPTION
OF LIABILITIES. In furtherance of the assignment, transfer and conveyance of the
CONVERGYS Assets and the assumption of CONVERGYS Liabilities set forth in
Sections 1.1 and 1.2, simultaneously with the execution and delivery hereof or
as promptly as practicable thereafter, (i) each of CBI and CONVERGYS shall
execute and deliver, and each shall cause its respective subsidiaries to execute
and deliver, such bills of sale, stock powers, certificates of title,
assignments of contracts and other instruments of transfer, conveyance and
assignment as and to the extent necessary to evidence the transfer, conveyance
and assignment of all of CBI's and its subsidiaries' right, title and interest
in and to the Assets to CONVERGYS and (ii) CONVERGYS shall execute and deliver,
to CBI and its subsidiaries such bills of sale, stock powers, certificates of
title, assumptions of contracts and other instruments of assumption as and to
the extent necessary to evidence the valid and effective assumption of the
CONVERGYS Liabilities by CONVERGYS.
1.6 OTHER ANCILLARY AGREEMENTS. Effective as of the date hereof,
each of CBI and CONVERGYS will execute and deliver all Ancillary Agreements to
which it is a party.
1.7 CONSENTS. Each party hereto understands and agrees that no
party hereto is, in this Agreement or in any other agreement or document
contemplated by this Agreement or otherwise,
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representing or warranting in any way that the obtaining of any consents or
approvals, the execution and delivery of any agreements or the making of any
filings or applications contemplated by this Agreement will satisfy the
provisions of any or all applicable agreements or the requirements of any or all
applicable laws or judgments, it being agreed and understood that the party to
which any assets were or are transferred shall bear the economic and legal risk
that any necessary consents or approvals are not obtained or that any
requirements of laws or judgments are not complied with. Notwithstanding the
foregoing, the parties shall use reasonable best efforts to obtain all consents
and approvals, to enter into all agreements and to make all filings and
applications which may be required for the consummation of the filings and
applications which may be required for the consummation of the transactions
contemplated by this Agreement or any other agreement or document contemplated
by this Agreement or otherwise, including, without limitation, all applicable
regulatory filings or consents under federal or state laws and all necessary
consents, approvals, agreements, filings and applications.
1.8 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES.
(a) Each of CBI (on behalf of itself and each member of the CBI
Group) and CONVERGYS (on behalf of itself and each member of the CONVERGYS
Group) understands and agrees that, except as expressly set forth herein or in
any Ancillary Agreement, no party to this Agreement, any Ancillary Agreement or
any other agreement or document contemplated by this Agreement, any Ancillary
Agreement or otherwise, is representing or warranting in any way as to the
assets, businesses or liabilities transferred or assumed as contemplated hereby
or thereby, as to any consents or approvals required in connection therewith, as
to the value or freedom from any security interests of, or any other matter
concerning, any assets of such party, or as to the absence of any defenses or
right of setoff or freedom from counterclaim with respect to any claim or other
asset, including any accounts receivable, of any party, or as to the legal
sufficiency of any assignment, document or instrument delivered hereunder to
convey title to any asset or thing of value upon the execution, delivery and
filing hereof or thereof. Except as may expressly be set forth herein or in any
Ancillary Agreement, all such CONVERGYS Assets are being transferred on an "as
is, where is" basis (and, in the case of any real property, by means of a
quitclaim or similar form deed or conveyance), and the respective transferees
shall bear the
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economic and legal risks that any conveyance shall prove to be insufficient to
vest in the transferee good and marketable title, free and clear of any security
interest.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF CBI
2.1 POWER AND AUTHORITY; EFFECT OF AGREEMENT. CBI is a corporation duly
organized, validly existing and in good standing under the laws of Ohio and has
requisite corporate power and authority to execute, deliver and perform this
Agreement and to consummate the transactions contemplated hereby. The execution,
delivery and performance by CBI of this Agreement and the consummation by it of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on its part. This Agreement has been duly and validly executed
and delivered by CBI and constitutes its legal, valid and binding obligation
enforceable against it in accordance with its terms, except to the extent that
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to creditors' rights generally. The
execution, delivery and performance by CBI of this Agreement and the
consummation by it of the transactions contemplated by the Separation does not,
and will not, with or without the giving of notice or the lapse of time, or
both: (i) violate any provision of law, rule or regulation to which it is
subject; (ii) violate any order, judgment or decree applicable to it; (iii)
conflict with, or result in a breach or default under, its Amended Articles of
Incorporation or its Amended Regulations; or (iv) conflict with, or result in a
breach or default under, any contract to which it is a party; except, in each
case, for violations, conflicts, breaches or defaults which in the aggregate
would not materially hinder or impair the consummation of the transactions
contemplated hereby or have a material adverse effect on the Business.
2.2 STOCK OF TRANSFERRED SUBSIDIARIES. CBI is the owner, beneficially
and of record, of all of the issued and outstanding shares of CBIS and MATRIXX,
free and clear of all liens, encumbrances, security agreements, options, claims,
charges and restrictions.
2.3 GOVERNMENT CONSENTS. No consent, approval or authorization of, or
exemption from, or filing with any governmental or regulatory authority is
required in connection with the execution, delivery or performance by CBI of the
terms of this Article 2 or the taking by it of any other action required to
effectuate the Separation.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF CONVERGYS
CONVERGYS represents and warrants to CBI as follows:
3.1 CONVERGYS' POWER AND AUTHORITY. CONVERGYS is a corporation duly
organized, validly existing and in good standing under the laws of Ohio, and has
all requisite corporate power and authority to carry on the Business as it is
now being conducted and as proposed to be conducted.
3.2 DUE AUTHORIZATION, EXECUTION AND DELIVERY; EFFECT OF AGREEMENT.
CONVERGYS has all requisite corporate power and authority to execute, deliver
and perform this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance by CONVERGYS of this Agreement
and the consummation by CONVERGYS of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of CONVERGYS.
This Agreement has been duly and validly executed and delivered by CONVERGYS and
constitutes the legal, valid and binding obligation of CONVERGYS enforceable
against CONVERGYS in accordance with its terms, except to the extent that such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to creditors' rights generally. The
execution, delivery and performance by CONVERGYS of this Agreement and the
consummation by CONVERGYS of the transactions contemplated by the Separation
does not, and will not, with or without the giving of notice of the lapse of
time, or both: (i) violate any provision of law, rule or regulation to which
CONVERGYS is subject; (ii) violate any order, judgment or decree applicable to
CONVERGYS; (iii) conflict with, or result in a breach or default under, the
Amended Articles of Incorporation or Regulations of CONVERGYS; or (iv) conflict
with, or result in a breach or default under, any contract to which it is a
party; except, in each case, for violations, conflicts, breaches or defaults
which in the aggregate would not materially hinder or impair the consummation of
the transactions contemplated hereby or have a material adverse effect on the
Business.
3.3 CONSENTS. No consent, approval or authorization of, or exemption
from, or filing with, any governmental or regulatory authority or any other
third party is required in connection with the execution, delivery or
performance by CONVERGYS of this Agreement or the taking
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by CONVERGYS of any other action required to effectuate the Separation, except
as referred to in Article 8.
ARTICLE 4
COVENANTS OF CBI
4.1 BOOKS AND RECORDS; PERSONNEL. For a period of six years after the
Distribution Date (or such longer period as may be required by any law or
regulation, any governmental agency, any ongoing litigation or class of
litigation, or in connection with any administrative proceeding):
(a) CBI shall not dispose of or destroy any of the business records
and files of the Business retained by it or any of its subsidiaries (the
"Retained Records"). If CBI wishes to dispose of or destroy such records and
files after that time, it shall use reasonable efforts to first give 30 days'
prior written notice to CONVERGYS and CONVERGYS shall have the right, at its
option and expense, upon prior written notice to CBI within such 30 day period,
to take possession of the Retained Records within 60 days after the date of
CONVERGYS' notice to CBI.
(b) CBI shall allow CONVERGYS and its representatives reasonable
access to all Retained Records during regular business hours and upon reasonable
notice. CBI shall maintain the Retained Records in a manner and at locations
that reasonably facilitates retrieval and review by CONVERGYS. CONVERGYS shall
have the right, at its own expense, to make copies of any such records and files
and CBI shall provide convenient duplication facilities for such purpose,
provided, however, that any such access or copying shall be had or done in such
manner so as not to unreasonably interfere with the normal conduct of CBI's
business or operations.
(c) CBI shall make reasonably available to CONVERGYS, upon written
request and at CONVERGYS' expense: (i) personnel to assist in locating and
obtaining records and files maintained by it (including those created after the
date hereof, to the extent necessary and appropriate in connection with pending
and future claims against CONVERGYS relating to the Business) and (ii) any of
its personnel whose assistance or participation (including as a witness during
depositions or at trial) is reasonably required by CONVERGYS in anticipation of,
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or preparation for or during, existing or future litigation or other matters in
which CONVERGYS or any of its affiliates is involved and which is related to the
Business.
ARTICLE 5
COVENANTS OF CONVERGYS
5.1 COOPERATION. CONVERGYS agrees to cooperate with CBI, both before
and after the Distribution Date, to enable both parties to implement the
Separation, including but not limited to performing the obligations undertaken
by the parties hereunder. Such cooperation will include but not be limited to
preparing and submitting required financial reports after the Distribution Date
which may relate to periods whether before or after the Distribution Date and
executing such documents and doing such other acts and things as may be
necessary to carry out the intent of this Agreement as it relates to the
Separation.
5.2 BOOKS AND RECORDS; PERSONNEL. For a period of six years after the
Distribution Date (or such longer period as may be required by any law or
regulation, any governmental agency, any ongoing litigation or class of
litigation, or in connection with any administrative proceeding);
(a) CONVERGYS shall not dispose of or destroy any of the business
records and files of the Business that are transferred to it or any of its
subsidiaries in carrying out the transactions contemplated hereby (the
"Transferred Records"). If CONVERGYS wishes to dispose of or destroy such
records and files after that time, it shall use reasonable efforts to first give
30 days' prior written notice to CBI and CBI shall have the right at its option
and expense, upon prior written notice to CONVERGYS within such 30 day period,
to take possession of the Transferred Records within 60 days after the date of
CBI's notice to CONVERGYS.
(b) CONVERGYS shall allow CBI and its representatives reasonable
access to all Transferred Records during regular business hours and upon
reasonable notice. CONVERGYS shall maintain the Transferred Records in a manner
and at locations that reasonably facilitates retrieval and review by CBI. CBI
shall have the right, at its own expense, to make copies of any such records and
files and CONVERGYS shall provide convenient duplication facilities for such
purposes provided, however, that any such access or copying shall
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be had or done in such a manner so as not to unreasonably interfere with the
normal conduct of CONVERGYS' business or operations.
(c) CONVERGYS shall make reasonably available to CBI upon written
request and at CBI's expense: (i) CONVERGYS' personnel to assist in locating and
obtaining records and files maintained by it (including those created after the
date hereof, to the extent necessary and appropriate in connection with pending
and future claims against CBI relating to the Business), and (ii) any of its
personnel whose assistance or participation (including as a witness during
depositions or at trial) is reasonably required by CBI in anticipation of, or
preparation for or during, existing or future litigation or other matters in
which CBI or any of its affiliates is involved.
ARTICLE 6
INTER-COMPANY LENDING
6.1 CONTRIBUTION. As to inter-company debt payable to CBI by CONVERGYS,
CONVERGYS' obligation will be to repay to CBI on or before 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 CONVERGYS' operating and
investing activities for the period April 1, 1998 to the date of repayment and
for any other indebtedness incurred by CONVERGYS or for any other repayments
made to CBI in that period. Upon the Closing Date, CONVERGYS shall apply all
the net proceeds of the IPO to reduce CONVERGYS' portion of its inter-company
debt.
6.2 ON-GOING FUNDING. For the period between the Closing Date through
the day preceding the Distribution Date, CBI shall continue to provide CONVERGYS
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 CONVERGYS 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 CONVERGYS in its efforts to obtain such financing.
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ARTICLE 7
CONTINGENT GAINS AND CONTINGENT LIABILITIES
7.1 DEFINITIONS RELATING TO CONTINGENT GAINS AND CONTINGENT
LIABILITIES. For the purpose of this Agreement, the following terms shall have
the following meanings:
(a) AFFILIATE of any Person means a Person that controls, is
controlled by, or is under common control with such Person. As used herein,
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of such entity, whether
through ownership of voting securities or other interests, by contract or
otherwise.
(b) ACTION means any demand, action, suit, countersuit,
arbitration, inquiry, proceeding or investigation by or before any federal,
state, local, foreign or international governmental authority or any arbitration
or mediation tribunal.
(c) CBI GROUP means CBI and each Person (other than any member of
the CONVERGYS Group) that is an Affiliate of CBI immediately after the Closing
Date.
(d) CLOSING DATE means the first time at which any Common Shares of
CONVERGYS are sold to the Underwriters pursuant to the IPO in accordance with
the terms of the Underwriting Agreement.
(e) CONTINGENT CLAIM COMMITTEE means a committee composed of one
representative designated from time to time by each of CBI and CONVERGYS that
shall be established in accordance with Section 7.6.
(f) CONTINGENT GAIN means any claim or other right of CBI,
CONVERGYS or any of their respective Affiliates, whenever arising, against any
Person other than CBI, CONVERGYS or any of their respective Affiliates, if and
to the extent that (i) such claim or right has accrued as of the Closing Date
(based on then existing law) and (ii) the existence or scope of the obligation
of such other Person as of the Closing Date was not acknowledged, fixed or
determined in any material respect, due to a dispute or other uncertainty as of
the Closing Date or as a result of the failure of such claim or other right to
have been discovered or asserted as of the Closing Date. A claim or right
meeting the foregoing definition shall be considered a Contingent Gain
regardless of whether there was any Action pending, threatened or contemplated
as of the Closing Date with respect thereto. For purposes of the
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foregoing, a claim or right shall be deemed to have accrued as of the Closing
Date if all the elements of the claim necessary for its assertion shall have
occurred on or prior to the Closing Date, such that the claim or right, were it
asserted in an Action on or prior to the Closing Date, would not be dismissed by
a court on ripeness or similar grounds. Notwithstanding the foregoing, none of
(i) any insurance proceeds, (ii) any reversal of any litigation or other
reserve, or (iii) any matters relating to taxes (which are governed by the Tax
Allocation Agreement) shall be deemed to be a Contingent Gain.
(g) CONTINGENT LIABILITY means any liability, other than
liabilities for taxes (which are governed by the Tax Allocation Agreement), of
CBI, CONVERGYS or any of their respective Affiliates, whenever arising, to any
Person other than CBI, CONVERGYS or any of their respective Affiliates, if and
to the extent that (i) such liability has accrued as of the Closing Date (based
on then existing law) and (ii) the existence or scope of the obligation of CBI,
CONVERGYS or any of their respective Affiliates as of the Closing Date with
respect to such liability was not acknowledged, fixed or determined in any
material respect, due to a dispute or other uncertainty as of the Closing Date
or as a result of the failure of such liability to have been discovered or
asserted as of the Closing Date (it being understood that the existence of a
litigation or other reserve with respect to any liability shall not be
sufficient for such liability to be considered acknowledged, fixed or
determined). In the case of any liability a portion of which had accrued as of
the Closing Date and a portion of which accrues after the Closing Date, only
that portion that had accrued as of the Closing Date shall be considered a
Contingent Liability. For purposes of the foregoing, a liability shall be deemed
to have accrued as of the Closing Date if all the elements necessary for the
assertion of a claim with respect to such liability shall have occurred on or
prior to the Closing Date, such that the claim, were it asserted in an Action on
or prior to the Closing Date, would not be dismissed by a court on ripeness or
similar grounds. For purposes of clarification of the foregoing, the parties
agree that no liability relating to, arising out of or resulting from any
obligation of any Person to perform the executory portion of any contract or
agreement existing as of the Closing Date, or to satisfy any obligation accrued
under any Plan (as defined in the Employee Benefits Agreement) as of the Closing
Date, shall be deemed to be a Contingent Liability.
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(h) CONVERGYS GROUP means CONVERGYS and each Person (other than any
member of the CBI Group) that is an Affiliate of CONVERGYS immediately after the
Closing Date.
(i) EXCLUSIVE CBI CONTINGENT GAIN means any Contingent Gain if such
Contingent Gain primarily relates to any business of any CBI Group Member or if
such Contingent Gain is expressly assigned to CBI pursuant to this Agreement or
any Ancillary Agreement.
(j) EXCLUSIVE CBI CONTINGENT LIABILITY means any Contingent
Liability if such Contingent Liability primarily relates to any business of any
CBI Group Member, or if such Contingent Liability is expressly assigned to CBI
pursuant to this Agreement or any Ancillary Agreement.
(k) EXCLUSIVE CONTINGENT LIABILITY means any Exclusive CBI
Contingent Liability or Exclusive CONVERGYS Contingent Liability.
(l) EXCLUSIVE CONVERGYS CONTINGENT GAIN means any Contingent Gain
if such Contingent Gain primarily relates to any business of any CONVERGYS Group
Member, or if such Contingent Gain is expressly assigned to CONVERGYS pursuant
to this Agreement or any Ancillary Agreement.
(m) EXCLUSIVE CONVERGYS CONTINGENT LIABILITY means any Contingent
Liability if such Contingent Liability primarily relates to any business of any
CONVERGYS Group Member or such Contingent Liability is expressly assigned to
CONVERGYS pursuant to this Agreement or any Ancillary Agreement.
(n) GROUP means any of the CBI Group or the CONVERGYS Group, as the
context requires.
(o) PERSON means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity or any governmental authority.
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(p) SHARED CONTINGENT GAIN means any Contingent Gain that is not an
Exclusive CBI Contingent Gain or an Exclusive CONVERGYS Contingent Gain.
(q) SHARED CONTINGENT LIABILITY means, without duplication, any
Contingent Liability that is not an Exclusive CBI Contingent Liability or an
Exclusive CONVERGYS Contingent Liability.
(r) VALUE means the aggregate amount of all cash payments, the fair
market value of all non-cash payments and the incremental cost of providing any
goods or services made or provided in respect of any Exclusive Contingent
Liability whether in satisfaction of any judgment, in settlement of any Action
or threatened Action or otherwise (including all costs and expenses of defending
or investigating any Action or threatened Action), net of: (i) any insurance
proceeds received or realized in respect of the applicable Exclusive Contingent
Liability, (ii) any tax benefits associated with such payments or the provision
of such goods or services (based on an assumed effective tax rate equal to the
effective tax rate of the applicable party for the fiscal year immediately
preceding the year in which such payments are made or goods or services provided
(it being understood that the effective tax rate of any party whose earnings for
such immediately preceding fiscal year are consolidated for federal income tax
purposes with another corporation shall be the effective tax rate of the
corporation filing such federal income tax return for such immediately preceding
fiscal year)), (iii) any other amounts recovered (including by way of set off)
from a third party in connection with any such Action or threatened Action and
(iv) the amount of any reserve, account payable or similar accrual in respect of
the Exclusive Contingent Liability, net of any offsetting receivables in respect
of such Exclusive Contingent Liability, in each case as reflected on the
CONVERGYS balance sheet or the audited consolidated balance sheet of CBI,
including the notes thereto, as of December 31, 1997 (and without giving effect
to any subsequent adjustment of any such reserve, account payable, accrual or
offsetting receivable).
7.2 CONTINGENT GAINS.
(a) Each of CBI and CONVERGYS shall have sole and exclusive right
to any benefit received with respect to any Exclusive CBI Contingent Gain or
Exclusive CONVERGYS Contingent Gain, respectively. Each of CBI and CONVERGYS
shall have sole and exclusive
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authority to commence, prosecute, settle, manage, control, conduct, waive,
forego, release, discharge, forgive and otherwise determine all matters
whatsoever with respect to any Exclusive CBI Contingent Gain or Exclusive
CONVERGYS Contingent Gain, respectively.
(b) Any benefit that may be received from any Shared Contingent
Gain shall be shared among CBI and CONVERGYS in proportion to CBI receiving 50%
and CONVERGYS receiving 50%, respectively (the "Shared Percentage"), and shall
be paid in accordance with Section 7.5. Notwithstanding the foregoing, CBI shall
have sole and exclusive authority to commence, prosecute, settle, manage,
control, conduct, waive, forego, release, discharge, forgive and otherwise
determine all matters whatsoever with respect to any Shared Contingent Gain.
CONVERGYS shall not take, or permit any member of its Group to take, any action
(including commencing any claim) that would interfere with such rights and
powers of CBI. CBI shall use its reasonable efforts to notify CONVERGYS in the
event that it commences an Action with respect to a Shared Contingent Gain;
provided that the failure to provide such notice shall not give rise to any
rights on the part of CONVERGYS against CBI or affect any other provision of
this Section 7.2. CONVERGYS acknowledges that CBI may elect not to pursue any
Shared Contingent Gain for any reason whatsoever (including a different
assessment of the merits of any Action, claim or right than CONVERGYS or any
business reasons that are in the best interests of CBI or a member of the CBI
Group, without regard to the best interests of any member of the CONVERGYS
Group) and that no member of the CBI Group shall have any liability to any
Person (including any member of the CONVERGYS Group) as a result of any such
determination.
(c) In the event of any dispute as to whether any claim or right is
a Contingent Gain or whether any Contingent Gain is a Shared Contingent Gain, an
Exclusive CBI Contingent Gain or an Exclusive CONVERGYS Contingent Gain, CBI
may, but shall not be obligated to, commence prosecution or other assertion of
such claim or right pending resolution of such dispute. In the event that CBI
commences any such prosecution or assertion and, upon resolution of the dispute,
a party other than CBI is determined hereunder to have the exclusive right to
such claim, CBI shall, promptly upon the request of such other party,
discontinue the prosecution or assertion of such right or claim and transfer the
control thereof to the party so determined to have the right thereto. In such
event, the party having the right to such a claim or
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right will reimburse CBI for all costs and expenses reasonably incurred prior to
resolution of such dispute in the prosecution or assertion of such claim or
right.
7.3 EXCLUSIVE CONTINGENT LIABILITIES. Except as otherwise provided in
this Section 7.3, each Exclusive Contingent Liability shall constitute a
liability for which indemnification is provided by CBI or CONVERGYS, as the case
may be, pursuant to Article 10 hereof and shall be subject to the procedures set
forth in Article 10 with respect thereto.
7.4 SHARED CONTINGENT LIABILITIES.
(a) As set forth in Section 10.5(c), CBI shall assume the defense
of, and may seek to settle or compromise, any Third Party Claim (as defined
herein) that is a Shared Contingent Liability, and the costs and expenses
thereof shall be included in the calculation of the amount of the applicable
Shared Contingent Liability in determining the reimbursement obligations of the
other parties with respect thereto pursuant to this Section 7.4.
(b) Each of CBI and CONVERGYS shall be responsible for its Shared
Percentage of any Shared Contingent Liability. It shall not be a defense to any
obligation by any party to pay any amount in respect of any Shared Contingent
Liability that such party was not consulted in the defense thereof, that such
party's views or opinions as to the conduct of such defense were not accepted or
adopted, that such party does not approve of the quality or manner of the
defense thereof or that such Shared Contingent Liability was incurred by reason
of a settlement rather than by a judgment or other determination of liability
(even if, subject to Section 10.5(g), such settlement was effected without the
consent or over the objection of such party).
7.5 PAYMENTS.
(a) Any amount owed in respect of any Shared Contingent Liabilities
(including reimbursement for the cost or expense of defense) of (i) any Third
Party Claim that is a Shared Contingent Liability or (ii) any Shared Contingent
Gain pursuant to this Article 6 shall be remitted promptly after the party
entitled to such amount provides an invoice (including reasonable supporting
information with respect thereto) to the party owing such amount.
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(b) In case of any Shared Contingent Liability, CBI shall be
entitled to reimbursement from CONVERGYS in advance of a final determination of
any Action for amounts paid in respect of costs and expenses related thereto,
from time to time as such costs and expenses are incurred. In the case of any
Shared Contingent Gain, CBI shall be entitled to retain from the amount of the
Shared Contingent Gain otherwise payable to CONVERGYS, CONVERGYS' Shared
Percentage of the costs and expenses paid or incurred by or on behalf of any
member of the CBI Group in connection with such Shared Contingent Gain.
(c) Any amounts billed and properly payable in accordance with this
Article 7 that are not paid within 30 days of such bill shall bear interest at
the Prime Rate plus 2% per annum.
7.6 PROCEDURES TO DETERMINE STATUS OF CONTINGENT LIABILITY OR
CONTINGENT GAIN.
(a) As of the Closing Date, CBI and CONVERGYS will form the
Contingent Claim Committee for the purpose of resolving any disagreement among
the parties as to whether:
(i) any claim or right is a Contingent Gain;
(ii) any Contingent Gain is a Shared Contingent Gain, an
Exclusive CBI Contingent Gain or an Exclusive CONVERGYS Contingent Gain;
(iii) any liability is a Contingent Liability; or
(iv) any Contingent Liability is a Shared Contingent
Liability, an Exclusive CBI Contingent Liability, or an Exclusive CONVERGYS
Contingent Liability.
(b) Any of the parties may refer any potential Contingent Gains or
Contingent Liabilities to the Contingent Claim Committee for resolution of a
disagreement described in Section 7.6(a) and the Contingent Claim Committee's
determination (which shall be made within 30 days of such referral), if
unanimous, shall be binding on all of the parties and their respective
successors and assigns. In the event that the Contingent Claim Committee cannot
reach a unanimous determination as to the nature or status of any such
Contingent Liabilities or Contingent Gains within 30 days after such referral,
the issue will be submitted for arbitration
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pursuant to the procedures set forth in Article 12 of this Agreement. The
outcome of the arbitration pursuant to Article 12 shall be final and binding on
all parties and their respective successors and assigns. The Contingent Claim
Committee shall consist of one member of the CBI Group and one member of the
CONVERGYS Group.
ARTICLE 8
THE IPO AND ACTIONS PENDING THE IPO
8.1 Transactions Prior to the IPO.
(a) Subject to the conditions specified in Section 8.2 hereof, CBI
and CONVERGYS shall use their reasonable best efforts to consummate the IPO.
Such actions shall include, but shall not necessarily be limited to, those
specified in this Section 8.1.
(b) CONVERGYS shall file with the Securities and Exchange
Commission (the "Commission") the IPO registration statement, and such
amendments or supplements thereto, as may be necessary in order to cause the
same to become and remain effective as required by law or by the Underwriters,
including, but not limited to, filing such amendments to the IPO registration
statement as may be required by the Underwriting Agreement, the Commission or
federal, state or foreign securities laws. CBI and CONVERGYS shall also
cooperate in preparing, filing with the Commission and causing to become
effective a registration statement registering the Common Shares under the
Exchange Act, and any registration statements or amendments thereof which are
required to reflect the establishment of, or amendments to, any employee benefit
and other plans necessary or appropriate in connection with the IPO, the
Separation, the Distribution or the other transactions contemplated by this
Agreement and the Ancillary Agreements.
(c) CONVERGYS, CBI, CBIS and MATRIXX shall enter into an
Underwriting Agreement (the "Underwriting Agreement"), with underwriters
selected jointly by CBI and CONVERGYS (the "Underwriters") in form and substance
reasonably satisfactory to CONVERGYS, CBI, CBIS and MATRIXX and shall comply
with their respective obligations thereunder.
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(d) CBI and CONVERGYS shall consult with each other and the
Underwriters regarding the timing, pricing and other material matters with
respect to the IPO.
(e) CONVERGYS shall use its reasonable best efforts to take all
such action as may be necessary or appropriate under state securities and blue
sky laws of the United States (and any comparable laws under any foreign
jurisdictions) in connection with the IPO.
(f) CONVERGYS shall prepare, file and use its reasonable best
efforts to seek to make effective an application for listing of the Common
Shares issued in the IPO on the New York Stock Exchange, subject to official
notice of issuance.
(g) CONVERGYS shall participate in the preparation of materials and
presentations as the Underwriters shall deem necessary or desirable.
(h) CONVERGYS shall pay all third party costs, fees and expenses
relating to the IPO, all of the reimbursable expenses of the Underwriters
pursuant to the Underwriting Agreement, all of the costs of producing, printing,
mailing and otherwise distributing the Prospectus, as well as the Underwriters'
discount as provided in the Underwriting Agreement.
8.2 CONDITIONS PRECEDENT TO CONSUMMATION OF THE IPO. As soon as
practicable after the date of this Agreement, the parties hereto shall use their
reasonable best efforts to satisfy the following conditions to the consummation
of the IPO. The obligations of the parties to consummate the IPO shall be
conditioned on the satisfaction, or waiver by CBI, of the following conditions:
(a) The IPO registration statement shall have been declared
effective by the Commission, and there shall be no stop-order in effect with
respect thereto.
(b) The actions and filings with regard to state securities and
blue sky laws of the United States (and any comparable laws under any foreign
jurisdictions) described in Section 8.1 shall have been taken and, where
applicable, have become effective or been accepted.
(c) The Common Shares to be issued in the IPO shall have been
accepted for listing on the New York Stock Exchange, on official notice of
issuance.
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(d) CONVERGYS, CBI, CBIS and MATRIXX shall have entered into the
Underwriting Agreement and all conditions to the obligations of CONVERGYS, CBI,
CBIS and MATRIXX and the Underwriters shall have been satisfied or waived.
(e) CBI shall be satisfied in its sole discretion that it will own
at least 80.0% of the outstanding CONVERGYS voting stock following the IPO, and
all other conditions to permit the Distribution (to qualify as a tax free
distribution to CBI's shareholders) shall, to the extent applicable as of the
time of the IPO, be satisfied, and there shall be no event or condition that is
likely to cause any of such conditions not to be satisfied as of the time of the
Distribution or thereafter.
(f) No order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the IPO or the Distribution or any of the other transactions
contemplated by this Agreement or any Ancillary Agreement shall be in effect.
(g) Such other actions as the parties hereto may, based upon the
advice of counsel, reasonably request to be taken prior to the Separation in
order to assure the successful completion of the IPO and the Distribution and
the other transactions contemplated by this Agreement shall have been taken.
(h) This Agreement shall not have been terminated.
(i) A pricing committee of CONVERGYS directors designated by the
Board of Directors of CONVERGYS shall have determined that the terms of the IPO
are acceptable to CONVERGYS.
ARTICLE 9
THE DISTRIBUTION
9.1 THE DISTRIBUTION.
(a) Subject to the conditions specified in Section 9.3 hereof, on
or prior to the Distribution Date, CBI will deliver to an agent designated by
its Board of Directors ("the Agent") for the benefit of holders of record of CBI
common shares on the Record Date, a single
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stock certificate, endorsed by CBI in blank, representing all of the outstanding
shares of CONVERGYS then owned by CBI, and shall cause the transfer agent for
the shares of CBI common shares to instruct the Agent to distribute on the
Distribution Date such number of CONVERGYS Common Share to each such holder or
designated transferee or transferees of such holder for each CBI common share
then held by each such holder or designated transferee or transferees as
determined by the CBI Board of Directors.
(b) CONVERGYS and CBI, as the case may be, will provide to the
Agent all share certificates and any information required in order to complete
the Distribution on the basis specified above.
9.2 ACTIONS PRIOR TO THE DISTRIBUTION.
(a) CBI and CONVERGYS shall prepare and mail, prior to the
Distribution Date, to the holders of CBI common shares, such information
concerning CONVERGYS, its business, operations and management, the Distribution
and such other matters as CBI shall reasonably determine and as may be required
by law. CBI and CONVERGYS will prepare, and CONVERGYS will, to the extent
required under applicable law, file with the Commission any such documentation
and any requisite no-action letters which CBI determines are necessary or
desirable to effectuate the Distribution and CBI and CONVERGYS shall each use
its reasonable best efforts to obtain all necessary approvals from the
Commission with respect thereto as soon as practicable.
(b) CBI and CONVERGYS shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of the United
States (and any comparable laws under any foreign jurisdiction) in connection
with the Distribution.
(c) CBI and CONVERGYS shall take all reasonable steps necessary and
appropriate to cause the conditions set forth in Section 9.3(d) to be satisfied
and to effect the Distribution on the Distribution Date.
(d) CONVERGYS shall prepare and file, and shall use its reasonable
best efforts to have approved, an application for the listing of the Common
Shares to be distributed in the Distribution on the New York Stock Exchange,
subject to official notice of distribution.
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9.3 CONDITIONS TO DISTRIBUTION. Subject to any restrictions contained
in the Underwriting Agreement, the CBI Board shall 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. CBI shall be 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 the CBI Board, in its sole discretion, of the conditions set forth
below. In the event that any such condition shall not have been satisfied or
waived on or before the date that is six months after the Closing Date, CBI
shall consummate the Distribution as promptly as practicable following the
satisfaction or waiver of all such conditions:
(a) a private letter ruling from the Internal Revenue Service shall
have been obtained and shall continue in effect, to the effect that, among other
things, the Distribution will qualify as a tax free distribution for federal
income tax purposes under Section 355 of the Code and will not result in the
recognition of any gain to CBI or CBI's shareholders, and such ruling shall be
in form and substance satisfactory to CBI in its sole discretion;
(b) any material governmental approvals and consents necessary to
consummate the Distribution shall have been obtained and be in full force and
effect;
(c) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Distribution shall be in effect and no other event outside
the control of CBI shall have occurred or failed to occur that prevents the
consummation of the Distribution; and
(d) no other event or developments shall have occurred subsequent
to the date hereof that, in the judgment of the Board of Directors of CBI, would
result in the Distribution having a material adverse effect on CBI or on the
shareholders of CBI.
(e) Each of CBI and CONVERGYS shall have received such consents,
and shall have received executed copies of such agreements or amendments of
agreements, as they shall deem necessary in connection with the completion of
the transactions contemplated by this Agreement or any other agreement or
document contemplated by this Agreement or otherwise.
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(f) All action and other documents and instruments deemed
necessary or advisable in connection with the transactions contemplated hereby
shall have been taken or executed, as the case may be, in form and substance
satisfactory to CBI and CONVERGYS.
The foregoing conditions are for the sole benefit of CBI and shall not give rise
to or create any duty on the part of CBI or the CBI Board of Directors to waive
or not waive any such condition.
9.4 FRACTIONAL SHARES. As soon as practicable after the Distribution
Date, CBI shall direct the Agent to determine the number of whole shares and
fractional shares of Common Shares allocable to each holder of record or
beneficial owner of CBI common shares as of the Record Date, to aggregate all
such fractional shares and sell the whole shares obtained thereby at the
direction of CBI in open market transactions or otherwise, in each case at then
prevailing trading prices, and to cause to be distributed to each such holder or
for the benefit of each such beneficial owner, in lieu of any fractional share,
such holder's or owner's ratable share of the proceeds of such sale, after
making appropriate deductions of any amount required to be withheld for federal
income tax purposes and after deducting an amount equal to all brokerage
charges, commissions and transfer taxes attributed to such sale. CBI and the
Agent shall use their reasonable best efforts to aggregate the CBI common shares
that may be held by any beneficial owner thereof through more than one account
in determining the fractional share allocable to such beneficial owner.
ARTICLE 10
MUTUAL RELEASES; INDEMNIFICATIONS
10.1 RELEASE OF PRE-CLOSING CLAIMS.
(a) Except as provided in Section 10.1(c), effective as of the
Closing Date, CONVERGYS does hereby, for itself and each of its Affiliates,
successors and assigns, and all persons who at any time prior to the Closing
Date have been shareholders, directors, officers, agents or employees of
CONVERGYS (in each case, in their respective capacities as such), remise,
release and forever discharge each of CBI and its Affiliates, successors and
assigns, and all persons who at any time prior to the Closing Date have been
shareholders, directors, officers, agents or employees of CBI (in each case, in
their respective capacities as such), and their respective heirs, executors,
administrators, successors and assigns, from any and all liabilities
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whatsoever, whether at law or in equity (including any right of contribution),
whether arising under any contract or agreement, by operation of law or
otherwise, existing or arising from any acts or events occurring or failing to
occur or alleged to have occurred or to have failed to occur or any conditions
existing or alleged to have existed on or before the Closing Date, including in
connection with the transactions and all other activities to implement any of
the Separation, the IPO and the Distribution.
(b) Except as provided in Section 10.1(c), effective as of the
Closing Date, CBI does hereby, for itself and its Affiliates, successors and
assigns, and all persons who at any time prior to the Closing Date have been
shareholders, directors, officers, agents or employees of CBI (in each case, in
their respective capacities as such), remise, release and forever discharge
CONVERGYS, and its Affiliates, successors and assigns, and all persons who at
any time prior to the Closing Date have been shareholders, directors, officers,
agents or employees of CONVERGYS (in each case, in their respective capacities
as such), and their respective heirs, executors, administrators, successors and
assigns, from any and all liabilities whatsoever, whether at law or in equity
(including any right of contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from any acts
or events occurring or failing to occur or alleged to have occurred or to have
failed to occur or any conditions existing or alleged to have existed on or
before the Closing Date, including in connection with the transactions and all
other activities to implement any of the Separation, the IPO and the
Distribution.
(c) Nothing contained in Section 10.1(a) or (b) shall impair any
right of any Person to enforce this Agreement, any Ancillary Agreement or any
agreements, arrangements, commitments or understandings that are specified
herein or in the Schedules and Exhibits hereto not to terminate as of the
Closing Date, in each case in accordance with its terms. Nothing contained in
Section 10.1(a) or (b) shall release any Person from:
(i) any liability provided in or resulting from any agreement
between CBI and CONVERGYS that is specified herein or the Ancillary Agreements
hereto specified as not to terminate as of the Closing Date, or any other
liability specified as not to terminate as of the Closing Date;
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(ii) any liability, contingent or otherwise, assumed,
transferred, assigned or allocated to such person;
(iii) any liability that the parties may have with respect to
indemnification or contribution pursuant to this Agreement for claims brought
against the parties by third persons, which liability shall be governed by this
Article 10 and, if applicable, the appropriate provisions of the Ancillary
Agreements.
(d) CONVERGYS shall not make any claim or demand, or commence any
action asserting any claim or demand, including any claim of contribution or any
indemnification, against CBI, or any other Person released pursuant to Section
10.1(a), with respect to any liabilities released pursuant to Section 10.1(a).
CBI shall not make any claim or demand, or commence any action asserting any
claim or demand, including any claim of contribution or any indemnification,
against CONVERGYS or any other Person released pursuant to Section 10.1(b), with
respect to any liabilities released pursuant to Section 10.1(b).
(e) It is the intent of each of CBI and CONVERGYS by virtue of the
provisions of this Section 10.1 to provide for a full and complete release and
discharge 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
Closing Date, between or among CONVERGYS 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 any such Persons
on or before the Closing Date), except as expressly set forth in Section
10.1(c). At any time, at the request of any other party, each party shall
execute and deliver releases reflecting the provisions hereof.
10.2 INDEMNIFICATION BY CONVERGYS. Except as provided in Section 10.4,
CONVERGYS shall indemnify, defend and hold harmless CBI, and each of its
directors, officers and employees, and each of the heirs, executors, successors
and assigns of any of the foregoing (collectively, the "CBI Indemnitees"), from
and against any and all liabilities of the CBI Indemnitees relating to, arising
out of or resulting from any of the following items:
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(a) the failure of CONVERGYS or any other person to pay, perform
or otherwise promptly discharge any CONVERGYS Liabilities, whether prior to or
after the Closing Date or the date hereof;
(b) the business of CONVERGYS or any CONVERGYS Liabilities;
(c) any breach by CONVERGYS or its Affiliates of this Agreement or
any of the Ancillary Agreements; and
(d) 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 any IPO Registration Statement or
Prospectus.
10.3 INDEMNIFICATION BY CBI. Except as provided in Section 10.4, CBI
shall indemnify, defend and hold harmless CONVERGYS, and each of its directors,
officers and employees, and each of the heirs, executors, successors and assigns
of any of the foregoing (collectively, the "CONVERGYS Indemnitees"), from and
against any and all liabilities of the CONVERGYS Indemnitees relating to,
arising out of or resulting from any of the following items:
(a) the failure of CBI or any other person to pay, perform or
otherwise promptly discharge any liabilities of CBI other than the CONVERGYS
liabilities whether prior to or after the Closing Date or the date hereof;
(b) the business of CBI or any liability of CBI other than the
CONVERGYS liabilities;
(c) any breach by CBI or any of its affiliates of this Agreement
or any of the Ancillary Agreements; and
(d) 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
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make the statements therein not misleading, with respect to all information
about CBI contained in any IPO Registration Statement or Prospectus.
10.4 INDEMNIFICATION OBLIGATIONS NET OF INSURANCE PROCEEDS AND OTHER
AMOUNTS.
(a) The parties intend that any liability subject to
indemnification or reimbursement pursuant to this Article 9 will be net of
insurance proceeds that actually reduce the amount of the liability.
Accordingly, the amount which any party (an "Indemnifying Party") is required to
pay to any person entitled to indemnification hereunder (an "Indemnitee") will
be reduced by any insurance proceeds theretofore actually recovered by or on
behalf of the Indemnitee in reduction of the related liability. If an Indemnitee
receives a payment (an "Indemnity Payment") required by this Agreement from an
Indemnifying Party in respect of any liability and subsequently receives
insurance proceeds, then the Indemnitee will pay to the Indemnifying Party an
amount equal to the excess of the Indemnity Payment received over the amount of
the Indemnity Payment that would have been due if the insurance proceeds
recovery had been received, realized or recovered before the Indemnity Payment
was made.
(b) In the case of any Shared Contingent Liability, any insurance
proceeds actually received, realized or recovered by any party in respect of the
Shared Contingent Liability will be shared among the parties in such manner as
may be necessary so that the obligations of the parties for such Shared
Contingent Liability, net of such insurance proceeds, will remain in proportion
to their respective Shared Percentages, regardless of which party or parties may
actually receive, realize or recover such insurance proceeds.
(c) An insurer who would otherwise be obligated to pay any claim
shall not be relieved of the responsibility with respect thereto or, solely by
virtue of the indemnification provisions hereof, have any subrogation rights
with respect thereto, it being expressly understood and agreed that no insurer
or any other third party shall be entitled to receive a benefit that they would
not be entitled to receive in the absence of the indemnification provisions by
virtue of the indemnification provisions hereof.
10.5 PROCEDURES FOR INDEMNIFICATION OF THIRD PARTY CLAIMS.
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(a) If an Indemnitee shall receive notice or otherwise learn of
the assertion by any Person other than the parties hereto (a "Third Party
Claim") with respect to which an Indemnifying Party may be obligated to provide
indemnification to such Indemnitee pursuant to Section 10.2 or 10.3, or any
other Section of this Agreement or any Ancillary Agreement, such Indemnitee
shall give such Indemnifying Party written notice thereof within 20 days after
becoming aware of such Third Party Claim. If any Person shall receive notice or
otherwise learn of the assertion of a Third Party Claim which may reasonably be
determined to be a Shared Contingent Liability, such Person (if other than CBI)
shall give CBI and any other party to this Agreement written notice thereof
within 20 days after becoming aware of such Third Party Claim. Any such notice
shall describe the Third Party Claim in reasonable detail. Notwithstanding the
foregoing, the failure of any Indemnitee or other Person to give notice as
provided in this Section 10.5(a) shall not relieve the related Indemnifying
Party of its obligations under this Article 10, except to the extent that such
Indemnifying Party is actually prejudiced by such failure to give notice.
(b) If the Indemnitee, the party receiving any notice pursuant to
Section 10.5(a) or any other party to this Agreement believes that the Third
Party Claim is or may be a Shared Contingent Liability, such Indemnitee or other
party may make a request for a determination of such matter to the Contingent
Claim Committee (a "Determination Request") at any time following any notice
given by the Indemnitee to an Indemnifying Party or given by any other Person to
CBI pursuant to Section 10.5(a). CBI may make such a Determination Request at
any time. Unless all parties have acknowledged that the applicable Third Party
Claim is not a Shared Contingent Liability or unless a determination to such
effect has been made in accordance with Section 7.6, CBI shall be entitled (but
not obligated) to assume the defense of such Third Party Claim as if it were the
Indemnifying Party hereunder. In any such event, CBI shall be entitled to
reimbursement of all the costs and expenses of such defense once a final
determination or acknowledgement is made as to the status of the Third Party
Claim from the applicable party or parties that would have been required to pay
such amounts if the status of the Third Party Claim had been determined
immediately; provided that, if such Third Party Claim is determined to be a
Shared Contingent Liability, such costs and expenses shall be shared as provided
in Section 7.4.
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(c) CBI shall assume the defense of, and may seek to settle or
compromise, any Third Party Claim that is a Shared Contingent Liability, and the
costs and expenses thereof shall be included in the calculation of the amount of
the applicable Shared Contingent Liability in determining the reimbursement
obligations of the other parties with respect thereto pursuant to Section 7.4.
Any Indemnitee in respect of a Shared Contingent Liability shall have the right
to employ separate counsel and to participate in (but not control) the defense,
compromise, or settlement thereof, but all fees and expenses of such counsel
shall be the expense of such Indemnitee.
(d) Other than in the case of a Shared Contingent Liability, an
Indemnifying Party may elect to defend (and, unless the Indemnifying Party has
specified any reservations or exceptions, to seek to settle or compromise), at
such Indemnifying Party's own expense and by such Indemnifying Party's own
counsel, any Third Party Claim. Within 30 days after the receipt of notice from
an Indemnitee in accordance with Section 10.5(a), the Indemnifying Party shall
notify the Indemnitee of its election whether the Indemnifying Party will assume
responsibility for defending such Third Party Claim, which election shall
specify any reservations or exceptions. After notice from an Indemnifying Party
to an Indemnitee of its election to assume the defense of a Third Party Claim,
such Indemnitee shall have the right to employ separate counsel and to
participate in (but not control) the defense, compromise, or settlement thereof,
but the fees and expenses of such counsel shall be the expense of such
Indemnitee except as set forth in the next sentence. In the event that (i) the
Third Party Claim is not a Shared Contingent Liability and (ii) the Indemnifying
Party has elected to assume the defense of the Third Party Claim but has
specified, and continues to assert, any reservations or exceptions in such
notice, then, in any such case, the reasonable fees and expenses of one separate
counsel for all Indemnitees shall be borne by the Indemnifying Party.
(e) Other than in the case of a Shared Contingent Liability, if an
Indemnifying Party elects not to assume responsibility for defending a Third
Party Claim, or fails to notify an Indemnitee of its election as provided in
Section 10.5(d), such Indemnitee may defend such Third Party Claim at the cost
and expense of the Indemnifying Party.
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(f) Unless the Indemnifying Party has failed to assume the defense
of the Third Party Claim in accordance with the terms of this Agreement, no
Indemnitee may settle or compromise any Third Party Claim that is not a Shared
Contingent Liability without the consent of the Indemnifying Party. No
Indemnitee may settle or compromise any Third Party Claim that is a Shared
Contingent Liability without the consent of CBI.
(g) In the case of a Third Party Claim that is not a Shared
Contingent Liability, no Indemnifying Party shall consent to entry of any
judgment or enter into any settlement of the Third Party Claim without the
consent of the Indemnitee if the effect thereof is to permit any injunction,
declaratory judgment, other order or other nonmonetary relief to be entered,
directly or indirectly, against any Indemnitee. In the case of a Third Party
Claim that is a Shared Contingent Liability, CBI shall not consent to entry of
any judgment or enter into any settlement of the Third Party Claim without the
consent of the Indemnitee if the effect thereof is to permit any injunction,
declaratory judgment, other order or other non-monetary relief to be entered,
directly or indirectly, against any Indemnitee.
10.6 ADDITIONAL MATTERS.
(a) Any claim on account of a liability which does not result from
a Third Party Claim shall be asserted by written notice given by the Indemnitee
to the Indemnifying Party. Such Indemnifying Party shall have a period of 30
days after the receipt of such notice within which to respond thereto. If such
Indemnifying Party does not respond within such 30-day period, such Indemnifying
Party shall be deemed to have refused to accept responsibility to make payment.
If such Indemnifying Party does not respond within such 30-day period or rejects
such claim in whole or in part, such Indemnitee shall be free to pursue such
remedies as may be available to such party as contemplated by this Agreement and
the Ancillary Agreements.
(b) In the event of payment by or on behalf of any Indemnifying
Party to any Indemnitee in connection with any Third Party Claim, such
Indemnifying Party shall be subrogated to and shall stand in the place of such
Indemnitee as to any events or circumstances in respect of which such Indemnitee
may have the right, defense or claim relating to such Third Party Claim against
any claimant or plaintiff asserting such Third Party Claim or against any
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other person. Such Indemnitee shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense of such Indemnifying Party, in
prosecuting any subrogated right, defense or claim; provided, however, that CBI
shall be entitled to control the prosecution of any such right, defense or claim
in respect of any Shared Contingent Liability.
(c) In the event of an Action in which the Indemnifying Party is
not a named defendant, if either the Indemnitee or Indemnifying Party shall so
request, the parties shall endeavor to substitute the Indemnifying Party for the
named defendant, or, in the case of a Shared Contingent Liability, add the
Indemnifying Party as a named defendant if at all possible. If such substitution
or addition cannot be achieved for any reason or is not requested, the named
defendant shall allow the Indemnifying Party to manage the Action as set forth
in this Section, and, subject to Section 7.4 with respect to Shared Contingent
Liabilities, the Indemnifying Party shall fully indemnify the named defendant
against all costs of defending the Action (including court costs, sanctions
imposed by a court, attorneys' fees, experts' fees and all other external
expenses), the costs of any judgment or settlement, and the cost of any interest
or penalties relating to any judgment or settlement.
10.7 REMEDIES CUMULATIVE. The remedies provided in this Article 10
shall be cumulative and shall not preclude assertion by an Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
ARTICLE 11
CONFIDENTIALITY
11.1 GENERAL.
(a) Subject to Section 11.2, each of CBI and CONVERGYS, on behalf
of itself and each member of its respective Group, agrees to hold, and to cause
its respective directors, officers, employees, agents, accountants, counsel and
other advisors and representatives to hold, in strict confidence, with at least
the same degree of care that applies to CBI's confidential and proprietary
information pursuant to policies in effect as of the Closing Date, all
Information (as defined herein) concerning each such other Group that is either
in its possession (including Information in its possession prior to any of the
date hereof, the Closing
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Date or the Distribution Date) or furnished by any such other Group or its
respective directors, officers, employees, agents, accountants, counsel and
other advisors and representatives at any time pursuant to this Agreement, any
Ancillary Agreement or otherwise, and shall not use any such Information other
than for such purposes as shall be expressly permitted hereunder or thereunder,
except, in each case, to the extent that such Information has been (i) in the
public domain through no fault of such party or any member of such Group or any
of their respective directors, officers, employees, agents, accountants, counsel
and other advisors and representatives, (ii) later lawfully acquired from other
sources by such party (or any member of such party's Group) which sources are
not themselves bound by a confidentiality obligation), or (iii) independently
generated without reference to any proprietary or confidential Information of
the other party.
(b) Each party agrees not to release or disclose, or permit to be
released or disclosed, any such Information to any other Person, except its
directors, officers, employees, agents, accountants, counsel and other advisors
and representatives who need to know such Information (who shall be advised of
their obligations hereunder with respect to such Information), except in
compliance with Section 11.2. Without limiting the foregoing, when any
Information is no longer needed for the purposes contemplated by this Agreement
or any Ancillary Agreement, each party will promptly after request of the other
party either return to the other party all Information in a tangible form
(including all copies thereof and all notes, extracts or summaries based
thereon) or certify to the other party that it has destroyed such Information
(and such copies thereof and such notes, extracts or summaries based thereon).
11.2 In the event that any party or any member of its Group either
determines on the advice of its counsel that it is required to disclose any
Information pursuant to applicable law or receives any demand under lawful
process or from any Governmental Authority to disclose or provide Information of
any other party (or any member of any other party's Group) that is subject to
the confidentiality provisions hereof, such party shall notify the other party
prior to disclosing or providing such Information and shall cooperate at the
expense of the requesting party in seeking any reasonable protective
arrangements requested by such other party. Subject to the foregoing, the Person
that received such request may thereafter disclose or provide Information
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to the extent required by such law (as so advised by counsel) or by lawful
process or such Governmental Authority.
11.3 Information means information, whether or not patentable or
copyrightable, in written, oral, electronic or other tangible or intangible
forms, stored in any medium, including studies, reports, books, records,
contracts, instruments, surveys, ideas, concepts, know-how, techniques, designs,
drawings, blueprints, diagrams, models, flow charts, data, computer data, disks,
diskettes, tapes, computer programs or other software, marketing plans, customer
names, communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under their
direction (including attorney work product), and other technical, financial,
employee or business information or data.
ARTICLE 12
ARBITRATION; DISPUTE RESOLUTION
12.1 AGREEMENT TO ARBITRATE. Except as otherwise specifically provided
in any Ancillary Agreement, the procedures for discussion, negotiation and
arbitration set forth in this Article 12 shall apply to all disputes,
controversies or claims (whether sounding in contract, tort or otherwise) that
may arise out of or relate to, or arise under or in connection with this
Agreement or any Ancillary Agreement, or the transactions contemplated hereby or
thereby (including all actions taken in furtherance of the transactions
contemplated hereby or thereby on or prior to the date hereof), or the
commercial or economic relationship of the parties relating hereto or thereto,
between or among any member of the CBI Group and the CONVERGYS Group. Each party
agrees on behalf of itself and each member of its respective Group that the
procedures set forth in this Article 12 shall be the sole and exclusive remedy
in connection with any dispute, controversy or claim relating to any of the
foregoing matters and irrevocably waives any right to commence any Action in or
before any governmental authority, except as expressly provided in Sections
12.7(b) and 12.8 and except to the extent provided under the Arbitration Act in
the case of judicial review of arbitration results or awards. Each party on
behalf of itself and each member of its respective Group irrevocably waives any
right to any trial by jury with respect to any claim, controversy or dispute set
forth in the first sentence of this Section 12.1.
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12.2 ESCALATION.
(a) It is the intent of the parties to use their respective
reasonable best efforts to resolve expeditiously any dispute, controversy or
claim between or among them with respect to the matters covered hereby that may
arise from time to time on a mutually acceptable negotiated basis. In
furtherance of the foregoing, any party involved in a dispute, controversy or
claim may deliver a notice (an "Escalation Notice") demanding an in person
meeting involving representatives of the parties at a senior level of management
of the parties (or if the parties agree, of the appropriate strategic business
unit or division within such entity). A copy of any such Escalation Notice shall
be given to the General Counsel, or like officer or official, of each party
involved in the dispute, controversy or claim (which copy shall state that it is
an Escalation Notice pursuant to this Agreement). Any agenda, location or
procedures for such discussions or negotiations between the parties may be
established by the parties from time to time; provided, however, that the
parties shall use their reasonable best efforts to meet within 30 days of the
Escalation Notice.
(b) The parties may, by mutual consent, retain a mediator to aid
the parties in their discussions and negotiations by informally providing advice
to the parties. Any opinion expressed by the mediator shall be strictly advisory
and shall not be binding on the parties, nor shall any opinion expressed by the
mediator be admissible in any arbitration proceedings. The mediator may be
chosen from a list of mediators previously selected by the parties or by other
agreement of the parties. Costs of the mediation shall be borne equally by the
parties involved in the matter, except that each party shall be responsible for
its own expenses. Mediation is not a prerequisite to a demand for arbitration
under Section 12.3.
12.3 DEMAND FOR ARBITRATION.
(a) At any time after the first to occur of (i) the date of the
meeting actually held pursuant to the applicable Escalation Notice or (ii) 45
days after the delivery of an Escalation Notice (as applicable, the "Arbitration
Demand Date"), any party involved in the dispute, controversy or claim
(regardless of whether such party delivered the Escalation Notice)
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may, unless the Applicable Deadline has occurred, make a written demand (the
"Arbitration Demand Notice") that the dispute be resolved by binding
arbitration, which Arbitration Demand Notice shall be given to the parties to
the dispute, controversy or claim in the manner set forth in Section 12.3(b). In
the event that any party shall deliver an Arbitration Demand Notice to another
party, such other party may itself deliver an Arbitration Demand Notice to such
first party with respect to any related dispute, controversy or claim with
respect to which the Applicable Deadline has not passed without the requirement
of delivering an Escalation Notice. No party may assert that the failure to
resolve any matter during any discussions or negotiations, the course of conduct
during the discussions or negotiations or the failure to agree on a mutually
acceptable time, agenda, location or procedures for the meeting, in each case,
as contemplated by Section 12.2, is a prerequisite to a demand for arbitration
under Section 12.3.
(b) Except as may be expressly provided in any Ancillary
Agreement, any Arbitration Demand Notice may be given until one year and 45 days
after the later of the occurrence of the act or event giving rise to the
underlying claim or the date on which such act or event was, or should have
been, in the exercise of reasonable due diligence, discovered by the party
asserting the claim (as applicable and as it may in a particular case be
specifically extended by the parties in writing, the "Applicable Deadline"). Any
discussions, negotiations or mediations between the parties pursuant to this
Agreement or otherwise will not toll the Applicable Deadline unless expressly
agreed in writing by the parties. Each of the parties agrees on behalf of itself
and each member of its Group that if an Arbitration Demand Notice with respect
to a dispute, controversy or claim is not given prior to the expiration of the
Applicable Deadline, as between or among the parties and the members of their
Groups, such dispute, controversy or claim will be barred. Subject to Sections
12.7(d) and 12.8, upon delivery of an Arbitration Demand Notice pursuant to
Section 12.3(a) prior to the Applicable Deadline, the dispute, controversy or
claim shall be decided by a sole arbitrator in accordance with the rules set
forth in this Article 12.
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12.4 ARBITRATORS
(a) Within 15 days after a valid Arbitration Demand Notice is
given, the parties involved in the dispute, controversy or claim referenced
therein shall attempt to select a sole arbitrator satisfactory to all such
parties.
(b) In the event that such parties are not able jointly to select
a sole arbitrator within such 15-day period, such parties shall each appoint an
arbitrator within 30 days after delivery of the Arbitration Demand Notice. If
one party appoints an arbitrator within such time period and the other party or
parties fail to appoint an arbitrator within such time period, the arbitrator
appointed by the one party shall be the sole arbitrator of the matter.
(c) In the event that a sole arbitrator is not selected pursuant
to paragraph (a) or (b) above and, instead, two arbitrators are selected
pursuant to paragraph (b) above, the two arbitrators will, within 30 days after
the appointment of the later of them to be appointed, select an additional
arbitrator who shall act as the sole arbitrator of the dispute. After selection
of such sole arbitrator, the initial arbitrators shall have no further role with
respect to the dispute. In the event that the arbitrators so appointed do not,
within 30 days after the appointment of the later of them to be appointed, agree
on the selection of the sole arbitrator, any party involved in such dispute may
apply to the American Arbitration Association, Cincinnati, Ohio ("AAA"), to
select the sole arbitrator, which selection shall be made by such organization
within 30 days after such application. Any arbitrator selected pursuant to this
paragraph (c) shall be disinterested with respect to any of the parties and the
matter and shall be reasonably competent in the applicable subject matter.
(d) The sole arbitrator selected pursuant to paragraph (a), (b) or
(c) above will set a time for the hearing of the matter which will commence no
later than 90 days after the date of appointment of the sole arbitrator pursuant
to paragraph (a), (b) or (c) above and which hearing will be no longer than 30
days (unless in the judgment of the arbitrator the matter is unusually complex
and sophisticated and thereby requires a longer time, in which event such
hearing shall be no longer than 90 days). The final decision of such arbitrator
will be rendered in writing to the parties not later than 60 days after the last
hearing date, unless otherwise agreed by the parties in writing.
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(e) The place of any arbitration hereunder will be Cincinnati,
Ohio, unless otherwise agreed by the parties.
12.5 HEARINGS. Within the time period specified in Section 12.4(d), the
matter shall be presented to the arbitrator at a hearing by means of written
submissions of memoranda and verified witness statements, filed simultaneously,
and responses, if necessary in the judgment of the arbitrator or both the
parties. If the arbitrator deems it to be essential to a fair resolution of the
dispute, live cross-examination or direct examination may be permitted, but is
not generally contemplated to be necessary. The arbitrator shall actively manage
the arbitration with a view to achieving a just, speedy and cost-effective
resolution of the dispute, claim or controversy. The arbitrator may, in his or
her discretion, set time and other limits on the presentation of each party's
case, its memoranda or other submissions, and refuse to receive any proffered
evidence, which the arbitrator, in his or her discretion, finds to be
cumulative, unnecessary, irrelevant or of low probative nature. Except as
otherwise set forth herein, any arbitration hereunder will be conducted in
accordance with the AAA Rules and Regulations then prevailing (except that the
arbitration will not be conducted under the auspices of the AAA and the fee
schedule of the AAA will not apply). Except as expressly set forth in Section
12.8(b), the decision of the arbitrator will be final and binding on the
parties, and judgment thereon may be had and will be enforceable in any court
having jurisdiction over the parties. Arbitration awards will bear interest at
an annual rate of the Prime Rate plus 2% per annum. To the extent that the
provisions of this Agreement and the prevailing rules of the AAA conflict, the
provisions of this Agreement shall govern.
12.6 DISCOVERY AND CERTAIN OTHER MATTERS.
(a) Any party involved in the applicable dispute may request
limited document production from the other party or parties of specific and
expressly relevant documents, with the reasonable expenses of the producing
party incurred in such production paid by the requesting party. Any such
discovery (which rights to documents shall be substantially less than document
discovery rights prevailing under the Federal Rules of Civil Procedure) shall be
conducted expeditiously and shall not cause the hearing provided for in Section
12.5 to be adjourned except upon consent of all parties involved in the
applicable dispute or upon an
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extraordinary showing of cause demonstrating that such adjournment is necessary
to permit discovery essential to a party to the proceeding. Depositions,
interrogatories or other forms of discovery (other than the document production
set forth above) shall not occur except by consent of the parties involved in
the applicable dispute. Disputes concerning the scope of document production and
enforcement of the document production requests will be determined by written
agreement of the parties involved in the applicable dispute or, failing such
agreement, will be referred to the arbitrator for resolution. All discovery
requests will be subject to the proprietary rights and rights of privilege of
the parties, and the arbitrator will adopt procedures to protect such rights and
to maintain the confidential treatment of the arbitration proceedings (except as
may be required by law). Subject to the foregoing, the arbitrator shall have the
power to issue subpoenas to compel the production of documents relevant to the
dispute, controversy or claim.
(b) The arbitrator shall have full power and authority to
determine issues of arbitrability but shall otherwise be limited to interpreting
or construing the applicable provisions of this Agreement or any Ancillary
Agreement, and will have no authority or power to limit, expand, alter, amend,
modify, revoke or suspend any condition or provision of this Agreement or any
Ancillary Agreement; it being understood, however, that the arbitrator will have
full authority to implement the provisions of this Agreement or any Ancillary
Agreement, and to fashion appropriate remedies for breaches of this Agreement
(including interim or permanent injunctive relief); provided that the arbitrator
shall not have (i) any authority in excess of the authority a court having
jurisdiction over the parties and the controversy or dispute would have absent
these arbitration provisions or (ii) any right or power to award punitive or
treble damages. It is the intention of the parties that in rendering a decision
the arbitrator give effect to the applicable provisions of this Agreement and
the Ancillary Agreements and follow applicable law (it being understood and
agreed that this sentence shall not give rise to a right of judicial review of
the arbitrator's award).
(c) If a party fails or refuses to appear at and participate in an
arbitration hearing after due notice, the arbitrator may hear and determine the
controversy upon evidence produced by the appearing party.
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(d) Arbitration costs will be borne equally by each party involved
in the matter, except that each party will be responsible for its own attorney's
fees and other costs and expenses, including the costs of witnesses selected by
such party.
12.7 CERTAIN ADDITIONAL MATTERS.
(a) Any arbitration award shall be a bare award limited to a
holding for or against a party and shall be without findings as to facts, issues
or conclusions of law and shall be without a statement of the reasoning on which
the award rests, but must be in adequate form so that a judgment of a court may
be entered thereupon. Judgment upon any arbitration award hereunder may be
entered in any court having jurisdiction thereof.
(b) Prior to the time at which an arbitrator is appointed pursuant
to Section 12.4, any party may seek one or more temporary restraining orders in
a court of competent jurisdiction if necessary in order to preserve and protect
the status quo. Neither the request for, or grant or denial of, any such
temporary restraining order shall be deemed a waiver of the obligation to
arbitrate as set forth herein and the arbitrator may dissolve, continue or
modify any such order. Any such temporary restraining order shall remain in
effect until the first to occur of the expiration of the order in accordance
with its terms or the dissolution thereof by the arbitrator.
(c) Except as required by law, the parties shall hold, and shall
cause their respective officers, directors, employees, agents and other
representatives to hold, the existence, content and result of mediation or
arbitration in confidence in accordance with the provisions of Article 12 and
except as may be required in order to enforce any award. Each of the parties
shall request that any mediator or arbitrator comply with such confidentiality
requirement.
(d) In the event that at any time the sole arbitrator shall fail
to serve as an arbitrator for any reason, the parties shall select a new
arbitrator who shall be disinterested as to the parties and the matter in
accordance with the procedures set forth herein for the selection of the initial
arbitrator. The extent, if any, to which testimony previously given shall be
repeated or as to which the replacement arbitrator elects to rely on the
stenographic record (if there is one) of such testimony shall be determined by
the replacement arbitrator.
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12.8 LIMITED COURT ACTIONS.
(a) Notwithstanding anything herein to the contrary, in the event
that any party reasonably determines the amount in controversy in any dispute,
controversy or claim (or any series of related disputes, controversies or
claims) under this Agreement or any Ancillary Agreement is, or is reasonably
likely to be, in excess of $25 million and if such party desires to commence an
Action in lieu of complying with the arbitration provisions of this Article,
such party shall so state in its Arbitration Demand Notice. If the other parties
to the arbitration do not agree that the amount in controversy in such dispute,
controversy or claim (or such series of related disputes, controversies or
claims) is, or is reasonably likely to be, in excess of $25 million, the
arbitrator selected pursuant to Section 12.4 hereof shall decide whether the
amount in controversy in such dispute, controversy or claim (or such series of
related disputes, controversies or claims) is, or is reasonably likely to be, in
excess of $25 million. The arbitrator shall set a date that is no later than ten
days after the date of his or her appointment for submissions by the parties
with respect to such issue. There shall not be any discovery in connection with
such issue. The arbitrator shall render his or her decision on such issue within
five days of such date so set by the arbitrator. In the event that the
arbitrator determines that the amount in controversy in such dispute,
controversy or claim (or such series of related disputes, controversies or
claims) is or is reasonably likely to be in excess of $25 million, the
provisions of Sections 12.4(d) and (e), 12.5, 12.6, 12.7 and 12.10 hereof shall
not apply and on or before (but, except as expressly set forth in Section
12.8(b), not after) the tenth business day after the date of such decision, any
party to the arbitration may elect, in lieu of arbitration, to commence an
Action with respect to such dispute, controversy or claim (or such series of
related disputes, controversies or claims) in any court of competent
jurisdiction. If the arbitrator does not so determine, the provisions of this
Article (including with respect to time periods) shall apply as if no
determinations were sought or made pursuant to this Section 12.8(a).
(b) In the event that an arbitration award in excess of $25
million is issued in any arbitration proceeding commenced hereunder, any party
may, within 60 days after the date of such award, submit the dispute,
controversy or claim (or series of related disputes, controversies or claims)
giving rise thereto to a court of competent jurisdiction, regardless of
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whether such party or any other party sought to commence an Action in lieu of
proceeding with arbitration in accordance with Section 12.8(a). In such event,
the applicable court may elect to rely on the record developed in the
arbitration or, if it determines that it would be advisable in connection with
the matter, allow the parties to seek additional discovery or to present
additional evidence. Each party shall be entitled to present arguments to the
court with respect to whether any such additional discovery or evidence shall be
permitted and with respect to all other matters relating to the applicable
dispute, controversy or claim (or series of related disputes, controversies or
claims).
12.9 CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in
writing, the parties will continue to provide service and honor all other
commitments under this Agreement and each Ancillary Agreement during the course
of dispute resolution pursuant to the provisions of this Article 11 with respect
to all matters not subject to such dispute, controversy or claim.
12.10 LAW GOVERNING ARBITRATION PROCEDURES. The interpretation of the
provisions of this Article 11, only insofar as they relate to the agreement to
arbitrate and any procedures pursuant thereto, shall be governed by the
Arbitration Act and other applicable federal law. In all other respects, the
interpretation of this Agreement shall be governed by the laws of the State of
Ohio.
ARTICLE 13
FURTHER ASSURANCES AND ADDITIONAL COVENANTS
13.1 FURTHER ASSURANCES.
(a) In addition to the actions specifically provided for
elsewhere in this Agreement, each of the parties hereto shall use its reasonable
best efforts, prior to, on and after the Closing Date, to take, or cause to be
taken, all actions, and to do, or cause to be done, all things, reasonably
necessary, proper or advisable under applicable laws, regulations and agreements
to consummate and make effective the transactions contemplated by this Agreement
and the Ancillary Agreements.
(b) Without limiting the foregoing, prior to, on and after the
Closing Date, each party hereto shall cooperate with the other parties, and
without any further consideration,
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but at the expense of the requesting party, to execute and deliver, or use its
reasonable best efforts to cause to be executed and delivered, all instruments,
including instruments of conveyance, assignment and transfer, and to make all
filings with, and to obtain all consents, approvals or authorizations of, any
governmental authority or any other Person under any permit, license, agreement,
indenture or other instrument (including any consents or governmental
approvals), and to take all such other actions as such party may reasonably be
requested to take by any other party hereto from time to time, consistent with
the terms of this Agreement and the Ancillary Agreements, in order to effectuate
the provisions and purposes of this Agreement and the Ancillary Agreements and
the transfers of the CONVERGYS Assets and the assignment and assumption of the
liabilities and the other transactions contemplated hereby and thereby. Without
limiting the foregoing, each party will, at the reasonable request, cost and
expense of any other party, take such other actions as may be reasonably
necessary to vest in such other party good and marketable title, free and clear
of any liens and encumbrances, if and to the extent it is practicable to do so.
(c) On or prior to the Closing Date, CBI and CONVERGYS, in their
respective capacities as direct and indirect shareholders of their respective
subsidiaries, shall each ratify any actions which are reasonably necessary or
desirable to be taken by CBI, CONVERGYS or any other subsidiary of CBI or
CONVERGYS, as the case may be, to effectuate the transactions contemplated by
this Agreement. On or prior to the Closing Date, CBI and CONVERGYS shall take
all actions as may be necessary to approve the stock-based employee benefit
plans of CONVERGYS in order to satisfy the requirement of Rule 16b-3 under the
Exchange Act and Section 162(m) of the Code.
(d) The parties hereto agree to take any reasonable actions
necessary in order for the Distribution to qualify as a tax-free distribution
pursuant to Section 355 of the Code.
13.2 QUALIFICATION AS TAX-FREE DISTRIBUTION. After the Closing Date,
neither CBI nor CONVERGYS shall take, or permit any member of its respective
Group to take, any action which could reasonably be expected to prevent the
Distribution from qualifying as a tax-free distribution within the meaning of
Section 355 of the Code or any other transaction contemplated by this Agreement
or any Ancillary Agreement which is intended by the parties to be tax-free
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from failing so to qualify. Without limiting the foregoing, after the Closing
Date and on or prior to the Distribution Date, CONVERGYS shall not issue or
grant, and shall not permit any member of the CONVERGYS Group to issue or grant,
directly or indirectly, any shares of CONVERGYS Common Shares or any rights,
warrants, options or other securities to purchase or acquire (whether upon
conversion, exchange or otherwise) any shares of CONVERGYS Common Shares
(whether or not then exercisable, convertible or exchangeable) if such issuance
or grant would prevent the Distribution from being tax-free under Section 355 of
the Code.
ARTICLE 14
TERMINATION
14.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated at
any time after the Closing Date and prior to the Distribution Date by the mutual
consent of CBI and CONVERGYS.
14.2 OTHER TERMINATION. This Agreement may be terminated by CBI at any
time prior to the Closing Date.
14.3 EFFECT OF TERMINATION.
(a) In the event of any termination of this Agreement prior to the
Closing Date, no party to this Agreement (or any of its directors or officers)
shall have any liability or further obligation to any other party.
(b) In the event of any termination of this Agreement on or after
the Closing Date, only the provisions of Article 8 will terminate and the other
provisions of this Agreement and each Ancillary Agreement shall remain in full
force and effect.
ARTICLE 15
MISCELLANEOUS
15.1 COUNTERPARTS; ENTIRE AGREEMENT; CORPORATE POWER.
(a) This Agreement and each Ancillary Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same
agreement, and shall
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become effective when one or more counterparts have been signed by each of the
parties and delivered to the other party.
(b) This Agreement and the Ancillary Agreements and the Exhibits,
Schedules and Appendices hereto and thereto contain the entire agreement between
the parties with respect to the subject matter hereof, supersede all previous
agreements, negotiations, discussions, writings, understandings, commitments and
conversations with respect to such subject matter and there are no agreements or
understandings between the parties other than those set forth or referred to
herein or therein.
15.2 GOVERNING LAW. This Agreement and, unless expressly provided
therein, each Ancillary Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of Ohio.
15.3 ASSIGNABILITY. Except as set forth in any Ancillary Agreement,
this Agreement and each Ancillary Agreement shall be binding upon and inure to
the benefit of the parties hereto and thereto, respectively, and their
respective successors and assigns; provided, however, that no party hereto or
thereto may assign its respective rights or delegate its respective obligations
under this Agreement or any Ancillary Agreement without the express prior
written consent of the other parties hereto or thereto.
15.4 THIRD PARTY BENEFICIARIES. Except for the indemnification rights
under this Agreement of any CBI Indemnitee or CONVERGYS Indemnitee in their
respective capacities as such, (a) the provisions of this Agreement and each
Ancillary Agreement are solely for the benefit of the parties and are not
intended to confer upon any person except the parties any rights or remedies
hereunder, and (b) there are no third party beneficiaries of this Agreement or
any Ancillary Agreement, and neither this Agreement nor any Ancillary Agreement
shall provide any third person with any remedy, claim, liability, reimbursement,
claim of action or other right in excess of those existing without reference to
this Agreement or any Ancillary Agreement. No party hereto shall have any right,
remedy or claim with respect to any provision of this Agreement or any Ancillary
Agreement to the extent such provision relates solely to the other two parties
hereto or the members of such other two parties' respective groups. No party
shall be
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required to deliver any notice under this Agreement or under any Ancillary
Agreement to any other party with respect to any matter in which such other
party has no right, remedy or claim.
15.5 NOTICES. All notices or other communications under this Agreement
or any Ancillary Agreement shall be in writing and shall be deemed to be duly
given when (a) delivered in person or (b) deposited in the United States mail or
private express mail, postage prepaid, addressed as follows:
If to CBI, to: Cincinnati Bell Inc.
201 East Fourth Street
Cincinnati, OH 45202
Attn: President
If to CONVERGYS, to: CONVERGYS CORPORATION
201 East Fourth Street
Cincinnati, OH 45202
Attn: President
Each party may change, at any time, the person or the address to which notices
should be sent hereunder by sending notice of such change as provided in this
Section 15.5
15.6 SEVERABILITY. If any provision of this Agreement or any Ancillary
Agreement or the application thereof to any person or circumstance is determined
by a court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions hereof or thereof, or the application of such provision to
persons or circumstances or in jurisdictions other than those as to which it has
been held invalid or unenforceable, shall remain in full force and effect and
shall in no way be affected, impaired or invalidated thereby, so long as the
economic or legal substance of the transactions contemplated hereby or thereby,
as the case may be, is not affected in any manner adverse to any party. Upon
such determination, the parties shall negotiate in good faith in an effort to
agree upon such a suitable and equitable provision to effect the original intent
of the parties.
15.7 FORCE MAJEURE. No party shall be deemed in default of this
Agreement or any Ancillary Agreement to the extent that any delay or failure in
the performance of its obligations under this Agreement or any Ancillary
Agreement results from any cause beyond its reasonable control and without its
fault or negligence, such as acts of God, acts of civil or military authority,
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embargoes, epidemics, wars, riots, insurrections, fires, explosions,
earthquakes, floods, unusually severe weather conditions, labor problems or
unavailability of parts, or, in the case of computer systems, any failure in
electrical or air conditioning equipment. In the event of any such excused
delay, the time for performance shall be extended for a period equal to the time
lost by reason of the delay.
15.8 PUBLICITY. Prior to the Distribution, each of CONVERGYS and CBI
shall consult with the other prior to issuing any press releases or otherwise
making public statements with respect to the IPO, the Distribution or any of the
other transactions contemplated hereby and prior to making any filings with any
governmental authority with respect thereto.
15.9 HEADINGS. The article, section and paragraph headings contained
in this Agreement and in the Ancillary Agreements are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement or any Ancillary Agreement.
15.10 SURVIVAL OF COVENANTS. Except as expressly set forth in any
Ancillary Agreement, the covenants, representations and warranties contained in
this Agreement and each Ancillary Agreement, and liability for the breach of any
obligations contained herein or therein, shall survive each of the Separation,
the IPO and the Distribution and shall remain in full force and effect
regardless of whether CBI shall consummate, delay, modify or abandon the
Distribution.
15.11 WAIVERS OF DEFAULT. Waiver by any party of any default by the
other party of any provision of this Agreement or any Ancillary Agreement shall
not be deemed a waiver by the waiving party of any subsequent or other default,
nor shall it prejudice the rights of the other party.
15.12 SPECIFIC PERFORMANCE. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement or any Ancillary Agreement, the party or parties who are or are to be
thereby aggrieved shall have the right to specific performance and injunctive or
other equitable relief of its rights under this Agreement or such Ancillary
Agreement, in addition to any and all other rights and remedies at law or in
equity, and all such rights and remedies shall be cumulative. The parties agree
that the remedies at law for any breach or threatened breach, including monetary
damages, are inadequate
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compensation for any loss and that any defense in any action for specific
performance that a remedy at law would be adequate is waived. Any requirements
for the securing or posting of any bond with such remedy are waived.
15.13 AMENDMENTS.
(a) No provisions of this Agreement or any Ancillary Agreement
shall be deemed waived, amended, supplemented or modified by any party, unless
such waiver, amendment, supplement or modification is in writing and signed by
the authorized representative of the party against whom it is sought to enforce
such waiver, amendment, supplement or modification.
(b) Without limiting the foregoing, the parties anticipate that,
prior to the Closing Date, some or all of the Schedules to this Agreement may be
amended or supplemented and, in such event, such amended or supplemented
Schedules shall be attached hereto in lieu of the original Schedules.
IN WITNESS WHEREOF, the parties have caused this Plan of Reorganization
and Distribution Agreement to be executed by their duly authorized
representatives on this ___ day of ________, 1998.
CINCINNATI BELL INC.
By:
---------------------------------------
John T. LaMacchia, President
and Chief Executive Officer
CONVERGYS CORPORATION
By:
---------------------------------------
James F. Orr, President
and Chief Executive Officer
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<PAGE> 1
Exhibit 10.2
EMPLOYEE BENEFITS AGREEMENT
BETWEEN
CINCINNATI BELL INC.
AND
CONVERGYS CORPORATION
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS............................................1
ARTICLE II GENERAL PRINCIPLES.....................................2
ARTICLE III DEFINED BENEFIT PLANS..................................4
ARTICLE IV DEFINED CONTRIBUTION PLANS.............................6
ARTICLE V HEALTH AND WELFARE PLANS...............................7
ARTICLE VI EXECUTIVE BENEFITS AND NON-EMPLOYEE
DIRECTOR BENEFITS...................................11
ARTICLE VII GENERAL AND ADMINISTRATIVE............................14
ARTICLE VIII MISCELLANEOUS.........................................16
i
<PAGE> 3
EMPLOYEE BENEFITS AGREEMENT
This EMPLOYEE BENEFITS AGREEMENT, dated as of _____________, 1998, is
by and between Cincinnati Bell Inc. ("CBI") and Convergys Corporation
("Convergys").
WHEREAS, CBI has determined to distribute to its shareholders all of
the Convergys common shares owned by CBI (the "Distribution"); and
WHEREAS, in conjunction with the Distribution, the parties have agreed
to enter into an agreement allocating assets, liabilities and responsibilities
with respect to certain employee compensation and benefit programs;
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement the following terms shall have the
following meanings:
1.1 AGREEMENT means this Employee Benefits Agreement.
1.2 CBI ENTITY means CBI and any corporation that is, at the relevant
time, a direct or indirect subsidiary of CBI, except that, for periods beginning
on and after the Distribution Date, the term "CBI Entity" shall not include a
Convergys Entity.
1.3 CODE means the Internal Revenue Code of 1986, as amended, or any
successor federal income tax law. Reference to a specific Code provision also
includes any proposed, temporary, or final regulation in force under that
provision.
1.4 CONVERGYS ENTITY means Convergys and any corporation that is, at
the relevant time, a direct or indirect subsidiary of Convergys, Cincinnati Bell
Information Systems Inc. and its direct and indirect subsidiaries and MATRIXX
Marketing Inc. and its direct and indirect subsidiaries.
1.5 CONVERGYS INDIVIDUAL means any individual (a) who is either
actively employed by or on leave of absence from a Convergys Entity on the
Distribution Date; (b) who is transferred from a CBI Entity to a Convergys
Entity on the Distribution Date or (c) who retired or separated from a Convergys
Entity prior to the Distribution Date and has not been reemployed by a CBI
Entity or Convergys Entity since retiring or separating. In addition, CBI and
Convergys may designate, by mutual agreement, any other individual or group of
individuals as Convergys Individuals.
1.6 DISTRIBUTION DATE means the date on which the Distribution
occurs.
<PAGE> 4
1.7 ERISA means the Employee Retirement Income Security Act of 1974,
as amended. Reference to a specific provision of ERISA also includes any
proposed, temporary, or final regulation in force under that provision.
1.8 IPO DATE means the date on which the initial public offering of
Convergy's common shares is closed.
1.9 NON-EMPLOYEE DIRECTOR, when immediately preceded by "CBI," means
a member of CBI's Board of Directors who is not an employee of a CBI Entity or a
Convergys Entity. When immediately preceded by "Convergys," Non-Employee
Director means a member of Convergys's Board of Directors who is not an employee
of a CBI Entity or a Convergys Entity.
1.10 PLAN, when immediately preceded by "CBI" or "Convergys," means
any plan, policy, program, payroll practice, on-going arrangement, contract,
trust, insurance policy or other agreement or funding vehicle providing benefits
to employees, former employees or Non-Employee Directors of a CBI Entity or a
Convergys Entity, as applicable.
ARTICLE II
GENERAL PRINCIPLES
2.1 ASSUMPTION OF LIABILITIES. Convergys hereby assumes and agrees
to pay, perform, fulfill and discharge, in accordance with their respective
terms, all of the following (regardless of when or where such liabilities arose
or arise or were or are incurred): (i) all liabilities, other than those arising
out of or relating to workers' compensation claims, arising out of or relating
to Convergys Individuals and their respective dependents and beneficiaries, in
each case relating to, arising out of or resulting from employment by a CBI
Entity before becoming Convergys Individuals (including liabilities under CBI
Plans and Convergys Plans); (ii) all other liabilities to or relating to
Convergys Individuals and other employees or former employees of Convergys
Entities, and their dependents and beneficiaries, to the extent relating to,
arising out of or resulting from future, present or former employment with a
Convergys Entity (including liabilities under CBI Plans and Convergys Plans) and
(iii) all other liabilities relating to, arising out of or resulting from
obligations, liabilities and responsibilities expressly assumed or retained by a
Convergys Entity or a Convergys Plan pursuant to this Agreement.
2.2 CONVERGYS PARTICIPATION IN CBI PLANS.
(a) CBI'S GENERAL OBLIGATIONS AS PLAN SPONSOR. CBI shall continue
through the Distribution Date to administer, or cause to be administered, in
accordance with their terms and applicable law, the CBI Plans, and shall have
the sole discretion and authority to interpret the CBI Plans as set forth
therein. Before the Distribution Date, CBI shall not, without the prior consent
of Convergys, amend any material feature of any CBI Plan in which a Convergys
Entity is a participating company, except to the extent such amendment
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<PAGE> 5
would not affect any benefits of Convergys Individuals under such Plan or as may
be necessary or appropriate to comply with any collective bargaining agreement
or applicable law.
(b) CONVERGYS' GENERAL OBLIGATIONS AS PARTICIPATING COMPANY.
Convergys shall perform with respect to its participation in the CBI Plans, and
shall cause each other Convergys Entity that is a participating company in any
CBI Plan to perform, the duties of a participating company as set forth in such
Plans or any procedures adopted pursuant thereto, including: (i) assisting in
the administration of claims, to the extent requested by the claims
administrator of the applicable CBI Plan; (ii) cooperating fully with CBI Plan
auditors, benefit personnel and benefit vendors; (iii) preserving the
confidentiality of all financial arrangements CBI has or may have with any
vendors, claims administrators, trustees or any other entity or individual with
whom CBI has entered into an agreement relating to the CBI Plans; and (iv)
preserving the confidentiality of participant health information (including
health information in relation to FMLA leaves).
(c) TERMINATION OF PARTICIPATING COMPANY STATUS. Effective as of
the Distribution Date, each Convergys Entity shall cease to be a participating
company in the CBI Plans.
2.4 CONVERGYS PLANS. The Convergys Plans shall be, with respect to
Convergys Individuals who are participating in CBI Plans, in all respects the
successors in interest to, and shall not provide benefits that duplicate
benefits provided by, the corresponding CBI Plans. CBI and Convergys shall agree
on methods and procedures, including amending the respective plan documents, to
prevent Convergys Individuals from receiving duplicative benefits from the CBI
Plans and the Convergys Plans. With respect to Convergys Individuals, each
Convergys Plan shall provide that all service, all compensation and all other
benefit-affecting determinations that, as of the Distribution Date, were
recognized under the corresponding CBI Plan shall, as of immediately after the
Distribution Date, receive full recognition, credit, and validity and be taken
into account under such Convergys Plan to the same extent as if such items
occurred under such Convergys Plan, except to the extent that duplication of
benefits would result. The provisions of this Agreement for the transfer of
assets from certain trusts relating to CBI Plans to the corresponding trusts
relating to Convergys Plans are based upon the understanding of the parties that
each such Convergys Plan will assume all liabilities of the corresponding CBI
Plan to or relating to Convergys Individuals, as provided for herein. If any
such liabilities are not effectively assumed by the appropriate Convergys Plan,
then the amount of assets transferred to the trust relating to such Convergys
Plan from the trust relating to the corresponding CBI Plan shall be recomputed,
ab initio, as set forth below but taking into account the retention of such
liabilities by such CBI Plan, and assets shall be transferred by the trust
relating to such Convergys Plan to the trust relating to such CBI Plan so as to
place each such trust in the position it would have been in, had the initial
asset transfer been made in accordance with such recomputed amount of assets.
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<PAGE> 6
2.5 PORTABILITY OF BENEFITS. On or before the Distribution Date, CBI
and Convergys may enter into an Interchange Agreement providing for (among other
things) the portability of benefits and mutual recognition of service with
respect to individuals who terminate employment with a CBI Entity and who become
employees of a Convergys Entity during the six month period commencing on the
Distribution Date or who terminate employment with a Convergys Entity and who
become employees of a CBI Entity during such six month period.
ARTICLE III
DEFINED BENEFIT PLANS
3.1 ESTABLISHMENT OF MIRROR PENSION PLAN. Effective immediately
after the Distribution Date, Convergys shall establish a qualified defined
benefit pension plan (the "Convergys Pension Plan") for its eligible employees
the provisions of which shall mirror the provisions of CBPP and CBMPP.
3.2 ASSUMPTION OF LIABILITIES BY CONVERGYS PENSION PLAN. Immediately
after the Distribution Date, all liabilities to or relating to Convergys
Individuals under CBPP and CBMPP (collectively, the "CBI Pension Plans"), shall
cease to be liabilities of the CBI Pension Plans and shall be assumed by the
Convergys Pension Plan.
3.3 CALCULATION OF CBMPP ASSET ALLOCATION. [To Be Determined]
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<PAGE> 7
3.4 CALCULATION OF CBPP ASSET ALLOCATION. The asset allocation of the
CBPP and the Convergys Pension Plan shall be determined by applying Section 3.3
but substituting "CBPP" for "CBMPP" wherever it appears in that Section.
3.5 TRANSFER OF CONVERGYS PENSION PLAN'S INTERESTS FROM THE CBI
PENSION TRUST TO THE CONVERGYS PENSION TRUST. The actual segregation of the
interests of the Convergys Pension Plan in Cincinnati Bell Pension Plans Trust
(the "CBI Pension Trust") into separate trust accounts, and the transfer of the
Convergys Pension Plan's allocable share of the assets from the CBI Pension
Trust to the trust established in conjunction with the Convergys Pension Plan
(the "Convergys Pension Trust"), shall occur as soon as practicable after the
calculation of such interests pursuant to Sections 3.3 and 3.4. The assets to
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<PAGE> 8
be transferred from the CBI Pension Trust to the Convergys Pension Trust share
shall consist of a pro rata share of each class of assets in the CBI Pension
Trust, unless CBI and Convergys agree otherwise.
ARTICLE IV
DEFINED CONTRIBUTION PLANS
4.1 RETIREMENT SAVINGS PLANS. Effective as of the Distribution Date,
(a) a Convergys Savings Plan designated by Convergys shall assume and be solely
responsible for all liabilities relating to each Convergys Individual under any
CBI Savings Plan and (b) CBI shall cause the accounts of such Convergys
Individual under each CBI Savings Plan to be transferred to the Convergys
Savings Plan designated by Convergys and Convergys shall cause such transferred
accounts to be accepted by the Convergys Savings Plan. CBI and Convergys shall
take such action as may be needed to cause the assets associated with each
transferred account to be transferred from the trust established in conjunction
with the CBI Savings Plan to the trust established in conjunction with the
Convergys Savings Plan. For purposes of this Section 4.1, "CBI Savings Plan"
means Cincinnati Bell Inc. Savings and Security Plan and "Convergys Plan" means
CBIS Retirement and Savings Plan and MATRIXX Marketing Inc. Profit
Sharing/401(k) Plan.
4.2 CBI ESOP. The Cincinnati Bell Inc. Employee Stock Ownership
Plan (the "CBI ESOP") shall be solely responsible for all liabilities relating
to Convergys Individuals under the CBI ESOP. The parties acknowledge that, as a
result of the Distribution, the CBI ESOP will, after the Distribution Date, hold
both CBI common shares and Convergys common shares and that, in order to
continue to qualify as an employee stock ownership plan, the CBI ESOP will be
required to dispose of the Convergys common shares and reinvest in CBI common
shares. The parties further acknowledge that applicable law generally prohibits
such plans from holding securities that are not "qualifying employer securities"
within the meaning of Code Section 409 for more than a reasonable time after the
Distribution Date unless the Internal Revenue Service ("IRS") grants an
extension of time. Accordingly, CBI shall request the IRS to grant an extension
of such holding period as its financial advisors shall deem prudent to allow the
CBI ESOP to dispose of the Convergys common shares received by it as a result of
the Distribution and, to reinvest in CBI common shares, in a manner consistent
with the best interests of the ESOP participants. It also is understood that,
for purposes of the CBI ESOP, each Convergys Individual will be deemed to have
terminated employment on the Distribution Date.
ARTICLE V
HEALTH AND WELFARE PLANS
5.1 TRANSFER OF RETIREMENT FUNDING ACCOUNT ASSETS. This Section
5.1 shall apply to the CBI group life insurance contract that has a retirement
funding account (the "CBI RFA") maintained for the purpose of accumulating,
through employer contributions in advance of employee retirements, a fund to be
used to pay all or a portion of the costs for continuing life insurance
protection for employees after their retirement. As soon as
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<PAGE> 9
practicable after the Distribution Date, there shall be transferred to the
retirement funding account of a Convergys Entity group life insurance contract
an amount of assets having a fair market value as of the Distribution Date equal
to the product obtained by multiplying (a) the present value, as of the
Distribution Date, of the future benefit obligation with respect to Convergys
Individuals to be discharged from the CBI RFA, divided by the present value of
the future benefit obligations with respect to all individuals whose benefits
are to be discharged from the CBI RFA assets as of the Distribution Date times
(b) the fair market value of all CBI RFA assets as of the Distribution Date. CBI
and Convergys shall adopt, and shall use their reasonable best efforts to cause
their insurers to adopt, procedures to implement such asset transfers in a
reasonable and expeditious manner that is consistent with the underlying group
life insurance contracts and applicable legal requirements. Nothing in this
Agreement shall be interpreted to provide that any assets so transferred have
reverted to CBI or Convergys.
5.2 VENDOR CONTRACTS.
(a) GROUP INSURANCE POLICIES.
(i) This Section 5.2(a) applies to group insurance
policies other than the group life insurance contract referred to in Section 5.1
("Group Insurance Policies").
(ii) To the extent that Convergys Individuals are covered
under a CBI Group Insurance Policy in existence as of the date of this
Agreement, at the request of Convergys, CBI shall use its reasonable best
efforts to amend such Group Insurance Policy to permit Convergys to participate
in the terms and conditions of such policy from immediately after the
Distribution Date until the expiration of the financial fee and rate guarantees
in effect under such Group Insurance Policy as of the Distribution Date.
(iii) Convergys's participation in the terms and conditions
of each such Group Insurance Policy shall be effectuated by obligating the
insurance company that issued such insurance policy to CBI to issue one or more
separate policies to Convergys. Such terms and conditions shall include the
financial and termination provisions, performance standards and target claims.
(iv) If CBI is not successful in negotiating policy
provisions that will permit compliance with Sections 5.2(a)(ii) and (iii) prior
to the Distribution Date, at the request of Convergys, CBI shall use its
reasonable best efforts to either continue to cover Convergys under its Group
Insurance Policies or procure a separate policy for Convergys until Convergys
has procured such separate insurance policy or made other arrangements for
replacement coverage, and Convergys shall bear all costs incurred by CBI to
continue such coverage.
(b) EFFECT OF CHANGE IN RATES. CBI and Convergys shall use
their reasonable best efforts to cause each of the insurance companies, HMOs,
point-of-service vendors and third-party administrators providing services and
benefits under the CBI Health and Welfare Plans and the Convergys Health and
Welfare Plans to maintain the premium and/or administrative rates based on the
aggregate number of participants in both the CBI Health and
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Welfare Plans and the Convergys Health and Welfare Plans through the expiration
of the financial fee or rate guarantees in effect as of the Distribution Date
under the respective ASO Contracts, Group Insurance Policies, and HMO
Agreements. To the extent they are not successful in such efforts, CBI and
Convergys shall each bear the revised premium or administrative rates
attributable to the individuals covered by their respective Health and Welfare
Plans.
5.3 CBI WORKERS' COMPENSATION PROGRAM.
(a) ADMINISTRATION.
(i) Through the Distribution Date or such earlier date as
may be agreed by CBI and Convergys, CBI shall continue to be responsible for the
administration of all claims and associated premiums, fees and other costs that
(1) are, or have been, incurred under the various arrangements established by
any CBI Entity to comply with the workers' compensation regulations of the
states where CBI and its affiliates conduct business (the "CBI WCP") before the
Distribution Date by Convergys Individuals and other employees and former
employees of the Convergys Entities through the Distribution Date ("Convergys
WCP Claims") and (2) have been historically administered by CBI or its insurance
company.
(ii) Effective immediately after the Distribution Date or
such earlier date as may be agreed by CBI and Convergys, (A) Convergys shall, to
the extent Legally Permissible (as defined below), be responsible for the
administration of all Convergys WCP Claims and associated premiums, fees and
other costs, whether those claims were previously administered by CBI or
Convergys, and (B) CBI shall be responsible for the administration of all
Convergys WCP Claims not administered by Convergys pursuant to clause (A),
whether previously administered by CBI or Convergys and whether under the
self-insured or insured portion of the CBI WCP. Any determination made, or
settlement entered into, by either party or its insurance company with respect
to Convergys WCP Claims for which it is administratively responsible shall be
final and binding upon the other party.
(iii) Each party shall fully cooperate with the other with
respect to the administration and reporting of Convergys WCP Claims, the payment
of Convergys WCP Claims determined to be payable, and the transfer of the
administration of any Convergys WCP Claims to the other party as determined
under Section 5.3(a)(ii).
(iv) For purposes of this Section 5.3(a), "Legally
Permissible" shall be determined on a state-by-state basis, and shall mean that
administration of Convergys WCP Claims by Convergys both (A) is permissible
under the applicable state's workers' compensation laws (taking into account all
relevant facts, including that Convergys may have a self-insurance certificate
in that state) and (B) would not have a material adverse effect on CBI's
self-insurance certificate within that state. If it is determined that, in a
particular state, it is Legally Permissible for Convergys to administer
Convergys WCP Claims, then Convergys shall be responsible for the administration
of all Convergys WCP Claims incurred in that state, whether previously
administered by CBI, Convergys, or an insurance company. If it is determined
that, in a
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particular state, it is not Legally Permissible for Convergys to
administer Convergys WCP Claims, then CBI shall be responsible for the
administration of all Convergys WCP Claims incurred in that state, whether
previously administered by CBI, Convergys, or an insurance company.
(b) SElF-INSURANCE STATUS.
(i) CBI shall amend its certificates of self-insurance with
respect to workers' compensation and any applicable group insurance policies to
include Convergys until the Distribution Date, and Convergys shall fully
cooperate with CBI in obtaining such amendments. All costs incurred by CBI in
amending such certificates or group insurance policies, including filing fees,
adjustments of security and excess loss policies and amendment of safety
programs, shall be shared equally by CBI and Convergys. CBI shall use its
reasonable best efforts to obtain self-insurance status for workers'
compensation for Convergys effective immediately after the Distribution Date in
each jurisdiction in which Convergys conducts business and in which CBI is
self-insured, if CBI determines that such status is beneficial to Convergys.
Convergys hereby authorizes CBI to take all actions necessary and appropriate on
its behalf in order to obtain such self-insurance status.
(ii) CBI shall also arrange a contingent insured or other
arrangement for payment of workers' compensation claims, into which Convergys
shall enter if and to the extent that CBI fails to obtain self-insured status
for Convergys as provided in Section 5.3(b)(i), unless Convergys obtains another
such arrangement that is effective immediately after the Distribution Date, in
which event Convergys shall reimburse CBI for any expenses incurred by CBI in
procuring such contingent arrangement.
(c) INSURANCE POLICY.
(i) In the event the workers' compensation insurance policy
that CBI maintains under the CBI WCP expires before the Distribution Date, CBI
shall use its reasonable best efforts to renew such policy and to cause the
issuing insurance company to issue a separate policy to Convergys. If CBI is not
able to cause such insurance company to issue such separate insurance policy,
Convergys shall use its reasonable best efforts to procure a separate policy
from another insurance company or to obtain self-insurance status, and CBI shall
use its reasonable best efforts to continue to cover Convergys under its renewed
policy until the earlier of (A) the date on which Convergys's application for
such self-insurance status is approved or (B) the date on which a separate
insurance policy is procured. Convergys shall compensate CBI for all costs
incurred by CBI to continue such coverage. Any claims incurred by Convergys
Individuals after the Distribution Date that will be covered under and during
any such continuation of coverage shall be treated as being incurred before the
Distribution Date for purposes of determining the party responsible for the
administration of benefits.
(ii) CBI shall use its reasonable best effort to maintain
the premium rates for all workers' compensation insurance policies for both CBI
and Convergys in effect for periods through the Distribution Date to be based on
the aggregate number of employees covered
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under the workers' compensation insurance policies of both CBI and Convergys.
Any premiums due under the separate workers' compensation insurance issued to
Convergys shall be payable by Convergys.
5.4 CONTINUANCE OF ELECTIONS, CO-PAYMENTS AND MAXIMUM BENEFITS.
(a) The transfer or other movement of employment from CBI to
Convergys at any time before the Distribution Date shall constitute a "status
change" under the CBI Health and Welfare Plans or the Convergys Health and
Welfare Plans.
(b) Convergys shall cause the Convergys Health and Welfare Plans
to recognize and give credit for (i) all amounts applied to deductibles,
out-of-pocket maximums, and other applicable benefit coverage limits with
respect to which such expenses have been incurred by Convergys Individuals under
the CBI Health and Welfare Plans for the remainder of the year in which the
Distribution occurs, and (ii) all benefits paid to Convergys Individuals under
the CBI Health and Welfare Plans for purposes of determining when such persons
have reached their lifetime maximum benefits under the Convergys Health and
Welfare Plans.
(c) Convergys shall provide coverage to Convergys Individuals
under the Convergys Group Life Program without the need to undergo a physical
examination or otherwise provide evidence of insurability.
ARTICLE VI
EXECUTIVE BENEFITS AND NON-EMPLOYEE DIRECTOR BENEFITS
6.1 LONG TERM INCENTIVE PLANS. For purposes of this Agreement, "CBI
LTIP" means any of the CBI 1988 Long Term Incentive Plan, the CBI 1989 Stock
Option Plan, the CBI 1997 Long Term Incentive Plan, the CBI 1988 Stock Option
Plan for Non-Employee Directors and the CBI 1997 Stock Option Plan for
Non-Employee Directors and "Convergys LTIP" means the Convergys Corporation 1998
Long Term Incentive Plan.
(a) STOCK OPTIONS. For purposes of this Agreement, "CBI Option"
means an option to purchase CBI common shares pursuant to a CBI LTIP and
"Convergys Option" means an option to purchase Convergys common shares pursuant
to the Convergys LTIP. At the time of the Distribution, each holder of a CBI
Option shall receive a Convergys Option to purchase a number of Convergys common
shares equal to the number of CBI common shares subject to the CBI Option. Each
Convergys Option shall have the same terms and conditions (including vesting) as
the CBI Option with respect to which it is granted, except that termination of
employment shall mean (i) in the case of a CBI employee or director, termination
of employment with CBI and (ii) in the case of a Convergys employee or director,
termination of employment with Convergys. Each CBI Option shall be amended to
provide that, in the case of a Convergys employee or director, termination of
employment shall mean termination of employment with Convergys. The exercise
price per share of each CBI Option (the "CBI
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Exercise Price") shall be reduced, and the exercise price per share of the
associated Convergys Option (the "Convergys Exercise Price") shall be set so
that (i) the sum of the CBI Exercise Price (after the reduction provided herein)
and the Convergys Exercise Price is equal to the CBI Exercise Price (before the
reduction provided herein) and (ii) the ratio of the CBI Exercise Price (after
the reduction provided herein) to the Convergys Exercise Price is equal to the
ratio of the average of the daily high and low per-share prices of CBI common
shares on the New York Stock Exchange ("NYSE") during each of the five trading
days starting on the ex-dividend date for the Distribution to the average of the
daily high and low per-share prices of Convergys common shares on the NYSE
during each of the five trading days starting on the ex-dividend date for the
Distribution. Notwithstanding the foregoing, in the event that the number of
Convergys common shares to be distributed to each CBI shareholder at the time of
the Distribution with respect to each CBI common share owned by the shareholder
on the record date for the Distribution is greater or less than one, the number
of Convergys common shares represented by each Convergys Option and the
Convergys Exercise Price shall be adjusted to reflect such difference.
(b) RESTRICTED STOCK. For purposes of this Agreement, "CBI
Restricted Stock" means CBI common shares issued subject to restrictions
pursuant to a CBI LTIP and "Convergys Restricted Stock" means Convergys common
shares issued subject to restrictions pursuant to the Convergys LTIP. At the
time of the Distribution, the Convergys common shares distributable to each
holder of CBI Restricted Stock shall be issued pursuant to the Convergys LTIP
and shall be subject to the same restrictions, terms and conditions (including
vesting) as the CBI Restricted Stock with respect to which they are distributed,
except that termination of employment shall mean (i) in the case of a CBI
employee, termination of employment with CBI and (ii) in the case of a Convergys
employee, termination of employment with Convergys. Each CBI Restricted Stock
grant shall be amended to provide that, in the case of a Convergys employee or
director, termination of employment shall mean termination of employment with
Convergys.
6.5 CBI EXECUTIVE DEFERRED COMPENSATION PLAN. Immediately after the
Distribution Date, the accrued benefit of any Convergys Individual in the CBI
Executive Deferred Compensation Plan shall be transferred to and assumed by the
Convergys Executive Deferred Compensation Plan.
6.6 DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS. Immediately
after the Distribution Date, the accrued benefit of any Convergys Non-Employee
Director in the CBI Deferred Compensation Plan for Outside Directors (the "CBI
Directors Plan") shall be transferred to and assumed by the Convergys Deferred
Compensation Plan for Non-Employee Directors (the "Convergys Directors Plan").
The Convergys Directors Plan shall be, with respect to the Convergys
Non-Employee Directors who participated in the CBI Director Plan, in all
respects the successor in interest to, and shall not provide benefits that
duplicate benefits provided by, the CBI Directors Plan.
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6.7 CONSENTS AND NOTIFICATIONS. CBI and Convergys shall use their
reasonable best efforts to obtain, or cause to be obtained, to the extent
necessary, the written consent of each Convergys Individual and Convergys
Director who is a party to an individual agreement and/or a participant in the
CBI Executive Deferred Compensation Plan, the CBI Long Term Plan, or the CBI
Deferred Compensation Plan for Outside Directors, to the treatment of such
individual agreement or plan, as applicable, in accordance with this Article VI,
including the assumption by Convergys and the Convergys Entities, of sole
responsibility for, and the release of the CBI Entities from, all liabilities
thereunder; provided, that no failure to seek or to obtain any such consent
shall have any effect upon the obligations of the Convergys Entities with
respect to such liabilities.
6.8 NON-COMPETITION AND CONFIDENTIALITY.
(a) NON-COMPETITION AGREEMENTS AND POLICIES. Prior to the
Distribution Date, CBI and Convergys shall take such action as may be necessary
to ensure that, during the 18-month period commencing on the Distribution Date,
(i) employment with a Convergys Entity shall not be deemed to be in violation of
any CBI Entity non-competition policy or agreement and (ii) employment with any
CBI Entity shall not be deemed to be in violation of any Convergys Entity
non-competition policy or agreement.
(b) CONFIDENTIALITY AND PROPRIETARY INFORMATION. No provision of
this Agreement shall be deemed to release any individual for any violation of
any agreement or policy of a CBI Entity or Convergys Entity pertaining to
confidential or proprietary information of a CBI Entity or Convergys, or
otherwise relieve any individual of his or her obligations under such agreement
or policy.
6.9 CORPORATE-OWNED LIFE INSURANCE. CBI shall retain all
corporate-owned life insurance policies that were purchased by CBI in 1986,
including those policies insuring Convergys Individuals. CBI shall continue,
liquidate and/or administer such corporate-owned life insurance policies on
terms and conditions agreed to by CBI and Convergys. Convergys and CBI shall
share all information that may be necessary to identify the individuals insured
by the corporate-owned life insurance policies owned by CBI and to determine
when and whether such individuals are deceased.
6.10 MANAGEMENT INCENTIVE COMPENSATION PAYMENTS. Effective as of the
Distribution Date, Convergys shall assume all liabilities to Convergys
Individuals for bonuses under CBI's 1998 bonus program and all liabilities to
Convergys Individuals for performance awards under CBI's Senior Management Long
Term Incentive Plan for the three-year performance periods commencing in 1996,
1997 and 1998. Convergys shall determine (a) the extent to which established
performance criteria (after taking into account the effects of the initial
public offering of Convergys common shares and the Distribution) have been met
and (b) the payment level for each Convergys Individual.
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ARTICLE VII
GENERAL AND ADMINISTRATIVE
7.1 PAYMENT OF LIABILITIES, PLAN EXPENSES AND RELATED MATTERS.
(a) ACTUARIAL AND ACCOUNTING METHODOLOGIES AND ASSUMPTIONS. For
purposes of this Agreement, unless specifically indicated otherwise: (i) all
actuarial methodologies and assumptions used for a particular Plan shall (except
to the extent otherwise determined by CBI and Convergys to be reasonable or
necessary) be substantially the same as those used in the actuarial valuation of
that Plan used to determine minimum funding requirements under ERISA Section 302
and Code Section 412 for 1998, or, if such Plan is not subject to such minimum
funding requirements, used to determine CBI's deductible contributions under
Code Section 419A or, if such Plan is not subject to Code Section 419A, the
assumptions used to prepare CBI's audited financial statements for 1997, as the
case may be; and (ii) the value of plan assets shall be the value established
for purposes of audited financial statements of the relevant plan or trust for
the period ending on the date as of which the valuation is to be made. Convergys
liabilities relating to, arising out of or resulting from the status of the
Convergys Entities as participating companies in CBI and all accruals relating
thereto shall be determined using actuarial assumptions and methodologies
(including with respect to demographics, medical trends and other relevant
factors) in a manner consistent with CBI's practice as in effect on the
effective date of this Agreement and in conformance with the generally accepted
actuarial principles promulgated by the American Academy of Actuaries, the Code,
ERISA, and/or generally accepted accounting principles, as applicable, in each
case consistent with past CBI practice. Except as otherwise contemplated by this
Agreement or as required by law, all determinations as to the amount or
valuation of any assets of or relating to any CBI Plan (whether or not such
assets are being transferred to a Convergys Plan) shall be made pursuant to
procedures to be established by the parties before the Distribution Date.
(b) PAYMENT OF LIABILITIES; DETERMINATION OF EMPLOYEE STATUS.
Convergys shall pay directly, or reimburse CBI promptly for, all liabilities
assumed by it pursuant to this Agreement, including all compensation payable to
Convergys Individuals for services rendered to a Convergys Entity (i) after the
date of this Agreement, (ii) while in the employ of a CBI Entity and (iii)
before becoming a Convergys Individual. Determinations of what entity employs or
employed a particular individual shall be made by reference to the applicable
legal entity and/or other appropriate accounting code, to the extent possible.
(c) STOCK AWARD CHARGEBACKS. Convergys shall pay CBI the
following amounts: (i) with respect to each CBI Option that is exercised by a
Convergys Individual at any time after the Distribution Date, the Spread on such
Option; (ii) with respect to the vesting at any time after the Distribution Date
of CBI Restricted Stock held by a Convergys Individual, the Value of such CBI
Restricted Stock on the date of such vesting. CBI shall pay Convergys the
following amounts: (i) with respect to each Convergys Option that is exercised
by a CBI Individual at any time after the Distribution Date, the Spread on such
Option; (ii) with respect to the vesting at any time after the Distribution Date
of Convergys Restricted Stock, the
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<PAGE> 16
Value of such Convergys Restricted Stock on the date of such vesting. For
purposes of this Agreement, "CBI Individual" means an individual who is employed
by a CBI Entity immediately after the Distribution Date, the "Spread" on an
option means the excess, if any, of the Value of the purchased shares on the
date of exercise of such option or the date of such purchase, as applicable,
over the price paid for such shares. The "Value" of a CBI or Convergys common
share on a given date means the average of the high and the low per-share prices
of such Common Shares on the NYSE on such date, or if there is no trading of
such common shares on the NYSE on such date, on the most recent previous date on
which such trading takes place.
7.2 NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES.
No provision of this Agreement shall be construed to create any right, or
accelerate entitlement, to any compensation or benefit whatsoever on the part of
any Convergys Individual or other future, present or former employee of any CBI
Entity or Convergys Entity under any CBI Plan or Convergys Plan or otherwise.
Without limiting the generality of the foregoing: (i) neither the Distribution
nor the termination of the participating company status of a Convergys Entity
shall cause any employee to be deemed to have incurred a termination of
employment which entitles such individual to the commencement of benefits under
any of the CBI Plans (other than the CBI ESOP), any of the Convergys Plans, or
any of the Individual Agreements; and (ii) except as expressly provided in this
Agreement, nothing in this Agreement shall preclude Convergys, at any time after
the Distribution Date, from amending, merging, modifying, terminating,
eliminating, reducing, or otherwise altering in any respect any Convergys Plan,
any benefit under any Convergys Plan or any trust, insurance policy or funding
vehicle related to any Convergys Plan.
7.3 BENEFICIARY DESIGNATIONS. All beneficiary designations made by
Convergys Individuals for CBI Plans shall be transferred to and be in full force
and effect under the corresponding Convergys Plans until such beneficiary
designations are replaced or revoked by the Convergys Individual who made the
beneficiary designation.
7.4 REQUESTS FOR IRS RULINGS AND DOL OPINIONS. The parties shall
cooperate fully with each other on any issue relating to the transactions
contemplated by this Agreement for which either party elects to seek a
determination letter or private letter ruling from the IRS or an advisory
opinion from the Department of Labor.
7.5 FIDUCIARY STATUS. CBI and Convergys each acknowledges that
actions required to be taken pursuant to this Agreement may be subject to
fiduciary duties or standards of conduct under ERISA or other applicable law,
and no party shall be deemed to be in violation of this Agreement if it fails to
comply with any provisions hereof based upon its good faith determination that
to do so would violate such a fiduciary duty or standard.
7.6 CONSENT OF THIRD PARTIES. If any provision of this Agreement
is dependent on the consent of any third party and such consent is withheld, CBI
and Convergys shall use their reasonable best efforts to implement the
applicable provisions of this Agreement to the full extent practicable. If any
provision of this Agreement cannot be implemented due to the failure of such
third party to consent, CBI and Convergys shall negotiate in good faith to
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<PAGE> 17
implement the provision in a mutually satisfactory manner. The phrase
"reasonable best efforts" as used herein shall not be construed to require the
incurrence of any non-routine or unreasonable expense or liability or the waiver
of any right.
ARTICLE VIII
MISCELLANEOUS
8.1 EFFECT IF DISTRIBUTION DOES NOT OCCUR. If the Distribution does
not occur, then all actions and events that are, under this Agreement, to be
taken or occur effective as of the Distribution Date, immediately after the
Distribution Date, or otherwise in connection with the Distribution, shall not
be taken or occur except to the extent specifically agreed by Convergys and CBI.
8.2 RELATIONSHIP OF PARTIES. Nothing in this Agreement shall be
deemed or construed by the parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
parties, it being understood and agreed that no provision contained herein, and
no act of the parties, shall be deemed to create any relationship between the
parties other than the relationship set forth herein.
8.3 AFFILIATES. Each of CBI and Convergys shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements and
obligations set forth in this Agreement to be performed by a CBI Entity or a
Convergys Entity, respectively.
8.4 GOVERNING LAW. To the extent not preempted by applicable federal
law, this Agreement shall be governed by, construed and interpreted in
accordance with the laws of the State of Ohio, irrespective of the choice of
laws principles of the State of Ohio, as to all matters, including matters of
validity, construction, effect, performance and remedies.
8.5 ARBITRATION. Any dispute, controversy or claim arising out of or
in connection with this Agreement (including any questions of fraud or questions
concerning the validity and enforceability of this Agreement or any of the
rights herein) shall be determined and settled in accordance with Article 11 of
the Plan of Reorganization.
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IN WITNESS WHEREOF, the parties have caused this Employee Benefits
Agreement to be duly executed as of the day and year first above written.
CINCINNATI BELL INC.
By:
---------------------------------
John T. LaMacchia, President
and Chief Executive Officer
CONVERGYS CORPORATION
By:
---------------------------------
James F. Orr, President
and Chief Executive Officer
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<PAGE> 1
Exhibit 10.3
SERVICES AGREEMENT
THIS SERVICES AGREEMENT (the "Agreement"), dated as of , 1998, is
by and between Cincinnati Bell Inc., an Ohio corporation ("CBI"), and CONVERGYS
Corporation, an Ohio corporation ("CONVERGYS").
RECITALS
WHEREAS, the Board of Directors of CBI has determined that it is in the
best interests of CBI and its shareholders to separate CBI's existing businesses
into two independent businesses by transferring all of the outstanding shares of
Cincinnati Bell Information Systems Inc. ("CBIS") and of MATRIXX Marketing Inc.
("MATRIXX") to CONVERGYS;
WHEREAS, CBI and CONVERGYS recognize that it is advisable for CBI to
continue providing certain administrative and other services to CONVERGYS until
the Distribution Date (as defined herein) and thereafter for CONVERGYS to
provide certain administrative and other services to CBI as provided herein
(individually a "Service" and, collectively, the "Services"); and
WHEREAS, this Agreement is entered into pursuant to the Plan of
Reorganization and Distribution Agreement, dated as of the date hereof, between
CBI and CONVERGYS (the "Plan of Reorganization and Distribution Agreement").
Capitalized terms used herein and not otherwise defined shall have the
respective meanings assigned to them in the Plan of Reorganization and
Distribution Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and
valid consideration, the receipt and adequacy of which are hereby acknowledged,
the parties, intending to be legally bound, agree as follows:
ARTICLE 1
SERVICES
1.1 SERVICES. Beginning on the Closing Date (the "Effective Date") and
continuing through the Distribution Date, CBI, through its corporate staff, will
provide or otherwise make available to CONVERGYS, upon the reasonable request of
CONVERGYS, certain general corporate services, including, but not limited to,
finance, treasury and accounting, tax, human resource services, food services,
transportation services and arrange for administration of insurance and risk
management and employee benefit programs. Beginning the next day after the
Distribution Date through the date that is six months after the Distribution
Date (the "Expiration Date"), CONVERGYS, through its corporate staff, will
provide or otherwise make available to CBI, upon the reasonable request of CBI,
certain general corporate services, including, but not limited to accounting and
audit, finance and treasury, tax, human resource services, food services,
transportation services and arrange for administration of insurance and
<PAGE> 2
risk management and employee benefit programs. For purposes of this Agreement,
the party receiving the Services is sometimes referred to as the "Receiving
Party," and the party providing the Services is sometimes referred to as the
"Providing Party." The Services may include the following:
(a) FINANCE, TREASURY AND ACCOUNTING RELATED SERVICES.
Provision of general financial advice and services including, without
limitation, assistance with respect to matters such as raising of additional
capital, cash management and financial controls, inter-company lending, and
accounting and internal audit.
(b) TAX RELATED SERVICES. Preparation of Federal tax returns,
preparation of state and local tax returns (including income tax returns), tax
research and planning and assistance on tax audits (Federal, state and local) in
accordance with the terms of the Tax Separation and Allocation Agreement.
(c) HUMAN RESOURCES. Provision of general advice regarding the
coordination of employment policies and executive compensation matters.
(d) FOOD SERVICES. Provision of general food services as
provided by CBI on the date of this Agreement.
(e) TRANSPORTATION SERVICES. Provision of general
transportation services as provided by CBI on the date of this Agreement.
(f) INSURANCE AND EMPLOYEE BENEFIT RELATED SERVICES. Provision
of liability, property, casualty, and other normal business insurance coverage
and assistance, if required, with respect to arrangement of such insurance
coverage. Assistance, if required, with respect to support for product, worker
safety and environmental programs. (The Receiving Party acknowledges that
principal responsibility for compliance rests with the Receiving Party.)
Administration of the Receiving Party's employee participation in employee
benefit plans and insurance programs sponsored by the Providing Party in
accordance with the Employee Benefits Agreement. Filing of all required reports
under ERISA for employee benefit plans sponsored by CONVERGYS.
(g) ADDITIONAL SERVICES. Services in addition to those
enumerated in subsections 1.1(a) through 1.1(g), above, as may be agreed upon by
CBI and CONVERGYS from time to time ("Additional Services").
(1) The parties shall create an Exhibit for each Additional
Service setting forth a description of the Service, the time period during which
the Service will be provided, the charge, if any, for the Service and any other
terms applicable thereto. Except as set forth in the paragraph immediately
below, the parties may, but shall not be required to, agree on Additional
Services during the term of this Agreement.
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<PAGE> 3
(2) Except as set forth in the next sentence, CBI shall be
obligated to perform, at charges established pursuant hereto, any Additional
Service that: (A) was provided by CBI immediately prior to the Effective Date
and that CONVERGYS reasonably believes was inadvertently or unintentionally
omitted from the list of Initial Services or (B) is essential to effectuate an
orderly transition under the Plan of Reorganization and Distribution Agreement
unless such performance would significantly disrupt CBI's operations or
materially increase the scope of its responsibility under this Agreement. If CBI
reasonably believes the performance of Additional Services required under
subparagraphs (A) or (B) would significantly disrupt its operations or
materially increase the scope of its responsibility under this Agreement, CBI
and CONVERGYS shall negotiate in good faith to establish terms under which CBI
can provide such Additional Services, but CBI shall not be obligated to provide
such Additional Services if, following good faith negotiation, it is unable to
reach agreement on such terms.
(h) SERVICES PERFORMED BY OTHERS. At its option, Providing
Party may cause any Service it is required to provide hereunder to be provided
by any other Person that is providing, or may from time to time provide, the
same or similar services for Providing Party. Providing Party shall remain
responsible, in accordance with the terms of this Agreement, for performance of
any Service it causes to be so provided.
1.2 TERM. The initial term of this Agreement shall begin on the
Effective Date of this Agreement and continue until the Expiration Date unless
terminated earlier as provided herein:
(a) Receiving Party may terminate any or all of the Services,
in whole or in part, upon 30 days written notice to Providing Party.
(b) This Agreement may be terminated at any time upon the
mutual consent of the parties.
(c) The non-defaulting party may terminate this Agreement if
the other party is in material default under this Agreement and fails to correct
such default within 30 days after receiving written notice of such default.
1.3 CHARGES AND PAYMENT.
(a) GENERAL. For performing general services of the types
described above in Section 1, Providing Party will charge Receiving Party the
costs actually incurred or such other charges as the parties may agree. To the
extent such direct costs cannot be separately measured, Providing Party shall
charge Receiving Party for a portion of the total cost determined according to a
method reasonably selected by Providing Party and approved by Receiving Party.
The charges for services above will be determined and
payable no less frequently than on a monthly basis. The charges will be due when
billed and shall be paid no later than thirty 30 days from the date of billing.
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<PAGE> 4
(b) CHARGES FOR THIRD-PARTY SERVICES. When services of the
type described above in Section 1 are provided, upon the mutual agreement of
Providing Party and Receiving Party, by outside providers or, in connection with
the provision of such Services out-of-pocket costs are incurred, such as travel,
the cost thereof will be paid by Receiving Party. To the extent that Receiving
Party is billed by the provider directly, Receiving Party shall pay the bill
directly. If Providing Party is billed for such Services, Providing Party may
pay the bill and charge Receiving Party the amount of the bill or forward the
bill to Receiving Party for payment by Receiving Party.
(c) TAXES. Receiving Party shall pay any sales, use or similar
tax, excluding any income tax or taxes levied with respect to gross receipts,
payable by Providing Party or Receiving Party with respect to amounts payable
under this Agreement.
1.4 GENERAL OBLIGATIONS; STANDARD OF CARE.
(a) TRANSITIONAL NATURE OF SERVICES; CHANGES. The parties
acknowledge the transitional nature of the Services and that Providing Party may
make changes from time to time in the manner of performing the Services if
Providing Party is making similar changes in performing similar services for
itself and its Affiliates and if Providing Party furnishes to Receiving Party
substantially the same notice that Providing Party shall provide its Affiliates
respecting such changes. Notwithstanding the foregoing, between the date hereof
and the Expiration Date, Providing Party will not make any material change to
Services affecting Receiving Party without first providing thirty (30) days
prior written notice and obtaining Receiving Party's prior written consent,
which consent shall not be unreasonably withheld or delayed. For purposes of
this Agreement, the term "Affiliates" means, with respect to any person, any
other person, corporation, partnership, or other entity, directly or indirectly
controlling, controlled by or under common control with such person.
(b) GOOD FAITH COOPERATION; CONSENTS. The parties will use
good faith efforts to cooperate with each other in all matters relating to the
provision and receipt of Services. Such cooperation shall include exchanging
information, providing electronic access to systems used in connection with
Services, performing true-ups and adjustments and obtaining all consents,
licenses, sublicenses or approvals necessary to permit each party to perform its
obligations hereunder. The costs of obtaining such consents, licenses,
sublicenses or approvals shall be allocated in accordance with Section 1.3(a).
The parties will maintain documentation supporting the information contained in
the Exhibits and cooperate with each other in making such information available
as needed in the event of a tax audit, whether in the United States or any other
country.
(c) ALTERNATIVES. If Providing Party reasonably believes it is
unable to provide any Service because of a failure to obtain necessary consents,
licenses, sublicenses or approvals pursuant to subsection 1.4(b) or because of
Impracticability, the parties shall cooperate to determine the best alternative
approach. Until such alternative approach is found or the problem otherwise
resolved to the satisfaction of the parties, Providing Party shall use
reasonable efforts, subject to Section 1.4(g) and Section 1.5(d), to continue
providing the Service or, in the
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<PAGE> 5
case of systems, to support the function to which the system relates or permit
Receiving Party to have access to the system so Receiving Party can support the
function itself. To the extent an agreed upon alternative approach requires
payment above and beyond that which is included in Providing Party's charge for
the Service in question, the parties shall share equally in making any such
payment unless they otherwise agree in writing.
(d) IMPRACTICABILITY. Providing Party shall not be required to
provide any Service to the extent that the performance of such Service becomes
"Impracticable" as a result of a cause or causes outside the reasonable control
of Providing Party including unfeasible technological requirements, or to the
extent the performance of such Services would require Providing Party to violate
any applicable laws, rules or regulations or would result in the breach of any
software license or other applicable contract.
(e) RECEIVING PARTY'S DIRECTORS AND OFFICERS. Nothing
contained herein will be construed to relieve the directors or officers of
Receiving Party from the performance of their respective duties or to limit the
exercise of their powers in accordance with the Receiving Party's Articles of
Incorporation or Regulations or in accordance with any applicable statute or
regulation.
(f) LIABILITIES. In furnishing Receiving Party with management
advice and other services as herein provided, neither Providing Party nor any of
its officers, directors, employees or agents shall be liable to Receiving Party,
its officers, directors, employees or agents, for errors of judgment or for
anything except willful malfeasance, bad faith or gross negligence in the
performance of their duties or reckless disregard of their obligations and
duties under the terms of this Agreement. The provisions of this Agreement are
for the sole benefit of Providing Party and Receiving Party and will not, except
to the extent otherwise expressly stated herein, inure to the benefits of any
third party.
(g) STANDARD OF CARE. Providing Party will use (and will cause
its subsidiaries to use) reasonable efforts in providing the scheduled Services
to Receiving Party and will perform such Services with the same degree of care,
skill and prudence customarily exercised for its own operations; provided,
however, that Providing Party shall not be required to devote full time and
attention to the performance of its duties under this Agreement, but shall
devote only so much of its time and attention as it deems reasonable or
necessary to perform the Services required hereunder. To the extent possible,
such Services will be substantially identical in nature and quality to the
services currently provided or otherwise made available by Providing Party to
its wholly owned subsidiaries and their respective operating divisions. Except
as provided in an Exhibit for a specific Service, in providing the Services,
Providing Party shall not be obligated to: (i) hire any additional employees;
(ii) maintain the employment of any specific employee; (iii) purchase, lease or
license any additional equipment or software; or (iv) pay any costs related to
the transfer or conversion of Receiving Party's data to Providing Party or any
alternate supplier of Services. Providing Party has the right to reasonably
supplement, modify, substitute or otherwise alter such services from time to
time in a manner consistent with supplements, modifications, substitutions or
alterations made with respect to similar services provided or otherwise made
available by Providing Party to its wholly owned subsidiaries and
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<PAGE> 6
their respective operating divisions. In providing such services, Providing
Party will not be responsible for the accuracy, completeness or timeliness of
any advice or service or any return, report, filing or other document which it
provides, prepares or assists in preparing, except to the extent that any
inaccuracy, incompleteness or untimeliness arises from Providing Party's willful
malfeasance, bad faith or gross negligence. Providing Party and Receiving Party
will cooperate in planning the scope and timing of services provided by
Providing Party under this Agreement in order to minimize or eliminate
interference with the conduct of Providing Party's business activities. If such
interference is unavoidable, Providing Party will apportion, in its sole
discretion, the available services in a fair and reasonable manner.
Notwithstanding anything set forth in this Section 1.4(g), neither Providing
Party nor any of its officers, directors, employees or agents shall have any
liability under this Agreement except to the extent provided in Section 1.4(f).
(h) NON-EXCLUSIVITY. Nothing in this Agreement precludes
Receiving Party from obtaining the scheduled Services, in whole or in part, from
its own employees or from providers other than Providing Party.
1.5 CERTAIN LIMITATIONS: NO SALE, TRANSFER, ASSIGNMENT. Receiving
Party may not sell, transfer, assign or otherwise use the Services provided
hereunder, in whole or in part, for the benefit of any person other than the
Receiving Party Affiliates.
1.6 CONFIDENTIALITY. Providing Party agrees to hold, and to use
its best efforts to cause its employees and representatives to hold, in
confidence all Confidential Information concerning Receiving Party, furnished to
or obtained by Providing Party after the Effective Date in the course of
providing the scheduled Services, in a manner consistent with Providing Party's
standard policies with respect to the preservation and disclosure of
Confidential Information concerning Providing Party and its subsidiaries and
operating units. Providing Party's systems used to perform the Services provided
hereunder are confidential and proprietary to Providing Party or third parties.
Receiving Party shall treat these systems and all related procedures and
documentation as confidential and proprietary to Providing Party or its third
party vendors.
1.7 DISCLAIMER OF WARRANTIES, LIMITATION OF LIABILITY AND
INDEMNIFICATION.
(a) DISCLAIMER OF WARRANTIES. PROVIDING PARTY DISCLAIMS ALL
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT
TO THE SERVICES. PROVIDING PARTY MAKES NO REPRESENTATIONS OR WARRANTIES AS TO
THE QUALITY, SUITABILITY OR ADEQUACY OF THE SERVICES FOR ANY PURPOSE OR USE.
(b) LIMITATION OF LIABILITY; INDEMNIFICATION OF RECEIVING PARTY.
Providing Party shall have no Liability to Receiving Party with respect to its
furnishing any of the Services hereunder except for Liabilities arising out of
the willful malfeasance, bad faith or gross negligence of Providing Party or any
Affiliates of Providing Party. Providing Party will
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<PAGE> 7
indemnify, defend and hold harmless Receiving Party and its officers, directors,
employees and agents in respect of all Liabilities related to, arising from,
asserted against or associated with such willful misconduct, malfeasance, bad
faith or gross negligence. Such indemnification obligation shall be a liability
of Providing Party for purposes of the Plan of Reorganization and Distribution
Agreement and the provisions with respect to indemnification shall govern with
respect thereto. In no event shall Providing Party or any Providing Party
Affiliate have any Liability for any incidental, indirect, special or
consequential damages, whether or not caused by or resulting from negligence or
breach of obligations hereunder and whether or not informed of the possibility
of the existence of such damages. For purposes of this Agreement, the term
"Liabilities" means any and all losses, claims, charges, debts, demands,
actions, causes of actions, suits, damages, costs and expenses, and similar
obligations, including those arising under any law, rule, regulation, action,
suit, proceeding (including reasonable attorneys' fees) and any and all costs
and expenses related thereto.
(c) LIMITATION OF LIABILITY; INDEMNIFICATION OF PROVIDING PARTY.
Receiving Party shall indemnify and hold harmless Providing Party and its
officers, directors, employees and agents in respect of all Liabilities related
to, arising from, asserted against or associated with Providing Party's
furnishing or failing to furnish the Services provided for in this Agreement,
other than Liabilities arising out of the willful malfeasance, bad faith or
gross negligence of Providing Party or any Providing Party Affiliate. The
provisions of this indemnity shall apply only to losses which relate directly to
the provision of Services. Such indemnification obligation shall be a liability
of the Receiving Party for purposes of the Plan of Reorganization and
Distribution Agreement and the provisions with respect to indemnification shall
govern with respect thereto. In no event shall Receiving Party or any Receiving
Party Affiliate have any Liability for any incidental, indirect, special or
consequential damages, whether or not caused by or resulting from negligence or
breach of obligations hereunder and whether or not informed of the possibility
of the existence of such damages.
(d) SUBROGATION OF RIGHTS VIS-A-VIS THIRD PARTY CONTRACTORS. In
the event any Liability arises from the performance of Services hereunder by a
third party contractor, Receiving Party shall be subrogated to such rights, if
any, as Providing Party may have against such third party contractor with
respect to the Services provided by such third party contractor to or on behalf
of Receiving Party.
ARTICLE 2
INSURANCE AND FOUNDATION MATTERS
2.1 CONVERGYS agrees that it will reimburse CBI for its
proportionate share of premiums paid or accrued, from the Effective Date until
the Distribution Date or such other date to which the parties agree, in respect
of insurance policies under which CONVERGYS and its Affiliates will continue to
have coverage following the Effective Date hereof. CBI and CONVERGYS agree to
cooperate in good faith to provide for an orderly transition of insurance
coverage from the Effective Date through the Distribution Date and for the
treatment of any insurance policies that will remain in effect following the
Effective Date on a mutually agreeable
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<PAGE> 8
basis. Such efforts shall include, without limitation, cooperation with the
insurance companies with respect to the determination and allocation of
premiums, fees, assessments and other associated costs, including, but not
limited to, the potential attainment of any aggregate maximum liability for
policies in place prior to the Distribution Date. To the extent that insurance
carriers are able to and agree to separately invoice each party for its
proportionate allocation of all premiums, fees, assessments and other associated
costs, each party shall fully cooperate with such arrangements. CBI shall fully
cooperate with CONVERGYS with respect to disclosing the existence of, and
providing certified original copies of, any applicable insurance and claims
agreements upon request.
2.2 Each party shall cooperate fully with the other with respect
to the administration and reporting of CONVERGYS claims, the payment of
CONVERGYS claims determined to be payable, and the transfer to CONVERGYS of the
administration and files pertaining to any CONVERGYS claims or obligations.
Nothing contained herein limits or in any way precludes CONVERGYS, by or for
itself, CBIS and/or MATRIXX from asserting its rights to coverage under any CBI
procured insurance policy that provided coverage to or for CONVERGYS, CBIS
and/or MATRIXX and/or any such entities' directors, officers, employees or
agents as insured parties prior to the Distribution Date. After the Effective
Date, neither CBI nor CONVERGYS shall, without the consent of the other, provide
any such insurance carrier with a release, or amend, modify or waive any rights
under any such policy or agreement, if such release, amendment, modification or
waiver would adversely affect any rights or potential rights of the other
hereunder; provided, however, that the foregoing shall not (i) preclude either
from presenting any claim or from exhausting any policy limit, (ii) require
either to pay any premium or other amount or to incur any liability, or (iii)
require either to renew, extend or continue any policy in force. Each of
CONVERGYS and CBI will share such information as is reasonably necessary in
order to permit the other to manage and conduct its insurance matters in an
orderly fashion.
2.3 In the event that any of the insurance policies that CBI
maintains expire before the Distribution Date, CBI shall use its reasonable best
efforts to renew such policy and to cause the issuing insurance company to issue
a separate policy to CONVERGYS. If CBI is not able to cause such insurance
company to issue such separate insurance policy, CONVERGYS shall use its
reasonable best efforts to procure a separate policy from another insurance
company, and CBI shall use its reasonable best efforts to continue to cover
CONVERGYS under its renewed policy until the date on which a separate insurance
policy is procured. CONVERGYS shall compensate CBI for all costs incurred by CBI
to continue such coverage. CBI shall use its reasonable best efforts to maintain
the premium rates for all insurance policies for both CBI and CONVERGYS in
effect for periods through the Distribution Date. Any premiums due under the
separate insurance policies issued to CONVERGYS shall be payable by CONVERGYS.
In no event shall CBI or any CBI Indemnitee have any liability or obligation
whatsoever to CONVERGYS in the event that any insurance policy or other contract
or policy of insurance shall be terminated or otherwise cease to be in effect
for any reason, shall be unavailable or inadequate to cover any liability of
CONVERGYS for any reason whatsoever or shall not be renewed or extended beyond
the current expiration date.
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<PAGE> 9
2.4 This Agreement shall not be considered as an attempted
assignment of any policy of insurance or as a contract of insurance and shall
not be construed to waive any right or remedy of either CBI or CONVERGYS in
respect of any insurance policy or any other contract or policy of insurance.
2.5 CONVERGYS does hereby, for itself and its Affiliates, agree
that CBI or any CBI Indemnitee shall not have any liability whatsoever as a
result of the insurance policies and practices of CBI and its Affiliates as in
effect at any time prior to the Effective Date, including as a result of the
level or scope of any such insurance, the creditworthiness of any insurance
carrier, the terms and conditions of any policy, the adequacy or timeliness of
any notice to any insurance carrier with respect to any claim or potential claim
or otherwise.
2.6 Notwithstanding the foregoing, CBI agrees 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 CONVERGYS. For purposes of
this Section 2.6, "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) (a) 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 (b) who is an officer, director or employee of
CONVERGYS or a CONVERGYS Affiliate on the day immediately following the
Distribution Date. The provisions of this Section 2.6 shall survive the
termination of this Agreement.
2.7 To the extent that at the Distribution Date the Cincinnati
Bell Foundation has assets in excess of its commitments, the parties shall cause
the Foundation's trustees to contribute half of such excess to a foundation
established by CONVERGYS which qualifies as a charitable entity under Section
501(c)(3) of the Internal Revenue Code.
ARTICLE 3
MISCELLANEOUS
3.1 LAWS AND GOVERNMENTAL REGULATIONS. Receiving Party shall be
responsible for (i) compliance with all laws and governmental regulations
affecting its business and (ii) any use Receiving Party may make of the Services
to assist it in complying with such laws and governmental regulations. While
Providing Party shall not have any responsibility for Receiving Party's
compliance with the laws and regulations referred to above, Providing Party
agrees to use reasonable efforts, subject to subsection 1.5, to cause the
Services to be designed in such manner that such Services shall be able to
assist Receiving Party in complying with applicable legal and regulatory
responsibilities. Providing Party's charge, if any, for such Service
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<PAGE> 10
may reflect its efforts under this Section 3.1. In no event, however, shall
Receiving Party rely solely on its use of the Services in complying with any
laws and governmental regulations.
3.2 RELATIONSHIP OF PARTIES. Nothing in this Agreement shall be
deemed or construed by the parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
parties, it being understood and agreed that no provision contained herein, and
no act of the parties, shall be deemed to create any relationship between the
parties other than the relationship of independent contractor nor be deemed to
vest any rights, interest or claims in any third parties.
3.3 INDEPENDENCE. All employees and representatives of Providing
Party providing the Services to Receiving Party will be deemed for purposes of
all compensation and employee benefits to be employees or representatives of
Providing Party and not employees or representatives of Receiving Party. In
performing such services, such employees and representatives will be under the
direction, control and supervision of Providing Party (and not of Receiving
Party), and Providing Party will have the sole right to exercise all authority
with respect to the employment (including termination of employment), assignment
and compensation of such employees and representatives.
3.4 AMENDMENTS; WAIVERS. This Agreement may be amended or modified
only in writing executed on behalf of CBI and CONVERGYS. No waiver shall operate
to waive any further or future act and no failure to object or forbearance shall
operate as a waiver.
3.5 INCONSISTENCY. In the event of any inconsistency between the
terms of this Agreement and any of the Exhibits hereto, the terms of this
Agreement, other than charges, shall control.
3.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns, provided that this Agreement and the rights and
obligations contained herein or in any exhibit or schedule hereto shall not be
assignable, in whole or in part, without the prior written consent of the
parties hereto and any attempt to effect any such assignment without such
consent shall be void.
3.7 ARBITRATION. Any dispute, controversy or claim arising out of
or in connection with this Agreement (including any questions of fraud or
questions concerning the validity and enforceability of this Agreement or any of
the rights herein), shall be determined and settled in accordance with Article
11 of the Plan of Reorganization and Distribution Agreement.
3.8 NOTICES. All notices required or permitted to be given under
this Agreement shall be in writing and shall be sent by facsimile transmission
or mailed by registered or certified mail addressed to the party to whom such
notice is required or permitted to be given. All notices shall be deemed to have
been given when transmitted if given by facsimile and confirmation of receipt is
received or, if mailed, 48 hours after mailed as evidenced by the postmark at
the point of mailing.
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<PAGE> 11
All notices to CBI shall be addressed as follows:
CINCINNATI BELL INC.
201 E. Fourth Street
Seventh Floor
Cincinnati, Ohio 45202
Fax No. 513-397-9900
Attention: President
All notices to CONVERGYS shall be addressed as follows:
CONVERGYS CORPORATION
201 E. Fourth Street
Twentieth Floor
Cincinnati, Ohio 45202
Fax No. 513-397-5364
Attention: President
Either party may, by written notice to the other, as provided herein designate a
new address to which notices to the party giving the notice shall thereafter be
mailed.
3.9 FORCE MAJEURE. Providing Party shall not be liable for any
delay or failure of performance to the extent such delay or failure is caused by
circumstances beyond its reasonable control and that by the exercise of due
diligence it is unable to prevent, provided that the party claiming excuse use
its best efforts to overcome the same.
3.10 ENTIRETY OF AGREEMENT. This Agreement, the Plan of
Reorganization and Distribution Agreement and the Ancillary Agreements set forth
the entire agreement and understanding of the parties relating to the subject
matter contained herein and merges all prior discussions between them, and
neither party shall be bound by any representation other than as expressly
stated in this Agreement or by a written amendment to this Agreement, the Plan
of Reorganization and Distribution agreement and the Ancillary Agreements signed
by authorized representatives of both parties.
3.11 SEVERABILITY. In the event any term of this Agreement is or
becomes or is declared to be invalid or void by any court of competent
jurisdiction, such term or terms shall be null and void and shall be deemed
deleted from this Agreement, and all the remaining terms of the Agreement shall
remain in full force and effect.
3.12 GOVERNING LAW. The validity, performance and construction of
this Agreement shall be governed by the laws of Ohio.
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<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Services Agreement
as of the date first above written.
CINCINNATI BELL INC.
By:
-------------------------------------
John T. LaMacchia, President
and Chief Executive Officer
CONVERGYS CORPORATION
By:
-------------------------------------
James F. Orr, President
and Chief Executive Officer
<PAGE> 1
Exhibit 10.4
TAX SEPARATION AND ALLOCATION AGREEMENT
This Tax Separation and Allocation Agreement (the "Agreement") is made
as of _______________, 1998 by and among Cincinnati Bell Inc., an Ohio
corporation ("CBI"), and Convergys Corporation, an Ohio corporation
("Convergys") (together with its subsidiaries existing immediately following the
Distribution, the "Convergys Group").
WHEREAS, CBI is the common parent of an Affiliated Group of
corporations engaged in separate and distinct lines of business, including
subsidiaries engaged in the telecommunication business and subsidiaries engaged
in information businesses that rely heavily on the latest technological
advances.
WHEREAS, CBI has formed Convergys as a holding company and transferred
to it all of the subsidiaries that comprise the Convergys Group.
WHEREAS, CBI intends to have Convergys issue slightly less than 20
percent of the shares of Convergys to the public leaving CBI as the owner of
more than 80 percent of the shares of Convergys.
WHEREAS, soon after such sale, CBI proposes to distribute to its
shareholders all of the shares of Convergys that it owns in a distribution that
is intended to be tax-free pursuant to the provisions of Section 355 of the
Code.
WHEREAS, CBI and Convergys have entered into a Distribution Agreement
(as defined below) providing for the distribution of all of the Convergys stock
owned by CBI to its shareholders in accordance with the Distribution Agreement;
and
WHEREAS, CBI and Convergys, for themselves and their respective Groups,
desire to set forth their agreement regarding the allocation between CBI and the
Convergys Group of all responsibilities, liabilities and benefits pertaining to
Taxes paid or payable by either of them for all Taxable periods.
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereby agree as follows:
1. DEFINITIONS. As used in this Agreement:
a. "Affiliate" shall mean, with respect to any person, any other
person means any person, corporation, partnership or other entity
directly or indirectly controlling, controlled by or under common
control with such person.
b. "Affiliated Group" shall mean an affiliated group of corporations
within the meaning of Section 1504(a) of the Code for the taxable
period in question.
c. "Carryback or Carryforward Item" shall have the meaning set forth
in Section 2d.
<PAGE> 2
d. "CBI-Caused Taxes" means any liability for Taxes, including
interest and penalties, incurred by the CBI Group or the
Convergys Group arising from or attributable to any of the
transactions that are directly related to the Distribution
failing to qualify under Section 355 of the Code, but only if
such failure (i) was caused by an act that occurred after the
Distribution in which CBI or a member of the CBI Group
participated, or (ii) was otherwise attributable to one or more
of the representations contained in Section 5b or Section 5c
hereof failing to be true as of the date of this Agreement.
e. "CBI Group" shall mean, with respect to any taxable period, the
corporations that were members of the CBI Consolidated Group
during such period, exclusive of the corporations that are
included in the Convergys Group.
f. "Code" shall mean the Internal Revenue Code of 1986, as amended.
g. "Consolidated Group" shall mean those corporations that presently
are eligible to file certain tax returns on an affiliated or
consolidated basis with CBI as the common parent.
h. "Consolidated Return" shall mean the consolidated federal income
Tax return of CBI including the Convergys Group and all other
subsidiaries of CBI for the period commencing January 1, 1998
through and including the Distribution Date.
i. "Controlled Return" shall mean (a) the Consolidated Return, (b)
any Prior Period Consolidated Return and (c) any combined returns
with respect to 1998 and all prior years.
j. "Convergys-Caused Taxes" means any liability for Taxes, including
interest and penalties, incurred by the CBI Group or the
Convergys Group arising from or attributable to any of the
transactions that are directly related to the Distribution
failing to qualify under Section 355 of the Code, but only if
such failure (i) was caused by an act that occurred after the
Distribution in which Convergys or a member of the Convergys
Group participated, or (ii) was otherwise attributable to one or
more of the representations contained in Section 5a or Section 5c
hereof failing to be true as of the date of this Agreement.
k. "Convergys Group" shall have the meaning set forth in the first
paragraph of this Agreement.
l. "Convergys Tax Liability" shall mean, with respect to any
Consolidated Group in any Taxable Period, the Convergys Group's
share of the Tax liability of such Consolidated Group, computed
as if the relevant members of the Convergys Group were not and
never were part of such Consolidated Group, but rather, were a
separate Affiliated Group of corporations filing a similar group
Return (provided, however, any transaction with any member of the
CBI Group included in such Consolidated Group shall not be taken
into account until the first taxable
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<PAGE> 3
period in which such transaction is required to be taken into
account for Tax purposes under applicable law). Such computation
shall be made (i) without regard to the income, deductions
(including the net operating loss and capital loss deductions)
and credits in any year of any member of the CBI Group, except to
the extent that a payment was made to any member of the CBI Group
with respect thereto, (ii) by taking account of any Tax Asset of
the Convergys Group, including net operating loss and capital
carryforwards and carrybacks and minimum Tax credits from earlier
years of the Convergys Group except to the extent that such
losses, carryforwards, carrybacks or credits have been used by
any member of the CBI Group, (iii) by applying the maximum
applicable statutory Tax rate in effect under applicable law
during the relevant year, and (iv) by reflecting the positions,
elections and accounting methods used by the Consolidated Group
preparing the relevant return for the Consolidated Group.
m. "Distribution" shall mean the distribution by CBI of all shares
of Convergys that are held by CBI to CBI's shareholders pursuant
to the Distribution Agreement.
n. "Distribution Agreement" shall mean the Plan of Reorganization
and Distribution Agreement dated _______________, 1998 between
CBI and Convergys.
o. "Distribution Date" shall mean the date on which the Distribution
shall be effected.
p. "Final Determination" shall mean the final resolution of
liability for any Tax for a taxable period, (i) by the Internal
Revenue Service Form 870 or Form 870-AD (or any successor forms
thereto), on the date of acceptance by or on behalf of the
taxpayer, or by comparable form under the laws of other
jurisdictions; except that a Form 870 or Form 870-AD or
comparable form that reserves (whether by its terms or by
operation of law) the right of the taxpayer to file a claim for
refund and/or the right of the taxing authority to assert a
further deficiency shall not constitute a Final Determination;
(ii) by decision, judgment, decree or other order by a court of
competent jurisdiction, which has become final and unappealable;
(iii) by a closing agreement or accepted offer in compromise
under Section 7121 or Section 7122 of the Code, or comparable
agreements under the laws of other jurisdictions; (iv) by any
allowance of a refund or credit in respect of an overpayment of
Tax, but only after the expiration of all periods during which
such refund may be recovered (including by way of offset) by the
Tax imposing jurisdiction; or (v) by any other final disposition,
including by reason of the expiration of the applicable statute
of limitations or by mutual agreement of the parties.
q. "Group" shall mean the Convergys Group and/or the CBI Group.
r. "Indemnitor" shall have the meaning set forth in Section 6dii.
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<PAGE> 4
s. "Prior Period Consolidated Return" shall mean any consolidated
Tax Return of CBI filed, or to be filed, for taxable years prior
to the Consolidated Return year.
t. "Return" shall mean any tax return, statement, report, form,
election or claim (including all exhibits and schedules thereto)
required to be filed with a Taxing Authority with respect to any
Taxes.
u. "Tax" (and the correlative meaning, "Taxes," "Taxing," "Taxable")
shall mean any income, alternative or add-on minimum tax, gross
income, gross receipts, sales, use, ad valorem, franchise,
profits, license, withholding, payroll, employment,
environmental, excise, severance, stamp, transfer, recording
occupation, premium, property, value ad, winfall profit tax,
custom duty, or other tax of any kind whatsoever, together with
any interest and penalty, addition to tax or additional amount
imposed by any governmental authority (a "Taxing Authority")
responsible for the imposition of any such (domestic or foreign).
v. "Tax Administrators" shall mean the person designated by CBI as
having primary responsibility for tax matters for the CBI Group
and the person designated by Convergys as having primary
responsibility for tax matters for the Convergys Group, or such
other persons as may be mutually agreed upon by CBI and
Convergys.
w. "Tax Asset" shall mean any net operating loss, net capital loss,
tax credit, or any other loss, credit, or Tax attribute, which
could reduce any Tax.
x. "Tax Benefit" shall have the meaning set forth in Section 3d.
y. "Tax CPA" shall mean Coopers & Lybrand or a comparable firm of
internationally recognized certified public accountants mutually
agreed upon by CBI and Convergys.
Any term used in this Agreement that is not defined in this Agreement
shall, to the extent the context requires, have the meaning assigned to
it in the Code or the applicable Treasury regulations thereunder (as
interpreted in administrative pronouncements and judicial decisions) or
in comparable provisions of applicable law.
2. ADMINISTRATIVE AND COMPLIANCE MATTERS.
a. TAX SHARING AGREEMENTS. Except for this Agreement and except as
provided in this Agreement, any and all existing Tax allocation
agreements or arrangements, written or unwritten, between any
member of the CBI Group and any member of the Convergys Group
shall terminate upon completion of the Distribution.
b. FILING OF RETURNS.
i. Consolidated and Prior Period Consolidated Returns. CBI
and Convergys will join, and will cause each of their
respective subsidiaries to join, in the
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<PAGE> 5
Consolidated Return to the extent each is eligible to
join in such Return under the provisions of the Code or
the regulations thereunder. Each of the Groups will
prepare separate returns for members of such Groups. The
consolidation of those returns will be done under the
direction of the Tax Administrators, who will cause the
Consolidated Return to be timely prepared and filed. The
Tax Administrators shall make the Consolidated Return
available to the chief financial officers of CBI and
Convergys for their review prior to filing and shall
furnish them a copy of the return promptly after it is
filed. In addition, prior to filing such Return, the
consolidation will be reviewed by the Tax CPA whose costs
will be borne equally by CBI and Convergys. For each
Taxable period, the Tax liability of each member shall be
computed consistent with past practice and in accordance
with the terms of the Tax Allocation Agreement among the
members of the CBI Affiliated Group that was signed by
CBI on October 29, 1987 and by Cincinnati Bell
Information Systems Inc. on November 3, 1987.
ii. RETURN INFORMATION. CBI and Convergys agree that each
will cause their respective chief financial officers to
furnish to the Tax Administrators on a timely basis such
information, schedules, analyses and any other items as
may be necessary to prepare the Consolidated Return. Such
information, schedules, analyses and other items will be
prepared in a manner consistent with existing practice
and in accordance with the work plan scheduled to be
agreed upon by the Tax Administrators and the chief
financial officers of CBI and Convergys, acting
reasonably, as soon as practicable after the Distribution
Date.
iii. FILING PROCEDURES. The parties will execute and deliver
all documentation reasonably required (including powers
of attorney, if requested) to enable the Tax
Administrators to timely file, and to take all action
necessary or incidental to the filing of, the
Consolidated Return or any amendment of the Consolidated
Return or any prior period of the Consolidated Return.
CBI agrees that an officer of CBI will timely sign the
Consolidated Return (and any Prior Period Consolidated
Return which has not been filed as of the Distribution
Date) and any amendment of the Consolidated Return and
any Prior Period Consolidated Return after (a) receiving
written confirmation from the Tax Administrators that the
Tax Administrators have reviewed such return and
consulted with the Tax CPA and that it is in order for
filing, (b) such officer has reviewed such Consolidated
Return, and (c) any reasonable questions raised by such
officer in reviewing such return have been resolved
satisfactorily.
iv. COMBINED STATE TAX RETURNS. The Tax Administrators will
cause any combined state tax returns with respect to 1998
or any prior Tax year and any amendment of such returns
to be timely prepared, filed and paid, utilizing
procedures substantially similar to those provided in
Section 2
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<PAGE> 6
and Section 3 of this Agreement with respect to the
Consolidated Return and Prior Period Consolidated
Returns.
v. OTHER TAX RETURNS. The parties and their respective
subsidiaries shall timely prepare and file Tax Returns
(other than Controlled Returns) in those jurisdictions in
which they are required to do so in a manner consistent
with past practice. Taxes for any Return filed by one of
the Companies pursuant to this section shall be paid or
caused to be paid by the party responsible under this
section for filing such return. The Tax Administrators
shall have the right to approve any Tax returns filed
pursuant to this section with regard to such filing.
c. TAX PAYMENTS.
i. INTERIM PAYMENTS. Following the Distribution Date, at the
request of the Tax Administrators, Convergys, on behalf
of the Convergys Group, shall make payment to CBI equal
to the excess of the estimated liability of the Convergys
Group for the Tax owing under the Consolidated Return (as
reasonably determined by the Tax Administrators and the
Tax CPA) over the prior payments made by such Group in
respect of such Tax. On or before March 15, 1999, an
interim Tax settlement payment shall be made to or by CBI
to the Convergys Group, as the case may be, equal to the
difference between the estimated liability of the
Convergys Group under the Consolidated Return and the
amounts previously paid by the Convergys Group with
respect to such Return. Such amounts will be reasonably
determined by the Tax Administrators and the Tax CPA.
ii. ADJUSTING PAYMENT. Based upon computations to be prepared
by the effected Group and approved by the Tax
Administrators and the Tax CPA, an adjusting payment
equal to the difference between amounts previously paid
with respect to estimated taxes for the Consolidated
Return shall be made by one Group to the other on or
before October 15, 1999 based on the Consolidated Return
as filed.
d. CARRYBACKS AND CARRYFORWARDS. If, for any Taxable period, a
member of the Convergys Group incurs a net operating loss, net
capital loss, unused general business tax credit or unused
foreign tax credit (a "Carryback or Carryforward Item"), that
may be carried back or carried forward to a Taxable year of the
CBI Group or the CBI Affiliated Group, CBI shall pay to
Convergys an amount equal to the amount by which the Tax
liability of the CBI Group is reduced by such Carryback or
Carryforward Item. Likewise, if, for any Taxable period, a
member of the CBI Group incurs Carryback or Carryforward Item
that may be carried back or carried forward to a Taxable year of
the CBI Affiliated Group, Convergys shall pay to CBI an amount
equal to the amount by which the Tax liability of the Convergys
Group is reduced by such Carryback or Carryforward Item.
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<PAGE> 7
e. AGENCY. Convergys irrevocably designates the Tax Administrator
designated by CBI (and shall cause each member of the Convergys
Group to irrevocably designate such Tax Administrator) as its
agent and attorney-in-fact (and shall execute any necessary
powers of attorney) for the purpose of taking any and all
actions necessary or incidental to the filing of Returns for (i)
any period during which any member of the Convergys Group or any
predecessor qualified to file a consolidated, combined, unitary
or similar Return with any member of the CBI Group, and (ii) any
period ending on or before the Distribution Date. CBI shall keep
Convergys reasonably informed of, and shall reasonably consult
with Convergys with respect to, all actions to be taken on
behalf of any member of the Convergys Group. CBI and Convergys
will each furnish the other any and all information that the
other may reasonably request in order to carry out the
provisions of this Agreement to determine the amount of any Tax
liability.
3. INDEMNITIES.
a. CBI INDEMNITY. CBI and each member of the CBI Group jointly and
severally indemnify Convergys, its shareholders, and the members
of the Convergys Group that were members of a Consolidated Group
that included such Convergys Affiliate against and hold them
harmless from:
i. Any Tax liability of the CBI Group and any CBI-Caused Tax
Liability;
ii. Any liability or damage resulting from a breach by CBI or
any member of the CBI Group of any representation or
covenant made by CBI herein;
iii. Any Tax liability resulting from the Distribution and
attributable to any action of CBI or any member of the CBI
Group; and
iv. All liabilities, costs, expenses (including, without
limitation, reasonable expenses of investigation and
attorneys' fees and expenses), losses, damages,
assessments, settlements or judgments arising out of or
incident to the imposition, assessment or assertion of any
Tax liability or damage described in (i), (ii), or (iii),
including those incurred in the contest in good faith and
appropriate proceedings relating to the imposition,
assessment or assertion of any such Tax, liability or
damage.
b. CONVERGYS INDEMNITY. Convergys and each member of the Convergys
Group will jointly and severally indemnify CBI, its
shareholders, and the members of the CBI Group that were members
of a Consolidated Group that included such CBI Affiliate against
and hold them harmless from:
i. Any Convergys Tax Liability and Convergys-Caused Tax
Liability;
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<PAGE> 8
ii. Any liability or damage resulting from a breach by
Convergys or any member of the CBI Convergys of any
representation or covenant made by Convergys herein;
iii. Any Tax liability resulting from the Distribution and
attributable to any action of Convergys or any member of
the Convergys Group; and
iv. All liabilities, costs, expenses (including, without
limitation, reasonable expenses of investigation and
attorneys' fees and expenses), losses, damages,
assessments, settlements or judgments arising out or
incident to the imposition, assessment or assertion of any
Tax liability or damage described in (i), (ii) or (iii)
including those incurred in the contest and good faith and
appropriate proceedings relating to the imposition,
assessment or assertion of any such Tax, liability or
damage.
c. DISCHARGE OF INDEMNITY. CBI, Convergys and the members of the
CBI Group and the Convergys Group, respectively, shall discharge
their obligations under Sections 3a and 3b, hereof,
respectively, by paying the relevant amount within thirty days
of demand therefor. The CBI Group shall be entitled to make such
a demand at any time after a member of the CBI Group makes a
payment or deposit in respect of a Tax for which any member of
the Convergys Group has an obligation under Section 3b. The
Convergys Group shall be entitled to make such a demand at any
time after a Final Determination of an obligation of any member
of the CBI Group under Section 3a. Any such demand shall include
a statement showing the amount due under Section 3a or Section
3b, as the case may be. If either Convergys, CBI or any member
of the Convergys Group or CBI Group disputes in good faith the
fact or the amount of its obligation, then no payment of the
amount of the dispute shall be required until any such good
faith dispute is resolved in accordance with Section 7 hereof;
provided, however, that any amount not paid within thirty days
of demand shall bear interest as provided in Section 6e.
d. TAX BENEFITS. If an indemnification obligation of any member of
the CBI Group or any member of the Convergys Group, as the case
may be, under this Section 3, arises in respect of an adjustment
that makes allowable to a member of the CBI Group or a member of
the Convergys Group, respectively, any deduction, amortization,
exclusion from income or other allowance (a "Tax Benefit") that
would not, but for such adjustment, be allowable, then any
payment by any member of the CBI Group or Convergys Group,
respectively, pursuant to this Section 3 shall be an amount
equal to (x) the amount otherwise due but for this subsection
3d, minus (y) the present value of the product of the Tax
Benefit multiplied (i) by the maximum applicable federal,
foreign or state, as the case may be, corporate tax rate in
effect at the time such Tax Benefit becomes allowable to a
member of the CBI Group or member of the Convergys Group (as the
case may be), or (ii) in the case of a Tax Credit, by 100%. The
present value of such product shall be determined by discounting
such product from the time
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<PAGE> 9
that the Tax Benefit becomes allowable at a rate equal to the
applicable federal rate, as set forth from time to time in the
Internal Revenue Bulletin.
e. CALCULATION OF TAX. For purposes of this Section 3, in the case
of Taxes that are imposed on a periodic basis and are payable
for a Tax period that includes (but does not end on) the
Distribution Date, a portion of such Tax related to the portion
of such Tax period ending on the Distribution Date shall (i) in
the case of any Taxes other than Taxes based upon or related to
income, sales, gross receipts, wages, capital expenditures, or
expenses, be deemed to be the amount of such Tax for the entire
Tax period multiplied by a fraction the numerator of which is
the number of days in the Tax period ending on the Distribution
Date and the denominator of which is the number of days in the
entire Tax period, and (ii) in the case of any Tax based upon or
related to income, sales, gross receipts, wages, capital
expenditures or expenses, be deemed equal to the amount that
would be payable if the relevant Tax period ended on the
Distribution Date.
f. GUARANTEES. CBI or Convergys, as the case may be, shall
guarantee the obligations of each member of the CBI Group or the
Convergys Group, respectively, under this Agreement.
4. TAX DEFICIENCIES AND CLAIMS.
a. Except as otherwise provided in Section 4b, the Tax
Administrators shall control all audits, examinations and
proceedings with respect to Taxes with respect to any Controlled
Returns. The Tax Administrators shall have overall
responsibility for obtaining and coordinating all responses in
connection with any such proceedings with respect to any
Controlled Returns. To the extent that any such audit affects
one of the Groups, such Group shall prepare and submit such
responses in a manner consistent with prior practice, provided,
however, that the Tax Administrators shall have the right to
approve all such responses prior to their submission.
Adjustments affecting solely the Taxable income, loss or
deductions of, or Tax credits generated by any Group, may be
agreed upon or settled only upon approval of that Group, which
approval shall not be unreasonably withheld or delayed.
b. Any proposed or actual income Tax deficiencies or refund claims,
with respect to the Consolidated Return or any Prior Period
Consolidated Return that arises from the business activities of
a particular member and that do not otherwise affect any
Controlled Return, may be defended or prosecuted by that member
at its own cost and expense and with counsel and accountants of
its own selection. Each of the Tax Administrators may
participate in any such prosecution or defense at the expense of
the respective company employing the Tax Administrator. A member
may not compromise or settle any such tax deficiency or any
refund claim without the prior written consent of the Tax
Administrators, which consent shall not be unreasonably
withheld. Notwithstanding the foregoing, no member shall have a
right to an extension of the statute of limitations or to any
waiver of any other
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<PAGE> 10
procedural safeguard without the prior written consent of the
Tax Administrators. The limitation expressed in the preceding
sentence applies, but is not limited to, the filing of a
petition in the United States Tax Court.
c. In connection with the defense of any audit of any Controlled
Return, except with regard to claims described in Section 4b,
above, the Tax Administrators may retain advisors and charge the
reasonable cost of their services to the appropriate Group or
Groups.
d. Refunds for any year will be allocated among the members in the
same manner as the Tax liability to which the refund relates was
allocated. If any member of the Convergys Group desires to file
a claim for refund with respect to a Taxable year for which it
was a member of the Consolidated Group, it shall prepare and
submit to CBI the claim for refund and a statement specifying
when the statute of limitations for filing the claim will
expire. The appropriate party to file such claim, under the
supervision of the Tax Administrators, will file the claim as
soon as practicable and will take such other action as may be
appropriate. Such member will reimburse CBI for all costs
incurred by CBI in complying with this section 4d.
5. REPRESENTATIONS AND COVENANTS.
a. CONVERGYS REPRESENTATIONS. Convergys, for itself and on behalf
of each member of the Convergys Group represents that, as of the
date hereof, and covenants that, on the Distribution Date, there
is no plan or intention (i) to liquidate Convergys or to merge
or consolidate Convergys, or any member of the Convergys Group
conducting an active trade or business relied upon in connection
with the restructuring or the Distribution, with any other
person subsequent to the Distribution, (ii) to sell, or
otherwise dispose of any asset, subsequent to the Distribution,
in a manner that would result in any increased Tax liability or
reduction of any Tax Asset of the CBI Group or any member
thereof, (iii) to take any action inconsistent with the
information or representations furnished to the Internal Revenue
Service or any other Tax Authority in connection with a request
for a private letter ruling (or any comparable pronouncement by
the Taxing Authority under applicable law) with respect to the
Distribution or the restructuring, (iv) to enter into any
negotiations, agreements, or arrangements with respect to
transactions or events (including stock issuances, pursuant to
the exercise of options or otherwise, capital contributions or
acquisitions, but not including the Distribution) which, if
treated as consummated before the proposed Distribution, would
result in CBI not having "control" of Convergys within the
meaning of Section 355(a)(1)(A) and Section 368(c) of the Code
at the time of the Distribution, (v) to make any change in
equity structure that would result in CBI not having such
"control" (except for the Distribution), (vi) to repurchase
stock of Convergys in a manner contrary to the requirements of
Revenue Procedure 96-30 or (vii) to take any action that
contravenes any agreement with a Taxing Authority to which any
member of the Convergys Group or the CBI Group is a party.
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<PAGE> 11
b. CBI REPRESENTATIONS. CBI, for itself and on behalf of each
member of the CBI Group, represents that, as of the date hereof,
and covenants that, on the Distribution Date, there is no plan
or intention (i) to liquidate CBI or to merge or consolidate
CBI, or any member of the CBI Group conducting an active trade
or business relied upon in connection with the restructuring or
the Distribution, with any other person subsequent to the
Distribution, (ii) to sell, or otherwise dispose of any asset,
subsequent to the Distribution, in a manner that would result in
any increased Tax liability or reduction of any Tax Asset of the
Convergys Group or any member thereof, (iii) to take any action
inconsistent with the information or representations furnished
to the Internal Revenue Service or any other Tax Authority in
connection with a request for a private letter ruling (or any
comparable pronouncement by the Taxing Authority under
applicable law) with respect to the Distribution or the
restructuring, or (iv) to take any action that contravenes any
agreement with a Taxing Authority to which any member of the
Convergys Group or the CBI Group is a party.
c. CBI AND CONVERGYS REPRESENTATIONS. Each of CBI, Convergys and
the members of the CBI Group and the Convergys Group,
respectively, represent that, as of the date hereof, and
covenants that on the Distribution Date, neither Convergys, CBI
nor the members of the Convergys Group or CBI Group,
respectively, as applicable, is aware of any present plan or
intention by the current shareholders of CBI to sell, exchange,
transfer by gift, or otherwise dispose of any of their stock in,
or securities of, CBI or Convergys subsequent to the
Distribution. In making this representation, the parties hereto
recognize that the shares of CBI are, and the shares of
Convergys will be, listed on certain stock exchanges and regular
public trading of such shares can be expected.
6. COOPERATION.
a. ONGOING COOPERATION. CBI and Convergys will cooperate, and cause
each member and their respective Groups to cooperate, at such
time and to the extent reasonably requested by the other party
in connection with all matters subject to this Agreement. Such
cooperation will include, without limitation:
i. The retention and provision on reasonable request of any
and all information including books, records, documentation
or other information pertaining to Tax matters relating to
the Groups, any necessary explanations of information, and
access to personnel, until one year after the expiration of
the applicable statute of limitations (giving effect to any
extension, waiver, or mitigation thereof);
ii. The execution of any document that may be necessary or
helpful with any required Return or in connection with any
audit, proceeding, suit or action; and
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<PAGE> 12
iii. The use of the party's best efforts to obtain any
documentation from a governmental authority or a third
party that may be necessary or helpful in connection with
the foregoing.
b. INFORMATION. CBI and Convergys shall keep each other fully
informed with respect to any material development relating to
the matters subject to this Agreement.
c. TAX ATTRIBUTES. CBI and Convergys shall promptly advise each
other with respect to any proposed Tax adjustments relating to a
Consolidated Group that are the subject of an audit or
investigation, or are the subject of any proceeding or
litigation, and it may affect any Tax liability or any Tax
attribution of CBI, Convergys, the CBI Group, the Convergys
Group or any member of the CBI Group or the Convergys Group.
d. AUDITS.
i. HANDLING OF AUDITS. Notwithstanding anything in this
Agreement to the contrary, the Tax Administrators shall be
kept apprised of all audits. CBI shall have full control
over all matters relating to any Return or any Tax
proceeding relating to any Tax matters of at least one
member of the CBI Group. Convergys shall have full control
over all matters relating to any Return or any Tax
Proceeding relating to any Tax matters of at least one
member of the Convergys Group. In the event that an audit
relates to any Tax matters of members from both the CBI
Group and the Convergys Group, oversight of such audit will
be handled by the Tax Administrators in consultation with
the chief financial officers of each of the respective
Groups.
ii. SETTLEMENTS. No settlement of any Tax proceeding relating
to any matter that would cause a payment obligation under
Sections 3a or 3b shall be accepted or entered into by or
on behalf of the party entitled to receive a payment under
Section 3a or 3b, whichever is applicable, unless a party
ultimately responsible for such payment under either
Section 3a or 3b, whichever is applicable (the
"Indemnitor"), consents thereto in writing, which consent
shall not be unreasonably withheld or delayed.
iii. NOTICE. The indemnified party agrees to give notice to the
Indemnitor of the assertion of any claim, or the
commencement of any suit, action or proceeding in respect
of which indemnity may be sought hereunder within thirty
days of such assertion or commencement, or such other time
that would allow the Indemnitor to timely respond to such
claim, suit, action or proceeding.
iv. OTHER ACTIONS. With respect to Returns relating to Taxes
solely attributable to the CBI Group or the Convergys
Group, as the case may be,
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<PAGE> 13
CBI and the members of the CBI Group, or Convergys and the
members of the Convergys Group, as the case may be, shall
have full control over all matters relating to any Tax
proceedings in connection therewith.
e. PAYMENTS. All payments to be made under this Agreement shall be
made in immediately available funds. Except as otherwise
provided, all payments required to be made pursuant to this
Agreement will be due thirty days after the receipt of notice of
such payment or, where no notice is required, thirty days after
the fixing of liability or the resolution of a dispute. Any
payment that is not made when due shall bear interest at a rate
equal to the "prime rate" then in effect, as quoted in the Wall
Street Journal, plus 2%.
f. TAX RESERVES. In connection with the Distribution, the Tax
Administrators will oversee the allocation of the tax reserves
shown on the balance sheet of CBI immediately prior to the
Distribution Date among the members of the CBI Group and the
Convergys Group in a manner that accurately reflects both the
parties to whom the reserves should be allocated and the amount
of reserves that should be allocated to each of such parties.
7. DISPUTE RESOLUTION. In the event of a disagreement between the Tax
Administrators or between the CBI Group or the Convergys Group, all
computations or recomputations of any Tax liability, Tax rate or other
similar items, and all determinations of the amount of payments or
repayments will be reviewed by the Tax CPA, with the cost of such
review being shared equally by the disputing Groups. The decision of
the Tax CPA shall be binding on the parties.
8. COSTS AND EXPENSES. Except as expressly set forth in this Agreement,
each party will bear its own costs and expenses incurred pursuant to
this Agreement. Notwithstanding anything to the contrary in this
Agreement, CBI and Convergys will share equally the cost of the Tax CPA
connected with reviewing the Consolidated Return.
9. EFFECTIVENESS. This Agreement will become effective upon the
consummation of the Distribution. All rights and obligations arising
hereunder with respect to a pre-Distribution Tax period will survive
until they are fully effectuated or performed and, provided further,
notwithstanding anything in this Agreement to the contrary, this
Agreement will remain in effect and its provisions will survive for one
year after the full period of all applicable statutes of limitation
(giving effect any extension, waiver or mitigation thereof) and, with
respect to any claim hereunder initiated prior to the end of such
period, and until such claim has been satisfied or otherwise resolved.
10. MISCELLANEOUS.
a. Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which will be deemed an
original, and which together will constitute one and the same
instrument.
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b. AMENDMENTS. This Agreement may be amended in writing duly
executed by all parties hereto.
c. GOVERNING LAW. This Agreement will be construed and enforced in
accordance with the laws of the State of Ohio.
d. BENEFICIARIES. This Agreement will be binding upon and inure to
the benefit of the parties hereto and their respective
successors and assigns, by merger, acquisition of assets or
otherwise. This Agreement is not intended to benefit any person
other than the parties hereto and such successors and assigns,
and no such other person will be a third-party beneficiary
hereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the _____ day of __________________, 1998.
CINCINNATI BELL INC. CONVERGYS CORPORATION
By: By:
-------------------------------- --------------------------------
<PAGE> 1
Exhibit 10.5
CONVERGYS CORPORATION
1998 LONG TERM INCENTIVE PLAN
1. Purpose.
--------
The purpose of the Convergys Corporation 1998 Long Term Incentive Plan
(the "Plan") is to further the long term growth of Convergys Corporation (the
"Company") by offering competitive incentive compensation related to long term
performance goals to those employees of the Company and its affiliates who will
be largely responsible for planning and directing such growth. The Plan is also
intended as a means of reinforcing the commonality of interest between the
Company's shareholders and the employees who are participating in the Plan and
as an aid in attracting and retaining employees of outstanding abilities and
specialized skills. The Plan shall become effective on the date on which it is
approved by the shareholders of the Company (the "Effective Date").
2. Administration.
---------------
2.1 The Plan shall be administered by the Compensation Committee (the
"Committee") of the Company's Board of Directors (the "Board"). The Committee
shall consist of at least three members of the Board (a) who are neither
officers nor employees of the Company and (b) who are "outside directors" within
the meaning of section 162(m)(4)(C) of the Internal Revenue Code of 1986, as
amended (the "Code").
2.2 Subject to the limitations of the Plan, the Committee shall have
the sole and complete authority (a) to select from the employees of the Company
and its affiliates those individuals who shall participate in the Plan, (b) to
make awards in such forms and amounts as it shall determine and to cancel or
suspend awards, (c) to impose such limitations, restrictions and conditions upon
awards as it shall deem appropriate, (d) to interpret the Plan and to adopt,
amend and rescind administrative guidelines and other rules and regulations
relating to the Plan and (e) to make all other determinations and to take all
other actions necessary or advisable for the proper administration of the Plan.
Determinations of fair market value under the Plan shall be made in accordance
with the methods and procedures established by the Committee. The Committee's
determinations on matters within its authority shall be conclusive and binding
on the Company and all other parties.
2.3 The Committee may delegate to one or more Senior Managers or to one
or more committees of Senior Managers the right to make awards to employees who
are not officers or directors of the Company.
<PAGE> 2
3. Types of Awards.
----------------
Awards under the Plan may be in any one or more of the following: (a)
stock options, including incentive stock options ("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 performance criteria and (e) other awards based in whole or in part by
reference to or otherwise based on Company Common Shares, without par value
("Common Shares"), or other securities of the Company or any of its subsidiaries
("other stock unit awards"). In connection with any award or any deferred award,
payments may also be made representing dividends or interest or other
equivalent. No awards shall be made under the Plan after ten years from the
Effective Date.
4. Shares Subject to Plan.
-----------------------
Subject to adjustment as provided in Section 14 below, 30,000,000 of
the Company's outstanding Common Shares shall be available for award under the
Plan. Common Shares available in any year which are not used for awards under
the Plan shall be available for award in subsequent years. Notwithstanding the
foregoing, subject to adjustment as provided in Section 14 below, the total
number of Common Shares available under the Plan for awards of ISOs shall not
exceed 15,000,000 and the total number of Common Shares available for awards
under the Plan to any one individual shall not exceed 3,000,000. In the future,
if another company is acquired, any Common Shares covered by or issued as result
of the assumption or substitution of outstanding grants of the acquired company
shall not be deemed issued under the Plan and shall not be subtracted from the
Common Shares available for grant under the Plan. The Common Shares deliverable
under the Plan may consist in whole or in part of authorized and unissued shares
or treasury shares. If any Common Shares subject to any award are forfeited, or
the award is terminated without issuance of Common Shares or other
consideration, the Common Shares subject to such awards shall again be available
for grant pursuant to the Plan.
5. Stock Options.
--------------
Except as provided in Section 10, all stock options granted under the
Plan shall be subject to the following terms and conditions:
5.1 The Committee may, from time to time, subject to the provisions of
the Plan and such other terms and conditions as the Committee may prescribe,
grant to any employee of the Company or affiliate of the Company options to
purchase Common Shares, which options may be options that comply with the
requirements for incentive stock options set forth in section 422 of the Code
("ISOs") or options which do not comply with such requirements ("NSOs") or both.
The grant of an option shall be evidenced by a signed written agreement ("Stock
Option Agreement") containing such terms and conditions as the Committee may
from time to time prescribe.
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<PAGE> 3
5.2 The purchase price per Common Share of options granted under the
Plan shall be determined by the Committee but shall not be less than 100% of the
fair market value of the Common Shares on the date the option is granted;
provided, however, that in the case of options issued in conjunction with the
initial public offering of the Common Shares, "fair market value" shall be the
price at which the Common Shares are offered in the initial public offering.
5.3 Unless otherwise prescribed by the Committee in the Stock Option
Agreement, each option granted under the Plan shall be for a period of ten
years, shall be exercisable in whole or in part after the commencement of the
second year of its specified term and may thereafter be exercised in whole or in
part before it terminates under the provisions of the Stock Option Agreement.
The Committee shall establish procedures governing the exercise of options and
shall require that written notice of exercise be given and that the option price
be paid in full in cash at the time of exercise. The Committee may permit an
optionee, in lieu of part or all of the cash payment, to make payment in Common
Shares or other property valued at fair market value on the date of exercise, as
partial or full payment of the option price. As soon as practicable after
receipt of each notice and full payment, the Company shall deliver to the
optionee a certificate or certificates representing the acquired Common Shares,
unless, in accordance with rules prescribed by the Committee, the optionee has
elected to defer receipt of the Common Shares.
5.4 Any ISO granted under the Plan shall be exercisable upon the date
or dates specified in the Stock Option Agreement, but not earlier than one year
after the date of grant of the ISO and not later than 10 years after the date of
grant of the ISO, provided that the aggregate fair market value, determined as
of the date of grant, of Common Shares for which ISOs are exercisable for the
first time during any calendar year as to any individual shall not exceed the
maximum limitations in section 422 of the Code. Notwithstanding any other
provisions of the Plan to the contrary, no individual will be eligible for or
granted an ISO if, at the time the option is granted, that individual owns
(directly or indirectly, within the meaning of section 424(d) of the Code) stock
of the Company possessing more than 10% of the total combined voting power of
all classes of stock of the Company or of any of its subsidiaries.
6. Stock Appreciation Rights.
--------------------------
6.1 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. The SAR shall represent
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
(or, if the Committee shall so determine in the case of any SAR not related to
an ISO, any time during a specified period before the exercise date) exceeds the
grant price of the SAR.
6.2 The grant price and other terms of the SAR shall be determined by
the Committee.
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<PAGE> 4
6.3 Payment of the amount to which an individual is entitled upon the
exercise of a SAR shall be made in cash, Common Shares or other property or in a
combination thereof, as the Committee shall determine. To the extent that
payment is made in Common Shares or other property, the Common Shares or other
property shall be valued at fair market value on the date of exercise of the
SAR.
6.4 Unless otherwise determined by the Committee, any related option
shall no longer be exercisable to the extent the SAR has been exercised and the
exercise of an option shall cancel the related SAR to the extent of such
exercise.
7. Restricted Stock.
-----------------
Common Shares awarded as restricted stock may not be disposed of by the
recipient until certain restrictions established by the Committee lapse.
Recipients of restricted stock are not required to provide consideration other
than the rendering of services or the payment of any minimum amount required by
law, unless the Committee otherwise elects. The recipient shall have, with
respect to Common Shares awarded as restricted stock, all of the rights of a
shareholder of the Company, including the right to vote the Common Shares, and
the right to receive any cash dividends, unless the Committee shall otherwise
determine. Upon termination of employment during the restricted period, all
restricted stock shall be forfeited, subject to such exceptions, if any, as are
authorized by the Committee, as to termination of employment, retirement,
disability, death or special circumstances.
8. Performance Shares and Units.
-----------------------------
8.1 The Committee may award to any Participant Performance Shares and
Performance Units ("Performance Award"). Each Performance Share shall represent,
as the Committee shall determine, one Common Share or other security. Each
Performance Unit shall represent the right of the recipient to receive an amount
equal to the value determined in the manner established by the Committee at time
of award. Recipients of Performance Awards are not required to provide
consideration other than the rendering of service, unless the Committee
otherwise elects.
8.2 Each Performance Award under the Plan shall be evidenced by a
signed written agreement containing such terms and conditions as the Committee
may determine.
8.3 The performance period for each award of Performance Shares and
Performance Units shall be of such duration as the Committee shall establish at
the time of award ("Performance Period"). There may be more than one award in
existence at any one time, and Performance Periods may differ. The performance
criteria for each Performance Period shall be determined by the Committee.
8.4 The Committee may provide that amounts equivalent to dividends paid
shall be payable with respect to each Performance Share awarded, and that
amounts
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<PAGE> 5
equivalent to interest at such rates as the Committee may determine shall be
payable with respect to amounts equivalent to dividends previously credited to
the Participant. The Committee may provide that amounts equivalent to interest
at such rates as the Committee may determine shall be payable with respect to
Performance Units.
8.5 Payments of Performance Shares and any related dividends, amounts
equivalent to dividends and amounts equivalent to interest may be made in a lump
sum or in installments, in cash, property or in a combination thereof, as the
Committee may determine. Payment of Performance Units and any related amounts
equivalent to interest may be made in a lump sum or in installments, in cash,
property or in a combination thereof, as the Committee may determine.
9. Other Stock Unit Awards.
------------------------
9.1 The Committee is authorized to grant to employees of the Company
and its affiliates, either alone or in addition to other awards granted under
the Plan, awards of Common Shares or other securities of the Company or any
subsidiary 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 or any subsidiary of the Company ("other stock unit awards"). Other
stock unit awards may be paid in cash, Common Shares, other property or in a
combination thereof, as the Committee shall determine.
9.2 The Committee shall determine the employees to whom other stock
unit awards are to be made, the times at which such awards are to be made, the
number of shares to be granted pursuant to such awards and all other conditions
of such awards. The provisions of other stock unit awards need not be the same
with respect to each recipient. The recipient shall not be permitted to sell,
assign, transfer, pledge, or otherwise encumber the Common Shares or other
securities prior to the later of the date on which the Common Shares or other
securities are issued, or the date on which any applicable restrictions,
performance or deferral period lapses. Common Shares (including securities
convertible into Common Shares) and other securities granted pursuant to other
stock unit awards may be issued for no cash consideration or for such minimum
consideration as may be required by applicable law. Common Shares (including
securities convertible into Common Shares) and other securities purchased
pursuant to purchase rights granted pursuant to other stock unit awards may be
purchased for such consideration as the Committee shall determine, which price
shall not be less than the fair market value of such Common Shares or other
securities on the date of grant, unless the Committee otherwise elects.
10. Grants to Non-Employee Directors.
---------------------------------
10.1 For purposes of the Plan, "Non-Employee Director" means a member
of the Board who is not an employee of the Company or an affiliate of the
Company. In addition to awards to employees, awards of stock options (other than
ISOs) and restricted stock also may be made to Non-Employee Directors under the
Plan. Except as otherwise
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<PAGE> 6
provided in this Section 10, any award to a Non-Employee Director shall be
subject to all of the terms and conditions of the Plan.
10.2 The Board, in its sole discretion, may make awards to Non-Employee
Directors. In exercising such authority, the Board shall have all of the power
otherwise reserved to the Committee under the Plan, including, but not limited
to, the sole and complete authority (a) to select the Non-Employee Directors who
shall be eligible to receive awards, (b) to select the types and amounts of
awards which may be made and (c) to impose such limitations, restrictions and
conditions upon awards as the Board shall deem appropriate.
11. Nonassignability of Awards.
---------------------------
Unless permitted by the Committee, no award granted under the Plan
shall be assigned, transferred, pledged or otherwise encumbered by the
recipient, otherwise than (a) by will, (b) by designation of a beneficiary after
death or (c) by the laws of descent and distribution. Each award shall be
exercisable during the recipient's lifetime only by the recipient or, if
permissible under applicable law, by the recipient's guardian or legal
representative or, in the case of a transfer permitted by the Committee, by the
recipient of the transferred amount.
12. Deferrals of Awards.
--------------------
The Committee may permit recipients of awards to defer the distribution
of all or part of any award in accordance with such terms and conditions as the
Committee shall establish.
13. Provisions Upon Change of Control.
----------------------------------
In the event of a Change in Control occurring on or after the Effective
Date, the provisions of this Section 13 will supersede any conflicting
provisions of the Plan.
13.1 In the event of a Change in Control, all outstanding stock options
and SARs under Sections 5 and 6 of the Plan shall become exercisable in full and
the restrictions otherwise applicable to any common shares awarded as restricted
stock under Section 7 of the Plan shall lapse; further, unless the Committee
shall revoke such an entitlement prior to a Change in Control, any optionee who
is deemed by the Committee to be a statutory officer ("insider") for purposes of
Section 16 of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
shall be entitled to receive in lieu of exercise of any stock option, to the
extent that it is then exercisable, a cash payment in an amount equal to the
difference between the aggregate price of such option, or portion thereof, and
(a) in the of a tender offer or similar event, the final offer price per share
paid for Common Shares times the number of Common Shares covered by the option
or portion thereof, or (b) the aggregate value of the Common Shares covered by
the stock option.
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In the event of a tender offer in which fewer than all Common Shares
which are validly tendered in compliance with such offer are purchased or
exchanged, then only that portion of the Common Shares covered by a stock option
as results from multiplying such Common Shares by a fraction, the numerator of
which is the number of Common Shares acquired pursuant to the offer and the
denominator of which is the number of Common Shares tendered in compliance with
such offer, shall be used to determine the payment thereupon. To the extent that
all or any portion of a stock option shall be affected by this provision, all or
such portion of the stock option shall be terminated.
13.2 In the event of a Change in Control, a pro rata portion of all
outstanding awards under Sections 8 and 9 of the Plan, whether in the form of
Performance Shares or Units, shall be paid to each recipient of the award within
five business days of such Change in Control. The pro rata portion of such
awards to be paid shall equal the full present value of each such award as of
the first day of the month in which such Change in Control occurs multiplied by
a ratio, the numerator of which shall equal the number of full and partial
months (including the month in which any Change in Control occurs) since the
date of the award and the denominator of which shall equal the number of months
in the applicable performance period.
13.3 For purposes of this Section 13, a "Change in Control" of the
Company means and shall be deemed to occur if:
(a) a tender shall be made and consummated for the ownership
of 30% or more of the outstanding voting securities of the Company;
(b) the Company shall be merged or consolidated with another
corporation and as a result of such merger or consolidation less than 75% of the
outstanding voting securities of the surviving or resulting corporation shall be
owned in the aggregate by the former shareholders of the Company, other than
affiliates (within the meaning of the 1934 Act) of any party to such merger or
consolidation, as the same shall have existed immediately prior to such merger
or consolidation;
(c) the Company shall sell substantially all of its assets to
another corporation which is not a wholly owned subsidiary;
(d) a person, within the meaning of Section 3(a)(9) or of
Section 13(d)(3) of the 1934 Act, shall acquire 20% or more of the outstanding
voting securities of the Company (whether directly, indirectly, beneficially or
of record), or a person, within the meaning of Section 3(a)(9) or Section
13(d)(3) of the 1934 Act, controls in any manner the election of a majority of
the directors of the Company; or
(e) within any period of two consecutive years commencing on
or after the effective date of the Plan, individuals who at the beginning of
such period constitute the Board cease for any reason to constitute at least a
majority thereof, unless the election of each director who was not a director at
the beginning of such period has been approved in advance by directors
representing at least two-thirds of the directors
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then in office who were directors at the beginning of the period. For purposes
hereof, ownership of voting securities shall take into account and shall include
ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i)
pursuant to the 1934 Act.
13.4 In the event of a Change in Control, the provisions of this
Section 13 may not be amended on or subsequent to the Change in Control in any
manner whatsoever which would be adverse to any recipient of an award under the
Plan without the consent of such recipient who would be so affected; provided,
however, the Board may make minor or administrative changes to this Section 13
or changes to conform to applicable legal requirements.
14. Adjustments.
------------
14.1 In the event of any change affecting the Common Shares by reason
of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, combination or exchange of shares or other corporate change, or any
distributions to common shareholders other than cash dividends, the Committee
shall make such substitution or adjustment in the aggregate number or class of
shares which may be distributed under the Plan and in the number, class and
option price or other price of shares subject to the outstanding awards granted
under the Plan as it deems to be appropriate in order to maintain the purpose of
the original grant.
14.2 The Committee shall be authorized to make adjustments in
performance award criteria or in the terms and conditions of other awards in
recognition of unusual or non-recurring events affecting the Company or its
financial statements or changes in applicable laws, regulations or accounting
principles. The Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any award in the manner and to the
extent it shall deem desirable to carry it into effect.
15. Amendments and Terminations.
----------------------------
Notwithstanding any other provisions hereof to the contrary, the Board
may assume responsibilities otherwise assigned to the Committee and may amend,
alter or discontinue the Plan or any portion thereof at any time, provided that
no such action shall impair the rights of any recipient of an award under the
Plan without such recipient'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 pursuant to the Plan, 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
classes of persons eligible to receive awards under the Plan.
16. Withholding.
------------
To the extent required by applicable federal, state, local or foreign
law, the recipient of an award under the Plan shall make arrangements
satisfactory to the Company for the satisfaction of any withholding obligations
that arise in connection with
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the award and the Company shall have the right to withhold from any cash award
the amount necessary, or retain from any award in the form of Common Shares a
sufficient number of Common Shares, to satisfy the applicable withholding tax
obligation. Unless otherwise provided in the applicable award agreement, a
Participant may satisfy any tax withholding obligation by any of the following
means or any combination thereof: (a) by a cash payment to the Company, (b) by
delivering to the Company Common Shares owned by the Participant or (c) with the
consent of the Committee, by authorizing the Company to retain a portion of the
Common Shares otherwise issuable to the Participant pursuant to the exercise or
vesting of the award.
17. CBI Stock Plan.
---------------
17.1 For purposes of this Section 17, "CBI" means Cincinnati Bell Inc.,
"CBI Option" means an option to purchase CBI common shares granted under a CBI
Stock Plan, "CBI Restricted Stock" means an award of CBI common shares as
restricted stock under a CBI Stock Plan, "CBI Stock Plan" means, collectively,
the Cincinnati Bell Inc. 1988 Long Term Incentive Plan, the Cincinnati Bell Inc.
1989 Stock Option Plan, the Cincinnati Bell Inc. 1997 Long Term Incentive Plan,
the Cincinnati Bell Inc.1988 Stock Option Plan for Non-Employee Directors and
the Cincinnati Bell Inc. 1997 Stock Option Plan for Non-Employee Directors and
"Distribution" means the date as of which CBI distributes to its shareholders
all of the Common Shares owned by CBI.
17.2 At the time of the Distribution, each holder of a CBI Option shall
receive an additional stock option under this Plan ("Company Option") to
purchase a number of Common Shares equal to the number of CBI common shares
subject to the CBI Option. Each Company Option shall have the same terms and
conditions (including vesting) as the CBI Option with respect to which it is
granted, except that termination of employment shall mean, (a) in the case of a
CBI employee or director, termination of employment with CBI and (b) in the case
of a Company employee or director, termination of employment with the Company.
The exercise price per share of each CBI Option (the "CBI Exercise Price") shall
be reduced, and the exercise price per share of the associated Company Option
(the "Company Exercise Price"), shall be set so that (a) the sum of the CBI
Exercise Price (after the reduction provided herein) and the Company Exercise
Price is equal to the CBI Exercise Price (before the reduction provided herein)
and (b) the ratio of the CBI Exercise Price (after the reduction provided herein
) to the Company Exercise Price is equal to the ratio of the average of the
daily high and low per-share prices of CBI common shares on the New York Stock
Exchange ("the NYSE") during each of the five trading days starting on the
ex-dividend date for the Distribution to the average of the daily high and low
per-share prices of Common Shares on the NYSE during each of the five trading
days starting on the ex-dividend date for the Distribution. Notwithstanding the
foregoing, in the event that the number of Common Shares to be distributed to
each CBI shareholder at the time of the Distribution with respect to each CBI
common share owned by the shareholder on the record date for the Distribution is
greater or less than one, the number of Common Shares represented by each
Company Option and the Company Exercise Price shall be adjusted to reflect such
difference.
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17.3 At the time of the Distribution, the Common Shares to be
distributed with respect to each CBI common share which constitutes CBI
Restricted Stock shall be deemed to have been issued under this Plan and shall
be subject to the same terms, conditions and restrictions (including vesting)
which apply to the CBI Restricted Stock with respect to which the distribution
is being made, except that termination of employment shall mean, (a) in the case
of a CBI employee, termination of employment with CBI and (b) in the case of a
Company employee, termination of employment with the Company.
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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
