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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
[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
------------------- ----------------------
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)
TABLE OF CONTENTS
PART I
ITEM PAGE
- ---- -----
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.
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
1
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
5
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
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
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the executive officers of the Company are as
follows:
NAME AGE TITLE
- ---- --- ------
(as of 3/31/00)
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
(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
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
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:
QUARTER 1ST 2ND 3RD 4TH
- ------------------------------------------------------------------------------------------------------------
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
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
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
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report: Page
----
(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
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
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
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
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.
SIGNATURE TITLE DATE
- --------- ----- ----
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
21
SIGNATURE TITLE DATE
- --------- ----- ----
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
22
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
CONVERGYS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Millions of Dollars)
- --------------------------------------------------------------------------------------------------------------------
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
- ----------- --------- ---------- -------- ---------- ---------
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
( 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