<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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
Incorporated under the laws of the State of Ohio
201 East Fourth Street, Cincinnati, Ohio 45202
I.R.S. Employer Identification Number 31-1598292
Telephone - Area Code (513) 723-7000
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 .
At April 30, 2000, 153,325,232 Common Shares were outstanding.
<PAGE>
Form 10-Q Part I Convergys Corporation
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
2000 1999
------ -----
<S> <C> <C>
Revenues ....................................................... $513.6 $399.8
---------- -------
Costs and Expenses
Cost of providing services and products sold................ 291.9 227.5
Selling, general and administrative......................... 86.0 64.2
Research and development costs.............................. 23.0 19.5
Depreciation................................................ 25.0 20.1
Amortization................................................ 12.5 9.5
Year 2000 programming costs................................. 0.5 6.2
--------- ---------
Total costs and expenses............................... 438.9 347.0
--------- ---------
Operating Income................................................ 74.7 52.8
Equity in Earnings of Cellular Partnership....................... 5.8 7.6
Other Expense, net.............................................. (0.1) (0.7)
Interest Expense................................................ (8.1) (7.5)
--------- ---------
Income Before Income Taxes...................................... 72.3 52.2
Income Taxes.................................................... 27.9 19.8
--------- ---------
Net Income...................................................... $ 44.4 $ 32.4
========= ========
Other Comprehensive Income (Loss), net of tax:
Unrealized loss on investments.............................. $ (18.2) -
Foreign currency translation adjustments.................... (4.7) $ 0.6
----------- ---------
Comprehensive Income............................................ $ 21.5 $ 33.0
========= ========
Earnings Per Common Share.......................................
Basic....................................................... $ 0.29 $ 0.21
========= ========
Diluted..................................................... $ 0.28 $ 0.21
========== ========
Average Common Shares Outstanding
Basic....................................................... 151.9 151.7
Diluted................................................ 156.8 154.1
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
Form 10-Q Part I Convergys Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Millions)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -------------
ASSETS
- -------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................................ $ 27.1 $ 30.8
Receivables, less allowances of $13.8 and $12.4.......................... 195.1 214.8
Deferred income taxes.................................................... 26.5 16.5
Prepaid expenses and other current assets................................ 42.3 35.8
------------ ------------
Total current assets................................................... 291.0 297.9
Property and equipment - net................................................ 348.2 335.6
Goodwill and other intangibles - net........................................ 751.1 754.3
Investment in Cellular Partnership.......................................... 85.2 79.4
Investments in marketable securities........................................ 36.2 55.5
Deferred charges and other assets........................................... 56.8 56.8
------------ -------
Total Assets........................................................... $ 1,568.5 $ 1,579.5
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Debt maturing in one year................................................ $ 43.8 $ 48.0
Payables and other current liabilities................................... 292.7 339.4
------------ ------------
Total current liabilities.............................................. 336.5 387.4
Long-term liabilities....................................................... 252.2 250.3
Other long-term liabilities................................................. 14.3 14.6
-------------- ------------
Total liabilities...................................................... 603.0 652.3
------------ ------------
Commitments and Contingencies
Shareowners' Equity
Preferred shares - without par value, 5.0 authorized..................... - -
Common shares - without par value, 500.0 authorized;
153.2 and 152.4 outstanding............................................ 206.0 206.0
Additional paid-in capital............................................... 507.0 491.5
Retained earnings........................................................ 234.4 190.0
Accumulated other comprehensive income................................... 28.7 51.6
Treasury shares - 0.5 and 0.6, at cost................................... (10.6) (11.9)
------------- -------------
Total shareowners' equity.............................................. 965.5 927.2
------------ ------------
Total Liabilities and Shareowners' Equity................................... $ 1,568.5 $ 1,579.5
============ ==========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
Form 10-Q Part I Convergys Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
2000 1999
------ -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income.................................................................................... $ 44.4 $ 32.4
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................................... 37.5 29.6
Deferred income taxes....................................................................... (9.2) 2.7
Undistributed earnings of Cellular Partnership.............................................. (5.8) (7.6)
Proceeds from receivables securitization, net............................................... 40.0 -
Changes in assets and liabilities, net of effects from acquisitions:
Increase in receivables..................................................................... (21.0) (33.7)
Decrease in payables and other current liabilities.......................................... (50.7) (5.7)
Other, net.................................................................................. (5.0) 6.4
--------- --------
Net cash provided by operating activities................................................... 30.2 24.1
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................................................................... (41.3) (23.4)
Acquisitions, net of cash acquired............................................................ (7.1) (31.2)
-------- --------
Net cash used in investing activities....................................................... (48.4) (54.6)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) under revolving credit facility, net.................................... (2.3) 43.8
Issuance of treasury shares, net.............................................................. 1.3 -
Issuance of common shares..................................................................... 15.5 3.1
-------- --------
Net cash provided by financing activities................................................... 14.5 46.9
-------- --------
Net increase (decrease) in cash and cash equivalents.......................................... (3.7) 16.4
Cash and cash equivalents at beginning of period.............................................. 30.8 3.8
-------- --------
Cash and cash equivalents at end of period.................................................... $ 27.1 $ 20.2
======== =======
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Amounts in Millions Except Per Share Amounts
(Unaudited)
(1) BACKGROUND AND BASIS OF PRESENTATION
The consolidated financial statements of Convergys Corporation
include the results of the Company's wholly-owned subsidiaries, the
Information Management Group (IMG) and the Customer Management Group
(CMG), as well as its 45% limited partnership interest in a cellular
communications services provider in southwestern and central Ohio and
northern Kentucky (the Cellular Partnership). These financial
statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC) and, in the opinion of
Management, include all adjustments necessary for a fair presentation
of the results of operations, financial position and cash flows for
each period shown. All adjustments are of a normal and recurring
nature. The December 31, 1999 condensed balance sheet has been derived
from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. It is suggested
that these financial statements be read in conjunction with the
financial statements and the notes thereto, included in the Company's
annual report on Form 10-K. Certain prior period amounts have been
reclassified to conform to current period presentation.
(2) CMG RESTRUCTURING
In the fourth quarter of 1997, a restructuring plan for CMG was
approved that included the consolidation of certain CMG operating
divisions and facilities. At March 31, 2000, the balance of the
restructuring liability was $6.0 related to ongoing lease termination
payments. The Company made payments related to this plan of $0.6 and
$2.4 in the first quarters of 2000 and 1999, respectively.
(3) ACQUISITIONS
On March 1, 1999, the Company paid approximately $53 to increase its
ownership interest in Wiztec Solutions Ltd. (Wiztec) to 70% from nearly
20%. During the remainder of 1999, the Company paid approximately $70
in a series of transactions to increase its ownership interest in
Wiztec to 100%. Wiztec, based in Herzlia, Israel, is a provider of
subscriber management systems for multi-channel subscription television
operators.
In January 1998, CMG acquired the customer management assets of
Maritz, Inc. for approximately $30 in cash. Under the terms of the
acquisition agreement, the Company made additional performance based
payments to the former owner of Maritz of approximately $4 in the first
quarter of 1999 and $3 in the first quarter of 2000. These payments
were recorded as additions to goodwill.
(4) SIGNIFICANT CUSTOMER
Both of the Company's segments derive significant revenues from
AT&T. Revenues from AT&T were 41.2% and 37.7% of the Company's
consolidated revenues for the three-month periods ended March 31, 2000
and March 31, 1999, respectively. Accounts receivable from AT&T totaled
$104.8 and $83.9 at March 31, 2000 and December 31, 1999, respectively.
The Company's 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 $30.2 and $19.0 for
the three-month periods ended March 31, 2000 and March 31, 1999,
respectively.
(5) 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 material adverse effect
on the Company's financial condition.
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Amounts in Millions Except Per Share Amounts
(UNAUDITED)
(6) 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 nor 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 Company will be required to
implement SAB 101 in the second quarter of 2000. 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.
(7) BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
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 all segments of the
communications industry, including wireless, wireline, cable, broadband
and Internet services. IMG also offers billing services to the
utilities market. CMG provides a full range of outsourced marketing and
customer management services.
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>
Three Months
Ended March 31,
MILLIONS OF DOLLARS 2000 1999
------ -----
<S> <C> <C>
Revenues
Information management....................... $ 179.8 $ 157.1
Customer management.......................... 340.0 251.7
Less: intersegment.......................... (6.2) (9.0)
---------- -----------
$ 513.6 $ 399.8
========== ===========
Depreciation
Information management....................... $ 9.1 $ 6.9
Customer management.......................... 15.6 12.9
Corporate and other.......................... 0.3 0.3
---------- -----------
$ 25.0 $ 20.1
========== ===========
Amortization
Information management....................... $ 4.6 $ 1.6
Customer management.......................... 7.9 7.9
---------- -----------
$ 12.5 $ 9.5
========== ===========
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
------- -------
<S> <C> <C>
Operating Income
Information management....................... $ 35.9 $ 30.3
Customer management.......................... 40.7 23.7
Corporate and other.......................... (1.9) (1.2)
----------- -----------
$ 74.7 $ 52.8
========== ===========
Capital Expenditures (excluding acquisitions)
Information management....................... $ 12.1 $ 10.4
Customer management.......................... 26.6 12.3
Corporate and other.......................... 2.6 0.7
---------- -------------
$ 41.3 $ 23.4
========== ===========
At
March 31, Dec. 31,
2000 1999
--------- --------
Total Assets
Information management....................... $ 502.2 $ 503.0
Customer management.......................... 937.1 953.1
Corporate and other.......................... 129.2 123.4
---------- ----------
$ 1,568.5 $ 1,579.5
========== ===========
</TABLE>
(8) 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>
Three Months Ended PER SHARE
March 31, INCOME SHARES AMOUNT
------- ------- ---------
<S> <C> <C> <C>
2000
Basic EPS $ 44.4 151.9 $ 0.29
Effect of dilutive securities:
Stock-based compensation arrangements -- 4.9 0.01
-------- --------- -------
Diluted EPS $ 44.4 156.8 $ 0.28
1999
Basic EPS $ 32.4 151.7 $ 0.21
Effect of dilutive securities:
Stock-based compensation arrangements -- 2.4 --
--------- --------- -------
Diluted EPS $ 32.4 154.1 $ 0.21
</TABLE>
6
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar 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.
FORWARD LOOKING STATEMENTS
This report contains "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.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and segment data. Results for interim periods
may not be indicative of the results for the full years.
CONSOLIDATED OVERVIEW
THREE MONTHS ENDED MARCH 31, 2000 VERSUS THREE MONTHS ENDED MARCH 31, 1999
The Company's revenues for the first quarter of 2000 totaled $513.6, a 28%
increase over the first quarter of 1999, reflecting strong client subscriber
growth and increasing demand for outsourced customer service support. The
Company's operating expenses for the first quarter of 2000 increased 26% over
the first quarter of 1999. Operating expenses decreased as a percentage of
revenue, in part, due to lower Year 2000 programming costs which offset
increased depreciation and amortization expenses related to acquisitions and
higher research and development costs. All other operating expense increases
were largely the result of increased business volume in the Company's operating
segments. The Company's operating income of $74.7 for the first quarter of 2000
represents a 41% increase over the same period for 1999. Operating margin in the
first quarter 2000 was 14.5% compared to 13.2% percent in the first quarter last
year.
The Company's equity in earnings of its Cellular Partnership decreased 24%,
to $5.8 for the first quarter 2000 as the general partner, SBC Communications,
increased marketing expenses to respond to increased competition in the markets
served by the partnership. Interest expense increased 8% reflecting higher debt
levels and a slight increase in interest rates during the first quarter of 2000.
Net income for the first quarter 2000 increased 37% to $44.4, or $0.28 per
diluted share compared to $0.21 per diluted share in the first quarter of 1999.
7
<PAGE>
INFORMATION MANAGEMENT
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
($ Millions) %
2000 1999 Change
----- ----- ------
<S> <C> <C> <C>
Revenues:
Data processing...................... $ 112.9 $ 94.3 20
Professional and consulting.......... 33.9 37.5 (10)
License and other.................... 13.9 6.3 121
International........................ 12.9 10.0 29
------- ------- -------
External revenues.................... 173.6 148.1 17
Intercompany services ............... 6.2 9.0 (31)
------- ------- -------
Total revenues...................... 179.8 157.1 14
Costs of products and services 91.7 84.9 8
Selling, general and administrative
expenses............................... 19.5 16.9 15
Research and development costs........... 18.7 13.5 39
Depreciation............................. 9.1 6.9 32
Amortization............................. 4.6 1.6 -
Year 2000 programming costs.............. 0.3 3.0 (90)
------- ------- -------
Total costs......................... 143.9 126.8 13
------- ------- -------
Operating income......................... $ 35.9 $ 30.3 18
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 VERSUS THREE MONTHS ENDED MARCH 31, 1999
Revenues for the Company's information management segment increased 17% for
the first quarter of 2000, excluding intercompany services. Data processing
revenue rose 20% in the first quarter of 2000, reflecting a 30% subscriber
increase in IMG's wireless client base. The increase in data processing revenues
resulting from clients' wireless subscriber growth was partially offset by
contractual rate reductions, some of which were triggered by certain clients'
higher subscriber levels, and a reduction in the number of a client's wireline
subscribers. IMG's professional and consulting revenues decreased 10% from the
first quarter of 1999, primarily from the suspension of MediaOne subscriber
conversions. IMG's license and other revenues more than doubled in the first
quarter of 2000 over the first quarter of 1999 due to higher cable support fees
and incremental hardware sales. IMG's international revenues increased 29%,
primarily due to the acquisition of a controlling interest in Wiztec that
occurred March 1, 1999.
IMG's costs and expenses increased 13% in the first quarter of 2000 over
the first quarter of 1999. The increase was principally the result of increased
direct costs associated with a higher business volume. Costs of products and
services decreased as a percentage of revenue reflecting the benefits of scale
experienced in providing data processing services. Increases in research and
development spending reflect ongoing development work on Internet Protocol
billing applications and convergent video broadband software. Depreciation
expense increased as a result of an increased fixed asset base resulting from
both acquisitions and ongoing capital spending. Additionally, IMG experienced a
significant increase in amortization expenses related to the 1999 acquisitions
of Wiztec and TAI. These increases were offset by a decrease in Year 2000
programming costs.
8
<PAGE>
CUSTOMER MANAGEMENT
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
($ Millions) %
2000 1999 Change
----- ----- -------
<S> <C> <C> <C>
Revenues:
Dedicated services.................. $ 286.0 $ 186.8 53
Traditional services................ 40.6 49.7 (18)
International 13.4 15.2 (12)
------- ------ ----
Total revenues................. 340.0 251.7 35
Costs of products and services........... 206.4 151.7 36
Selling, general and administrative
expenses............................... 64.9 46.5 40
Research and development costs........... 4.3 6.0 (28)
Depreciation............................. 15.6 12.8 22
Amortization............................. 7.9 7.9 --
Year 2000 programming costs.............. 0.2 3.1 (94)
------- ------- --------
Total costs.................... 299.3 228.0 31
------- ------- --------
Operating income......................... $ 40.7 $ 23.7 72
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 VERSUS THREE MONTHS ENDED MARCH 31, 1999
Revenue for the Company's customer management segment, CMG, increased 35%
in the first quarter of 2000 from the first quarter of 1999. 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 53% reflecting
strong demand from AT&T and its affiliates and DirecTV, and growth in technical
help desk services. Traditional campaign-based teleservices revenues decreased
18% over the first quarter of 1999 as AT&T further shifted its emphasis away
from outbound services towards dedicated programs. CMG's international revenues
decreased 12% compared to the first quarter of 1999, primarily reflecting
unfavorable movements in exchange rates.
CMG's costs and expenses increased 31% in the first quarter of 2000,
primarily a result of higher volumes. Selling, general and administrative
expenses increased by 40% reflecting an aggressive launch of the Company's eCRM
initiative to provide web based customer care and customer relationship
management services. Research and development costs decreased 28% reflecting the
1999 completion of the implementation of a new system for CMG's employee care
business. Depreciation expense increased 22% from the addition of new customer
support contact centers to accommodate the increased business volume. Operating
margin increased to 12.0% in the first quarter of 2000 from 9.4% in the first
quarter of 1999. This margin expansion is expected to continue throughout the
year, but at a slower rate, as cost savings from CMG's continuous improvement
initiatives will be offset partially by continued spending on eCRM and several
information system initiatives.
9
<PAGE>
CLIENT CONCENTRATION
The Company's three largest clients accounted for 56% and 49% of its
revenues in the first quarter of 2000 and 1999, respectively. The risk posed by
this revenue concentration is reduced by the long-term contracts the Company has
with its largest clients. AT&T, the Company's largest client at 41% of revenues
in the first quarter of 2000, is principally served under long-term information
and customer management contracts that expire in 2006.
The communications and cable industries served by the Company have
experienced a consolidation trend. ALLTEL, an IMG competitor, became a client of
IMG in 1998 through its acquisition of 360(degree) Communications. In September
1999, the Company reached an agreement with ALLTEL under which ALLTEL will begin
to migrate its subscribers off of IMG's billing software beginning later this
year. 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 terms of the amended contract, IMG will
receive payments totaling $55 (of which $30 has been received as of March 31,
2000), as well as amounts for continued data processing and professional and
consulting services through the date that the contract is terminated. The
payments will be recognized as revenue as the related services are performed
based on the value of the services provided, with the remainder to be recognized
as a termination penalty once the contract is terminated. The amended contract
provides a floor for annual data processing revenues for 2000 and 2001, as well
as a monthly minimum for any period after 2001 during which IMG provides data
processing services to ALLTEL. 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 the first quarter of 2000, ALLTEL
announced that it would be transferring its interest in certain markets with
approximately 1 million subscribers in the aggregate to Bell Atlantic/GTE in
return for Bell Atlantic/GTE markets with approximately 1.5 million subscribers.
The Company does not know what impact this swap will have on ALLTEL's subscriber
migration plans. None of the Bell Atlantic/GTE markets that will be transferred
to ALLTEL is served by IMG.
In October 1999, Media One, an IMG client representing far less than 1% of
the Company's first quarter 2000 revenues, announced that its shareholders had
approved its merger with AT&T. The merger is currently awaiting regulatory
approval. Under its license contract with Media One, IMG has converted over
500,000 Media One subscribers onto its systems. In October 1999, Media One
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 Media One under a license agreement with
over 70% of the contract revenues guaranteed. Accordingly, the delay in the
Media One conversions will not materially impact the Company's operating results
for 2000.
IMG currently provides certain wireless billing services to PrimeCo
Personal Communications (PrimeCo) and AirTouch Cellular (AirTouch), who along
with Bell Atlantic have formed a U.S. wireless alliance doing business as
Verizon Wireless. IMG also serves certain wireless markets held by GTE that will
also be part of Verizon Wireless once Bell Atlantic's pending merger with GTE is
completed. The formation of Verizon Wireless may have a positive or negative
effect on IMG's existing contractual relationships with PrimeCo, GTE and
AirTouch.
10
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated $30.2 and $24.1 in cash during
the first quarter of 2000 and 1999, respectively. Capital expenditures were
$41.3 and $23.4 for the first quarter of 2000 and 1999, respectively. This
increase primarily relates to CMG's expansion of existing contact facilities and
the opening of additional facilities.
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 March 31, 2000, the Company had $296 of 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 the fourth quarter of 1999, the Company entered into an accounts
receivable securitization agreement. The Company increased its balance of
outstanding sold receivables by $40 during the first quarter of 2000, bringing
the total outstanding balance of sold receivables to $191 at March 31, 2000. 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 $19.7 decrease in accounts receivable from December 31, 1999 to March
31, 2000 reflects the sale of an additional $40 in receivables under the
Company's securitization agreement. Absent the effects of the securitization,
days sales outstanding remained consistent with December 31, 1999 at 68 days.
Marketable securities decreased $19.3 primarily due to the decline in market
value of the Company's equity investment in Kana Communications, Inc. This
decline in market value did not affect net income as it was recorded directly to
shareowners' equity as a component of other comprehensive income. The decrease
in payables and other current liabilities reflects the timing of payments
including the payout of 1999 bonuses in the first quarter of 2000.
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 $0.5
and $6.2 in expenses during the first quarter of 2000 and 1999, respectively.
The Company has not experienced any significant problems associated with the
date change and expects to incur less than $2 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.
MARKET RISK
The Company derived approximately 5% of its first quarter 2000 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 has
not entered into interest rate or foreign currency transactions for speculative
purposes. The Company's foreign currency exposures were immaterial at March 31,
2000. 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 fees based on market rates of interest. At
March 31, 2000, the Company had $296.0 in debt outstanding bearing interest at a
variable rate, which is equal to LIBOR plus an index based on the Company's
credit ratings. Additionally, the Company has sold $191 of accounts receivable
that were still outstanding at March 31, 2000. Based upon the Company's level of
variable rate debt and receivables sold under the securitization agreement at
March 31, 2000, a one percentage point increase in the weighted average interest
rate would increase the Company's annual interest expense by approximately $5.
11
<PAGE>
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced, and in the future could experience, quarterly
variations in revenues as a result of a variety of factors, many of which are
outside of the control of the Company. These factors include: the timing of new
contracts and contract renewals, 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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following is filed as an Exhibit to Part I of this Form 10-Q:
Exhibit
Number
------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURE
Pursuant to the requirements 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
Date: May 5, 2000 /s/ Steven G. Rolls
--------------------------------
Steven G. Rolls
Chief Financial Officer
14
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 27,100
<SECURITIES> 0
<RECEIVABLES> 195,100
<ALLOWANCES> 13,800
<INVENTORY> 0
<CURRENT-ASSETS> 291,000
<PP&E> 692,500
<DEPRECIATION> 344,300
<TOTAL-ASSETS> 1,568,500
<CURRENT-LIABILITIES> 336,500
<BONDS> 0
0
0
<COMMON> 153,200
<OTHER-SE> 812,300
<TOTAL-LIABILITY-AND-EQUITY> 1,568,500
<SALES> 0
<TOTAL-REVENUES> 513,600
<CGS> 0
<TOTAL-COSTS> 438,900
<OTHER-EXPENSES> 100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,100
<INCOME-PRETAX> 72,300
<INCOME-TAX> 27,900
<INCOME-CONTINUING> 44,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,400
<EPS-BASIC> .29
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