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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-4379
CONVERGYS CORPORATION
An Ohio I.R.S. Employer
Corporation No. 31-1598292
201 East Fourth Street, Cincinnati, Ohio 45202
Telephone Number 513 723-7000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Shares (no par value) New York Stock Exchange
Series A Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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At February 29, 2000, there were 153,621,104 common shares outstanding.
At February 29, 2000, the aggregate market value of the voting shares
owned by non-affiliates was $5,875,761,007.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's annual report to security holders for the
fiscal year ended December 31, 1999 (Parts I, II and IV)
(2) Portions of the registrant's definitive proxy statement dated March 8, 2000
issued in connection with the annual meeting of shareholders (Part III)
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TABLE OF CONTENTS
PART I
ITEM PAGE
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1. Business................................................................................... 1
2. Properties................................................................................. 13
3. Legal Proceedings.......................................................................... 13
4. Submission of Matters to a Vote of the Security Holders.................................... 13
PART II
5. Market for the Registrant's Common Equity and Related Security
Holder Matters............................................................................. 16
6. Selected Financial Data.................................................................... 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 16
7a. Quantitative and Qualitative Disclosure about Market
Risk....................................................................................... 16
8. Financial Statements and Supplementary Data................................................ 16
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................................... 16
PART III
10. Directors and Executive Officers of Registrant............................................. 17
11. Executive Compensation..................................................................... 17
12. Security Ownership of Certain Beneficial Owners and Management............................. 17
13. Certain Relationships and Related Transactions............................................. 17
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................ 18
See page 14 for Executive Officers of the Registrant.
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PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This report and the documents incorporated by reference herein contain
"forward-looking" statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are based on current expectations, estimates and
projections. Statements that are not historical facts, including statements
about the beliefs and expectations of Convergys Corporation are forward-looking
statements. These statements discuss potential risks and uncertainties and,
therefore, actual results may differ materially. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date on which they were made. The Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
markets in which the Company operates; changes in the regulatory environment in
which the Company's customers operate; changes in the demand for the Company's
services; changes in technology that impact both the markets served and the
types of services offered; and consolidation within the industries in which the
Company's customers operate.
PART I
ITEM I. BUSINESS
GENERAL
Convergys Corporation (the Company or Convergys) is a leading provider of
outsourced information and customer management products and services. The
Company focuses on developing long-term strategic relationships with clients in
customer-intensive industries including telecommunications, Internet services,
cable, broadband, satellite broadcasting, utilities, technology, financial
services, consumer products, healthcare and pharmaceuticals. The Company serves
its clients through its two operating subsidiaries: (i) the Information
Management Group (IMG), which develops complex software to provide outsourced
billing and information services; and (ii) the Customer Management Group (CMG),
which provides outsourced customer, employee and marketing support services. For
certain clients, IMG and CMG jointly provide a full range of billing and
customer management services.
The Company was formed in 1998 as a wholly owned subsidiary of Cincinnati Bell
Inc. (CBI). In July 1998, CBI contributed the two operating subsidiaries and a
45% limited partnership interest in a cellular communications services provider
in southwestern Ohio and northern Kentucky (the Cellular Partnership) to the
Company. On August 13, 1998, approximately 10% of the common shares of the
Company were issued to the public and on December 31, 1998, the remaining shares
held by CBI were distributed to CBI shareholders.
INDUSTRY OVERVIEW
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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. Convergys is unique amongst
its peers in that it offers both billing and customer support services in an
end-to-end solution to customer care. In addition, particularly in highly
competitive industries such as telecommunications, it is critical to have robust
scalable systems and software that 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, companies are facing
increased pressure to either invest heavily in technology or seek an outsourced
provider to deliver high quality billing and customer management. Many companies
lack the in-house expertise to collect, analyze and respond efficiently to the
types of information that can be captured with each customer interaction, which
has resulted in outsourced billing and customer management solutions as a
strategic management tool.
The Company believes that the growth of customer management outsourcing will
continue as companies focus on their core competencies and seek to benefit from
the advantages that outsourcing companies can provide, including: (i) expertise
to target, acquire and retain customers effectively; (ii) cost savings resulting
from economies of scale achieved by operating large data processing facilities
or customer service 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.
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 LONG-TERM RELATIONSHIPS WITH TARGETED INDUSTRY LEADERS
The Company has developed strategic relationships with leading companies in the
telecommunications, cable, broadband, satellite broadcasting, Internet services,
utilities, technology, financial services, consumer products and healthcare and
pharmaceutical industries. Such relationships have enabled the Company to become
an integral component of its clients' customer and information management
processes. Long-term strategic relationships enable the Company to grow as its
clients grow, develop significant industry-specific expertise and establish
recurring revenue streams. During 1999, the Company enhanced its client base by
winning long-term contracts and/or contract extensions with Airtouch Cellular,
Ameritech Mobile, AT&T Wireless, BGE Home (Baltimore Gas & Electric), Cincinnati
Bell Wireless, Nicor Energy L.L.C., Pfizer Pharmaceuticals and Toys 'R' Us.
IMG's top five clients, with relationships averaging over ten years, provided
67% of IMG's revenues in 1999. CMG's top five clients, with relationships
averaging over eight years,
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provided 61% of CMG's revenues in 1999.
BREADTH OF VALUE-ADDED SERVICES
The Company provides a broad array of information and customer management
services. IMG contracts with its clients to use its proprietary software to
provide billing services for wireless, wireline, cable, broadband, satellite,
utilities and Internet service providers either in IMG's data processing
facilities or on a licensed basis. CMG's services include 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
the capabilities of IMG and CMG, the Company can serve as a single source
solution for the entire range of a client's billing and customer management
needs. In addition to customer management services the Company, through CMG,
also provides employee care services that include human resources and employee
benefits administration outsourcing.
SIZE AND SCALE TO DELIVER COST-EFFECTIVE SOLUTIONS AND HANDLE LARGE PROGRAMS
As the leading provider of outsourced information 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 generate the information to produce over one
million bills each day and the Company fields more than one million calls and
web-based contacts each day in its more than 36 customer contact centers. The
Company has the size and breadth of experience to design, develop and implement
large-scale, complex information and customer management solutions that provide
superior value to its clients.
TECHNOLOGICAL EXPERTISE
With approximately 2,000 software professionals, the Company can provide
significant technical resources to develop customized solutions for its clients.
The Company spent more than $87 million on existing and new technologies and
systems in 1999, 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 billing and customer
management solutions. IMG's 1999 research and development efforts were focused
on adding GSM and international capabilities to its wireless platform,
development of the Catalys billing system for Internet service providers, adding
Internet Protocol (IP) functionality to existing wireless and cable platforms
and development of a next-generation cable and satellite broadcasting billing
system. CMG's efforts were focused on adding Internet-based customer support and
customer relationship management services to its existing service offerings.
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
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competitive strengths to further its market leadership.
The Company has established a leadership role in the relatively new and rapidly
growing Customer Relationship Management (CRM) field. Convergys has been
developing CRM practices for more than a decade. During that time, the Company
has brought value to its customers by helping them:
- Enter markets quickly and expand aggressively while minimizing risk
- Differentiate their products and services
- Capitalize on changes in the marketplace
- Maximize the value of each customer interaction
The Company's growth strategy includes the use of strategic acquisitions. The
1999 acquisition of Technology Applications, Inc. (TAI) served to accelerate the
Company's efforts to incorporate IP functionality into its billing and customer
care applications. Similarly, the 1999 acquisition of Wiztec Solutions, Ltd.
(Wiztec) serves to enhance the Company's position in the cable/broadband
marketplace and to increase its international presence. Additionally, the
Company's investments and strategic alliances provide its clients with advanced
technologies for e-business and Internet-based communications as well as
providing convergent billing capabilities.
Convergys has expanded its customer management capabilities beyond traditional
contact scenarios by allowing its customers to enhance customer relationships
and generate revenues through a combination of Internet-based communications and
interactive voice response (IVR) as well as traditional telephone contacts with
customer support professionals.
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 IMG and CMG 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
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developed industry expertise and an in-depth understanding of the information
and 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 information and customer management processes.
In addition to continuing to advance the solutions currently offered separately
by IMG and CMG, the Company is developing next generation customer management
solutions that combine the software and information services capabilities of IMG
with CMG's expertise in strengthening clients' relationships with their
customers. This integrated approach to customer relationship management enables
our clients to expand and enhance the value of their customer base.
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
telecommunications sector, is likely to have a similar effect on the utility
industry and will create opportunities for outsourced customer management
services. During the fourth quarter of 1999, the Company signed multi-year
contracts with two utility companies to provide customer care and/or outsourced
billing services.
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 information and
customer management solutions in multiple geographic markets. In addition,
during 1999, the Company introduced its Atlys billing system that features
international and GSM functionality and acquired Wiztec in Israel. The Company
believes that these developments position it with scaleable software platforms
for the international wireless and cable/broadband marketplace that will lead to
growth in the Company's international business.
PURSUING STRATEGIC ACQUISITIONS AND ALLIANCES
Building upon a history of growth through acquisitions (28 acquisitions in the
past fourteen years), the Company will pursue additional acquisition and
alliance opportunities. The
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Company believes that consolidation in its industry will continue and the
Company expects to pursue acquisitions and alliances that expand its client
base, add new capabilities or enable it to accelerate international
expansion. The aforementioned acquisitions of Technology Applications Inc.,
an Internet software development and systems integration company focused on
billing and customer care for ISPs, and Wiztec, an Israeli-based provider of
subscriber management systems for multi-channel subscription television
operators, reflect the Company's use of acquisitions as a growth strategy.
Similarly, during 1999, the Company entered into strategic alliances with
Kana Communications and Neuromedia to add advanced capabilities for
e-business and Internet-based communications to CMG's customer management
services, and with iSoft Corporation to enhance IMG's delivery of convergent
billing services.
PRODUCTS AND SERVICES
IMG
IMG serves clients principally by providing and managing complex billing and
information services primarily delivered through IMG data centers or on a
licensed software basis. IMG's billing software platforms address all segments
of the communications industry, including wireless, wireline, cable, broadband
and Internet services. IMG also offers billing services to the utilities market.
IMG's solutions consist of data processing services, professional and consulting
services and licensed software. IMG 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. IMG's professional and consulting services include its
customization of software at its clients' requests to create, modify and enhance
billing and other related customer support solutions. IMG also 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 1999, over 64% of IMG's revenues were generated from recurring monthly
payments from its clients based upon the number of subscribers or bills
processed by IMG in its data center. Professional and consulting services for
software maintenance and enhancements, a majority of which are based on hourly
fees for work performed, accounted for approximately 22% of IMG's 1999 revenues.
IMG's remaining revenues resulted from software licensing arrangements and other
miscellaneous services.
IMG's 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. IMG's 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 a multitude of pricing plans, roaming charges,
long distance charges, different taxing jurisdiction, the need for an ability to
implement strategic marketing programs, and the existence of multiple services
for a subscriber. In addition to addressing these difficulties, a
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successful billing system must possess the scalability to meet the needs of
the wireless industry that has grown at an average rate of approximately 32%
over the past five years while experiencing significant consolidation.
In addition to processing bills in its data centers, IMG performs a significant
amount of professional and consulting work for certain of its clients to
customize software to the client's marketing objectives and regulatory
requirements. For example, IMG 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 (frequently referred to
in the wireless industry as pre-pay services.)
IMG has leveraged its billing expertise in the wireless communications market to
become a leading provider of billing services for the cable and broadband
industries. IMG's current contracts will increase its U.S. cable television
billing market share to 30% and the Company is further expanding its billing
software platforms in the broadband services market. IMG's international cable
and broadband presence has been enhanced by its 1999 acquisition of Wiztec.
IMG made significant investments in IP-based technologies in 1999 to address a
critical need in this rapidly growing market. The acquisition of TAI, a leading
Internet software developer and integration company, allowed the Company to
accelerate the effort to incorporate IP functionality into its billing and
customer care applications. The Company now offers Catalys, a flexible,
scalable, Internet billing and customer care platform that enables Internet
Service Providers (ISPs) to manage and automate subscriber accounts. Catalys
will enable the Company's clients to bill differentially for their services
based on the value delivered. The primary target market for Catalys is small
and medium ISPs.
Similarly, by adding IP billing capabilities to its wireless and video
billing applications, IMG will be able to offer convergent billing for
wireless, wireline, Internet and video services on a single billing system.
Atlys, the Company's global wireless billing software, will be marketed to
carrier-class communications companies with convergent billing needs.
IMG's software services for wireline-based carriers include a range of billing,
information and network management solutions. Wireline clients served by IMG in
1999 included AT&T, Cincinnati Bell Telephone and, on a more limited basis, PTT
Netherlands, Swisscom, British Telecom and Telenor.
CMG
CMG creates comprehensive, outsourced customer management services for its
clients utilizing its advanced information systems capabilities, human resource
management skills and industry experience. In 1999, approximately 79% of CMG's
revenues were related to dedicated services and 16% 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. The remaining 5% of CMG's revenues were related to
international contracts that are primarily dedicated services.
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CMG's dedicated services include:
CUSTOMER SERVICE--CMG 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--CMG 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, CMG 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. CMG 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.
EMPLOYEE CARE --CMG provides human resources and benefits
administration outsourcing that assist employees in enrolling, changing
or gathering further information about their company's programs.
When developing a dedicated services solution, CMG devotes significant resources
to understand a client's unique customer management needs and collaborates to
design a customized solution utilizing CMG'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 CMG's systems).
CMG 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 performance measurement targets. Additional fees are charged for service
enhancements or system upgrades requested by clients. Since dedicated services
require CMG to become an integral part of a client's customer management
function, these services are generally provided pursuant to multi-year
contracts.
CLIENTS
IMG
IMG generally has long-term relationships and multi-year contracts with its
clients. In many
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cases, IMG is the client's exclusive provider of billing services or the
contract requires the client to fulfill minimum annual commitments. IMG
billing and customer management software platforms process billing
information for monthly customer statements for approximately 40% of U.S.
cellular subscribers. IMG's customers include three of the largest PCS
providers, Sprint PCS, AT&T Wireless and PrimeCo Personal Communications,
with whom the Company has multi-year contracts. Combined, these clients serve
customers in all 50 of the top U.S. metropolitan areas, often with more than
one client serving the same metropolitan area. Over the past five years,
IMG's clients' subscriber growth in domestic wireless cellular services has
averaged approximately 29% per year. At December 31, 1999, IMG's wireless
billing customers included AT&T Wireless, Sprint PCS, PrimeCo, SBC
Communications, GTE, Cincinnati Bell Wireless, Houston Cellular, Macrocell,
Celulares Telefonica, Airtouch and ALLTEL. In January 2000, IMG entered into
a contract with Telesp, the largest wireless telephony provider in South
America.
IMG has entered into contracts to provide cable billing services for 30% of the
US cable television market, and the Company is further expanding its billing
products and services in the broadband services market. IMG's products and
services also support bundled telephone and entertainment services provided by
cable television system operators in the U.S. and Europe. U.S. cable clients
served by IMG include Time Warner, Cox, Comcast, MediaOne and Insight. The
acquisition of Wiztec greatly enhanced IMG's international cable, broadband and
direct broadcast satellite billing presence. International clients served by IMG
in these industries include Telewest, Irish Multi-channel, Deutsche Telekom,
KabelNet, TeleKabel, Tevel and SkyTel.
CMG
CMG principally focuses on developing long-term strategic outsourcing
relationships with large clients in the telecommunications, technology,
financial services and consumer products industries. CMG 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
services. A representative listing of clients for which CMG provides a full
range of customer management services would include AT&T, DIRECTV(R), American
Express, Sprint PCS, Ameritech, Microsoft and Procter & Gamble. The Company
provides technical support services to leading technology companies such as
Microsoft, Gateway, Dell, CISCO and Compaq.
SALES AND MARKETING
The Company has a direct sales force and sales support organization of
approximately 275 sales and marketing personnel, focused on the leading
companies in its target industries. This number is expected to increase in 2000
and beyond as the Company seeks to become even more aggressive in pursuing
growth opportunities. 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
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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
At December 31, 1999, the Company operated three data centers in Orlando and
Jacksonville, Florida, and Cincinnati, Ohio, 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. In January
2000, the Company consolidated the operations of the Jacksonville data center
into the Orlando facility and closed the Jacksonville center.
The Company's technologically advanced data centers provide twenty-four hour per
day, seven day a week availability (with redundant power and communication feeds
and emergency power back-up supplied by diesel generators) and are designed to
withstand most environmental disasters. Over 30 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 becomes inoperative.
The Company operates more than 36 contact centers with twenty-four hours per
day, seven day a week availability, averaging 85,000 square feet per center and
over 21,000 available production workstations. These customer contact centers
handled more than 400 million customer contacts during 1999.
The capacity of the Company's data center and call center operations coupled
with the scalability of the its 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 products and services.
TECHNOLOGY, RESEARCH & DEVELOPMENT
The Company intends to continue to emphasize the design, development and
deployment of scalable, information and customer management systems to increase
its market share, both domestically and internationally. During 1999, the
Company spent $87.2 million for
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research and development to advance the functionality, flexibility and
scalability of its products and services.
In 1999, IMG introduced its Atlys billing system as an internationalized,
GSM-compatible evolution of its Precedent 2000 billing system. The Atlys system
employs advanced 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. During 1999, IMG also introduced the Catalys billing system for
Internet service providers, invested in research and development activities to
add IP billing functionality to existing wireless and cable billing systems and
to develop a next-generation cable and satellite broadcasting billing system.
Spending also continued to enhance existing mainframe systems. CMG's research
and development spending in 1999 focused on adding Internet-based functionality
and customer relationship management services to its existing service offerings.
The Company's technical capabilities are comprehensive, ranging from OS/390
COBOL-based batch processing to open systems to client/server based real-time
processing applications. The Company is also investing in (i) object-oriented
analysis, design and programming technologies to achieve 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'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.
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
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introductory systems development through application specific expertise.
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
capabilities internally, (ii) other billing software and/or services companies
such as Alltel Corporation, Amdocs, CSG Systems International, DST Systems,
Portal Software and LHS, (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
products and services, 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.
EMPLOYEES
The Company currently has over 41,000 employees in more than eleven countries.
Fewer than 100 of these employees are covered by collective bargaining
agreements.
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 1999, the Company's equity in earnings of the Cellular
Partnership was $20.0 million and the Company received $22.0 million in
distributions of Cellular Partnership earnings. The Company's earnings were
reduced by $12.4 million ($7.8 million after tax) of special items recorded by
the Cellular Partnership principally as a result of equipment impairments
subsequent to the merger of SBC Communications, Inc. and Ameritech.
Ameritech Mobile Phone Service of Cincinnati, Inc., acquired by SBC
Communications, Inc. during 1999, is the general partner and a limited partner
in the Cellular Partnership with a combined partnership interest of
approximately 53%. 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
12
<PAGE>
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.
ITEM 2. PROPERTIES
The Company leases space for offices, data centers and call centers on
commercially reasonable terms. Domestic facilities are located in Arizona,
California, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana,
Louisiana, Missouri, Nebraska, New Jersey, North Carolina, Ohio, Oklahoma,
Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin.
International facilities are located in Belgium, Brazil, Canada, England,
France, Italy, Israel, Sweden, Switzerland and The Netherlands. Upon the
expiration or termination of any such leases, the Company could obtain
comparable office space. IMG also leases some of the computer hardware, computer
software and office equipment necessary to conduct its business. The Company
believes that its facilities and equipment are adequate and have sufficient
productive capacity to meet its current needs.
The property of the Company is principally computer and communications equipment
and software that does not lend itself to description by character and location
of principal units. Other property of the Company is principally buildings and
leasehold improvements.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter of
the fiscal year covered by this report.
13
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- ------
(as of 3/31/00)
<S> <C> <C>
Charles S. Mechem, Jr. (a,b,c) 69 Chairman of the Board
James F. Orr (a,b,c) 54 President and Chief Executive
Officer
William D. Baskett III 60 General Counsel and Secretary
Steven G. Rolls 45 Chief Financial Officer
Robert J. Marino 53 President of IMG
David F. Dougherty 44 President of CMG
</TABLE>
(a) Member of the Board of Directors
(b) Member of the Executive Committee
(c) Effective April 25, 2000, Mr. Mechem will retire as Chairman of the
Board. The Board of Directors has elected Mr. Orr as its new chairman
effective April 25, 2000.
Officers are elected annually but are removable at the discretion of the Board
of Directors.
14
<PAGE>
CHARLES S. MECHEM, JR., Chairman of the Board of the Company since May 8, 1998;
Chairman of the Board of Cincinnati Bell Inc. (CBI) 1996-1998; Commissioner
Emeritus, Ladies Professional Golf Association ("LPGA"); Commissioner of the
LPGA, 1991-1995; Chairman of the United States Shoe Corporation, 1993-1995.
Director of Mead Corporation, Ohio National Life Insurance Company, J.M. Smucker
Company and Arnold Palmer Golf Company.
JAMES F. ORR, Chief Executive Officer of the Company since May 8, 1998; Chief
Operating Officer of CBI, 1996-1998; Executive Vice President of CBI and
President and Chief Executive Officer of IMG, 1995-1996; Chief Operating Officer
of IMG, 1994. Director of Ohio National Life Insurance Company.
WILLIAM D. BASKETT III, General Counsel and Secretary of the Company since May
8, 1998; General Counsel and Chief Legal Officer of CBI 1993-1998; Partner of
Frost & Jacobs 1970-1997.
STEVEN G. ROLLS, Chief Financial Officer of the Company since June 1, 1998; Vice
President and Controller of The BF Goodrich Company, 1993-1998; CFO of the
Aerospace Segment of BF Goodrich, 1989-1993.
ROBERT J. MARINO, President of IMG since 1996; Chief Operating Officer of IMG,
1995-1996; President - Northeast Region of Nextel, 1993-1995.
DAVID F. DOUGHERTY, President of CMG since 1995; Senior Vice President and Chief
Operating Officer U.S. Operations of CMG, 1993-1994.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
Convergys Corporation (symbol: CVG) common shares are listed on the New York
Stock Exchange. As of February 29, 2000, there were approximately 20,831 holders
of record of the 153,621,104 outstanding common shares of the Company. The high,
low and closing sales prices of its common shares each quarter since issued are
listed below:
<TABLE>
<CAPTION>
QUARTER 1ST 2ND 3RD 4TH
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 High $23.000 $21.813 $23.625 $31.750
Low $14.500 $15.938 $18.500 $17.250
Close $17.125 $19.375 $19.813 $30.750
1998 High -- -- $17.438 $23.750
Low -- -- $11.375 $ 9.625
Close -- -- $14.938 $22.375
</TABLE>
The Company did not declare any dividends during 1999 or 1998 and does not
anticipate doing so in the near future.
ITEMS 6 THROUGH 8.
The Selected Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Quantitative and Qualitative Disclosure
About Market Risk and Financial Statements and Supplementary Data required by
these items are included in the registrant's annual report to security holders
for the fiscal year ended December 31, 1999, included in Exhibit 13 and are
incorporated herein by reference pursuant to General Instruction G (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements with accountants on any accounting or financial disclosure or
auditing scope or procedure occurred during the period covered by this report.
16
<PAGE>
PART III
ITEMS 10 THROUGH 13.
Information regarding executive officers required by Item 401 of Regulation S-K
is furnished in a separate disclosure in Part I of this report under the caption
Executive Officers of the Registrant since the registrant did not furnish such
information in its definitive proxy statement prepared in accordance with
Schedule 14A.
The other information required by these items is included in the registrant's
definitive proxy statement dated March 8, 2000, in the first paragraph on page
2, the accompanying notes on page 2 and the Section 16 paragraph on page 2, the
information under Election of Directors on pages 5 through 7, the information
under Share Ownership of Directors and Officers on page 4 and the information
under Executive Compensation on pages 14 through 18. The foregoing is
incorporated herein by reference pursuant to General Instruction G (3).
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) Documents filed as part of this report: Page
----
<S> <C>
(1) Consolidated Financial Statements:
Report of Management.............................................................. *
Report of Independent Accountants................................................. *
Consolidated Statements of Income and Comprehensive Income........................ *
Consolidated Balance Sheets....................................................... *
Consolidated Statements of Cash Flows............................................. *
Consolidated Statements of Shareowners' Equity.................................... *
Notes to Financial Statements..................................................... *
(2) Financial Statement Schedules:
Report of Independent Accountants................................................. 23
II - Valuation and Qualifying Accounts........................................... 24
</TABLE>
Financial statement schedules other than that listed above have been
omitted because the required information is contained in the financial
statements and notes thereto, or because such schedules are not required
or applicable.
...............................
* Incorporated herein by reference to the appropriate portions of the
registrant's annual report to security holders for the fiscal year ended
December 31, 1999. (See Part II)
(3) Exhibits
(Exhibits identified in parenthesis below, on file with the Securities and
Exchange Commission ("SEC"), are incorporated herein by reference as exhibits
hereto.
EXHIBIT NUMBER
- --------------
3.1 Amended Articles of Incorporation of the Company. (Exhibit 3.1 to
Registration Statement No. 333-53619.)
3.2 Regulations of the Company. (Exhibit 3.2 to Registration Statement
No. 333-53619.)
4 Rights Agreement dated November 30, 1998 between Convergys
Corporation and The Fifth Third Bank. (Exhibit 4.1 to Form 8-A12B
filed December 23,
18
<PAGE>
1998, File No. 001-14379.)
10.1* Convergys Corporation 1998 Long Term Incentive Plan. (Exhibit 10.5
to Registration Statement No. 333-53619.)
10.1.1* December 31, 1998 Amendment to Convergys Corporation 1998 Long Term
Incentive Plan. (Exhibit 10.5.1 to the Company's 1998 Annual Report
on Form 10-K.)
10.2* Convergys Corporation Deferred Compensation Plan for Non-Employee
Directors. (Exhibit 10.6 to the Company's 1998 Annual Report on Form
10-K.)
10.3* Convergys Corporation Executive Deferred Compensation Plan. (Exhibit
4.3 to Registration Statement No. 333-69633.)
10.3.1* January 1, 1999 Amendment to Convergys Corporation Executive
Deferred Compensation Plan. (Exhibit 10.7.1 to the Company's 1998
Annual Report on Form 10-K.)
10.4* Employment Agreement between the Company and James F. Orr and
December 16, 1998 Amendment to Employment Agreement. (Exhibit 10.8
to the Company's 1998 Annual Report on Form 10-K.)
10.5* Employment Agreement between the Company and William D. Baskett III
and December 16, 1998 Amendment to Employment Agreement. (Exhibit
10.9 to the Company's 1998 Annual Report on Form 10-K.)
10.6* Employment Agreement between the Company and Steven G. Rolls and
December 16, 1998 Amendment to Employment Agreement. (Exhibit 10.10
to the Company's 1998 Annual Report on Form 10-K.)
10.7* Employment Agreement between the Company and Robert J. Marino and
December 16, 1998 Amendment to Employment Agreement. (Exhibit 10.11
to the Company's 1998 Annual Report on Form 10-K.)
10.8* Employment Agreement between the Company and David F. Dougherty and
December 16, 1998 Amendment to Employment Agreement. (Exhibit 10.12
to the Company's 1998 Annual Report on Form 10-K.)
10.9* Convergys Corporation Employment Agreement with Ronald E. Schultz
and November 1, 1998 Amendment to Employment Agreement. (Exhibit
10.14 to the Company's 1998 Annual Report on Form 10-K.)
10.10* Convergys Corporation Supplemental Executive Retirement Plan.
(Exhibit 10.15 to the Company's 1998 Annual Report on Form 10-K.)
19
<PAGE>
10.11* Rights Agreement dated November 30, 1998 between Convergys
Corporation and The Fifth Third Bank. (Exhibit 4.1 to Form 8-A12B
filed December 23, 1998, File No. 001-14379.)
10.12* Employment Agreement between the Company and John C. Freker dated
August 12, 1999.
13 Portions of the Company's annual report to security holders for the
year ended December 31, 1999, as incorporated by reference including
the Selected Financial Data, Report of Management, Report of
Independent Accountants, Management's Discussion and Analysis and
Consolidated Financial Statements.
21 Subsidiaries of the Company. (Exhibit 21 to Registration Statement
No. 333-53619.)
23 Consent of PricewaterhouseCoopers LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
...............................
* Management contract or compensatory plan required to be filed as an
exhibit pursuant to Item 14(c) of Form 10-K.
The Company will furnish, without charge, to a security holder upon request, a
copy of the documents, portions of which are incorporated by reference (Annual
Report to security holders and proxy statement), and will furnish any other
exhibit at cost.
(b) Reports on Form 8-K.
Form 8-K, date of report November 15, 1999, reported the adoption of a common
share repurchase plan for up to 7 million shares from time to time as market and
business conditions warrant.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONVERGYS CORPORATION
March 28, 2000 By /s/ Steven G. Rolls
------------------------
Steven G. Rolls
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
Principal Executive Officer;
President, Chief Executive
JAMES F. ORR* Officer and Director
- -------------------------------------------------
James F. Orr
Principal Financial Officer;
STEVEN G. ROLLS* Chief Financial Officer
- -------------------------------------------------
Steven G. Rolls
Principal Accounting Officer;
Vice President and
ANDRE S. VALENTINE* Controller
- -------------------------------------------------
Andre S. Valentine
JOHN F. BARRETT* Director
- -------------------------------------------------
John F. Barrett
JUDITH G. BOYNTON* Director
- -------------------------------------------------
Judith G. Boynton
GARY C. BUTLER* Director
- -------------------------------------------------
Gary C. Butler
DAVID B. DILLON* Director
- -------------------------------------------------
David B. Dillon
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
ROGER L. HOWE* Director
- -------------------------------------------------
Roger L. Howe
STEVEN C. MASON* Director
- -------------------------------------------------
Steven C. Mason
Chairman of the Board
CHARLES S. MECHEM, JR.* and Director
- -------------------------------------------------
Charles S. Mechem, Jr.
PHILIP A. ODEEN* Director
- -------------------------------------------------
Philip A. Odeen
JAMES F. ORR* Director
- -------------------------------------------------
James F. Orr
BRIAN H. ROWE* Director
- -------------------------------------------------
Brian H. Rowe
*By /s/ Steven G. Rolls March 28, 2000
----------------------------------------
Steven G. Rolls
as attorney-in-fact and on his behalf
as Chief Financial Officer
</TABLE>
22
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareowners of Convergys Corporation:
Our audits of the consolidated financial statements referred to in our report
dated February 11, 2000 appearing in the 1999 Annual Report to Shareholders of
Convergys Corporation (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 11, 2000
23
<PAGE>
CONVERGYS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING 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 Other at End
Description of Period to Expense Accounts Deductions of Period
- ----------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR 1999
Allowance for
Doubtful Accounts $ 9.8 $ 9.7 --- $ 7.1 (b) $ 12.4
Deferred Tax Asset
Valuation Allow. $ 21.0 --- --- $ 18.2 (c) $ 2.8
Restructuring
Reserve $ 10.6 --- --- $ 4.0 $ 6.6
YEAR 1998
Allowance for
Doubtful Accounts $ 6.4 $ 4.2 $ 3.2 (a) $ 4.0 (b) $ 9.8
Deferred Tax Asset
Valuation Allow. $ 21.0 --- --- --- $ 21.0
Restructuring
Reserve $ 17.2 --- --- $ 6.6 $ 10.6
YEAR 1997
Allowance for
Doubtful Accounts $ 6.5 $ 4.5 $ 0.5 (a) $ 5.1 (b) $ 6.4
Deferred Tax Asset
Valuation Allow. $ 21.0 --- --- --- $ 21.0
Restructuring
Reserve --- $ 18.6 --- $ 1.4 $ 17.2
</TABLE>
( a ) Includes amounts previously written off which were credited directly to
this account when recovered, acquired reserves and other adjustments.
( b ) Primarily includes amounts written off as uncollectible.
( c ) Amounts were recorded as a component of other comprehensive income
related to unrealized gains on marketable securities.
24
<PAGE>
EXHIBIT 10.12
TO
FORM 10-K FOR 1999
EMPLOYMENT AGREEMENT
This Agreement is made as of August 2, 1999 (the "Effective Date")
between Convergys Corporation, an Ohio corporation ("Employer"), and John C.
Freker ("Employee").
Employer and Employee agree as follows:
1. EMPLOYMENT. By this Agreement, Employer and Employee set forth the
terms of Employer's employment of Employee on and after the Effective Date. Any
prior agreements or understandings with respect to Employee's employment by
Employer, are canceled as of the Effective Date. Notwithstanding the preceding
sentence, all stock options and restricted stock awards granted to Employee
prior to the Effective Date shall continue in effect in accordance with their
respective terms and shall not be modified, amended or canceled by this
Agreement.
2. TERM OF AGREEMENT. The term of this Agreement initially shall be the
four year period commencing on the Effective Date. On the third anniversary of
the Effective Date and on each subsequent anniversary of the Effective Date, the
term of this Agreement automatically shall be extended for a period of one
additional year. Notwithstanding the foregoing, the term of this Agreement is
subject to termination as provided in Section 13.
3. DUTIES.
A. Effective from and after October 1, 1999 or such earlier date as may
be agreed upon by Employee and the President of Convergys Customer Management
Group Inc. (the "Position Change Date"), Employee will serve as Executive Vice
President, U.S. Operations of Convergys Customer Management Group Inc.
("Convergys CMG") or in such other equivalent capacity as may be designated by
the President of Employer. From the Effective Date to the Position Change Date,
Employee shall continue to occupy the position Employee was occupying
immediately prior to the Effective Date. Employee will report to the Chief
Operating Officer of Convergys CMG or to such other officer as may be designated
by the President of Employer.
B. Employee shall furnish such managerial, executive, financial,
technical, and other skills, advice, and assistance in operating Employer and
its Affiliates as Employer may reasonably request. For purposes of this
Agreement, "Affiliate" means each corporation which is a member of a controlled
group of corporations (within the meaning of section 1563(a) of the Internal
Revenue Code of 1986, as amended (the "Code")), which includes Employer.
C. Employee shall also perform such other duties, consistent with the
provisions of Section 3.A., as are reasonably assigned to Employee by the
officer to whom Employee reports.
<PAGE>
D. Employee shall devote Employee's entire time, attention, and
energies to the business of Employer and its Affiliates. The words "entire time,
attention, and energies" are intended to mean that Employee shall devote
Employee's full effort during reasonable working hours to the business of
Employer and its Affiliates and shall devote at least 40 hours per week to the
business of Employer and its Affiliates. Employee shall travel to such places as
are necessary in the performance of Employee's duties.
4. COMPENSATION.
A. Effective as of the Position Change Date, Employee shall receive a
base salary (the "Base Salary") of at least $275,000 per year, payable not less
frequently than monthly, for each year during the term of this Agreement,
subject to proration for any partial year. Such Base Salary, and all other
amounts payable under this Agreement, shall be subject to withholding as
required by law. From the Effective Date to the Position Effective Date,
Employee's base salary rate in effect on the day immediately prior to the
Effective Date shall continue in effect.
B. In addition to the Base Salary, Employee shall be entitled to
receive an annual bonus (the "Bonus") for each calendar year for which services
are performed under this Agreement. Any Bonus for a calendar year shall be
payable after the conclusion of the calendar year in accordance with Employer's
regular bonus payment policies. Each year, Employee shall be given a Bonus
target of not less than $85,000, subject to proration for a partial year.
C. Within five days after the date on which this Agreement is signed by
Employer and Employee, Employee shall receive a one-time signing bonus of
$100,000.
D. On at least an annual basis, Employee shall receive a formal
performance review and be considered for Base Salary and/or Bonus target
increases.
5. EXPENSES. All reasonable and necessary expenses incurred by Employee in
the course of the performance of Employee's duties to Employer shall be
reimbursable in accordance with Employer's then current travel and expense
policies.
6. BENEFITS.
A. While Employee remains in the employ of Employer, Employee shall be
entitled to participate in all of the various employee benefit plans and
programs, or equivalent plans and programs, which are made available to
similarly situated officers of Employer, including the benefits set forth in
Attachment A.
B. Notwithstanding anything contained herein to the contrary, the Base
Salary and Bonuses otherwise payable to Employee shall be reduced by any
benefits paid to Employee by Employer under any disability plans made available
to Employee by Employer.
C. As of the Effective Date, Employee shall be granted options to
purchase 40,000 common shares of Employer under Employer's 1998 Long Term
Incentive Plan. In each year of
2
<PAGE>
this Agreement after 1999, Employee will be granted stock options under
Employer's 1998 Long Term Incentive Plan or any similar plan made available to
employees of Employer.
D. As of the Effective Date, Employee shall receive a restricted stock
award of 40,000 common shares of Employer. Such award shall be made under
Employer's 1998 Long Term Incentive Plan on the terms set forth in Attachment B.
7. CONFIDENTIALITY. Employer and its Affiliates are engaged in the
outsourced customer care industry within the U.S. and world wide. Employee
acknowledges that in the course of employment with the Employer, Employee will
be entrusted with or obtain access to information proprietary to the Employer
and its Affiliates with respect to the following (all of which information is
referred to hereinafter collectively as the "Information"): the organization and
management of Employer and its Affiliates; the names, addresses, buying habits,
and other special information regarding past, present and potential customers,
employees and suppliers of Employer and its Affiliates; customer and supplier
contracts and transactions or price lists of Employer, its Affiliates and their
suppliers; products, services, programs and processes sold, licensed or
developed by the Employer or its Affiliates; technical data, plans and
specifications, present and/or future development projects of Employer and its
Affiliates; financial and/or marketing data respecting the conduct of the
present or future phases of business of Employer and its Affiliates; computer
programs, systems and/or software; ideas, inventions, trademarks, business
information, know-how, processes, improvements, designs, redesigns, discoveries
and developments of Employer and its Affiliates; and other information
considered confidential by any of the Employer, its Affiliates or customers or
suppliers of Employer or its Affiliates. Employee agrees to retain the
Information in absolute confidence and not to disclose the Information to any
person or organization except as required in the performance of Employee's
duties for Employer, without the express written consent of Employer; provided
that Employee's obligation of confidentiality shall not extend to any
Information which becomes generally available to the public other than as a
result of disclosure by Employee.
8. NEW DEVELOPMENTS. All ideas, inventions, discoveries, concepts,
trademarks, or other developments or improvements, whether patentable or not,
conceived by the Employee, alone or with others, at any time during the term of
Employee's employment, whether or not during working hours or on Employer's
premises, which are within the scope of or related to the business operations of
Employer or its Affiliates ("New Developments"), shall be and remain the
exclusive property of Employer. Employee shall do all things reasonably
necessary to ensure ownership of such New Developments by Employer, including
the execution of documents assigning and transferring to Employer, all of
Employee's rights, title and interest in and to such New Developments, and the
execution of all documents required to enable Employer to file and obtain
patents, trademarks, and copyrights in the United States and foreign countries
on any of such New Developments.
9. SURRENDER OF MATERIAL UPON TERMINATION. Employee hereby agrees that
upon cessation of Employee's employment, for whatever reason and whether
voluntary or involuntary, Employee will immediately surrender to Employer all of
the property and other things of value in his possession or in the possession of
any person or entity under Employee's control that are the
3
<PAGE>
property of Employer or any of its Affiliates, including without any limitation
all personal notes, drawings, manuals, documents, photographs, or the like,
including copies and derivatives thereof, relating directly or indirectly to any
confidential information or materials or New Developments, or relating directly
or indirectly to the business of Employer or any of its Affiliates.
10. REMEDIES.
A. Employer and Employee hereby acknowledge and agree that the services
rendered by Employee to Employer, the information disclosed to Employee during
and by virtue of Employee's employment, and Employee's commitments and
obligations to Employer and its Affiliates herein are of a special, unique and
extraordinary character, and that the breach of any provision of this Agreement
by Employee will cause Employer irreparable injury and damage, and consequently
the Employer shall be entitled to, in addition to all other remedies available
to it, injunctive and equitable relief to prevent a breach of Sections 7, 8, 9,
11 and 12 of this Agreement and to secure the enforcement of this Agreement.
B. Except as provided in Section 10.A., the parties agree to submit to
final and binding arbitration any dispute, claim or controversy, whether for
breach of this Agreement or for violation of any of Employee's statutorily
created or protected rights, arising between the parties that either party would
have been otherwise entitled to file or pursue in court or before any
administrative agency (herein "claim"), and waives all right to sue the other
party.
(i) This agreement to arbitrate and any resulting
arbitration award are enforceable under and subject to the Federal
Arbitration Act, 9 U.S.C. section 1 et seq. ("FAA"). If the FAA is held not
to apply for any reason then Ohio Revised Code Chapter 2711 regarding the
enforceability of arbitration agreements and awards will govern this
Agreement and the arbitration award.
(ii) (a) All of a party's claims must be presented at a
single arbitration hearing. Any claim not raised at the arbitration hearing is
waived and released. The arbitration hearing will take place in Cincinnati,
Ohio.
(b) The arbitration process will be governed by the
Employment Dispute Resolution Rules of the American Arbitration Association
("AAA") except to the extent they are modified by this Agreement.
(c) Employee has had an opportunity to review the AAA
rules and the requirements that Employee must pay a filing fee for which the
Employer has agreed to split on an equal basis.
(d) The arbitrator will be selected from a panel of
arbitrators chosen by the AAA in White Plains, New York. After the filing of a
Request for Arbitration, the AAA will send simultaneously to Employer and
Employee an identical list of names of five persons chosen
4
<PAGE>
from the panel. Each party will have 10 days from the transmittal date in which
to strike up to two names, number the remaining names in order of preference and
return the list to the AAA.
(e) Any pre-hearing disputes will be presented to the
arbitrator for expeditious, final and binding resolution.
(f) The award of the arbitrator will be in writing
and will set forth each issue considered and the arbitrator's finding of fact
and conclusions of law as to each such issue.
(g) The remedy and relief that may be granted by the
arbitrator to Employee are limited to lost wages, benefits, cease and desist and
affirmative relief, compensatory, liquidated and punitive damages and reasonable
attorney's fees, and will not include reinstatement or promotion. If the
arbitrator would have awarded reinstatement or promotion, but for the
prohibition in this Agreement, the arbitrator may award front pay. The
arbitrator may assess to either party, or split, the arbitrator's fee and
expenses and the cost of the transcript, if any, in accordance with the
arbitrator's determination of the merits of each party's position, but each
party will bear any cost for its witnesses and proof.
(h) Employer and Employee recognize that a primary
benefit each derives from arbitration is avoiding the delay and costs normally
associated with litigation. Therefore, neither party will be entitled to conduct
any discovery prior to the arbitration hearing except that: (i) Employer will
furnish Employee with copies of all non-privileged documents in Employee's
personnel file; (ii) if the claim is for discharge, Employee will furnish
Employer with records of earnings and benefits relating to Employee's subsequent
employment (including self-employment) and all documents relating to Employee's
efforts to obtain subsequent employment; (iii) the parties will exchange copies
of all documents they intend to introduce as evidence at the arbitration hearing
at least 10 days prior to such hearing; (iv) Employee will be allowed (at
Employee's expense) to take the depositions, for a period not to exceed four
hours each, of two representatives of Employer, and Employer will be allowed (at
its expense) to depose Employee for a period not to exceed four hours; and (v)
Employer or Employee may ask the arbitrator to grant additional discovery to the
extent permitted by AAA rules upon a showing that such discovery is necessary.
(i) Nothing herein will prevent either party from
taking the deposition of any witness where the sole purpose for taking the
deposition is to use the deposition in lieu of the witness testifying at the
hearing and the witness is, in good faith, unavailable to testify in person at
the hearing due to poor health, residency and employment more than 50 miles from
the hearing site, conflicting travel plans or other comparable reason.
(iii) Arbitration must be requested in writing no later than 6
months from the date of the party's knowledge of the matter disputed by the
claim. A party's failure to initiate arbitration within the time limits herein
will be considered a waiver and release by that party with respect to any claim
subject to arbitration under this Agreement.
5
<PAGE>
(iv) Employer and Employee consent that judgment upon the
arbitration award may be entered in any federal or state court that has
jurisdiction.
(v) Except as provided in Section 10.A., neither party will
commence or pursue any litigation on any claim that is or was subject to
arbitration under this Agreement.
(vi) All aspects of any arbitration procedure under this
Agreement, including the hearing and the record of the proceedings, are
confidential and will not be open to the public, except to the extent the
parties agree otherwise in writing, or as may be appropriate in any subsequent
proceedings between the parties, or as may otherwise be appropriate in response
to a governmental agency or legal process.
11. COVENANT NOT TO COMPETE. For purposes of this Section 11 only, the term
"Employer" shall mean, collectively, Employer and each of its Affiliates. During
the two-year period following termination of Employee's employment with Employer
for any reason (or if this period is unenforceable by law, then for such period
as shall be enforceable) Employee will not engage in any business offering
services related to the current business of Employer, whether as a principal,
partner, joint venturer, agent, employee, salesman, consultant, director or
officer, where such position would involve Employee (i) in any business activity
in competition with Employer; (ii) in any position with any customer of Employer
which involves such customer's billing and/or billing related systems or; or
(iii) in any business that provides billing and/or billing related systems to
third parties engaged in the communication business (including wireless,
wireline and cable communication businesses). This restriction will be limited
to the geographical area where Employer is then engaged in such competing
business activity or to such other geographical area as a court shall find
reasonably necessary to protect the goodwill and business of the Employer.
During the two-year period following termination of Employee's
employment with Employer for any reason (or if this period is unenforceable by
law, then for such period as shall be enforceable) Employee will not interfere
with or adversely affect, either directly or indirectly, Employer's
relationships with any person, firm, association, corporation or other entity
which is known by Employee to be, or is included on any listing to which
Employee had access during the course of employment as a customer, client,
supplier, consultant or employee of Employer and that Employee will not divert
or change, or attempt to divert or change, any such relationship to the
detriment of Employer or to the benefit of any other person, firm, association,
corporation or other entity.
During the two-year period following termination of Employee's
employment with Employer for any reason (or if this period is unenforceable by
law, then for such period as shall be enforceable) Employee shall not, without
the prior written consent of Employer, accept employment, as an employee,
consultant, or otherwise, with any company or entity which is a customer or
supplier of Employer at any time during the final year of Employee's employment
with Employer.
6
<PAGE>
Employee will not, during or at any time within three years after the
termination of Employee's employment with Employer, induce or seek to induce,
any other employee of Employer to terminate his or her employment relationship
with Employer.
12. GOODWILL. Employee will not disparage Employer or any of its Affiliates
in any way which could adversely affect the goodwill, reputation and business
relationships of Employer or any of its Affiliates with the public generally, or
with any of their customers, suppliers or employees. Employer will not disparage
Employee.
13. TERMINATION.
A. (i) Employer or Employee may terminate this Agreement upon
Employee's failure or inability to perform the services required hereunder
because of any physical or mental infirmity for which Employee receives
disability benefits under any disability benefit plans made available to
Employee by Employer (the "Disability Plans"), over a period of one hundred
twenty consecutive working days during any twelve consecutive month period (a
"Terminating Disability").
(ii) If Employer or Employee elects to terminate this
Agreement in the event of a Terminating Disability, such termination shall be
effective immediately upon the giving of written notice by the terminating party
to the other.
(iii) Upon termination of this Agreement on account of
Terminating Disability, Employer shall pay Employee Employee's accrued
compensation hereunder, whether Base Salary, Bonus or otherwise (subject to
offset for any amounts received pursuant to the Disability Plans), to the date
of termination. For as long as such Terminating Disability may exist, Employee
shall continue to be an employee of Employer for all other purposes and Employer
shall provide Employee with disability benefits and all other benefits according
to the provisions of the Disability Plans and any other Employer plans in which
Employee is then participating.
(iv) If the parties elect not to terminate this Agreement upon
an event of a Terminating Disability and Employee returns to active employment
with Employer prior to such a termination, or if such disability exists for less
than one hundred twenty consecutive working days, the provisions of this
Agreement shall remain in full force and effect.
B. This Agreement terminates immediately and automatically on the death
of the Employee, provided, however, that the Employee's estate shall be paid
Employee's accrued compensation hereunder, whether Base Salary, Bonus or
otherwise, to the date of death.
C. Employer may terminate this Agreement immediately, upon written
notice to Employee, for Cause. For purposes of this Agreement, Employer shall
have "Cause" to terminate this Agreement only if Employer's Board of Directors
determines that there has been fraud, misappropriation or embezzlement on the
part of Employee.
7
<PAGE>
D. Employer may terminate this Agreement immediately, upon written
notice to Employee, for any reason other than those set forth in Sections 13.A.,
B. and C. In the event of a termination by Employer under this Section 13.D.,
Employer shall, within five days after the termination, pay Employee an amount
equal to two times the sum of the annual Base Salary rate in effect at the time
of termination plus the Bonus target in effect at the time of termination. For
the two year period following the termination, Employer shall continue to
provide Employee with medical, dental, vision and life insurance coverage
comparable to the medical, dental, vision and life insurance coverage in effect
for Employee immediately prior to the termination; and, to the extent that
Employee would have been eligible for any post-retirement medical, dental,
vision or life insurance benefits from Employer if Employee had continued in
employment through the end of such two year period, Employer shall provide such
post-retirement benefits to Employee after the end of such two year period. For
purposes of any stock option or restricted stock grant outstanding immediately
prior to the termination, Employee's employment with Employer shall not be
deemed to have terminated until the end of the two year period following the
termination. In addition, Employee shall be entitled to receive, as soon as
practicable after termination, an amount equal to the sum of (i) any forfeitable
benefits under any qualified or nonqualified pension, profit sharing, 401(k) or
deferred compensation plan of Employer or any Affiliate which would have vested
prior to the end of the two year period following the termination if Employee's
employment had not terminated plus (ii) if Employee is participating in a
qualified or nonqualified defined benefit plan of Employer or any Affiliate at
the time of termination, an amount equal to the present value of the additional
vested benefits which would have accrued for Employee under such plan if
Employee's employment had not terminated prior to the end of the two year period
following the termination and if Employee's annual Base Salary and Bonus target
had neither increased nor decreased after the termination. Finally, to the
extent that Employee is deemed to have received an excess parachute payment
(within the meaning of section 4999 of the Code) from Employer or any Affiliate,
Employer shall pay Employee an additional sum sufficient to pay (i) any taxes
imposed under section 4999 of the Code plus (ii) any federal, state and local
taxes applicable to the payment called for under clause (i) of this sentence.
E. Employee may resign upon 60 days' prior written notice to Employer.
In the event of a resignation under this Section 13.E., this Agreement shall
terminate and Employee shall be entitled to receive Employee's Base Salary
through the date of termination, any Bonus earned but not paid at the time of
termination and any other vested compensation or benefits called for under any
compensation plan or program of Employer.
F. Employee may retire (a) upon six months' prior written notice to
Employer at any time after Employee has attained age 55 and completed at least
ten years of service with Employer and its Affiliates or (b) on such earlier
date as may be approved by the President of Employer. For purposes of the
preceding sentence, service with Cincinnati Bell Inc. and its subsidiaries prior
to the Effective Date shall be deemed to be service with Employer. In the event
of a retirement under this Section 13.F., this Agreement shall terminate and
Employee shall be entitled to receive Employee's Base Salary through the date of
termination and any Bonus earned but not paid at the time of termination. In
addition, Employee shall be entitled to receive any compensation or benefits
made available to retirees under Employer's standard policies and
8
<PAGE>
programs, including retiree medical and life insurance benefits, a prorated
Bonus for the year of termination, and the right to exercise options after
retirement.
G. Upon termination of this Agreement as a result of an event of
termination described in this Section 13 and except for Employer's payment of
the required payments under this Section 13 (including any Base Salary accrued
through the date of termination, any Bonus earned for the year preceding the
year in which the termination occurs and any nonforfeitable amounts payable
under any employee plan), all further compensation under this Agreement shall
terminate.
H. The termination of this Agreement shall not amend, alter or modify
the rights and obligations of the parties under Sections 7, 8, 9, 10, 11, and 12
hereof, the terms of which shall survive the termination of this Agreement.
14. ASSIGNMENT. As this is an agreement for personal services involving a
relation of confidence and a trust between Employer and Employee, all rights and
duties of Employee arising under this Agreement, and the Agreement itself, are
non-assignable by Employee.
15. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient, if in writing, and if delivered personally or by
certified mail to Employee at Employee's place of residence as then recorded on
the books of Employer or to Employer at its principal office.
16. WAIVER. No waiver or modification of this Agreement or the terms
contained herein shall be valid unless in writing and duly executed by the party
to be charged therewith. The waiver by any party hereto of a breach of any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by such party.
17. GOVERNING LAW. This agreement shall be governed by the laws of the
State of Ohio.
18. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties with respect to Employee's employment by Employer. There are no other
contracts, agreements or understandings, whether oral or written, existing
between them except as contained or referred to in this Agreement.
19. SEVERABILITY. In case any one or more of the provisions of this
Agreement is held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or other enforceability shall not affect any other
provisions hereof, and this Agreement shall be construed as if such invalid,
illegal, or unenforceable provisions have never been contained herein.
20. SUCCESSORS AND ASSIGNS. Subject to the requirements of Paragraph 14
above, this Agreement shall be binding upon Employee, Employer and Employer's
successors and assigns.
21. CONFIDENTIALITY OF AGREEMENT TERMS. The terms of this Agreement shall
be held in strict confidence by Employee and shall not be disclosed by Employee
to anyone other than
9
<PAGE>
Employee's spouse, Employee's legal counsel, and Employee's other advisors,
unless required by law. Further, except as provided in the preceding sentence,
Employee shall not reveal the existence of this Agreement or discuss its terms
with any person (including but not limited to any employee of Employer or its
Affiliates) without the express authorization of the President of Employer. To
the extent that the terms of this Agreement have been disclosed by Employer, in
a public filing or otherwise, the confidentiality requirements of this Section
21 shall no longer apply to such terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
CONVERGYS CORPORATION
By:
-----------------------------------
EMPLOYEE
---------------------------------------
John C. Freker
10
<PAGE>
Attachment A
EMPLOYEE BENEFITS
<TABLE>
<S> <C>
- ------------------------------------------------------------- -----------------------------------------------
Automobile Allowance $850 per month
- ------------------------------------------------------------- -----------------------------------------------
Cellular Telephone Yes
- ------------------------------------------------------------- -----------------------------------------------
Executive Deferred Compensation Plan Yes
- ------------------------------------------------------------- -----------------------------------------------
Group Accident Life $500,000
- ------------------------------------------------------------- -----------------------------------------------
Legal/Financial/Insurance Allowance $5,000 per year
- ------------------------------------------------------------- -----------------------------------------------
Parking Yes
- ------------------------------------------------------------- -----------------------------------------------
Annual Physical Yes
- ------------------------------------------------------------- -----------------------------------------------
Short Term Disability Supplement Yes
- ------------------------------------------------------------- -----------------------------------------------
Travel Insurance (Spouse) $50,000
- ------------------------------------------------------------- -----------------------------------------------
Vacation 27 days per year
- ------------------------------------------------------------- -----------------------------------------------
</TABLE>
<PAGE>
ATTACHMENT B
RESTRICTED STOCK AWARD
UNDER THE PROVISIONS OF
THE CONVERGYS CORPORATION
1998 LONG TERM INCENTIVE PLAN
NAME OF EMPLOYEE: JOHN C. FREKER
AWARD DATE: AUGUST 2, 1999
NUMBER OF RESTRICTED SHARES: 40,000
Pursuant to the provisions of the Convergys Corporation 1998 Long Term
Incentive Plan (the "Plan"), a copy of which has been delivered to you, the
Compensation and Benefits Committee of the Board of Directors of Convergys
Corporation (the "Compensation Committee") has granted you an award of 40,000
common shares, without par value, of Convergys Corporation (the "Shares"), on
and subject to the terms of the Plan and your agreement to the following terms,
conditions and restrictions.
1. SECURITIES SUBJECT TO THIS AGREEMENT. This Agreement is made with
respect to the Shares and any securities (including additional common
shares of Convergys Corporation (the "Company")) issued in respect of
the Shares, whether by way of a share dividend, a share split, any
reorganization or recapitalization of the Company or its stock or any
merger, exchange of securities or like event or transaction as the
result of which any security or securities of any kind are issued to
you by reason of your ownership of the Shares. Reference herein to the
Shares shall include any such securities issued in respect of the
Shares.
2. RIGHTS OF OWNERSHIP. Except for the Restrictions (as defined in
Section 3 hereof) and subject to the provisions regarding forfeiture
set forth in Section 8 hereof, you are the record and beneficial owner
of the Shares, with all rights and privileges (including but not
limited to the right to vote, to receive dividends and to receive
distributions upon liquidation of the Company) appertaining thereto.
3. RESTRICTIONS. Neither the Shares nor any interest therein may be
transferred or conveyed by you in any manner whatsoever, whether or not
for consideration (the "Restrictions"), except upon the passage of time
or occurrence of events as specified in Sections 4, 5, 6, and 7 hereof.
4. LAPSE. The Restrictions shall lapse and be of no further force and
effect as to 100% of the Shares on August 1, 2003.
5. TERMINATION OF RESTRICTIONS - DEATH. In the event of your death
while employed by the Company or any of its subsidiaries the
Restrictions shall terminate and be of no further force or effect,
effective as of the date of death: (a) if death occurs prior to August
1, 2003, with respect to a number of the Shares (rounded up to the
nearest whole Share) that bears the same ratio to the total number of
Shares as the number of days from August 2, 1999 through the date of
your death bears to the number of days from August 2, 1999 through
August 1, 2003. Any Shares which remain subject to the Restrictions
after the calculation prescribed in the preceding sentence shall be
forfeited to the Company as of your date of death. Upon the
Restrictions terminating with respect to certain Shares, the executor,
administrator or other personal representative of your estate, or the
1
<PAGE>
trustee of any trust becoming entitled thereto be reason of your death,
may transfer the unrestricted Shares to any person or persons entitled
thereto under your will or under your trust or other instrument (or in
the absence of any will under the laws of descent and distribution)
governing the distribution of your estate in the event of your death.
6. TERMINATION OF RESTRICTIONS - DISABILITY. If you shall become
disabled to such extent that you are unable to perform the usual duties
of your job for a period of 12 consecutive weeks or more and if as the
result thereof the Compensation Committee approves the termination of
your employment on terms that include the right to transfer the Shares
free of the Restrictions, the Restrictions shall terminate and be of no
further force and effect as of the date you cease to be an employee in
the same manner as prescribed in the event of death outlined in Section
5 above.
7. TERMINATION OF RESTRICTIONS - TERMINATION WITHOUT CAUSE. In the
event that your employment is terminated by the Company without Cause
(within the meaning of your Employment Agreement dated August 2, 1999),
the Restrictions shall terminate and be of no further force and effect
two years after the date on which your employment is terminated and,
for purposes of this Section 7, your employment shall not be deemed to
have terminated until the end of such two year period.
8. FORFEITURE. If you cease to be an employee of the Company or any of
its subsidiaries, except as provided in Section 4, 5, 6, and 7 hereof,
any Shares which remain subject to the Restrictions of the date such
employment terminates shall be at once forfeited to the Company as of
the date of such termination of employment (the "Forfeiture Date").
Upon such forfeiture all of your rights in respect of such Shares shall
cease automatically and without further action by the Company or you.
For the purpose of giving effect to this provision, you have executed
and delivered to the Company a stock power with respect to each
certificate evidencing any of the Shares, thereby assigning to the
Company all of your interest in the Shares. By the execution and
delivery of this Agreement, you authorize and empower the Company, in
the event of a forfeiture of any of the Shares under this Section 8 to
(a) date (as of the Forfeiture Date) those stock powers relating to
Shares that remain subject to the Restrictions as of the Forfeiture
Date and (b) present such stock powers and the certificates to which
they relate to the Company's transfer agent or other appropriate party
for the sole purpose of transferring the forfeited Shares to the
Company.
9. MATTERS RELATING TO CERTIFICATES.
(a) Upon their issuance, the certificates representing the
Shares shall be deposited with the Secretary of the Company
and shall be released to you only pursuant to the provisions
of this Section 9.
(b) Each certificate for Shares issued to you in accordance
with this Agreement shall bear the following legend:
2
<PAGE>
"THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS OF A RESTRICTED STOCK AGREEMENT BETWEEN THE REGISTERED
HOLDER HEREOF AND CONVERGYS CORPORATION, DATED AS OF AUGUST 2,
1999, AND MAY NOT BE TRANSFERRED BY THE HOLDER, EXCEPT AS
PROVIDED BY THE TERMS OF SUCH AGREEMENT, A COPY OF WHICH IS ON
DEPOSIT WITH THE SECRETARY OF CONVERGYS CORPORATION AND WHICH
WILL BE MAILED TO A SHAREHOLDER OF CONVERGYS CORPORATION
WITHOUT CHARGE WITHIN FIVE DAYS AFTER RECEIPT OF A WRITTEN
REQUEST."
Upon the lapse or termination of the Restrictions as to any
Shares, the certificate evidencing such Shares shall be promptly
presented to the Company's transfer agent or other appropriate party
with instructions to cause such certificate to be reissued, to the
extent appropriate, in your name and without the foregoing legend. Any
Shares evidenced by such certificate which remain subject to the
Restrictions shall be evidenced by a new certificate, bearing the
foregoing legend, which shall be returned to the Company. Upon the
lapse or termination of the Restrictions as to any Shares, the stock
power or powers held by the Company with respect to such Shares shall
be surrendered to you (in exchange, if applicable, for a stock power
relating to any Shares which remain subject to the Restrictions).
10. INTERPRETATION. You acknowledge that the Compensation Committee has
the authority to construe and interpret the terms of the Plan and this
Agreement if and when any questions of meaning arises under the Plan or
this Agreement, and any such construction or interpretation shall be
binding on you, your heirs, executors, administrators, personal
representatives and any other persons having or claiming to have an
interest in the Shares.
11. WITHHOLDING. In connection with the award of Shares to you and any
dividend payments made while such Shares remain subject to restrictions
hereunder, the Company will withhold or cause to be withheld from your
salary payments such amounts of tax at such times as may be required by
law to be withheld with respect to the Shares and/or dividends,
provided that if your salary is not sufficient for such purpose, you
shall remit to the Company, on request, the amount required for such
withholding taxes. Within 45 days after issuance of the certificates
representing the Shares, you shall advise the Company in writing
whether or not you have made an election, under Section 83(b) of the
Internal Revenue Code of 1986, to include the fair market value of the
Shares in your gross income for the calendar year in which the
certificates are issued.
12. NOTICES. All notices and other communications to be given hereunder
shall be in writing and shall be deemed to have been duly given when
delivered personally or when deposited in the United States mail, first
class postage prepaid, and addressed as follows:
TO THE COMPANY: Convergys Corporation
201 East Fourth Street, RM. 102-2060
P. O. Box 1638
Cincinnati, Ohio 45202
Attention: Assistant Secretary of the Compensation
and Benefits Committee
3
<PAGE>
TO THE EMPLOYEE: JOHN C. FREKER
9060 INDIAN RIDGE
CINCINNATI, OH 45243
or to any other address as to which notice has been given in the manner
herein provided.
13. MISCELLANEOUS. This Agreement shall be binding upon the parties
hereto and their respective heirs, executors, administrators, personal
representatives, successors and assigns. Subject to the provisions of
the Plan, this Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and shall be
construed and interpreted in accordance with the laws of the State of
Ohio. This Agreement may not be amended except in a writing signed by
each of the parties hereto. If any provisions of this Agreement shall
be deemed to be invalid or void under any applicable law, the remaining
provisions hereof shall not be affected thereby and shall continue in
full force and effect.
Please indicate your acceptance by signing at the place provided and returning
this Agreement.
COMPENSATION AND BENEFITS
COMMITTEE OF THE BOARD OF
DIRECTORS OF CONVERGYS
CORPORATION
Dated: By:
------------------------- -------------------------
Assistant Secretary
Dated:
------------------------- -------------------------
Accepted and Agreed
4
<PAGE>
Attachment B
Election Under Section 83(b)
OF THE INTERNAL REVENUE CODE
The undersigned hereby makes an election pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, with respect to the property
described below and supplies the following information in accordance with the
regulations promulgated thereunder.
(1) Name: JOHN C. FREKER
Address: 9060 INDIAN RIDGE
CINCINNATI, OH 45243
Taxpayer's Identification Number: XXX-XXX-XXX
(2) Description of property to which this election is being made: 40,000
shares of common stock of Convergys Corporation.
(3) Date on which the stock was transferred: AUGUST 2, 1999 Taxable year
for which this election is made: 1999
(4) Nature of Restrictions:
The shares may not be transferred by the holder in accordance with the
terms of a Restrictive Stock Award and are subject to forfeiture to
Convergys Corporation upon termination of employment for reasons other
than death or disability. Restrictions lapse as to 40,000 SHARES ON
AUGUST 1, 2003.
(5) Fair market value at time of transfer (determined without regard to any
restrictions other than provisions which by their terms will never
lapse): $19.50 per share (market price) or $780,000.00 in total.
(6) The amount paid for such property: $ NONE .
(7) A copy of this statement has been furnished to Convergys Corporation.
- ---------------------------------------
Date
- ---------------------------------------
John C. Freker
1
<PAGE>
Financial Contents
<TABLE>
<S> <C>
Selected Financial and Operating Data 24
Management's Discussion and Analysis 25
Report of Management 33
Report of Independent Accountants 33
Consolidated Statements of Income 34
Consolidated Balance Sheets 35
Consolidated Statements of Cash Flows 36
Consolidated Statements of Shareowners' Equity
and Comprehensive Income 37
Notes to Financial Statements 38
</TABLE>
23
<PAGE>
Selected Financial and Operating Data
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(Amounts in Millions Except Per Share Amounts) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations
Revenues $ 1,762.9 $ 1,447.2 $ 987.5 $ 842.4 $ 644.7
Costs and expenses before special items 1,518.8 1,264.7 838.4 718.2 566.4
- ---------------------------------------------------------------------------------------------------------------------------
Operating income before special items 244.1 182.5 149.1 124.2 78.3
Special items[1] 8.9 42.6 35.0 5.0 47.1
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 235.2 139.9 114.1 119.2 31.2
Equity in earnings of cellular partnership[2] 20.0 25.1 14.7 11.6 8.8
Other income (expense), net[3] (0.2) (0.5) 7.2 -- (13.2)
Interest expense 32.5 33.9 5.4 6.0 7.4
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 222.5 130.6 130.6 124.8 19.4
Income taxes 85.5 49.6 44.0 46.8 22.9
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 137.0 $ 81.0 $ 86.6 $ 78.0 $ (3.5)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share[4]
Basic $ .90 $ .57 $ .63 $ .57 $ (.03)
Diluted $ .89 $ .57 $ .63 $ .57 $ (.03)
Weighted average common shares outstanding
Basic 151.6 142.7 137.0 137.0 137.0
Diluted 154.5 142.9 137.0 137.0 137.0
Financial Position
Total assets $ 1,579.5 $ 1,450.9 $ 654.4 $ 619.2 $ 517.8
Total debt 298.3 467.0 60.3 94.7 89.2
Shareowners' equity 927.2 731.5 430.8 364.2 289.9
Other Data
Cash provided (used) by:
Operating activities 463.0 146.4 127.4 117.7 44.6
Investing activities (276.9) (758.4) (74.8) (118.6) (58.0)
Financing activities (159.1) 613.7 (52.8) 3.2 13.4
Free cash flows[5] 156.8 52.9 66.5 61.5 18.0
EBITDA[6] 406.8 308.9 224.8 187.6 133.0
Operating margin (excluding special items) 13.8% 12.6% 15.1% 14.7% 12.1%
</TABLE>
[1] See notes 3 and 4 of Notes to Financial Statements for a discussion of
special items in 1999, 1998 and 1997. Special items in 1996 relate to
in-process research and development costs associated with acquisitions.
Special items in 1995 include a $39.6 goodwill impairment charge and $7.5
of in-process research and development costs.
[2] Equity in earnings of cellular partnership includes $12.4 ($7.8 after tax)
for one-time charges recorded by the partnership during 1999.
[3] Other income (expense), net includes a $1.9 ($1.2 after tax) benefit from a
non-recurring investment gain in 1999 and a $13.3 charge resulting from the
termination of a currency and interest rate swap agreement in 1995.
[4] Earnings (loss) per share for all periods prior to the initial public
offering have been calculated using the number of common shares outstanding
immediately prior to the Company's initial public offering.
[5] Free cash flows is not defined under generally accepted accounting
principles and is calculated as cash flows from operations excluding the
impact of the accounts receivable securitization less capital expenditures.
[6] EBITDA is not defined under generally accepted accounting principles and is
calculated as operating income before special items, plus depreciation and
amortization expense and the Company's equity in the earnings of its
investment in a cellular partnership. EBITDA is presented as an alternative
measure of the Company's ability to generate cash flow.
24
<PAGE>
Management's Discussion and Analysis
(Amounts in Millions Except Per Share Amounts)
Background
Convergys Corporation (the Company) is a leading provider of outsourced
information and customer management services. The Company focuses on
developing long-term strategic relationships with clients in
customer-intensive industries including telecommunications, cable, broadband,
satellite broadcasting, Internet services, utilities, technology, financial
services, consumer products, healthcare and pharmaceuticals. The Company
serves its clients through its two operating subsidiaries: (i) the
Information Management Group (IMG), which provides outsourced billing and
information services; and (ii) the Customer Management Group (CMG), which
provides outsourced marketing and customer support services. For certain
clients, IMG and CMG jointly provide a full range of billing and customer
management services.
The Company was formed in 1998 as a wholly owned subsidiary of Cincinnati
Bell Inc. (CBI). In July 1998, CBI contributed the two operating subsidiaries
and a 45% limited partnership interest in a cellular communications services
provider in southwestern Ohio and northern Kentucky (the Cellular
Partnership) to the Company. On August 13, 1998, approximately 10% of the
common shares of the Company were issued to the public and on December 31,
1998, the remaining shares held by CBI were distributed to CBI shareholders.
The amounts presented for periods through December 31, 1998 have been carved
out from the financial statements of CBI using the historical results of
operations and the historical bases of the assets and liabilities of the
contributed businesses. These financial statements include the allocation of
certain corporate expenses from CBI to the Company. Additionally, during 1997
and 1998, the Company's debt financing was provided by CBI at rates based on
CBI's external borrowing rates. Management believes that the assumptions made
in preparing the carve-out basis consolidated financial statements of the
Company are reasonable. The financial information presented for periods
through December 31, 1998, however, may not necessarily reflect the results
of operations, financial position or cash flows had the Company been a
separate, stand-alone entity.
The following discussion and the related consolidated financial statements
and accompanying notes contain certain forward-looking statements that
involve potential risks and uncertainties. Future results could differ
materially from results discussed in such forward-looking statements.
Results of Operations
Consolidated Results
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
% Change % Change
1999 1998 99 vs. 98 1997 98 vs. 97
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $1,762.9 $1,447.2 22 $ 987.5 47
Costs and
Expenses:
Costs of products
and services 996.1 826.4 21 540.2 53
Selling, general
and administrative
expenses 291.3 226.0 29 158.7 42
Research and
development
costs 87.2 81.9 6 68.6 19
Depreciation 86.0 68.1 26 37.9 80
Amortization 44.3 33.2 33 23.1 44
Year 2000
programming
costs 13.9 29.1 (52) 9.9 --
Special items 8.9 42.6 -- 35.0 --
- ---------------------------------------------------------------------------------------
Total costs and
expenses 1,527.7 1,307.3 17 873.4 50
- ---------------------------------------------------------------------------------------
Operating income $ 235.2 $ 139.9 68 $ 114.1 23
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
1999 vs. 1998
The Company's 1999 revenues increased 22%, 15% pro forma for acquisitions as
if the acquisitions had occurred at the beginning of both periods. Operating
expenses excluding special items increased 20% over 1998, 12% pro forma for
acquisitions. Operating expenses included an $11.1 increase in non-cash
amortization of acquisition-related intangible assets. Operating income
excluding special items increased 34% from 1998 as a result of revenue growth
and margin expansion in both of the Company's businesses.
25
<PAGE>
Cellular Partnership earnings were $32.4 in 1999, an increase of $7.3 over
1998, excluding special items recorded by the partnership. Interest expense
was $32.5 in 1999 and $33.9 in 1998. The effective tax rate was 38.4% in 1999
and 38.0% in 1998. Excluding special items, net income increased to $149.9 or
$.97 per diluted share from $107.4 or $.75 per diluted share in 1998.
The Company recorded special items in both 1999 and 1998. The 1999 special
items include facility and staff organization consolidation costs ($6.9) and
expensing of in-process research and development costs from an acquisition
($2.0). Additionally, other income includes a $1.9 special item for a
non-recurring investment gain. The Company's income from the Cellular
Partnership was reduced $12.4 by special items recorded by the Cellular
Partnership related to the merger of SBC Communications and Ameritech, the
general partner. The special item in 1998 was a $42.6 charge to expense
in-process research and development costs from an acquisition.
Including special items, operating income was $235.2 in 1999 and $139.9 in
1998. Net income including special items was $137.0 or $.89 per share in 1999
and $81.0 or $.57 per share in 1998.
[GRAPH]
1998 vs. 1997
The Company's 1998 revenues increased 47% from 1997. In the first quarter of
1998, the Company acquired American Transtech, Inc. and the Canadian assets
of AT&T's Canadian customer care business (Transtech) from AT&T and the
teleservices operations of Maritz Inc. (Maritz). These acquisitions accounted
for 38% of the revenue increase. Operating expenses in 1998, excluding
special items, increased 51% from 1997. Acquisitions accounted for 43% of
this increase. Excluding acquisitions and special items, revenues and
operating expenses both increased by 8%. Operating expenses in 1998 included
a $19.2 increase in Year 2000 programming expenses. Operating income in 1998
increased 22% from 1997 excluding special items in both periods.
Cellular Partnership earnings were $25.1 in 1998, an increase of $10.4 over
1997. Other income (expense) in 1998 was net expense of $0.5 compared to
income of $7.2 in 1997. The change in this item primarily resulted from
recognizing interest income associated with federal tax audit settlements in
1997. Interest expense increased to $33.9 in 1998 from $5.4 in 1997,
reflecting interest from acquisitions. The effective tax rate increased to
38.0% in 1998 from 33.7% in 1997, due to the positive impact of federal tax
audit settlements in 1997. Without the impact of the federal tax audit
settlements, the 1998 and 1997 effective tax rates were comparable. Excluding
special items, net income decreased to $107.4 or $.75 per share in 1998 from
$109.6 or $.80 per share in 1997.
The Company recorded special items in both 1998 and 1997. The 1998 special
item was a $42.6 charge to expense in-process research and development costs
associated with the Transtech acquisition. The 1997 special item was a charge
for $35.0 for restructuring costs ($18.6) and asset impairments ($16.4) at
CMG. Including special items, operating income was $139.9 in 1998 and $114.1
in 1997, and net income was $81.0 or $.57 per share in 1998 and $86.6 or $.63
per share in 1997.
26
<PAGE>
Information Management Group
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
% Change % Change
1999 1998 99 vs. 98 1997 98 vs. 97
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Data processing $418.0 $358.5 17 $326.0 10
Professional and
consulting 141.1 137.8 2 130.1 6
License and other 41.7 39.3 6 31.5 25
International 51.2 41.8 22 52.5 (20)
- -----------------------------------------------------------------------------------
External revenues 652.0 577.4 13 540.1 7
Intercompany
revenues 35.1 24.6 -- 7.9 --
- -----------------------------------------------------------------------------------
Total revenues 687.1 602.0 14 548.0 10
Costs and
Expenses:
Costs of products
and services 356.0 308.6 15 270.6 14
Selling, general
and administrative
expenses 76.7 66.6 15 66.2 1
Research and
development
costs 67.9 61.1 11 63.3 (3)
Depreciation 29.7 23.9 24 17.7 35
Amortization 12.8 6.0 113 16.8 (64)
Year 2000
programming
costs 9.7 19.3 (50) 8.7 122
Special items 2.0 -- -- -- --
- -----------------------------------------------------------------------------------
Total costs and
expenses 554.8 485.5 14 443.3 10
- -----------------------------------------------------------------------------------
Operating income $132.3 $116.5 14 $104.7 11
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
1999 vs. 1998
IMG's external revenues increased 13% from 1998. The 17% increase in data
processing was driven by clients' average wireless subscriber growth of 30%,
partially offset by contractual rate reductions triggered by higher
subscriber levels and contract extensions. The Company experienced a
continued reduction in the number of a client's wireless long distance
subscribers that also partially offset the increase in data processing
revenues. Increased professional and consulting revenues reflect an increase
in services for PCS clients, which was partially offset by reduced
enhancement requests from ALLTEL, which acquired the IMG client 360 Degree
Communications in 1998. The decrease in ALLTEL professional and consulting
revenues resulted from discussions that led to a contract amendment in
September 1999. Under the amendment, ALLTEL, an IMG competitor, will migrate
its subscribers to its own billing system beginning in the second quarter of
2000. The increase in license and other revenues reflects general growth in
the Company's cable operations and recurring license and support revenues
from MediaOne under a contract signed in the fourth quarter of 1998. The
impact of the increase was partially offset by a difficult comparison to the
fourth quarter of 1998 when the Company recognized approximately $10 in
license and equipment revenues from MediaOne. The 22% increase in
international revenues resulted primarily from the acquisition of Wiztec
Solutions, Ltd. (Wiztec) in 1999, offset by the completion of two
international long-term system development contracts in 1998.
[GRAPH]
IMG's total costs and expenses increased 14% from 1998, excluding special
items. Costs of products and services increased primarily as a result of
increased revenues. Selling, general and administrative expenses increased
reflecting the Wiztec acquisition and spending to launch IMG's Internet
protocol (IP) billing initiative. Research and development costs increased
11% from 1998, primarily reflecting spending to add GSM and international
capabilities to the Atlys global billing system, to develop the Catalys
billing system for Internet service providers, to add IP billing
functionality to existing wireless and cable billing systems and to develop a
next-generation cable and satellite broadcasting billing
27
<PAGE>
system. Spending also continued to enhance existing mainframe systems.
Depreciation and amortization expenses increased primarily from the
acquisitions of Wiztec and Technology Applications Inc. (TAI) during 1999.
Year 2000 spending decreased 50% from 1998 as systems achieved compliance.
The $2.0 special item represents purchased research and development costs
associated with the Wiztec acquisition.
Excluding the 1999 special item, IMG's operating income increased to $134.3
in 1999 from $116.5 in 1998 and its operating margin increased to 20.6% from
20.2%.
1998 vs. 1997
IMG's external revenues in 1998 increased 7% from 1997, largely the result of
a 10% increase in data processing revenue. The increase in data processing
was driven by clients' average wireless subscriber growth of 29%, partially
offset by contractual rate reductions triggered by higher subscriber levels.
The Company also experienced a reduction in the number of a client's wireless
long-distance subscribers that partially offset the increase in data
processing revenues. Increased professional and consulting revenues reflect
an increase in services for PCS clients which was partially offset by reduced
enhancement requests from AT&T and 360 Degree Communications. The AT&T
decrease resulted from AT&T's move to requesting system enhancements on a
national rather than a regional basis. The 360 Degree Communications decrease
was caused by its acquisition by ALLTEL. IMG's license and other revenues
increased from license fees and equipment sales recognized in the fourth
quarter of 1998 associated with IMG's contract with MediaOne. International
revenues decreased, reflecting the successful completion of two long-term
system development projects during 1998.
IMG's total costs and expenses increased 10% from 1997. Higher bill finishing
costs and higher wage rates, particularly for software professionals, caused
direct costs to increase at a rate in excess of the revenue increase.
Research and development costs decreased reflecting heavier spending in 1997
to prepare the Precedent 2000 software system (a forerunner of the Atlys
billing software system) for PCS clients. Research and development spending
on Precedent 2000, to increase its functionality and scalability, continued
in 1998, as did IMG's spending to enhance existing mainframe systems.
Depreciation expense increased as a result of increased capital spending.
Amortization expense decreased as a result of capitalized
internally-developed software becoming fully amortized during 1997. Year 2000
programming costs increased by $8.6 over 1997 reflecting increased compliance
activities.
IMG's operating income increased to $116.5 in 1998 from $104.7 in 1997 and
its operating margin increased to 20.2% from 19.4% despite increased Year
2000 spending.
Customer Management Group
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
% Change % Change
1999 1998 99 vs. 98 1997 98 vs. 97
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Dedicated
services $ 874.4 $ 651.0 34 $ 247.9 163
Traditional
services 178.6 181.2 (1) 170.4 6
International 57.9 37.7 54 29.3 29
- ----------------------------------------------------------------------------------
Total revenues 1,110.9 869.9 28 447.6 94
Costs and
Expenses:
Costs of products
and services 675.3 542.3 25 277.5 95
Selling, general
and administrative
expenses 209.9 157.5 33 92.7 70
Research and
development
costs 19.2 20.7 (7) 5.3 --
Depreciation 55.2 44.2 25 20.2 118
Amortization 31.5 27.2 16 6.3 --
Year 2000
programming
costs 4.2 9.8 (57) 1.2 --
Special items 6.9 42.6 -- 35.0 --
- ----------------------------------------------------------------------------------
Total costs and
expenses 1,002.2 844.3 19 438.2 93
- ----------------------------------------------------------------------------------
Operating income $ 108.7 $ 25.6 -- $ 9.4 172
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
1999 vs. 1998
CMG's revenues increased 28% from 1998, 18% pro forma for acquisitions.
Dedicated services revenues (typically longer-term relationships where CMG
provides value-added customer service, technical support and sales account
management primarily through personnel dedicated to a specific client)
increased 34%, which is primarily the result of growth in services provided
to communications, cable and direct broadcast clients. The growth in
dedicated services also reflects increased Internet-based services and
services in support of clients' e-commerce activities. Traditional,
campaign-based, revenues decreased by 1% as some major clients shifted their
emphasis towards dedicated programs. CMG's international revenues increased
54% reflecting the continued growth of the Company's dedicated customer
service business in Europe.
CMG's costs and expenses excluding special items increased 24% in 1999 from
1998, 14% pro forma for acquisitions. This increase was primarily due to
higher labor and facility costs needed to support the increased business
volume as CMG added five customer support contact centers and approximately
5,000 production workstations during the year. These increases were partially
offset by lower research and development spending resulting from the
completion of a project to implement a new system for CMG's employee care
business and by lower Year 2000 programming costs. Research and development
spending by CMG in 1999 focused on adding Internet-based customer support and
customer relationship management services to CMG's service offerings.
Depreciation and amortization expenses increased as a result of the new
contact centers opened in 1999 and the recognition of a full year of
amortization of goodwill and other intangible assets from the March 1998
acquisition of Transtech.
CMG's operating income excluding special items increased to $115.6 in 1999
from $68.2 in 1998. This 70% increase resulted from both increased revenues
and an improvement in operating margin from 7.8% in 1998 to 10.4% in 1999.
Margins in 1999 increased in each successive quarter from 9.4% in the first
quarter to 11.8% in the fourth quarter as a result of continued efficiencies
resulting from the Transtech integration plan and the substantial completion
of CMG's 1997 restructuring activities. While continued operating margin
expansion is expected in 2000, margins are not expected to grow at the rate
experienced in 1999.
The 1999 special items recorded at CMG were the result of a Convergys-wide
review of synergistic opportunities that began early in 1999 after the
Company's spin-off from CBI. The special items totaled $6.9 and include costs
to consolidate CMG's data center activities into an IMG data center, to
combine certain staff organizations with those of IMG and for the impairment
of certain software ($3.8). Included in this charge is an accrual of $1.3 for
the severance of approximately 45 employees, with most of the severed
employees being associated with the closed data center. The data center
consolidation activities were completed in the first quarter of 2000, while
the staff organization activities will be completed later in 2000.
[GRAPH]
1998 vs. 1997
CMG's 1998 revenues increased 94% from 1997. Acquisitions contributed $379.2
or 85% to the increase in dedicated service revenues. Traditional revenues
increased over 1997 reflecting a recovery in these revenues that began in the
third quarter of the year. CMG's international revenues increased from new
client relationships for dedicated customer support services.
29
<PAGE>
CMG's costs and expenses excluding special items increased 99% from 1997. The
acquisitions of Transtech and Maritz contributed $359.6 or 89% to the
increase. The remaining increase included increases of $14.9 in costs of
products and services resulting from higher revenues and an $8.6 increase in
Year 2000 programming costs. CMG's research and development costs increased
primarily from spending for the development of a new employee care business
system at Transtech, and initiatives to integrate CMG's inbound and outbound
operating systems. Depreciation and amortization expenses increased
significantly, principally as a result of acquisitions.
CMG's operating income excluding special items increased to $68.2 in 1998
from $44.4 in 1997. Transtech and Maritz contributed $19.6 to the increase,
with the remaining increase attributable to revenue increases and improved
margins. Cost savings related to the 1997 restructuring program and the
implementation of Transtech and Maritz integration plans drove CMG's margin
improvement from 6.3% in the second quarter of 1998 to 9.1% in the fourth
quarter of 1998.
CMG recorded special items in both 1998 and 1997. The 1998 special item was a
charge of $42.6 to expense purchased research and development costs resulting
from the Transtech acquisition. The 1997 special item was a charge of $35.0
for restructuring costs ($18.6) and associated asset impairments ($16.4).
Client Concentration
The Company's top three clients accounted for 53% of its revenues in 1999, up
from 47% in 1998, and some of the industries the Company serves have
experienced consolidation. The 1998 acquisition of Transtech and significant
growth in AT&T's outsourcing of dedicated customer support programs have
increased the Company's revenue concentration, but the related eight-year
customer management agreement with AT&T that runs into 2006 reduces the risk
of loss for that portion of the business. CMG provides services to DirecTV,
its second largest client, under a contract that was extended in 1999 through
2003. The risk posed by revenue concentration is also reduced by IMG's
multi-year contracts with its clients. IMG renegotiated contracts with two of
its largest clients, AT&T and Ameritech, during 1999 that involved exchanging
lower prices for longer contract terms.
During 1998, 360 Degree Communications, representing approximately 3% of the
Company's 1999 revenues, was acquired by ALLTEL, one of IMG's competitors. In
September 1999, the Company reached an agreement on a contract amendment with
ALLTEL, under which ALLTEL will migrate its subscribers from IMG's billing
software beginning in the second quarter of 2000. ALLTEL has indicated that
it expects to complete the migration of its subscribers by the end of 2001.
The contract will terminate when the migration of subscribers is complete.
Under the terms of the amended contract, IMG will receive payments totaling
$55 in installments primarily in 1999 and 2000, as well as amounts for
continued data processing and professional and consulting services through
the contract termination date. These payments will be recognized as revenue
as related services are performed through the contract termination date based
on the value of services provided, with the remainder to be recognized as a
contract termination penalty once the migration of ALLTEL subscribers is
complete. The amended contract provides a floor for annual processing
revenues to be billed to ALLTEL in both 2000 and 2001, as well as a monthly
minimum for any period after 2001 during which IMG provides any data
processing services under the contract. The amended contract is not expected
to impact IMG's revenues or operating income significantly in 2000, but IMG
will have to replace lost revenues beginning in 2001.
In October 1999, SBC Communications completed its acquisition of Ameritech, a
client representing approximately 3% of the Company's revenues for 1999. In
August 1999, IMG announced that it had agreed to an extension of the
Ameritech contract through September 30, 2004. The extended contract replaced
an existing arrangement under a binding letter of intent. Under the
agreement, IMG will remain the exclusive wireless
30
<PAGE>
billing service provider for the Ameritech operations acquired by SBC.
Additionally, the contract extension provides terms under which IMG will
continue to serve into 2001 the approximately 50% of Ameritech's wireless
subscribers who were transferred to GTE in the fourth quarter of 1999 under
provisions that the Company believes are as favorable as those currently in
place.
In October 1999, MediaOne, an IMG client representing less than 1% of the
Company's revenues, announced that its shareholders had approved its merger
with AT&T. The merger is currently awaiting regulatory approval. Under its
license contract with MediaOne, IMG has converted over 500,000 MediaOne
subscribers onto its systems. In October 1999, MediaOne notified IMG that it
would not move forward with additional subscriber conversions to IMG's
systems in 2000 until after the merger with AT&T is completed. IMG provides
services to MediaOne under a license agreement with over 70% of the contract
revenues guaranteed. Accordingly, the delay in MediaOne conversions will not
materially impact the Company's operating results for 2000.
Financial Condition, Liquidity and Capital Resources
<TABLE>
<CAPTION>
- ----------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
Operating cash flows $463.0[a] $146.4 $127.4
Capital expenditures 155.2 93.5 60.9
Net debt 267.5 463.0 57.0
Debt to capital 24%[b] 39% 12%
</TABLE>
[a] This amount includes $151 in proceeds from an accounts receivable
securitization.
[b] The decrease in debt to capital in 1999 reflects the $151 accounts
receivable securitization.
Operating cash flows have historically been more than sufficient to fund the
Company's cash needs, other than for very large acquisitions. Acquisitions
have historically been financed with a combination of borrowings and
operating cash flows. At December 31, 1999, the Company had $298 of variable
rate debt outstanding. The Company's borrowing facilities include a $250
borrowing capacity expiring in November 2000 and an additional $250 borrowing
capacity expiring in November 2002. During 1999, the Company entered into an
accounts receivable securitization agreement that generated $151 which was
used to repay a portion of outstanding borrowings under its credit
facilities. The Company will continue to service these accounts receivable
and the securitization agreement provides for the sale of additional
receivables as collections reduce the outstanding balance of the accounts
that were sold. The Company anticipates that future operating cash flows, its
available credit under existing facilities and its access to capital markets
will be sufficient to meet future capital needs.
Balance Sheet
The increase in cash and cash equivalents in 1999 is primarily the result of
cash held by Wiztec. The decrease in accounts receivable is the result of the
securitization of $151 in accounts receivable which more than offset a $52
increase that resulted from increased revenues. Excluding the effects of the
securitization, days sales outstanding decreased two days during 1999 to 68
days at December 31, 1999. Property and equipment increases are the result of
the acquisitions of Wiztec and TAI in 1999, as well as the opening of new
customer support contact centers during the year. Investments in marketable
securities include $50 of unrealized gains on equity investments made during
1999, principally Kana Communications, Inc. These gains have been recorded in
shareowners' equity as a component of other comprehensive income. The
increase in payables and other current liabilities includes increases of $38
in advanced billings to clients primarily resulting from the MediaOne license
agreement and the ALLTEL contract amendment. The remaining increase in
payables and other current liabilities is the result of increases in various
accrued liabilities caused principally by the timing of payments, an increase
in the volume of business and increases in accrued bonuses caused by improved
operating results.
31
<PAGE>
During 1999 and 1998, the Company incurred $4.0 and $6.6 in cash outflows,
respectively, related to the 1997 CMG restructuring plan. Future cash
outflows under the plan are expected to be approximately $6.6 for ongoing
facility lease obligations. Future cash outflows related to the 1999 special
charge for facility and staff consolidations are expected to be $3.7,
primarily for severance and ongoing lease obligations.
Year 2000 Programming
The Company initiated a program in 1995 to identify and address issues
associated with the ability of its date-sensitive information and business
systems and equipment to recognize the Year 2000 properly. Given its reliance
on its information and business systems, the Company's Year 2000 efforts have
primarily focused on information technology systems. The Company incurred
$13.9, $29.1 and $9.9 in expenses during 1999, 1998 and 1997, respectively,
in order to prepare for the Year 2000. Approximately 46% of the Company's
1999 Year 2000 spending was paid to third party service providers. The
Company has not experienced any significant problems associated with the date
change and expects to incur approximately $2 in expense in 2000 as it
continues to monitor and test ongoing compliance. While the Company does not
anticipate any significant problems regarding the Year 2000, there can be no
assurance that problems will not arise in the future as systems processing
occurs around leap-year and quarterly and annual time periods.
Market Risk
The Company derived approximately 6% of its 1999 consolidated revenues
outside of North America and is, accordingly, exposed to the impact of
foreign currency fluctuations. The Company is also exposed to the impact of
interest rate changes based on its use of variable rate financing. It is the
Company's policy to enter into interest rate and foreign currency
transactions only to the extent considered necessary to meet its objectives.
The Company does not enter into interest rate or foreign currency
transactions for speculative purposes. The Company's foreign currency
exposures were immaterial at December 31, 1999. In January 2000, the Company
announced an agreement to provide outsourced billing services to a client in
Brazil that will modestly increase the Company's overall exposure to foreign
currency fluctuations.
The Company's exposure to interest rate risk results from its variable rate
debt outstanding under its credit facility and from its receivables
securitization program that involves variable fees based on market
conditions. At December 31, 1999, the Company had $298 in debt outstanding
subject to variable interest rates. Additionally, the Company has sold $151
of accounts receivable that were still outstanding at December 31, 1999.
Based upon the Company's level of variable rate debt and receivables sold
under the securitization agreement at December 31, 1999, a one percentage
point increase in the weighted average interest rate would increase the
Company's annual interest expense by approximately $4.
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 the Company's control. These factors include: the timing of new
contracts, the timing of increased expenses incurred in support of new
business, the timing and frequency of client spending for system enhancement
requests, the timing of contractual rate reductions triggered by subscriber
growth and the seasonal pattern of the customer management segment of the
Company.
32
<PAGE>
Report of Management
Management is responsible for the preparation of the consolidated financial
statements and all related information appearing in this Annual Report. The
consolidated financial statements and notes have been prepared in conformity
with generally accepted accounting principles and include certain amounts
which are estimates based upon currently available information and
management's judgment of current conditions and circumstances.
To provide reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition and that accounting records are reliable for
preparing financial statements, management maintains a system of accounting
and other controls, including an internal audit function. Even an effective
internal control system, no matter how well designed, has inherent
limitations--including the possibility of circumvention or overriding of
controls--and therefore can provide only reasonable assurance with respect to
financial statement presentation. The system of accounting and other controls
is improved and modified in response to changes in business conditions and
operations and recommendations made by the independent accountants and the
internal auditors.
The Audit and Finance Committee of the Board of Directors, which is composed
of directors who are not employees, meets periodically with management, the
internal auditors and the independent accountants to review the manner in
which these groups of individuals are performing their responsibilities and
to carry out the Committee's oversight role with respect to auditing,
internal controls and financial reporting matters. Periodically, both the
internal auditors and the independent accountants meet privately with the
Committee and have access to its individual members.
Convergys engaged PricewaterhouseCoopers LLP, independent accountants, to
audit the consolidated financial statements in accordance with generally
accepted auditing standards, which include consideration of the internal
control structure. Their report appears on this page.
/s/ Steven G. Rolls /s/ Andre S. Valentine
Steven G. Rolls Andre S. Valentine
Chief Financial Officer Chief Accounting Officer
Report of Independent Accountants
To the Board of Directors and Shareowners of Convergys Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareowners' equity and comprehensive
income and cash flows present fairly, in all material respects, the financial
position of Convergys Corporation and its subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 11, 2000
33
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------
(Amounts in Millions Except Per Share Amounts) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 1,762.9 $1,447.2 $ 987.5
Costs and expenses:
Costs of products and services 996.1 826.4 540.2
Selling, general and administrative expenses 291.3 226.0 158.7
Research and development costs 87.2 81.9 68.6
Depreciation 86.0 68.1 37.9
Amortization 44.3 33.2 23.1
Year 2000 programming costs 13.9 29.1 9.9
Purchased research and development costs 2.0 42.6 --
Special charges 6.9 -- 35.0
- ------------------------------------------------------------------------------------------------
Total costs and expenses 1,527.7 1,307.3 873.4
- ------------------------------------------------------------------------------------------------
Operating Income 235.2 139.9 114.1
- ------------------------------------------------------------------------------------------------
Equity in earnings of cellular partnership 20.0 25.1 14.7
Other income (expense), net (0.2) (0.5) 7.2
Interest expense 32.5 33.9 5.4
- ------------------------------------------------------------------------------------------------
Income before income taxes 222.5 130.6 130.6
Income taxes 85.5 49.6 44.0
- ------------------------------------------------------------------------------------------------
Net Income $ 137.0 $ 81.0 $ 86.6
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $ .90 $ .57 $ .63
Diluted $ .89 $ .57 $ .63
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 151.6 142.7 137.0
Diluted 154.5 142.9 137.0
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
at December 31,
- --------------------------------------------------------------------------------------------
(Amounts in Millions Except Share Amounts) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 30.8 $ 3.8
Receivables, net of allowances of $12.4 and $9.8 214.8 314.3
Deferred income tax benefits 16.5 10.9
Prepaid expenses and other current assets 35.8 31.5
- -------------------------------------------------------------------------------------------
Total current assets 297.9 360.5
Property and equipment, net 335.6 249.8
Goodwill and other intangibles, net 754.3 687.4
Investment in cellular partnership 79.4 81.6
Investments in marketable securities 55.5 2.3
Deferred charges and other assets 56.8 69.3
- --------------------------------------------------------------------------------------------
Total Assets $1,579.5 $1,450.9
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 48.0 $ 466.8
Payables and other current liabilities 339.4 231.1
- --------------------------------------------------------------------------------------------
Total current liabilities 387.4 697.9
Long-term debt 250.3 --
Other long-term liabilities 14.6 21.5
- --------------------------------------------------------------------------------------------
Total liabilities 652.3 719.4
- --------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareowners' Equity
Preferred shares--without par value, 5,000,000 authorized -- --
Common shares--without par value, 500,000,000 authorized 206.0 206.0
Additional paid-in capital 491.5 475.1
Retained earnings 190.0 53.0
Accumulated other comprehensive income 51.6 (2.6)
Treasury stock--at cost (11.9) --
- --------------------------------------------------------------------------------------------
Total shareowners' equity 927.2 731.5
- --------------------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $1,579.5 $1,450.9
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------
(Amounts in Millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $137.0 $ 81.0 $ 86.6
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 130.3 101.3 61.0
Deferred income taxes (20.9) (8.3) (13.0)
Special charges 6.9 -- 35.0
Purchased research and development costs 2.0 42.6 --
Cellular partnership distributions in excess of
(less than) earnings 2.2 (25.1) (2.1)
Proceeds from receivables securitization, net 151.0 -- --
Changes in assets and liabilities, net of effects from acquisitions:
Increase in receivables (45.2) (41.8) (16.2)
Increase (decrease) in payables and other current liabilities 86.1 7.4 (18.0)
Other, net 13.6 (10.7) (5.9)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 463.0 146.4 127.4
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (155.2) (93.5) (60.9)
Acquisitions, net of cash acquired (122.4) (664.9) (13.9)
Purchase of marketable securities (5.6) -- --
Proceeds from sales of marketable securities 6.3 -- --
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (276.9) (758.4) (74.8)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Borrowings (payments) under revolving credit facilities, net (168.5) 460.0 --
Repayment of long-term debt -- -- (9.4)
Change in debt payable to CBI, net -- (52.3) (25.0)
Transfers to CBI, net -- -- (18.4)
Purchase of treasury shares (11.9) -- --
Other, net 4.9 -- --
Issuance of common shares 16.4 206.0 --
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (159.1) 613.7 (52.8)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 27.0 1.7 (0.2)
Cash and cash equivalents at beginning of year 3.8 2.1 2.3
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 30.8 $ 3.8 $ 2.1
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid for interest $ 32.2 $ 33.2 $ 5.4
Income taxes paid, net of refunds $ 86.8 $ 21.8 $ 47.9
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
36
<PAGE>
Consolidated Statements of Shareowners' Equity and Comprehensive Income
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Number Accumulated
of Additional Other
Common Common Paid-In Treasury Retained Shareowners' Comprehensive
(Amounts in Millions) Shares Shares Capital Stock Earnings Investment Income Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 360.2 $ 4.0 $364.2
Transfers to CBI, net (18.4) (18.4)
Comprehensive Income
Net income 86.6 86.6
Other comprehensive
income, net of tax:
Currency translation
adjustments (1.6) (1.6)
----- -----
Other comprehensive income (1.6) (1.6)
-----
Total comprehensive income 85.0
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 428.4 2.4 430.8
Initial capitalization of
Company, after share split 137.0 $457.1 (457.1)
Issuance of common shares 14.9 $206.0 206.0
Transfers from CBI, net 18.0 0.7 18.7
Comprehensive Income
Net income $53.0 28.0 81.0
Other comprehensive
income, net of tax:
Currency translation
adjustments (3.0) (3.0)
Unrealized loss
on investment (2.0) (2.0)
----- -----
Other comprehensive income (5.0) (5.0)
-----
Total comprehensive income 76.0
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 151.9 206.0 475.1 53.0 -- (2.6) 731.5
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of common shares 1.1 16.4 16.4
Repurchase of common
shares $(11.9) (11.9)
Comprehensive Income
Net income 137.0 137.0
Other comprehensive
income, net of tax:
Currency translation
adjustments 2.2 2.2
Unrealized gain on
investments 52.0 52.0
---- ----
Other comprehensive income 54.2 54.2
----
Total comprehensive income 191.2
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 153.0 $206.0 $491.5 $(11.9) $190.0 -- $51.6 $927.2
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
37
<PAGE>
Notes to Financial Statements
(Amounts in Millions Except Share and Per Share Amounts)
1. Background and Basis of Presentation
The Company was organized on May 8, 1998, as a wholly owned subsidiary of
Cincinnati Bell Inc. (CBI). In July 1998, CBI contributed to the Company the
outstanding common shares of the Information Management Group (IMG), the
Customer Management Group (CMG) and a 45% limited partnership interest in a
cellular communications services provider in southwestern and central Ohio
and northern Kentucky (the Cellular Partnership). On August 13, 1998, the
Company issued 14.95 million common shares, approximately 10% of the
outstanding shares, to the public at a price of $15 per share less
underwriting discounts and commissions of $.98 per share (the Offering). On
December 31, 1998, CBI distributed all of its remaining interest in the
Company to CBI shareholders (the Distribution).
The consolidated financial statements for 1998 and 1997 have been prepared
using the historical results of operations and bases of the assets and
liabilities of the Company's businesses. The 1998 and 1997 financial
statements include the allocation of certain expenses relating to the Company
by CBI. Management believes these allocations are reasonable. All material
intercompany transactions and balances between the Company and its
subsidiaries have been eliminated. Certain prior year amounts have been
reclassified to conform to current year presentation.
2. Accounting Policies
Consolidation--The consolidated financial statements include the accounts of
the Company's wholly owned subsidiaries. The Cellular Partnership interest is
accounted for under the equity method.
Use of Estimates--Preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
Depreciation is based on the straight-line method over the estimated useful
lives 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. Leasehold improvements are depreciated over the shorter of
their estimated useful life or the remaining term of the associated lease.
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, and
capitalized thereafter, subject to assessment of realizability. Amortization
of the capitalized amounts is computed using the greater of the sales ratio
method or the straight-line method over a life of four years or less. At both
December 31, 1999 and 1998, capitalized costs for software to be marketed was
fully amortized.
Internal Use Software--Effective January 1, 1999, the Company adopted
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" that requires the
capitalization of certain expenditures for software that is purchased or
internally developed for use in the business. Amortization of internal use
software begins when the software is ready for service and continues on the
straight-line method over a three-year life. The prospective implementation
of SOP 98-1 did not have a material impact on the Company's results of
operations.
Goodwill and Other Intangibles--Goodwill and other intangibles resulting from
acquisitions are recorded at cost and amortized on a straight-line basis over
lives ranging from five to forty years. Goodwill and other
38
<PAGE>
intangibles are evaluated periodically if events or circumstances indicate a
possible inability to recover their carrying amounts. This 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. Included in the fair value of certain acquired
companies are purchased research and development activities that had not
reached technological feasibility and had no alternative future use. Such
amounts are determined by independent valuation and expensed immediately at
the date of acquisition.
Revenue Recognition--IMG's data processing and professional and consulting
revenues are recognized as services are performed. Software license revenues
are recognized upon delivery and acceptance of the licensed software.
Revenues for software maintenance and post-contract support are recognized
over the related agreement period. Many of IMG's software license agreements
include both software licenses and other elements. For these multiple element
arrangements, the Company determines the fair value of each element based on
specific objective evidence for that element and allocates total revenue from
these arrangements to each element based on its fair value. The revenue
associated with each element is recognized using the respective methodology
discussed above. If no specific objective evidence of fair value exists for
each element, revenue for the entire arrangement is recognized ratably over
the license period. CMG revenues are generally recognized as the related
customer management services are performed.
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. Revenues and expenses are translated at average
exchange rates for the year. Translation adjustments are accumulated and
reflected as adjustments to comprehensive income.
Investments--The Company accounts for its 45% ownership interest in the
Cellular Partnership under the equity method. Equity investments in other
entities are classified as available-for-sale and recorded at fair value
where such value is readily determinable. Unrealized gains or losses on those
investments, net of tax, are reported as a component of other comprehensive
income and included in shareowners' equity, but excluded from the
determination of net income until realized.
Financial Instruments--The Company's financial instruments consist of cash,
cash equivalents and debt. The carrying amount of such instruments
approximates fair value.
3. Acquisitions
The following is a summary of significant acquisitions, all accounted for
under the purchase method:
<TABLE>
<CAPTION>
1999 1998
-------------------- ----------------------
TAI Wiztec Transtech Maritz
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchase Price $ 19.5 $123.0 $625.0 $ 30.0
Allocation
Tangible assets $ 0.7 $ 16.6 $ 91.0 $ 1.9
Purchased software -- 28.9 4.4 --
Contracts -- 2.5 68.2 --
Trademarks -- 13.3 -- --
Assembled
workforce -- 2.0 11.4 --
Purchased research
and development -- 2.0 42.6 --
Goodwill 18.8 57.7 407.4 28.1
Goodwill amortization
life, in years 10 15 30 25
</TABLE>
During 1999, the Company paid approximately $123 in a series of transactions
to increase its ownership interest in Wiztec Solutions Ltd. (Wiztec) from
approximately 20% at the beginning of the year to 100%. Wiztec, based in
Herzlia, Israel, is a provider of subscriber management systems for
multi-channel subscription television operators.
In June 1999, the Company paid approximately $20 to acquire the assets of
Technology Applications Inc.
39
<PAGE>
(TAI), a software development and systems integration company that creates
customer care and billing software for Internet service providers.
In February 1998, CMG acquired American Transtech, Inc. and the assets of
AT&T's Canadian customer care business (Transtech) from AT&T for
approximately $625 in cash. At the time of the acquisition, the Company began
a process of evaluating an integration plan for the acquired operations. The
Company has accrued approximately $7.0 for severance of approximately 375
client service and administrative employees. Through December 31, 1998, the
Company made payments of $6.5 for the severance of 354 employees. The
remainder of the liability was paid in 1999 for the severance of 20 employees.
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. All other acquisitions were
immaterial.
<TABLE>
<CAPTION>
Year Ended
December 31,
- --------------------------------------------------
1998 1997
- --------------------------------------------------
<S> <C> <C>
Revenues $ 1,509.6 $ 1,389.9
Net income 75.6 73.5
Earnings per share:
Basic $ .53 $ .54
Diluted $ .53 $ .54
</TABLE>
In January 1998, CMG acquired the customer management assets of Maritz, Inc.
for approximately $30 in cash. The acquisition agreement contains provisions
that could increase the purchase price and related goodwill by up to
approximately $20 based upon the operating results of the acquired business
over the two-year period after the acquisition. Based on the first year of
results following the acquisition, the Company paid an additional $3.7 to the
former owner in 1999.
4. Business Restructuring and Special Charges
In addition to the $2.0 charge for purchased research and development from
the Wiztec acquisition, the Company recorded special items in 1999 related to
the Cellular Partnership, certain consolidation activities, and a realized
investment gain of $1.9. The special items related to the Cellular
Partnership principally resulted from equipment impairments recorded by the
partnership subsequent to the merger of SBC Communications and Ameritech, the
general partner. The special items recorded by the Cellular Partnership
reduced the Company's equity income from the partnership by $12.4. The
special item for consolidation activities of $6.9 reflects costs associated
with the closure of a CMG data center, the impairment of certain software and
the combination of certain staff organizations between the Company's two
operating segments. This charge includes an accrual of $1.3 for the severance
of approximately 45 employees, most of whom are associated with the data
center.
In 1997, a restructuring plan for CMG was approved that included the
consolidation of certain CMG operating divisions and facilities. CMG recorded
special charges of $35.0 ($23.0 after tax) consisting of a $18.6
restructuring charge and a $16.4 asset impairment charge for property and
goodwill associated with the facilities to be closed.
The restructuring charge included $9.5 in lease termination costs, $7.5 in
severance pay under existing severance plans and $1.6 in other restructuring
costs. The Company anticipated the severance of approximately 425 client
service and administrative employees under the plan. The number of employees
terminated under the plan was 29, 363 and 37 in 1999, 1998 and 1997,
respectively.
Restructuring liability activity consists of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $10.6 $17.2 --
Restructuring charge -- -- $18.6
Severance payments (0.9) (3.9) (1.4)
Lease termination payments (2.0) (1.6) --
Other costs (1.1) (1.1) --
- ---------------------------------------------------------------
Balance at December 31 $ 6.6 $10.6 $17.2
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
40
<PAGE>
At December 31, 1999, the 1997 CMG restructuring plan activities were
substantially completed with the balance of the restructuring liability
related to ongoing lease termination payments.
5. Income Taxes
The Company's provision for income taxes, calculated on a separate return
basis for periods prior to the Distribution, consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 81.7 $ 45.2 $ 45.6
Foreign 15.5 3.3 0.4
State and local 9.2 9.4 11.0
- ---------------------------------------------------------
Total current 106.4 57.9 57.0
Deferred (20.9) (8.3) (13.0)
- ---------------------------------------------------------
Total $ 85.5 $ 49.6 $ 44.0
- ---------------------------------------------------------
- ---------------------------------------------------------
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
with the effective tax rate for each year:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net
of federal income tax benefit 2.5 4.0 4.3
Research tax credits (1.3) (2.9) (10.4)
Non-deductible amortization of
intangible assets 2.3 1.6 2.4
Other (0.1) 0.3 2.4
- ----------------------------------------------------------------------
Effective rate 38.4% 38.0% 33.7%
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
The resolution of federal tax return audits for 1989 through 1994 resulted in
the recognition of a significant amount of research and experimentation tax
credits by the Company in 1997.
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
at December 31,
- ------------------------------------------------------------
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Restructuring charge $ 4.5 $ 4.6
Loss carryforwards 7.3 26.1
Depreciation and amortization -- 7.9
Allowance for doubtful accounts 5.6 2.8
State income taxes 4.9 4.1
Pension and employee benefits 6.0 --
Other 15.5 5.0
Valuation allowance (2.8) (21.0)
- ------------------------------------------------------------
Total deferred tax asset 41.0 29.5
- ------------------------------------------------------------
Deferred tax liability:
Depreciation and amortization 7.1 --
Other 1.7 1.0
- ------------------------------------------------------------
Total deferred tax liability 8.8 1.0
- ------------------------------------------------------------
Net deferred tax asset $32.2 $28.5
- ------------------------------------------------------------
- ------------------------------------------------------------
</TABLE>
The net change in the valuation allowance during 1999 results from realized
and unrealized gains on marketable securities and other investments. This
change had no impact on net income, as it is reflected in other comprehensive
income.
Convergys has not provided for U.S. federal income taxes or foreign
withholding taxes on approximately $21.6 of undistributed earnings of its
foreign subsidiaries at December 31, 1999, because such earnings are intended
to be reinvested indefinitely. It is not practicable to determine the amount
of applicable taxes that would be due if such earnings were distributed.
41
<PAGE>
6. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
at December 31,
- -----------------------------------------------------------
1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Revolving credit facility -- $460.0
Commercial paper $268.0 --
Other 30.3 6.8
- -----------------------------------------------------------
Total $298.3 $466.8
Less current maturities 48.3 466.8
- -----------------------------------------------------------
Long-term debt $250.0 --
- -----------------------------------------------------------
- -----------------------------------------------------------
Weighted average interest rates:
Revolving credit facilities 7.1% 6.2%
Commercial paper 6.2% --
Other 5.7% --
</TABLE>
At December 31, 1999, the Company had both an unused $250 revolving credit
facility extending through November 2000 and a $250 revolving credit facility
extending through November 2002. At December 31, 1999, the Company had issued
$268 of commercial paper, backed by the revolving credit facilities, with
maturities ranging from 1 to 60 days. The Company classified $250 of the
outstanding commercial paper borrowings as long-term based on the Company's
intent and ability to refinance these borrowings under the long-term credit
facility. Other debt at December 31, 1999 consisted primarily of $30 of an
uncommitted line of credit with a bank. The credit agreements include certain
restrictive covenants including maintenance of interest coverage and debt to
capitalization ratios. Interest rates under the credit facilities are
generally based on LIBOR adjusted for an index related to the Company's
credit ratings.
During 1998 and 1997, the Company's consolidated financial statements
included an allocation of CBI's consolidated debt and the related interest
expense based on the terms of the Plan of Reorganization and Distribution
Agreement between the Company and CBI. The Company believes the allocations
of interest expense from CBI are reasonable estimates of the cost of
financing its assets and operations prior to the Distribution.
7. Sale of Receivables
In October 1999, the Company entered into a three-year agreement to sell a
portion of its domestic trade accounts receivable. The maximum amount of
outstanding receivables to be sold under the agreement is $200. As
collections reduce the outstanding balance, the Company may sell additional
receivables. At December 31, 1999, the Company had sold $151 of outstanding
receivables. The full amount of the allowance for doubtful accounts has been
retained since the Company holds a retained interest in the sold receivables
of $33. In accordance with Statement of Financial Accounting Standards 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the sales have been reflected as a reduction
of accounts receivable and as a cash flow from operating activities. The cost
of the program, $3.0 in 1999, which is based on the amount and timing of
outstanding sold receivables, is recorded as a component of interest expense.
8. Employee Benefit Plans
Prior to January 1, 1999, the Company participated in CBI's noncontributory
defined benefit pension and postretirement plans. Accordingly, the Company's
financial statements for 1998 and prior periods reflect the costs experienced
for its employees and retirees while included in those plans. Effective
January 1, 1999, the Company assumed responsibility for employee benefit
plans covering its active employees and retirees.
Pensions
The Company sponsors three defined benefit pension plans: one for all
eligible employees (the cash balance plan), one nonqualified, unfunded
executive deferred compensation plan and one supplementary, nonqualified,
unfunded plan for certain senior managers. The pension benefit formula for
the cash balance plan is determined by a combination of compensation-based
credits and annual guaranteed interest credits. Benefits for the executive
deferred compensation plan are based on employee deferrals and interest
credits. Benefits for the supplementary plan are based on years of service
and eligible pay. Funding of the cash balance plan has been
42
<PAGE>
achieved through contributions made to an irrevocable trust fund. The
contributions have been determined using the aggregate cost method. The
projected unit credit cost method is used for determining pension cost for
financial reporting purposes.
Pension cost included the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Service cost (benefits earned
during the period) $ 12.8 $ 11.4 $ 4.8
Interest cost on projected
benefit obligation 7.7 18.2 17.6
Expected return on plan assets (12.0) (21.2) (19.9)
Amortization and deferrals--net (0.4) (0.4) (0.3)
- -----------------------------------------------------------------------
Pension cost $ 8.1 $ 8.0 $ 2.2
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>
The following table sets forth the pension plans' funded status:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $111.2 $ 87.1
Service cost 12.8 11.4
Interest cost 7.7 18.2
Amendments -- 0.4
Actuarial loss (gain) 13.0 (2.0)
Benefits paid (7.3) (3.9)
- ---------------------------------------------------------------------
Benefit obligation at end of year 137.4 111.2
Change in plan assets:
Fair value of plan assets at
beginning of year 168.2 156.8
Actual return on plan assets 15.5 14.7
Employer contribution 2.4 0.6
Benefits paid (7.3) (3.9)
- ---------------------------------------------------------------------
Fair value of plan assets at end of year 178.8 168.2
Funded status 41.4 57.0
Unrecognized transition asset (1.8) (2.1)
Unrecognized prior cost 3.9 4.7
Unrecognized net gain (57.0) (67.3)
- ---------------------------------------------------------------------
Accrued benefit expense $(13.5) $ (7.7)
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
The benefit obligation related to the unfunded plans was $51.1 and $32.8 at
December 31, 1999 and 1998, respectively. At December 31, 1999, plan assets
include $20.6 of Company common shares.
The following rates were used in determining the actuarial present value of
the projected benefit obligation and pension cost for the pension plans:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate--projected
benefit obligation 7.75% 6.50% 7.00%
Future compensation growth rate 4.75% 4.00% 4.00%
Expected long-term rate of return
on plan assets 9.00% 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 either
matching a portion of the employee contributions, a percentage of employee
earnings, or a discretionary profit sharing contribution. Total Company
contributions to the defined contribution plans were $8.6, $6.8 and $5.8 for
1999, 1998 and 1997, respectively.
Employee Postretirement Benefits Other Than Pensions
The Company sponsors separate postretirement health and life insurance plans
for certain eligible employees. Convergys funds its group life insurance
benefits through Retirement Funding Accounts (RFAs) and funds healthcare
benefits using Voluntary Employee Benefit Association (VEBA) trusts. It is
the Company'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 Company's postretirement benefit cost was $2.0,
$2.0 and $1.8 for 1999, 1998 and 1997, respectively.
9. Common and Preferred Shares
Share Repurchase Plan
In November 1999, the Board of Directors authorized the repurchase of up to 7
million shares of common stock from time to time as market and business
conditions
43
<PAGE>
warrant. At December 31, 1999, the Company had spent $11.9 for the repurchase
of 580,000 shares, which have been treated as treasury stock.
Shareholder Rights Plan
Under the Shareholder Rights Plan, a dividend of one preferred share purchase
right for each outstanding common share was granted to shareholders of record
at close of business on December 1, 1998. Under certain conditions, each
right entitles the holder to purchase one one-hundredth of a Series A
preferred share. The rights cannot be exercised or transferred separately
from common shares, unless a person or group acquires 15% or more of the
Company's outstanding common shares. The rights will expire on December 1,
2008, unless earlier redeemed by the Company.
Preferred Shares
The Company is authorized to issue up to 5 million preferred shares, of which
4 million would have voting rights. At December 31, 1999 and 1998, there were
no preferred shares outstanding.
10. Stock-Based Compensation Plans
At December 31, 1999, the Company had authorized 30 million shares of common
stock for issuance under the Convergys Long-Term Incentive Plan (Convergys
LTIP). During 1999 and 1998, certain Company employees were granted stock
options and other stock-based awards under the Convergys LTIP. During 1998
and in prior years, certain employees of the Company were granted stock
options and other stock-based awards under CBI's Long-Term Incentive Plan
(CBI LTIP). Effective December 31, 1998, awards outstanding under the CBI
LTIP were modified to the extent that, for each CBI option or share award,
the holder received, in addition, a Convergys option or share award pursuant
to the Convergys LTIP. The Convergys stock options or share awards issued to
holders of CBI options or share awards on December 31, 1998, have the same
vesting provisions, option periods and other terms and conditions as the
original CBI options. The exercise prices of the Company and CBI stock
options issued to holders of CBI options at the Distribution date were
established so the options had the same ratio of exercise price per share to
market value per share as the original stock option. Under both the Convergys
LTIP and the CBI LTIP, options are granted with exercise prices that are no
less than market value of the stock at the grant date. Generally, stock
options have a ten-year term and vesting terms of three to four years. There
were no Convergys stock appreciation rights granted or outstanding during the
three-year period ended December 31, 1999.
The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) 123, "Accounting for Stock-Based Compensation,"
but applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for its plans. If the Company had elected to
recognize compensation cost for the issuance of Company or CBI options to
Company employees based on the fair value at the grant dates for awards
consistent with the method prescribed by SFAS 123, net income and earnings
per share would have been impacted as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 137.0 $ 81.0 $ 86.6
Pro forma compensation
expense, net of tax benefit (10.8) (8.3) (3.8)
- -------------------------------------------------------------------------
Pro forma $ 126.2 $ 72.7 $ 82.8
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Diluted earnings per share:
As reported $ .89 $ .57 $ .63
Pro forma $ .82 $ .51 $ .60
</TABLE>
Note: The pro forma effect on net income for all periods shown above 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. Additionally, the pro forma disclosure for 1998
includes incremental compensation expense based on the difference in the fair
value of the replacement Company and CBI options issued at the date of the
Distribution to Company employees who held CBI options.
The weighted average fair value on the date of grant for the Convergys
options granted during 1999 and 1998 was $9.31 and $7.68, respectively. The
weighted average fair values at the date of grant for the CBI options
44
<PAGE>
granted to Company employees during 1998 and 1997 were $8.78 and $9.64,
respectively. Such amounts were estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Convergys CBI
- -----------------------------------------------------------------
1999 1998 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Expected
dividend yield 0.0% 0.0% 1.4% 1.8%
Expected volatility 47.8% 44.9% 25.0% 29.9%
Risk free
interest rate 4.8% 5.4% 5.7% 6.2%
Expected holding
period, in years 4 4 4 4
</TABLE>
Presented below is a summary of the status of the outstanding Convergys and
CBI stock options issued to the Company's employees, the issuance of
Convergys options to CBI option-holders at the date of Distribution, and
related transactions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Weighted
Average
Exercise
Shares in thousands Shares Price
- -------------------------------------------------------------------
<S> <C> <C>
CBI options held by Company employees
at January 1, 1997 3,437 $13.14
Granted 1,095 $30.01
Exercised (676) $10.08
Forfeited/expired (119) $23.90
- -------------------------------------------------------------------
CBI options held by Company employees
at December 31, 1997 3,737 $17.16
Granted 1,322 $31.25
Exercised (335) $12.02
Forfeited/expired (274) $28.26
- -------------------------------------------------------------------
CBI options held by Company employees
at December 31, 1998 4,450 $20.33
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Convergys options issued to holders of
CBI options at December 31, 1998 7,284 $12.26
Convergys options granted in 1998 2,004 $15.01
Convergys options forfeited in 1998 (20) $15.00
- -------------------------------------------------------------------
Convergys options outstanding at
December 31, 1998 9,268 $12.30
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Convergys options granted in 1999 2,509 $21.79
Convergys options exercised in 1999 (716) $ 9.17
Convergys options forfeited in 1999 (346) $18.68
- -------------------------------------------------------------------
Convergys options outstanding at
December 31, 1999 10,715 $14.52
Convergys options exercisable at
December 31, 1999 5,164 $10.05
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
The following table summarizes the status of the Company stock options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Shares in Options
thousands Options Outstanding Exercisable
- ---------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise prices Shares Life Price Shares Price
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.72 to $ 6.62 2,336 3.4 $ 5.29 2,336 $ 5.29
$ 6.63 to $ 9.63 972 5.8 9.33 972 9.33
$ 9.64 to $14.03 88 6.5 13.87 88 13.87
$14.04 to $19.15 4,897 8.0 16.35 1,676 16.33
$19.16 to $22.75 2,422 9.0 21.84 92 20.56
- ---------------------------------------------------------------------------------------
Total 10,715 7.0 $14.52 5,164 $10.05
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
11. Commitments and Contingencies
Commitments
The Company leases certain facilities and equipment used in its operations
under operating leases. Total rent expense was approximately $110.3, $117.2
and $94.8 in 1999, 1998 and 1997, respectively.
At December 31, 1999, the total minimum rental commitments under
noncancelable leases are as follows:
<TABLE>
<S> <C>
2000 $ 67.1
2001 54.4
2002 46.2
2003 39.1
2004 29.3
Thereafter 95.5
- ---------------------------------------------------------------------------------
Total $331.6
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
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 its financial
condition or results of operations.
45
<PAGE>
12. Additional Financial Information
<TABLE>
<CAPTION>
at December 31,
- -----------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Property and equipment, net:
Land $ 6.2 $ 6.2
Buildings 47.9 47.8
Leasehold improvements 72.6 54.3
Equipment 287.7 226.2
Software 195.0 136.2
Construction in progress and other 48.1 27.9
- -----------------------------------------------------------------
657.5 498.6
Less: Accumulated depreciation (321.9) (248.8)
- -----------------------------------------------------------------
$335.6 $249.8
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Goodwill and intangibles, net:
Goodwill $834.4 $744.5
Other intangible assets 92.6 79.6
- -----------------------------------------------------------------
927.0 824.1
Less: Accumulated amortization (172.7) (136.7)
- -----------------------------------------------------------------
$754.3 $687.4
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Investments in marketable securities:
Cost basis $ 5.6 $ 4.3
Unrealized gains (losses) 49.9 (2.0)
- -----------------------------------------------------------------
$ 55.5 $ 2.3
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Payables and other current liabilities:
Accounts payable $ 40.9 $ 81.1
Accrued taxes 38.3 23.1
Accrued payroll-related expenses 122.5 67.2
Accrued expenses, other 67.6 19.5
Restructuring and exit costs 12.1 21.3
Advance billing and customer deposits 58.0 18.9
- -----------------------------------------------------------------
$339.4 $231.1
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Accumulated other comprehensive income:
Currency translation adjustments $ 1.6 $ (0.6)
Unrealized gain (loss) on investments 50.0 (2.0)
- -----------------------------------------------------------------
$ 51.6 $ (2.6)
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
Cellular Partnership
Summarized financial information for the Cellular Partnership is as follows:
<TABLE>
<CAPTION>
at December 31,
- --------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 93.8 $ 63.0 $ 42.6
Non-current assets 109.3 139.6 107.9
Current liabilities 22.1 18.0 24.3
Non-current liabilities 1.9 2.0 2.0
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $210.0 $203.9 $189.7
Operating income 49.6 60.6 37.8
Net income 45.0 58.4 33.2
</TABLE>
Note: The Cellular Partnership's results for 1999 reflect special charges
recorded by the Partnership related to the acquisition of Ameritech, the
general partner, by SBC Communications (see Note 4).
In the fourth quarter of 1999, the Company entered into transactions where it
purchased and sold call options expiring in January 2000 on the S&P 500 index
of equity securities. The transactions were entered into for investment
purposes and resulted in a net investment of approximately $7.7 as of
December 31, 1999 which is included in cash and cash equivalents. The
investments in the purchased and sold call options are presented on a net
basis because the contracts provided for a right of offset. In January 2000,
the remaining option contracts were terminated and the Company received $7.7
in proceeds. The transactions did not result in any material gain or loss for
financial reporting purposes.
13. Transactions and Agreements with CBI
The Company and CBI entered into the Plan of Reorganization and Distribution
Agreement dated July 20, 1998 (the Agreement). The Agreement provides that,
among other things, the Company will indemnify CBI for all liabilities and
contingent liabilities arising from the Company's business and operations or
otherwise assigned to the Company. The Agreement provides for the equal
sharing of contingent liabilities not allocated to one of the two companies.
In addition, the Company has a number of other agreements with CBI regarding
federal, state and local tax allocation and sharing, employee benefits,
general services, telecommunications support services provided to the Company
by CBI and billing and data processing and customer management services
46
<PAGE>
provided by the Company to CBI. The Company earned revenues from CBI totaling
$49.8 and $49.6, and incurred expenses for communication and other services
from CBI of $10.1 and $18.6, in 1998 and 1997, respectively. The Company also
incurred $10.6 and $7.7 in allocated overhead costs from CBI in the same
periods.
14. Industry Segment and Geographic Operations
Industry Segment Information
The Company operates in two industry segments, which are identified by
service offerings. IMG is principally engaged in providing information
systems and billing services to the communications, cable and broadband
services industries. CMG provides a full range of outsourced marketing and
customer service solutions to large companies.
The Company does not allocate activities below the operating income level to
its reported segments. The Company's business segment information is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
IMG $ 687.1 $ 602.0 $ 548.0
Less intersegment (35.1) (24.6) (7.9)
CMG 1,110.9 869.9 447.6
Less intersegment 0.0 (0.1) (0.2)
- -------------------------------------------------------------------
$1,762.9 $1,447.2 $ 987.5
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Depreciation
IMG $ 29.7 $ 23.9 $ 17.7
CMG 55.2 44.2 20.2
Corporate 1.1 -- --
- -------------------------------------------------------------------
$ 86.0 $ 68.1 $ 37.9
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Amortization
IMG $ 12.8 $ 6.0 $ 16.8
CMG 31.5 27.2 6.3
- -------------------------------------------------------------------
$ 44.3 $ 33.2 $ 23.1
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Special items
IMG $ 2.0 -- --
CMG 6.9 $ 42.6 $ 35.0
- -------------------------------------------------------------------
$ 8.9 $ 42.6 $ 35.0
- -------------------------------------------------------------------
- -------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Operating income
IMG $132.3 $116.5 $104.7
CMG 108.7 25.6 9.4
Corporate and other (5.8) (2.2) --
- -------------------------------------------------------------------
$235.2 $139.9 $114.1
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Capital Expenditures
(excluding acquisitions)
IMG $ 41.1 $ 39.3 $ 24.5
CMG 101.9 53.9 36.4
Corporate and other 10.8 0.3 --
- --------------------------------------------------------------------
$153.8 $ 93.5 $ 60.9
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
at December 31,
- ------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Total Assets
IMG $ 503.0 $ 384.0
CMG 953.1 981.2
Corporate and other 123.4 85.7
- ------------------------------------------------------------------------
$1,579.5 $1,450.9
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
Geographic Operations
The following table presents certain geographic information regarding the
Company's operations:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
North America $1,653.8 $1,367.7 $905.8
International 109.1 79.5 81.7
- ------------------------------------------------------------------------
$1,762.9 $1,447.2 $987.5
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
at December 31,
- ------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Long-lived assets
North America $1,058.6 $1,038.7
International 104.5 34.1
- ------------------------------------------------------------------------
$1,163.1 $1,072.8
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
47
<PAGE>
Concentrations
Both of the Company's segments derive significant revenues from AT&T.
Revenues from AT&T were 40.2%, 35.4% and 30.1% of the Company's consolidated
revenues for 1999, 1998 and 1997, respectively. Accounts receivable from AT&T
totaled $83.9 and $99.6 at December 31, 1999 and 1998, respectively. The
relationship with AT&T includes the Company's use of AT&T communication
services, which is particularly significant to the CMG segment. Spending for
these services with AT&T was $100.7, $83.7 and $39.2 in 1999, 1998 and 1997,
respectively.
15. Earnings Per Share
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Per Share
Income Shares Amount
- --------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Basic EPS $ 137.0 151.6 $ .90
Effect of dilutive securities:
Stock-based compensation
arrangements -- 2.9 .01
- --------------------------------------------------------------------------
Diluted EPS $ 137.0 154.5 $ .89
- --------------------------------------------------------------------------
1998
Basic EPS $ 81.0 142.7 $ .57
Effect of dilutive securities:
Stock-based compensation
arrangements -- 0.2 --
- --------------------------------------------------------------------------
Diluted EPS $ 81.0 142.9 $ .57
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
There were no dilutive securities outstanding during 1997. Accordingly, for
that year basic EPS and diluted EPS were equal.
The EPS information for 1998 and 1997 has been calculated giving retroactive
recognition of the share split, effective August 4, 1998, which increased the
number of then outstanding common shares to 137.0 million.
16. Recently Issued Accounting Standards
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company occasionally employs 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
such financial instruments for trading purposes. The Company will adopt SFAS
133, as required, in the year 2001, and does not expect the impact of
adoption to be material.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". SAB 101 interprets and expands upon existing guidance regarding
revenue recognition. The impact of SAB 101 on the Company's future revenue
recognition will be dependent on the nature and terms of services offered by
the Company in the future.
17. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 399.8 $ 426.2 $ 450.2 $ 486.7 $ 1,762.9
Operating
income $ 52.8 $ 54.1 $ 62.1 $ 66.2 $ 235.2
Net income $ 32.4 $ 32.8 $ 39.7 $ 32.1 $ 137.0
Earnings
per share:
Basic .21 .22 (1) .26 .21 (1) .90
Diluted .21 .21 (1) .26 .21 (1) .89
- ---------------------------------------------------------------------------------------------------
1998
Revenues $ 308.6 $ 363.6 $ 370.3 $ 404.7 $ 1,447.2
Operating
income
(loss) $ (1.3) $ 41.6 $ 45.8 $ 53.8 $ 139.9
Net income
(loss) $ (2.3) $ 23.6 $ 25.6 $ 34.1 $ 81.0
Earnings (loss)
per share:
Basic (.02) (1) .17 .18 .22 .57
Diluted (.02) (1) .17 .18 .22 .57
</TABLE>
(1) See Notes 3 and 4 for a discussion of special items that were recorded by
the Company in the second and fourth quarters of 1999 and the first quarter
of 1998.
48
<PAGE>
EXHIBIT 23
TO
FORM 10-K FOR 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File No. 333-69633 and 333-86137) of Convergys
Corporation of our report dated February 11, 2000 relating to the financial
statements, which appears in the Annual Report to Shareholders, which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated February 11, 2000 relating to
the financial statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 27, 2000
<PAGE>
EXHIBIT 24
TO
FORM 10-K FOR 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/ John F. Barrett
-------------------
John F. Barrett
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, her attorneys for her and in her name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand
this 9th day of March, 2000.
/s/ Judith G. Boynton
---------------------
Judith G. Boynton
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/Gary C. Butler
-----------------
Gary C. Butler
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/David B. Dillon
------------------
David B. Dillon
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/Roger L. Howe
----------------
Roger L. Howe
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/Steven C. Mason
------------------
Steven C. Mason
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/Charles S. Mechem, Jr.
-------------------------
Charles S. Mechem, Jr.
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/Philip A. Odeen
------------------
Philip A. Odeen
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/James F. Orr
---------------
James F. Orr
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/Brian H. Rowe
----------------
Brian H. Rowe
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is an officer of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/William D. Baskett III
-------------------------
William D. Baskett III
General Counsel and Secretary
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is an officer of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/Steven G. Rolls
------------------
Steven G. Rolls
Chief Financial Officer
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation
(hereinafter referred to as the "Company"), proposes shortly to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934, as amended, and the Rules and Regulations thereunder, an
annual report on Form 10-K for the year ended December 31, 1999; and
WHEREAS, the undersigned is an officer of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints James F. Orr, Steven G. Rolls and William D. Baskett III, and each of
them singly, his attorneys for him and in his name, place and stead, and in his
office and capacity in the Company, to execute and file such annual report on
Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorneys may or shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 9th day of March, 2000.
/s/Andre S. Valentine
---------------------
Andre S. Valentine
Vice President and Controller
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 30,800
<SECURITIES> 0
<RECEIVABLES> 214,800
<ALLOWANCES> 12,400
<INVENTORY> 0
<CURRENT-ASSETS> 297,900
<PP&E> 657,500
<DEPRECIATION> 321,900
<TOTAL-ASSETS> 1,579,500
<CURRENT-LIABILITIES> 387,400
<BONDS> 250,300
0
0
<COMMON> 153,000
<OTHER-SE> 774,200
<TOTAL-LIABILITY-AND-EQUITY> 1,579,500
<SALES> 0
<TOTAL-REVENUES> 1,762,900
<CGS> 0
<TOTAL-COSTS> 1,527,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,400
<INTEREST-EXPENSE> 32,500
<INCOME-PRETAX> 222,500
<INCOME-TAX> 85,500
<INCOME-CONTINUING> 137,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,000
<EPS-BASIC> .90
<EPS-DILUTED> .89
</TABLE>
