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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 1-14379
CONVERGYS CORPORATION
An Ohio I.R.S. Employer
Corporation No. 31-1598292
201 East Fourth Street, Cincinnati, Ohio 45202
Telephone Number (513) 723-7000
--------------------------------------
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
--------------------------------------------------
At January 31, 2001, there were 155,298,672 common shares outstanding.
At January 31, 2001, the aggregate market value of the voting shares
owned by non-affiliates was $7,378,239,907.
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. [ ]
-------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's definitive proxy statement dated March 7,
2001 issued in connection with the annual meeting of shareholders (Part
III)
TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business................................................................................... 3
2. Properties................................................................................. 11
3. Legal Proceedings.......................................................................... 11
4. Submission of Matters to a Vote of the Security Holders.................................... 11
PART II
5. Market for the Registrant's Common Equity and Related Security
Holder Matters............................................................................. 13
6. Selected Financial and Operating Data...................................................... 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 15
7a. Quantitative and Qualitative Disclosure about Market
Risk........................................................................................ 22
8. Financial Statements and Supplementary Data................................................ 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................................... 43
PART III
10. Directors and Officers of the Registrant................................................... 43
11. Executive Compensation..................................................................... 43
12. Security Ownership of Certain Beneficial Owners and Management............................. 43
13. Certain Relationships and Related Transactions............................................. 43
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K............................. 44
See page 12 for Executive Officers of the Registrant.
2
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 clients operate.
PART I
ITEM I. BUSINESS
GENERAL
Convergys Corporation (the Company or Convergys) is a global leader in the
provision of outsourced, integrated billing and customer care services.
Convergys focuses on developing long-term strategic relationships with clients
in customer-intensive industries including telecommunications, cable, broadband,
satellite broadcasting, Internet services, technology and financial services.
The Company serves its clients through its two operating units: (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 marketing and customer support services.
For certain clients, IMG and CMG jointly provide a full range of billing and
customer management services.
INDUSTRY OVERVIEW
As the result of a broad combination of factors, including advances in
technology, globalization and deregulation, the communications, technology and
financial services markets are experiencing increased competition. As a result,
billing and customer management solutions, which utilize software-based
information systems and services to identify, attract, bill and retain
customers, have become a strategic necessity for companies in these industries
as they seek to remain competitive.
The communications industry, which includes wireless and wireline
telecommunications, cable, cable telephony, broadband, direct satellite
broadcasting and Internet services, is becoming increasingly more competitive as
a result of deregulation, convergence, the development of new technologies and
global industry consolidation. Deregulation and the development of new
technologies have created new entrants. Convergence and global
3
industry consolidation, coupled with the enormous demand for communication
services, have resulted in the formation of companies that provide a full range
of communication services to millions of residential and business subscribers.
The emergence of the Internet and other new technologies has created additional
channels for customer support. Where companies once provided customer support
through telephone-based call centers, these emerging technologies and shifts in
consumer preferences now require customer support to be offered through
multi-channel contact centers. In these multi-channel contact centers, trained
agents provide customer support through a full-range of Web-enabled services
ranging from self-care to chat to click-to-live-agent in addition to
telephone-based agent services. This shift in customer support methodology, as
well as the competitive environment in the communications, technology and
financial services industries, has led many companies in these industries to
consider and embrace the outsourcing of customer support services.
Technological advances such as relational databases and predictive behavior
software are making it possible for companies in these competitive industries to
analyze their customers' behavior and design product/service offerings which
address specific customer needs. This ability has given rise to customer
relationship management, which companies use to identify, attract and retain
customers effectively and efficiently.
Convergys is unique among its peers in that it offers both outsourced billing
and customer support services in an end-to-end solution.
Convergys believes that the growth of information and customer management
outsourcing will continue in its target markets as companies focus on their core
competencies and seek to benefit from the advantages that outsourcing companies
can provide. These advantages include: (i) technologically advanced, scalable
systems and software which enable rapid competitive response; (ii) cost savings
resulting from economies of scale achieved by leveraging investments in
technology, large data processing facilities and large customer service centers;
(iii) improved time-to-market for new products/services, whether for existing
companies or new entrants; and (iv) expertise to target, acquire and retain
customers more effectively.
STRATEGY
Convergys' strategy for growth is designed to capitalize on the trends in the
industries it serves: explosive demand and competition in the communications
industry; need for complex, highly scalable communications billing systems; the
continuing trend toward outsourcing of billing and customer support services;
and demand for the use of new technologies (multi-channel contact centers) and
new disciplines (customer relationship management) in providing customer support
services. Specific tenets of the strategy include:
LEVERAGING INDUSTRY LEADERSHIP POSITION
Convergys is a global leader in providing complex, highly scalable billing
solutions to the communications industry. The Company's strategy is to use this
position to be the billing services provider of choice for wireless, wireless
data, Internet, cable, cable telephony, broadband and direct broadcast satellite
services. The strategy includes being positioned to
4
provide billing services as our current clients introduce new services, as
existing service providers who are not clients outgrow their current billing
systems and as new entrants emerge.
With respect to customer support services, Convergys' strategy is to leverage
its leadership position in the industry to provide a growing array of customer
support and customer relationship management services through its multi-channel
contact centers. These services will be focused on the needs of high-growth
industries, such as communications, technology and financial services.
PURSUING INTERNATIONAL GROWTH
The Company believes that developments in the international communications
market position Convergys for significant international growth. As deregulation
in the international market leads to increased competition and industry
consolidation, Convergys believes that the demand for Convergys' highly
scalable, complex billing systems will increase. Similarly, the auctions of new
spectrum for 3G wireless services and the growth of wireless data communications
in the international markets will lead to new entrants and new potential clients
for Convergys' robust systems. Convergys is investing heavily in its systems'
capabilities, particularly its global wireless billing system, Atlys, and in its
international sales and marketing efforts to realize this market potential.
DEPLOYING AGGRESSIVE SALES AND MARKETING EFFORTS
Beginning in 2000, Convergys has begun to increase its sales and marketing
efforts to realize its market potential. During 2000, Convergys significantly
increased its sales force in order to penetrate existing clients more fully and
to capture new clients both domestically and internationally. Similarly, in
2000, Convergys began the implementation of a marketing and business development
plan with the goals of increasing the Company's visibility in the vertical
markets it serves, leading the Company's product development efforts and
pursuing technology-based alliances, as needed, to meet market needs.
PURSUING STRATEGIC ACQUISITIONS AND ALLIANCES
Convergys has a history of enhancing internal growth through acquisitions (30
acquisitions in the past 15 years). The Company believes that consolidation in
its industry will continue and that it will continue to pursue acquisitions and
alliances that expand its client base, add new capabilities or enable it to
accelerate its product development efforts or geographic expansion.
PRODUCTS AND SERVICES
IMG
IMG serves clients principally by providing and managing complex billing and
information systems delivered through IMG data centers or on a licensed software
basis. IMG's billing software addresses all segments of the communications
industry, including wireless, wireline, cable, cable telephony, broadband,
direct broadcast satellite and Internet services. IMG's software and data
processing capabilities enable it to activate services, capture usage
information, calculate billing charges, consolidate billing for multiple service
or equipment
5
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 its software at clients' request 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 2000, over 63% of IMG's revenues were for data processing services
generated from recurring monthly payments from its clients based upon the number
of subscribers or bills processed by IMG in its data centers. Professional and
consulting services for software maintenance and enhancements, a majority of
which are based on hourly fees for work performed, accounted for approximately
20% of IMG's 2000 revenues. IMG's remaining revenues were primarily from
software license 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 and access to
advanced technology without high capital expenditures. 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 jurisdictions, the need for an
ability to implement strategic marketing programs, and the existence of multiple
services for a subscriber. This complexity is expected to increase as a wide
array of additional services is added to traditional wireless communication
services. In addition to these complexities, a successful billing system must
possess the scalability to meet the needs of the wireless industry that has
continued to grow at a rapid rate while experiencing significant consolidation.
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 share of the U.S. cable television billing market is
24%, and the Company has further expanded its billing software capabilities to
serve the cable telephony and broadband services market.
IMG has made significant investments in billing systems in the past two years to
address billing for IP-based services. Billing systems are a critical need in
this rapidly growing market. The Company 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-size
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, IMG's
global wireless billing software, is being marketed to carrier-class
communications companies with convergent billing needs.
6
IMG's software services for wireline-based carriers include a range of billing,
information and network management solutions.
CMG
CMG provides comprehensive, outsourced customer management services for its
clients utilizing its advanced information systems capabilities, human resource
management skills and industry experience. In 2000, approximately 91% of CMG's
North American revenues were related to dedicated services and only 9% 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. CMG's international revenues are
primarily derived from dedicated services.
CMG's dedicated services include:
CUSTOMER SERVICE--CMG handles customer contacts that 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. CMG's revenues from
technical support services more than doubled in 2000.
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 companies' programs.
CMG generally receives a fee based on staffing hours or number of calls handled
by the customer service representatives assigned to a program. Per hour or per
call 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. These supplemental revenues are recognized by the Company
only after it has achieved the required measurement target. Additional fees are
charged for service enhancements or system upgrades requested by clients.
7
CLIENTS
IMG
IMG generally has long-term relationships and multi-year contracts with its
clients. In many 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 37% of
U.S. wireless subscribers. IMG's customers include three of the largest PCS
providers, Sprint PCS, AT&T Wireless and Verizon, with whom the Company has
multi-year contracts. At December 31, 2000, IMG's wireless billing customers
included AT&T Wireless, Sprint PCS, Verizon, ALLTEL, SBC Communications,
Cincinnati Bell Wireless, Houston Cellular and Telesp Celular (Brazil).
IMG provides cable and direct broadcast satellite billing services both
domestically and internationally. IMG's cable billing systems also support
bundled telephone and entertainment services provided by cable television system
operators in the U.S. and Europe. At December 31, 2000, U.S. cable clients
served by IMG include Time Warner, Cox Communications, Comcast, AT&T Broadband
and Insight. International cable clients served by IMG include Telewest, NTO,
ONO, Chorus, Deutsche Telekom, KabelNet, TeleKabel, PTK, Ondigital, Telstra,
Cablemas, Tevel and SkyTel.
CMG
CMG principally focuses on developing long-term strategic outsourcing
relationships with large clients in the communications, technology and financial
services 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, American Express, Sprint PCS, Ameritech, Microsoft
and Procter & Gamble. The Company provides technical support services to leading
technology companies such as Microsoft, Dell, Hewlett-Packard, Nortel, Prodigy
and Compaq.
OPERATIONS
At December 31, 2000, the Company operated two data centers in Orlando, 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.
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 natural disasters. Over 30 million bills are processed on a
monthly basis from the Company's mainframe and open systems facilities, which
can process over 3.4 billion 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.
8
The Company operates 53 contact centers with twenty-four hour per day, seven day
a week availability, averaging 85,000 square feet per center and over 25,000
available production workstations.
The capacity of the Company's data center and call center operations, coupled
with the scalability of its billing and customer management systems, enable the
Company to meet initial and ongoing 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 2000, the
Company spent $94.6 million for research and development to advance the
functionality, flexibility and scalability of its products and services.
During 2000, IMG introduced Release 6.0 of its Atlys 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. Release 6.0 features additional
functionality to support general packet radio service (GPRS), IP enablement for
Internet services including an IP mediation and provisioning gateway,
event-based rating and global roaming (TAP3) support. Atlys is also being
enhanced to support leading-edge m-commerce services over 3G broadband wireless
networks.
During 2000, IMG also introduced Release 5.0 of 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 IMG's systems' technical architecture. CMG's
research and development spending in 2000 focused on adding Internet-based
functionality and customer relationship management services to its existing
service offerings.
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.
9
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 SEMA Group; and (iii) other teleservices companies, such as
APAC Teleservices Inc., SITEL Corporation, Inc., Sykes International, TeleTech
Holdings, Inc. and West Teleservices Corporation. 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
technological expertise, service quality, sales and marketing skills, the
ability to develop customized products and services and the cost of services.
The Company differentiates itself from its competitors based on its size and
scale, advanced technology, service quality, breadth of services provided,
industry and client focus, financial resources, cost of services and business
reputation.
CELLULAR PARTNERSHIP LIMITED PARTNERSHIP INTEREST
The Company has a 45% limited partnership interest in a provider of cellular
telecommunications business in central and southwestern Ohio and northern
Kentucky (the Cellular Partnership). 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 2000, the Company's equity in earnings of the Cellular
Partnership was $20.5 million and the Company received $33.9 million in
distributions of Cellular Partnership earnings.
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%. Beginning in the second half of 2000, the Cellular
Partnership conducts its operations as a part of the Cingular Wireless joint
venture between the wireless units of SBC Communications and BellSouth
Corporation. 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.
10
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, Mississippi, 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, Israel, Italy, the Netherlands, Sweden and
Switzerland. 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
There were no matters submitted to a vote of security holders in the fourth
quarter of 2000.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is included in accordance with the provisions for Part
III, Item 10:
Name Age Title
- ---- --- -----
(as of 2/28/01)
James F. Orr (a) 55 Chairman of the Board,
President and Chief Executive Officer
William D. Baskett III 61 General Counsel and Secretary
David F. Dougherty 44 Chief Development Officer
Steven G. Rolls 46 Chief Financial Officer
Robert J. Marino 53 President of IMG
Ronald E. Schultz 46 President of CMG
(a) Member of the Board of Directors and Executive Committee
Officers are elected annually but are removable at the discretion of the Board
of Directors.
JAMES F. ORR, Chairman of the Board since April 25, 2000; Chief Executive
Officer of the Company since May 8, 1998; Chief Operating Officer of Cincinnati
Bell Inc. (CBI), 1996-1998; Executive Vice President of CBI and President and
Chief Executive Officer of IMG, 1995-1996; Director of Ohio National Life
Insurance Company and Becton, Dickinson and 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.
DAVID F. DOUGHERTY, Chief Development Officer of the Company since June 1, 2000;
President of CMG, 1995-2000.
STEVEN G. ROLLS, Chief Financial Officer of the Company since June 1, 1998; Vice
President and Controller of The BF Goodrich Company, 1993-1998.
ROBERT J. MARINO, President of IMG since 1996; Chief Operating Officer of IMG,
1995-1996.
RONALD E. SCHULTZ, President of CMG since June 1, 2000; Chief Operating Officer
of CMG, 1995-2000.
12
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 January 31, 2001, there were 18,849 holders of record of
the 155,298,672 outstanding common shares of the Company. The high, low and
closing prices of its common shares for each quarter in 2000 and 1999 are listed
below:
Quarter 1st 2nd 3rd 4th
- --------------------------------------------------------------------------------------------
2000 High $42.063 $51.922 $55.438 $52.250
Low $26.625 $30.500 $35.688 $30.750
Close $38.688 $51.875 $38.875 $45.312
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
The Company did not declare any dividends during 2000 or 1999 and does not
anticipate doing so in the near future.
13
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(Amounts in Millions Except Per Share Amounts) 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------
Results of Operations
Revenues....................................... $2,162.5 $1,762.9 $1,447.2 $ 987.5 $ 842.4
Costs and expenses before special items........ 1,834.6 1,518.8 1,264.7 838.4 718.2
Operating income before special items.......... 327.9 244.1 182.5 149.1 124.2
Special items (1).............................. -- 8.9 42.6 35.0 5.0
Operating income............................... 327.9 235.2 139.9 114.1 119.2
Equity in earnings of Cellular Partnership (2). 20.5 20.0 25.1 14.7 11.6
Other income (expense), net (3)................ 1.5 (0.2) (0.5) 7.2 --
Interest expense............................... 32.9 32.5 33.9 5.4 6.0
Income before income taxes..................... 317.0 222.5 130.6 130.6 124.8
Income taxes................................... 122.3 85.5 49.6 44.0 46.8
Net income..................................... $ 194.7 $ 137.0 $ 81.0 $ 86.6 $ 78.0
Earnings per share: (4)
Basic....................................... $ 1.28 $ 0.90 $ 0.57 $ 0.63 $ 0.57
Diluted..................................... $ 1.23 $ 0.89 $ 0.57 $ 0.63 $ 0.57
Weighted average common shares outstanding:
Basic....................................... 152.7 151.6 142.7 137.0 137.0
Diluted..................................... 158.0 154.5 142.9 137.0 137.0
Financial Position
Total assets................................... $1,779.5 $1,579.5 $1,450.9 $ 654.4 $ 619.2
Total debt..................................... 290.7 298.3 467.0 60.3 94.7
Shareholders' equity........................... 1,112.5 927.2 731.5 430.8 364.2
Other Data
Cash provided (used) by:
Operating activities (5)...................... $179.4 $463.0 $146.4 $127.4 $117.7
Investing activities.......................... (210.6) (276.9) (758.4) (74.8) (118.6)
Financing activities.......................... 28.6 (159.1) 613.7 (52.8) 3.2
Free cash flows (6) ........................... (110.6) 156.8 52.9 66.5 61.5
EBITDA (7)..................................... 509.2 406.8 308.9 224.8 187.6
Operating margin (excluding special items)..... 15.2% 13.8% 12.6% 15.1% 14.7%
(1) See Notes 3 and 4 of Notes to Financial Statements for a discussion of
special items in 1999 and 1998. Special items in 1997 relate to a
restructuring of CMG's operations and in 1996 relate to in-process
research and development costs associated with acquisitions.
(2) Equity earnings of Cellular Partnership includes $12.4 ($7.8 after tax)
for one-time charges recorded by the partnership during 1999.
(3) Other income (expense) net includes a $1.9 ($1.2 after tax) benefit
from a non-recurring investment gain in 1999.
(4) Earnings per share for all periods prior to the initial public offering
have been calculated using the number of common shares outstanding
immediately prior to the Company's initial public offering.
(5) Cash provided by operating activities in 2000 and 1999 was impacted by
the amount of the Company's accounts receivable securitization.
Excluding the impact of the securitization, cash provided by operating
activities was $227.8 in 2000 and $312.0 in 1999.
(6) Free cash flows are not defined under generally accepted accounting
principles and are calculated as cash flows from operations excluding
the impact of the accounts receivable securitization less capital
expenditures. Free cash flows are presented as an alternative measure
of the Company's ability to generate cash flows.
(7) EBITDA is not defined under generally accepted accounting principles
and is calculated as operating income before special items, plus
depreciation and amortization expense and the Company's equity in the
earnings of its investment in the Cellular Partnership. EBITDA is
presented as an alternative measure of the Company's ability to
generate cash flows.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Amounts in Millions Except Per Share Amounts)
BACKGROUND
Convergys serves its clients through its two operating segments: (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.
The Company was formed in May 1998 as a wholly owned subsidiary of
Cincinnati Bell Inc. (CBI). In July 1998, CBI contributed to the Company
the operations of IMG, CMG and a 45% limited partnership interest in the
Cellular Partnership. On August 13, 1998, approximately 10% of the common
shares of the Company were issued to the public. On December 31, 1998, the
remaining shares held by CBI were distributed to CBI shareholders.
The amounts presented for 1998 have been carved out from the financial
statements of CBI using the historical results of operations and the
historical bases of the assets and liabilities of the contributed
businesses. The 1998 financial statements include the allocation of
certain corporate expenses from CBI to the Company. Additionally, during
most of 1998, the Company's debt financing was provided by CBI at rates
based on CBI's external borrowing rates. Management believes that the
assumptions made in preparing the Company's 1998 consolidated financial
statements are reasonable. The financial information presented for 1998,
however, may not necessarily reflect the Company's results of operations
or cash flows had the Company been a separate, stand-alone entity.
15
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
% Change % Change
2000 1999 00 vs. 99 1998 99 vs. 98
- ----------------------------------------------------------------------------------------------------------------
REVENUES....................................... $2,162.5 $1,762.9 23 $1,447.2 22
COSTS AND EXPENSES:
Costs of products and services................. 1,216.4 996.1 22 826.4 21
Selling, general and administrative expenses... 362.5 291.3 24 226.0 29
Research and development costs................. 94.6 87.2 8 81.9 6
Depreciation................................... 110.2 86.0 28 68.1 26
Amortization................................... 50.6 44.3 14 33.2 33
Year 2000 programming costs.................... 0.3 13.9 -- 29.1 (52)
Special items.................................. -- 8.9 -- 42.6 --
---- --- ----
Total costs and expenses...................... 1,834.6 1,527.7 20 1,307.3 17
------- ------- -------
OPERATING INCOME............................... $ 327.9 $ 235.2 39 $ 139.9 68
2000 VS. 1999
The Company's 2000 revenues totaled $2,162.5, a 23% increase over 1999,
reflecting growth in both operating segments. The Company's operating
expenses for 2000 totaled $1,834.6, a 21% increase over 1999, excluding
special items recorded in 1999. The Company's operating income was $327.9
in 2000, a 34% increase over 1999, excluding special items. Excluding the
1999 special items, the Company's operating margin increased to 15.2% in
2000 from 13.8% in 1999. Including the 1999 special items, operating
income in 1999 was $235.2.
The Cellular Partnership earnings in 2000 were $20.5, a 37% decrease from
1999, excluding special charges recorded by the partnership in 1999. The
decrease in Cellular Partnership earnings was the result of increased
competition in the partnership's market, which led to a drop in subscriber
levels during the year. Interest expense increased 1% in 2000 over 1999 as
a result of higher interest rates partially offset by lower average
borrowing levels. The effective tax rate was 38.6% in 2000, up slightly
from 38.4% in 1999. Net income was $194.7, or $1.23 per diluted share, a
30% increase compared to $149.9, or $0.97 per diluted share in 1999,
excluding the 1999 special items. Including the special items, the
Company's net income was $137.0 or $0.89 per diluted share in 1999.
1999 VS. 1998
The Company's 1999 revenues totaled $1,762.9, a 22% increase from 1998,
15% pro forma for acquisitions as if the acquisitions had occurred at the
beginning of both periods. Operating expenses excluding special items
totaled $1,518.8, a 20% increase over 1998, 12% pro forma for
acquisitions. Operating income excluding special items was $244.1, a 34%
increase from 1998 as a result of revenue growth and margin expansion in
both of the Company's businesses. Excluding special items, the Company's
operating margin increased to 13.8% in 1999 from 12.6% in 1998. Including
special items, operating income was $235.2 in 1999 and $139.9 in 1998.
Cellular Partnership earnings were $32.4 in 1999, a 29% increase over
1998, excluding special items recorded by the partnership in 1999.
Interest expense decreased slightly to $32.5 in 1999 from $33.9 in 1998.
The effective tax rate was 38.4% in 1999 and 38.0% in 1998. Net income in
1999 was $149.9 or $0.97 per diluted share compared to $107.4 or $0.75 per
diluted share in 1998, excluding special items in both periods. Net income
including special items was $137.0 or $0.89 per share in 1999 and $81.0 or
$0.57 per share in 1998.
16
The Company recorded special items in both 1999 and 1998. The 1999 special
items include facility and staff organization consolidation costs ($6.9)
and expensing of in-process research and development costs from an
acquisition ($2.0). Other income in 1999 includes a $1.9 special item for
a non-recurring investment gain. The Company's income from the Cellular
Partnership in 1999 was reduced $12.4 by special items recorded by the
partnership related to the merger of SBC Communications and Ameritech, the
general partner. The special item in 1998 was a $42.6 charge to expense
in-process research and development costs from an acquisition.
INFORMATION MANAGEMENT GROUP
% Change % Change
2000 1999 00 vs. 99 1998 99 vs. 98
- -------------------------------------------------------------------------------------------------------------------
REVENUES:
Data processing................................ $486.1 $418.0 16 $358.5 17
Professional and consulting.................... 153.5 141.1 9 137.8 2
License and other.............................. 53.6 41.7 29 39.3 6
International.................................. 73.8 51.2 44 41.8 22
---- ---- ----
External revenues.............................. 767.0 652.0 18 577.4 13
Intercompany revenues.......................... 17.7 35.1 (50) 24.6 --
---- ---- ----
Total revenues................................ 784.7 687.1 14 602.0 14
COSTS AND EXPENSES:
Costs of products and services................. 389.5 356.0 9 308.6 15
Selling, general and administrative expenses... 94.8 76.7 24 66.6 15
Research and development costs................. 79.2 67.9 17 61.1 11
Depreciation................................... 38.0 29.7 28 23.9 24
Amortization................................... 18.7 12.8 46 6.0 113
Year 2000 programming costs.................... 0.3 9.7 (97) 19.3 (50)
Special items.................................. -- 2.0 -- -- --
----- ----- -----
Total costs and expenses...................... 620.5 554.8 12 485.5 14
----- ----- -----
OPERATING INCOME............................... $164.2 $132.3 24 $116.5 14
2000 VS. 1999
IMG's 2000 external revenues increased 18% over 1999. Data processing
revenues increased 16% in 2000, reflecting wireless subscriber growth of
32%. The increase in data processing revenues was partially offset by
contractual rate reductions and a decline in revenues from wireline
clients. Professional and consulting service revenues increased 9% in 2000
as a result of increased enhancement requests from wireless clients,
particularly in the second half of the year, partially offset by the
expiration of a small Canadian wireless billing relationship at the
beginning of the year. IMG's license and other revenues increased $11.9 in
2000 over 1999, reflecting growth in the Company's cable billing
operations. International revenues increased $22.6 in 2000, primarily as a
result of revenues from the implementation of IMG's Atlys wireless billing
system at Telesp Celular in Brazil.
IMG's costs and expenses increased 12% over 1999, excluding a 1999 special
item. Costs of products and services increased 9% as a result of increased
revenues. Selling, general and administrative expenses increased 24%,
primarily as a result of increased focus on sales and marketing efforts.
Research and development costs increased 17%, reflecting continued
enhancements to Atlys, IMG's global wireless billing system, and Catalys,
IMG's billing system for Internet service providers. IMG's research and
development spending on enhancements to its systems' technical
architecture also increased in 2000. Amortization expense increased 46%
from 1999, primarily as a result of the acquisitions of Wiztec and
Technology Applications Inc. (TAI) in 1999. These increased costs and
expenses were partially offset by a $9.4 reduction in Year 2000
programming costs.
17
IMG's operating income increased in 2000 by 22% to $164.2, excluding the
impact of the 1999 special item. IMG's operating margin increased to 21.4%
in 2000 from 20.6% in 1999, reflecting earnings leverage on higher
revenues.
1999 VS. 1998
IMG's external revenues increased 13% over 1998. Data processing revenues
increased 17% in 1999 over 1998, reflecting wireless subscriber growth of
30%. This increase was partially offset by contractual rate reductions.
During 1999, the Company also experienced a continued reduction in the
number of wireless long distance subscribers that also partially offset
the increase in data processing revenues. Professional and consulting
service revenues increased slightly in 1999, reflecting an increase in
client enhancement requests which was partially offset by reduced
enhancement requests from one wireless client that had been acquired by a
competitor. The increase in license and other revenues reflects general
growth in the Company's cable billing operations and recurring license and
support revenues from Media One under a contract signed in the fourth
quarter of 1998. The 22% increase in international revenues in 1999
results primarily from the Wiztec acquisition, offset by the completion of
two long-term international system development contracts in 1998.
IMG's costs and expenses increased 14% from 1998, excluding a 1999 special
item. Costs of products and services increased 15%, primarily as a result
of increased revenues. Selling, general and administrative expenses
increased 15% from 1998, reflecting the Wiztec acquisition and spending to
launch IMG's Internet protocol (IP) billing initiative. Research and
development costs increased 11% from 1998, primarily reflecting spending
to add GSM and international capabilities to the Atlys global wireless
billing system, to develop the Catalys billing system for Internet service
providers, to add IP billing functionality to existing wireless and cable
billing systems and to develop a next-generation cable and satellite
broadcasting billing system. Spending also continued to enhance existing
mainframe systems. Depreciation and amortization expenses increased
primarily from the acquisitions of Wiztec and TAI during 1999. Year 2000
spending decreased 50% from 1998 as systems achieved compliance by the end
of the year. The $2.0 special item represents purchased research and
development costs associated with the Wiztec acquisition.
Excluding the 1999 special item, IMG's operating income increased to
$134.3 in 1999 from $116.5 in 1998, and its operating margin increased to
20.6% from 20.2%.
CUSTOMER MANAGEMENT GROUP
% Change % Change
2000 1999 00 vs. 99 1998 99 vs. 98
- ------------------------------------------------------------------------------------------------------------
REVENUES:
Dedicated services............................. $1,209.9 $874.4 38 $651.0 34
Traditional services........................... 135.1 178.6 (24) 181.2 (1)
International.................................. 50.5 57.9 (13) 37.7 54
---- ---- ----
Total revenues................................ 1,395.5 1,110.9 26 869.9 28
COSTS AND EXPENSES:
Costs of products and services................. 844.6 675.3 25 542.3 25
Selling, general and administrative expenses... 264.2 209.9 26 157.5 33
Research and development costs................. 15.4 19.2 (20) 20.7 (7)
Depreciation................................... 68.3 55.2 24 44.2 25
Amortization................................... 31.9 31.5 1 27.2 16
Year 2000 programming costs.................... -- 4.2 -- 9.8 (57)
Special items.................................. -- 6.9 -- 42.6 --
------- ------- -----
Total costs and expenses...................... 1,224.4 1,002.2 22 844.3 19
------- ------- -----
OPERATING INCOME............................... $ 171.1 $108.7 57 $ 25.6 --
18
2000 VS. 1999
CMG's 2000 revenues increased 26% from 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 38%,
reflecting strong customer support revenue volume growth from AT&T,
DIRECTV and technology clients. The growth in dedicated services also
includes continued growth in Internet-based services and services in
support of clients' e-commerce activities. Traditional, campaign-based,
teleservices revenues decreased 24% from 1999, reflecting CMG's strategy
to emphasize the provision of dedicated services. CMG's international
revenues decreased $7.4 in 2000 over 1999, reflecting a combination of
lower volumes and unfavorable movements in currency rates.
CMG's costs and expenses increased 22% over 1999. Costs of products and
services and selling, general and administrative expenses grew at
approximately the same rate as revenue, reflecting higher labor and
facility costs to support increased volumes. Depreciation expense
increased 24% as a result of the addition of fifteen new contact centers
and approximately 5,600 workstations during 2000 to support the increased
business volume. The higher costs and expenses were offset by lower
research and development costs and Year 2000 programming costs.
CMG's operating income increased 48% in 2000, excluding special items
recorded in 1999. This increase resulted from the 26% revenue increase and
an improvement in operating margins to 12.2% in 2000 from 10.4% in 1999.
Margins in 2000 improved in each successive quarter from 12.0% in the
first quarter to 12.5% in the fourth quarter as a result of continuous
improvement and cost control efforts.
1999 VS. 1998
CMG's revenues increased 28% from 1998 (18% pro forma for acquisitions).
Dedicated services revenues increased 34%, the result of growth in
services provided to AT&T and DIRECTV. The growth in dedicated services
also reflects increased Internet-based services and services in support of
clients' e-commerce activities. Traditional, campaign-based, revenues
decreased by 1% as some major clients shifted their emphasis toward
dedicated programs. CMG's international revenues increased 54%, reflecting
growth of the Company's dedicated customer service business in Europe.
CMG's costs and expenses excluding special items increased 24% in 1999
over 1998 (14% pro forma for acquisitions). This increase was primarily
due to higher labor and facility costs needed to support the increased
business volume as CMG added five customer support contact centers and
approximately 4,800 production workstations during the year. These
increases were partially offset by lower research and development spending
resulting from the completion of a project to implement a new system for
CMG's employee care business and by lower Year 2000 programming costs.
Research and development spending by CMG in 1999 focused on adding
Internet-based customer support and customer relationship management
services to CMG's service offerings. Depreciation and amortization expense
increased as a result of the new contact centers opened in 1999 and the
recognition of a full year of amortization of goodwill and other
intangible assets from the March 1998 acquisition of Transtech.
CMG's operating income excluding special items increased to $115.6 in 1999
from $68.2 in 1998. This 70% increase resulted from both increased
revenues and an improvement in operating margin from 7.8% in 1998 to 10.4%
in 1999. Margins in 1999 increased in each successive quarter from 9.4% in
the first quarter to 11.8% in the fourth quarter as a result of continued
efficiencies resulting from the Transtech integration plan and the
substantial completion of CMG's 1997 restructuring activities.
The 1999 special items recorded at CMG totaled $6.9 and included costs to
consolidate CMG's data center activities into an IMG data center, to
combine certain staff organizations with those of IMG and for the
impairment of certain software ($3.8). Included in this charge is an
accrual of $1.3 for the severance of approximately 45 employees, with most
of the severed employees being
19
associated with the closed data center. The data center consolidation
activities were primarily completed in the first quarter of 2000, while
the staff organization activities were completed later in 2000.
CLIENT CONCENTRATION AND NEW CLIENT CONTRACTS
The Company's three largest clients accounted for 55% of its revenues in
2000, up from 53% in 1999. 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 2000, is
principally served under long-term information and customer management
contracts that expire in 2006. In January 2001, the Company announced that
IMG's contract with Sprint PCS, the Company's second largest client, was
extended through December 31, 2004. DIRECTV, the Company's third largest
client in 2000, is served by CMG under a contract that expires at the end
of 2002.
In December 2000, the Company signed an agreement under which IMG will
continue to provide wireless billing services to ALLTEL through at least
2003. Previously, in September 1999, the Company amended its wireless
billing contract with ALLTEL. Under the September 1999 amendment, ALLTEL
could begin to migrate its wireless subscribers from IMG's systems
beginning in 2000. The companies had announced that the subscriber
migration would be completed by the end of 2001. The September 1999
amended agreement called for ALLTEL to make payments totaling $55 to the
Company, of which $50 had been received as of December 31, 2000. The
Company recorded the payments upon receipt as deferred revenue to be
recognized as the related services are provided to ALLTEL.
In July 2000, the Company announced that it had reached an agreement to
expand its billing relationship with Verizon Wireless, the U.S. wireless
alliance formed by Bell Atlantic, PrimeCo Personal Communications
(PrimeCo) and AirTouch Cellular (AirTouch). Previously, IMG had served
GTE, which recently merged with Bell Atlantic, as well as PrimeCo and
AirTouch under separate billing contracts. Under the five-year agreement,
IMG will continue to serve the Verizon markets it previously served under
the former contracts. The contract provides for reduced pricing effective
January 1, 2001, which will have a dampening effect on IMG's data
processing revenue growth in 2001.
In the second quarter of 2000, AT&T Broadband acquired Media One, an IMG
client representing less than 1% of the Company's 2000 revenues. AT&T
Broadband had a cable billing contract with an IMG competitor through an
earlier acquisition. In October 2000, AT&T Broadband announced its
intention to move the majority of the Media One cable subscribers to the
competitor's system by late 2001 and all of the subscribers by June 2002.
Over 70% of IMG's revenues under the Media One contract are guaranteed.
Under its license contract with Media One, which was signed in the fourth
quarter of 1998, IMG had converted approximately 800,000 of Media One's
approximately 5 million subscribers onto IMG software as of December 31,
2000. It is expected that these subscribers will be removed from IMG's
systems by late 2001 or in the first half of 2002. However, in January
2001, the Company amended its previous contract with Media One to provide
billing services to AT&T Broadband's residential telephony subscribers in
IMG's service bureaus. The term of the residential telephony contract
amendment expires in December 2007. Company management does not expect the
amendment to the previous Media One contract to have a material impact on
the Company's operating results in 2001. Also in January 2001, IMG signed
a contract to provide service bureau billing services to AT&T Broadband's
commercial telephony subscribers through October 2005.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
2000 1999 1998
---- ---- ----
Cash flows
from operations $179.4(a) $463.0(a) $146.4
Capital expenditures 175.0 155.2 93.5
Net debt (b) 377.5 418.5 463.0
(a) Includes the impacts of the accounts receivable securitization.
Excluding the impacts of the securitization, cash flows from
operations were $215.4 in 2000 and $312.0 in 1999.
(b) Defined as outstanding debt plus net accounts receivable
securitization proceeds less cash and cash equivalents.
20
Operating cash flows have historically been more than sufficient to fund
the Company's cash needs, other than for very large acquisitions.
Acquisitions have historically been financed with a combination of
borrowings and operating cash flows. At December 31, 2000, the Company had
$290.7 of borrowings outstanding. The Company's borrowing facilities
include two revolving credit facilities with $100 in borrowing capacity
expiring in November 2001 and an additional $250 in borrowing capacity
expiring in November 2002, and $100 in notes which expire in September
2002. The Company also has a $150 accounts receivable securitization
agreement, under which it had sold $115 in accounts receivable at December
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 $171.6 increase in accounts receivable from December 31, 1999 to
December 31, 2000 reflects increases related to higher revenue and slower
payments at the end of 2000 from one large client, in addition to a $36.0
reduction in the amount of receivables sold under the Company's
securitization agreement. Excluding the effects of the securitization,
days sales outstanding increased by 11 days during 2000 to 79 days. The
Company's investment in the Cellular Partnership decreased by $13.4 as a
result of the Company's receipt of $33.9 in distributions from the
partnership, which exceeded equity method earnings of $20.5. The Company's
investment in marketable securities decreased $48.0 from December 31,
1999, 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 shareholders' equity
as a component of other comprehensive income. Payables and other current
liabilities increased by $19.6 from December 31, 1999, largely as the
result of the timing of payments for certain accrued expenses,
particularly accrued taxes and accrued payroll and related employee
benefits, and a $6.1 increase in advanced billings and customer deposits.
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 primarily focused on information technology systems. The Company
incurred $0.3, $13.9 and $29.1 in expenses during 2000, 1999 and 1998,
respectively, in order to prepare for the Year 2000. The Company has not
experienced any significant problems associated with the date change and
does not expect to incur any additional Year 2000 costs other than for
routine monitoring and testing of continued 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 6% of its 2000 consolidated revenues
outside of North America. The Company's activities expose it to a variety
of market risks, including the effects of changes in foreign currency
exchange rates and interest rates. The Company's risk management program
seeks to reduce the potentially adverse effects that the volatility of the
markets may have on its operating results. The Company's risk management
strategy includes the use of derivative instruments to reduce the effects
on its operating results and cash flows from fluctuations caused by
volatility in currency exchange and interest rates. In using derivative
financial instruments to hedge exposures to changes in exchange rates and
interest rates, the Company exposes itself to some counterparty credit
risk. The Company manages exposure to counterparty credit risk by entering
into derivative financial instruments with highly rated institutions that
can be expected to fully perform under the terms of the agreements and by
diversifying the number of financial institutions with which it enters
into such agreements.
21
The Company currently uses cash flow hedges. These instruments are hedges
of forecasted transactions or of the variability of cash flows to be
received or paid related to a recognized asset or liability. The Company
generally enters into forward exchange contracts expiring within one year
as hedges of anticipated cash flows denominated in foreign currencies.
These contracts are entered into to protect against the risk that the
eventual cash flows resulting from such transactions will be adversely
affected by changes in exchange rates.
The Company is exposed to market risk from its variable rate borrowings.
At December 31, 2000, the Company had $288.2 in outstanding variable rate
borrowings and had sold $115.0 in accounts receivable on a variable rate
basis. The Company entered into an interest rate swap agreement to
effectively fix the interest rate for $100 of variable rate borrowings.
The swap agreement exposes the Company to credit risk in the event the
counterparty could not perform under the agreement. The Company managed
this risk by entering into the interest rate swap agreement with a highly
rated financial institution. Based upon the Company's exposure to variable
rate borrowings, a one percent point change in the weighted average
interest rate would change the Company's annual interest expense by
approximately $3.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced, and in the future could experience, quarterly
variations in revenues as a result of a variety of factors, many of which
are outside the Company's control. These factors include: the timing of
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 or the
passage of time and the seasonal pattern of the customer management
segment of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is included in Item 7 on page 22 of
this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Beginning on page 26 and continuing through page 43 are the consolidated
financial statements with applicable notes and the related Report of
Independent Accountants, and the supplementary financial information
specified by Item 302 of Regulation S-K.
22
REPORT OF MANAGEMENT
Management is responsible for the preparation of the consolidated
financial statements and all related information appearing in this Annual
Report. The consolidated financial statements and notes have been prepared
in conformity with generally accepted accounting principles and include
certain amounts which are estimates based upon currently available
information and management's judgment of current conditions and
circumstances.
To provide reasonable assurance that assets are safeguarded against loss
from unauthorized use or disposition and that accounting records are
reliable for preparing financial statements, management maintains a system
of accounting and other controls, including an internal audit function.
Even an effective internal control system, no matter how well designed,
has inherent limitations, including the possibility of circumvention or
overriding of controls, and therefore can provide only reasonable
assurance with respect to financial statement presentation. The system of
accounting and other controls is improved and modified in response to
changes in business conditions and operations and recommendations made by
the independent accountants and the internal auditors.
The Audit Committee of the Board of Directors, which is composed of
directors who are not employees, meets periodically with management, the
internal auditors and the independent accountants to review the manner in
which these groups of individuals are performing their responsibilities
and to carry out the Committee's oversight role with respect to auditing,
internal controls and financial reporting matters. Periodically, both the
internal auditors and the independent accountants meet privately with the
Committee and have access to its individual members.
Convergys engaged PricewaterhouseCoopers LLP, independent accountants, to
audit the consolidated financial statements in accordance with generally
accepted auditing standards, which include consideration of the internal
control structure. Their report appears on this page.
/s/ Steven G. Rolls /s/ Andre S. Valentine
Steven G. Rolls Andre S. Valentine
Chief Financial Officer Chief Accounting Officer
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF CONVERGYS CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows present fairly, in all material
respects, the financial position of Convergys Corporation and its
subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule appearing on page 47 presents
fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
These financial statements and the financial statement schedule are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 12, 2001
23
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
--------------------------------
(Amounts in Millions Except Per Share Amounts) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
Revenues.................................................................. $2,162.5 $1,762.9 $1,447.2
Costs and Expenses:
Costs of products and services......................................... 1,216.4 996.1 826.4
Selling, general and administrative expenses........................... 362.5 291.3 226.0
Research and development costs......................................... 94.6 87.2 81.9
Depreciation........................................................... 110.2 86.0 68.1
Amortization........................................................... 50.6 44.3 33.2
Year 2000 programming costs............................................ 0.3 13.9 29.1
Purchased research and development costs............................... -- 2.0 42.6
Special charges........................................................ -- 6.9 --
Total costs and expenses............................................ 1,834.6 1,527.7 1,307.3
Operating Income.......................................................... 327.9 235.2 139.9
Equity in earnings of Cellular Partnership................................ 20.5 20.0 25.1
Other income (expense), net............................................... 1.5 (0.2) (0.5)
Interest expense.......................................................... 32.9 32.5 33.9
Income before income taxes................................................ 317.0 222.5 130.6
Income taxes.............................................................. 122.3 85.5 49.6
Net Income................................................................ $194.7 $ 137.0 $ 81.0
Earnings per common share:
Basic.................................................................. $ 1.28 $ 0.90 $ 0.57
Diluted................................................................ $ 1.23 $ 0.89 $ 0.57
Weighted average common shares outstanding:
Basic.................................................................. 152.7 151.6 142.7
Diluted................................................................ 158.0 154.5 142.9
The accompanying notes are an integral part of the financial statements.
24
CONSOLIDATED BALANCE SHEETS
at December 31,
(Amounts in Millions) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents........................................................... $ 28.2 $ 30.8
Receivables, net of allowances of $11.9 and $12.4................................... 386.4 214.8
Deferred income tax benefits........................................................ 27.1 16.5
Prepaid expenses and other current assets........................................... 39.4 35.8
Total current assets............................................................. 481.1 297.9
Property and equipment, net............................................................ 392.6 335.6
Goodwill and other intangibles, net.................................................... 740.2 754.3
Investment in Cellular Partnership..................................................... 66.0 79.4
Investments in marketable securities................................................... 7.5 55.5
Deferred charges and other assets...................................................... 92.1 56.8
---- ----
Total Assets..................................................................... $1,779.5 $1,579.5
Liabilities and Shareholders' Equity
Current Liabilities
Debt maturing within one year....................................................... $ -- $ 48.0
Payables and other current liabilities.............................................. 359.0 339.4
----- -----
Total current liabilities........................................................ 359.0 387.4
Long-term debt......................................................................... 290.7 250.3
Other long-term liabilities............................................................ 17.3 14.6
---- ----
Total liabilities................................................................ 667.0 652.3
Commitments and Contingencies
Shareholders' Equity
Preferred Shares -- without par value, 5.0 authorized; none outstanding............. -- --
Common shares--without par value, 500.0 authorized;
154.8 outstanding in 2000 and 153.0 in 1999........................................ 206.0 206.0
Additional paid-in capital.......................................................... 531.8 491.5
Retained earnings................................................................... 384.7 190.0
Accumulated other comprehensive income (loss)....................................... (8.2) 51.6
Treasury stock--at cost; 0.4 in 2000 and 0.6 in 1999................................ (1.8) (11.9)
----- ------
Total shareholders' equity....................................................... 1,112.5 927.2
------- -----
Total Liabilities and Shareholders' Equity............................................. $1,779.5 $1,579.5
The accompanying notes are an integral part of the financial statements.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------
(Amounts in Millions) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income............................................................. $ 194.7 $ 137.0 $ 81.0
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization....................................... 160.8 130.3 101.3
Deferred income tax benefit......................................... (7.6) (20.9) (8.3)
Special charges..................................................... -- 6.9 --
Purchased research and development costs............................ -- 2.0 42.6
Cellular Partnership distributions in excess of (less than) earnings 13.4 2.2 (25.1)
Income tax benefit from stock option exercises...................... 14.2 6.7 --
Proceeds from (repayments of) receivables securitization, net....... (36.0) 151.0 --
Changes in assets and liabilities, net of effects from acquisitions:
Increase in receivables............................................. (135.6) (45.2) (41.8)
Increase in payables and other current liabilities.................. 19.6 79.4 7.4
Decrease (increase) in other assets................................. (38.3) 11.2 (8.1)
Other, net.......................................................... (5.8) 2.4 (2.6)
Net cash provided by operating activities......................... 179.4 463.0 146.4
Cash Flows From Investing Activities:
Capital expenditures................................................... (175.0) (155.2) (93.5)
Acquisitions, net of cash acquired..................................... (36.5) (122.4) (664.9)
Purchase of marketable securities...................................... (1.3) (5.6) --
Proceeds from sales of marketable securities........................... 2.2 6.3 --
Net cash used in investing activities............................. (210.6) (276.9) (758.4)
Cash Flows From Financing Activities:
Borrowings (payments) of debt, net..................................... (7.6) (168.5) 460.0
Change in debt payable to CBI, net..................................... -- -- (52.3)
Purchase of treasury shares............................................ (4.9) (11.9) --
Issuance of treasury shares............................................ 15.0 -- --
Other, net............................................................. -- 4.9 --
Issuance of common shares.............................................. 26.1 16.4 206.0
---- -----
Net cash provided by (used in) financing activities............... 28.6 (159.1) 613.7
Net increase (decrease) in cash and cash equivalents...................... (2.6) 27.0 1.7
Cash and cash equivalents at beginning of year............................ 30.8 3.8 2.1
---- --- ---
Cash and cash equivalents at end of year.................................. $ 28.2 $ 30.8 $ 3.8
Supplemental Cash Flow Information:
Cash paid for interest................................................. $ 30.7 $ 32.2 $ 33.2
Income taxes paid, net of refunds...................................... $ 128.9 $ 86.8 $ 21.8
The accompanying notes are an integral part of the financial statements.
26
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Number Accumulated
Of Additional Other
Common Common Paid-In Treasury Retained Shareholders' Comprehensive
Shares Shares Capital Stock Earnings Investment Income (Loss) Total
(Amounts in Millions)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $428.4 $ 2.4 $430.8
Initial capitalization of
Company, after share split 137.0 $457.1 (457.1)
Issuance of common shares 14.9 $206.0 206.0
Transfers from CBI, net 18.0 0.7 18.7
Net income $ 53.0 28.0 81.0
Other comprehensive loss (5.0) (5.0)
-------
Balance at December 31, 1998 151.9 206.0 475.1 53.0 -- (2.6) 731.5
Issuance of common shares 1.1 16.4 16.4
Repurchase of common shares $(11.9) (11.9)
Net income 137.0 137.0
Other comprehensive income 54.2 54.2
Balance at December 31, 1999 153.0 206.0 491.5 (11.9) 190.0 -- 51.6 927.2
Issuance of common shares 1.8 40.3 15.0 55.3
Repurchase of common shares (4.9) (4.9)
Net income 194.7 194.7
Other comprehensive loss (59.8) (59.8)
------
Balance at December 31, 2000 154.8 $206.0 $531.8 $(1.8) $384.7 -- $(8.2) $1,112.5
The accompanying notes are an integral part of the financial statements.
27
NOTES TO FINANCIAL STATEMENTS
(Amounts in Millions Except Share and Per Share Amounts)
1. Background and Basis of Presentation
The Company was organized in May 1998 as a wholly owned subsidiary of
Cincinnati Bell Inc. (CBI). In July 1998, CBI contributed to the Company
the outstanding common shares of the Information Management Group (IMG),
the Customer Management Group (CMG) and a 45% limited partnership interest
in the Cellular Partnership. On August 13, 1998, the Company issued 14.95
million common shares, approximately 10% of the then outstanding shares,
to the public at a price of $15 per share less underwriting discounts and
commissions of $0.98 per share (the Offering). On December 31, 1998, the
remaining shares held by CBI were distributed to CBI shareholders.
The consolidated financial statements for 1998 have been prepared using
the historical results of operations and bases of the assets and
liabilities of the Company's businesses. The 1998 financial statements
include the allocation of certain expenses relating to the Company by CBI.
Management believes these allocations are reasonable. All material
intercompany transactions and balances between the Company and its
subsidiaries have been eliminated. Certain prior year amounts have been
reclassified to conform to current year presentation.
2. Accounting Policies
Consolidation--The consolidated financial statements include the accounts
of the Company's wholly owned subsidiaries. The Cellular Partnership
interest is accounted for under the equity method.
Use of Estimates--Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates.
Cash Equivalents--Cash equivalents consist of short-term, highly liquid
investments with original maturities of three months or less.
Property and Equipment--Property and equipment is stated at cost.
Depreciation is based on the straight-line method over the estimated
useful lives of the assets. Buildings are depreciated over a thirty-year
life, software over a three- to five-year life and equipment generally
over a five-year life. Leasehold improvements are depreciated over the
shorter of their estimated useful life or the remaining term of the
associated lease. For property and equipment retired or sold, the gain or
loss is recognized in other income.
Software Development Costs--Research and development expenditures are
charged to expense as incurred. The development costs of software to be
marketed are charged to expense until technological feasibility is
established, and capitalized thereafter, subject to assessment of
realizability. Amortization of the capitalized amounts is computed using
the greater of the sales ratio method or the straight-line method over a
life of four years or less. At December 31, 2000 and 1999, capitalized
costs for software to be marketed were fully amortized.
Internal Use Software --- Effective January 1, 1999, the Company adopted
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Development or Obtained for Internal Use," that requires the
capitalization of certain expenditures for software that is purchased or
internally developed for use in the business. Amortization of internal use
software begins when the software is ready for service and continues on
the straight-line method over a three-year life. The implementation of SOP
98-1 did not have a material impact on the Company's results of
operations.
28
Goodwill and Other Intangibles--Goodwill and other intangibles resulting
from acquisitions are recorded at cost and amortized on a straight-line
basis over lives ranging from five to forty years. Goodwill and other
intangibles are evaluated periodically if events or circumstances indicate
a possible inability to recover their carrying amounts. This evaluation is
based on various analyses, including cash flow and profitability
projections. If future expected undiscounted cash flows are insufficient
to recover the carrying amount of the asset, then an impairment loss is
recognized based upon the excess of the carrying value of the asset over
the anticipated cash flows on a discounted basis. Included in the fair
value of certain acquired companies are purchased research and development
activities that had not reached technological feasibility and had no
alternative future use. Such amounts are determined by independent
valuations and expensed immediately at the date of acquisition.
Revenue Recognition--IMG's data processing and professional and consulting
revenues are recognized as services are performed. Software license
revenues are recognized upon delivery and acceptance of the licensed
software. Revenues for software maintenance and post-contract support are
recognized over the related agreement period. Many of IMG's software
license agreements include both the delivery of software and other
elements. For these multiple element arrangements, the Company determines
the fair value of each element based on specific objective evidence for
that element and allocates total revenue from these arrangements to each
element based on its fair value. The revenue associated with each element
is recognized using the respective methodology discussed above. If no
specific objective evidence of fair value exists for each element, revenue
for the entire arrangement is recognized ratably over the license period.
CMG revenues are generally recognized as the related customer management
services are performed. The Company implemented the revenue recognition
guidance of the Securities and Exchange Commission's Staff Accounting
Bulletin (SAB) No. 101 in the fourth quarter of 2000. The implementation
of SAB 101 did not have a material impact on the Company's revenue
recognition.
Currency Translation--Assets and liabilities of foreign operations, where
the functional currency is the local currency, are translated to U.S.
dollars at year-end exchange rates. Revenues and expenses are translated
at average exchange rates for the year. Translation adjustments are
accumulated and reflected as adjustments to comprehensive income.
Investments--The Company accounts for its 45% ownership interest in the
Cellular Partnership under the equity method. Equity investments in other
entities are classified as available-for-sale and recorded at fair value
where such value is readily determinable. Unrealized gains or losses on
those investments, net of tax, are reported as a component of other
comprehensive income and included in shareholders' equity, but excluded
from the determination of net income until realized.
Financial Instruments--Effective July 1, 2000, the Company adopted
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of SFAS 133." Under this guidance, all
derivatives, including foreign currency exchange contracts, are recognized
in the balance sheet at fair value. Fair values for the Company's
derivative financial instruments are based on quoted market prices of
comparable instruments or, if none are available, on pricing models or
formulas using current assumptions. On the date the derivative contract is
entered into, the Company determines whether the derivative contract
should be designated as a hedge. For derivatives that are designated as
hedges, the Company further designates the hedge as either a fair value,
cash flow, foreign currency fair value or foreign currency cash flow
hedge. Changes in the fair value of derivatives that are highly effective
as, and designated as, fair value hedges are recorded in the consolidated
statement of income along with the loss or gain on the hedged asset or
liability. Changes in the fair value of derivatives that are highly
effective as, and designated as, cash flow hedges are recorded in other
comprehensive income, until the underlying transactions occur. Changes in
the fair value of derivatives that are highly effective as, and designated
as, foreign currency fair value hedges are recorded in the consolidated
statement of income. Changes in the fair value of derivatives that are
highly effective as, and designated as, foreign currency cash flow hedges
are recorded in other comprehensive income. Changes in the fair value of
derivative trading instruments, derivatives that are not hedges and for
the ineffective portion of derivatives that are hedges are recorded in the
consolidated statement of income. The Company formally documents all
relationships between hedging
29
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedging activities. This process includes
linking all derivatives that are designated as fair value, cash flow or
foreign currency hedges to specific assets and liabilities on the balance
sheet or to forecasted transactions. The Company also formally assesses,
both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair value or cash flows of hedged items. When it is
determined that a derivative is not highly effective as a hedge or that it
has ceased to be a highly effective hedge, the Company discontinues hedge
accounting prospectively. At December 31, 2000, no hedges were determined
to be ineffective.
3. Acquisitions
The following is a summary of significant acquisitions, all accounted for
under the purchase method:
2000 1999 1998
MAX Taima TAI Wiztec Transtech Maritz
Purchase Price $10.8 $17.0 $19.5 $123.0 $625.0 $30.0
Allocation:
Tangible assets $ 1.0 $ 1.5 $ 0.7 $ 16.6 $ 91.0 $ 1.9
Purchased software -- -- -- 28.9 4.4 --
Contracts -- -- -- 2.5 68.2 --
Trademarks -- -- -- 13.3 -- --
Assembled workforce -- -- -- 2.0 11.4 --
Purchased research
and development -- -- -- 2.0 42.6 --
Goodwill 9.8 15.5 18.8 57.7 407.4 28.1
Goodwill amortization
life, in years 25 25 10 15 30 25
In June 2000, CMG paid approximately $11 to acquire the assets of
MAXWorldwide LLC, a provider of loyalty programs for Fortune 500
corporations. In September 2000, CMG paid approximately $17 to acquire the
assets of Taima Corporation, a provider of integrated, technical help desk
support services for Internet service providers and other Internet-based
clients.
During 1999, IMG paid approximately $123 in a series of transactions to
increase its ownership interest in Wiztec Solutions Ltd. (Wiztec) from
approximately 20% at the beginning of the year to 100%. Wiztec, based in
Herzlia, Israel, is a provider of subscriber management systems for
multi-channel subscription television operators. In June 1999, IMG paid
approximately $20 to acquire the assets of Technology Applications Inc.
(TAI), a software development and systems integration company that creates
customer care and billing software for Internet service providers.
In February 1998, CMG acquired American Transtech, Inc. and the assets of
AT&T's Canadian customer care business (Transtech) from AT&T for
approximately $625 in cash. At the time of the acquisition, the Company
began a process of evaluating an integration plan for the acquired
operations. The Company accrued approximately $7.0 for severance of
approximately 375 client service and administrative employees. Through
December 31, 1998, the Company made payments of $6.5 for the severance of
354 employees. The remainder of the severance was paid in 1999 to 20
employees.
In January 1998, CMG paid approximately $30 to acquire the customer
management assets of Maritz, Inc. The acquisition agreement provided for
additional payments by the Company based upon the operating results of the
acquired business over the two-year period after the acquisition. The
additional payments totaled approximately $7.
30
4. Business Restructuring and Special Charges
In addition to the $2.0 charge for purchased research and development from
the Wiztec acquisition, the Company recorded special items in 1999 related
to the Cellular Partnership, certain consolidation activities, and a
realized investment gain of $1.9. The special items related to the
Cellular Partnership principally resulted from equipment impairments
recorded by the partnership subsequent to the merger of SBC Communications
and Ameritech, the general partner. The special items recorded by the
Cellular Partnership reduced the Company's equity income from the
partnership by $12.4 in 1999. The special item for consolidation
activities of $6.9 reflects costs associated with the closure of a CMG
data center, the impairment of certain software and the combination of
certain staff organizations between the Company's two operating segments.
This charge includes an accrual of $1.3 for the severance of approximately
45 employees, most of whom are associated with the data center. During
2000, the Company paid $1.1 in severance under this plan, with the
remaining severance to be paid in 2001.
In 1997, a restructuring plan for CMG was approved that included the
consolidation of certain CMG operating divisions and facilities. CMG
recorded special charges of $35.0 ($23.0 after tax) consisting of a $18.6
restructuring charge and a $16.4 asset impairment charge for property and
goodwill associated with the facilities to be closed. The restructuring
charge included $9.5 in lease termination costs, $7.5 in severance pay
under existing severance plans and $1.6 in other restructuring costs. The
Company anticipated the severance of approximately 425 client service and
administrative employees under the plan. The number of employees
terminated under the plan was 29 and 363 in 1999 and 1998, respectively.
Restructuring liability activity for the 1997 CMG Plan consists of the
following:
2000 1999 1998
---- ---- ----
Balance at January 1................. $6.6 $10.6 $17.2
Severance payments................... -- (0.9) (3.9)
Lease termination payments........... (1.1) (2.0) (1.6)
Other costs.......................... (1.0) (1.1) (1.1)
----- ----- -----
Balance at December 31 $4.5 $ 6.6 $10.6
At December 31, 2000, the 1997 CMG restructuring plan activities were
complete, with the majority of the remaining balance of the restructuring
liability related to ongoing lease termination payments.
5. Income Taxes
The Company's provision for income taxes, consists of the following:
Year Ended December 31,
----------------------
2000 1999 1998
---- ---- ----
Current:
Federal..................... $107.5 $81.7 $ 45.2
Foreign..................... 11.6 15.5 3.3
State and local............. 12.1 9.2 9.4
---- --- ---
Total current............. 131.2 106.4 57.9
Deferred..................... (8.9) (20.9) (8.3)
----- ------ -----
Total........................ $122.3 $85.5 $ 49.6
The 1998 provision for income taxes is presented as if the Company filed
tax returns that were separate from those filed by CBI.
31
The following is a reconciliation of the statutory federal income tax rate
with the effective tax rate for each year:
2000 1999 1998
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal income tax benefit 2.3 2.5 4.0
Research tax credits (2.1) (1.3) (2.9)
Non-deductible amortization of
intangible assets 1.7 2.3 1.6
Other 1.7 (0.1) 0.3
--- ----- ---
Effective rate 38.6% 38.4% 38.0%
The components of deferred tax assets and liabilities are as follows:
At December 31,
---------------------------
2000 1999
---- ----
Deferred tax asset:
Loss carryforwards.................. $24.4 $ 7.3
Pension and employee benefits....... 11.4 6.0
Advance billings.................... 10.8 4.4
Restructuring charges............... 6.4 4.5
State income taxes.................. 5.7 4.9
Allowance for doubtful accounts..... 2.9 5.6
Other............................... 13.3 11.1
Valuation allowance................. (18.8) (2.8)
------ -----
Total deferred tax asset............ 56.1 41.0
Deferred tax liability:
Depreciation and amortization....... 14.7 7.1
Other............................... 1.5 1.7
--- ---
Total deferred tax liability........ 16.2 8.8
---- ---
Net deferred tax asset.............. $39.9 $32.2
The Company provided a valuation allowance against a portion of the
deferred tax asset related to an approximately $53.8 capital loss
carryforward that expires on December 31, 2005. The net change in the
valuation allowance during 2000 resulted from an increase in the capital
loss carryforward during the year.
The Company has not provided for U.S. federal income taxes or foreign
withholding taxes on approximately $39.6 of undistributed earnings of its
foreign subsidiaries at December 31, 2000, because such earnings are
intended to be reinvested indefinitely. It is not practicable to determine
the amount of applicable taxes that would be due if such earnings were
distributed.
32
6. Debt
Debt consists of the following:
At December 31,
---------------
2000 1999
---- ----
Revolving credit facility.... -- --
Commercial paper............. $175.4 $268.0
Medium-term notes............ 100.0 --
Other........................ 15.3 30.3
---- ----
Total........................ $290.7 $298.3
Less current maturities..... -- 48.3
-- ----
Long-term debt............... $290.7 $250.0
Weighted average interest rates:
Commercial paper 7.2% 6.6%
Medium-term notes 7.8% --
Other 8.2% 6.7%
At December 31, 2000, the Company's borrowing facilities included two
variable rate revolving credit facilities, one with a $100 borrowing
capacity expiring in November 2001 and the other with a $250 borrowing
capacity expiring in November 2002. Additionally, at December 31, 2000,
the Company had $100 in variable rate notes outstanding which expire in
September 2002. At December 31, 2000 and 1999, the Company had issued
$175.4 and $268.0, respectively, of commercial paper, backed by the
revolving credit facilities, with maturities ranging from 2 to 145 days at
December 31, 2000. Other debt at December 31, 2000 and 1999 consisted
primarily of $15.3 and $30.3, respectively, of uncommitted short-term
lines of credit with banks. At December 31, 2000 and 1999, the Company
classified $188.2 and $250.0, respectively, of short-term borrowings as
long-term based on the Company's intent and ability to refinance these
borrowings under the revolving credit facility that expires in 2002. The
Company's credit agreements include certain restrictive covenants
including maintenance of interest coverage and debt to capitalization
ratios. Interest rates under the revolving credit facilities are generally
based on LIBOR adjusted for an index related to the Company's credit
ratings. The Company has entered into an interest rate swap with a
notional value of $100 to effectively convert the variable rate notes
expiring in September 2002 to a fixed rate of 7.82%. The interest rate
swap agreement terminates when the notes mature.
During 1998, the Company's consolidated financial statements included an
allocation of CBI's consolidated debt and the related interest expense
based on the terms of an agreement between the Company and CBI. The
Company believes the allocations of interest expense from CBI are
reasonable estimates of the cost of financing its assets and operations
during 1998.
7. Sale of Receivables
In October 1999, the Company entered into an agreement to sell a portion
if its domestic trade accounts receivables. As collections reduce the
outstanding balance, the Company may sell additional receivables. The
Company services and retains an interest in the receivables sold under
this agreement. The Company's retained interest in the receivables sold is
measured at the time of sale and is based on the sales of similar assets.
The maximum amount of outstanding receivables to be sold under the
agreement was $200 until September 2000 when it was lowered to $150. At
December 31, 2000 and 1999, the Company had sold $115.0 and $151.0 of
outstanding receivables, respectively. The full amount of the allowance
for doubtful accounts has been retained since the Company holds a retained
interest in the sold receivables of $32.1 and $28.9 at December 31, 2000
and 1999, respectively. Gross receivables sold and amounts received under
the program were $1,135.1 and $1,132.0, and $390.6 and $361.6 in 2000 and
1999, respectively. The sales have been reflected as a reduction of
accounts receivable and as a component of cash flows from operating
activities.
33
The cost of the program was $11.4 in 2000 and $3.0 in 1999. This cost is
based on the amount and timing of outstanding sold receivables and is
recorded as a component of interest expense.
8. Employee Benefit Plans
Prior to January 1, 1999, the Company participated in CBI's
noncontributory defined benefit pension and postretirement plans.
Accordingly, the Company's financial statements for 1998 reflect the costs
experienced for its employees and retirees while included in those plans.
Effective January 1, 1999, the Company assumed responsibility for employee
benefit plans covering its active employees and retirees.
Pensions
The Company sponsors three defined benefit pension plans: one for all
eligible employees (the cash balance plan), one nonqualified, unfunded
executive deferred compensation plan and one supplementary, nonqualified,
unfunded plan for certain senior managers. The pension benefit formula for
the cash balance plan is determined by a combination of compensation-based
credits and annual guaranteed interest credits. Benefits for the executive
deferred compensation plan are based on employee deferrals and interest
credits. Benefits for the supplementary plan are based on years of service
and eligible pay. Funding of the cash balance plan has been achieved
through contributions made to an irrevocable trust fund. The contributions
have been determined using the aggregate cost method. The projected unit
credit cost method is used for determining pension cost for financial
reporting purposes.
Pension cost included the following components:
Year Ended December 31,
-----------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------
Service cost (benefits earned
during the period) $13.7 $12.8 $11.4
Interest cost on projected
benefit obligation 10.6 7.7 18.2
Expected return on plan assets (14.1) (12.0) (21.2)
Amortization and deferrals--net (2.4) (0.4) (0.4)
----- ----- -----
Pension cost $7.8 $ 8.1 $ 8.0
The following table sets forth the pension plans' funded status:
At December 31,
---------------------
2000 1999
- ------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $137.4 $111.2
Service cost 13.7 12.8
Interest cost 10.6 7.7
Amendments 2.3 --
Actuarial loss 11.7 13.0
Benefits paid (10.2) (7.3)
------ -----
Benefit obligation at end of year 165.5 137.4
34
Change in plan assets:
Fair value of plan assets at beginning of year 178.8 168.2
Actual return on plan assets (1.4) 15.5
Employer contribution 3.1 2.4
Benefits paid (10.2) (7.3)
------ -----
Fair value of plan assets at end of year 170.3 178.8
Funded status 4.8 41.4
Unrecognized transition asset (1.4) (1.8)
Unrecognized prior service cost 5.8 3.9
Unrecognized net gain (28.7) (57.0)
------ ------
Accrued benefit expense $(19.5) $(13.5)
The benefit obligation related to the unfunded plans was $58.2 and $51.1
at December 31, 2000 and 1999, respectively.
Plan assets include $22.0 and $20.6 of Company common shares at December
31, 2000 and 1999, respectively.
The following rates were used in determining the actuarial present value
of the projected benefit obligation and pension cost for the pension
plans:
Year Ended December 31,
-----------------------------
2000 1999 1998
- ----------------------------------------------------------------------------
Discount rate--projected
benefit obligation................ 7.50% 7.75% 6.50%
Future compensation growth rate....... 4.75% 4.75% 4.00%
Expected long-term rate of return
on plan assets.................... 9.00% 9.00% 8.25%
Savings Plans
The Company sponsors defined contribution plans covering substantially all
employees. The Company's contributions to the plans are based on either
matching a portion of the employee contributions, a percentage of employee
earnings, or a discretionary profit sharing contribution. Total Company
contributions to the defined contribution plans were $12.2, $8.6 and $6.8
for 2000, 1999 and 1998, respectively.
Employee Postretirement Benefits Other Than Pensions
The Company sponsors separate postretirement health and life insurance
plans for certain eligible employees. The Company funds its group life
insurance benefits through Retirement Funding Accounts (RFAs) and funds
healthcare benefits using Voluntary Employee Benefit Association (VEBA)
trusts. It is the Company's practice to fund amounts as deemed appropriate
from time to time. Contributions are subject to IRS limitations developed
using the aggregate cost method. The Company's postretirement benefit cost
was $1.7, $2.0 and $2.0 for 2000, 1999 and 1998, respectively.
9. Common and Preferred Shares
Share Repurchase Plan
In November 1999, the Board of Directors authorized the repurchase of up
to 7 million shares of common stock from time to time as market and
business conditions warrant. Through December 31, 2000, the Company had
spent $16.8 to repurchase 720,000 shares. At December 31, 2000, 353,391
shares of the repurchased shares had not been reissued and are treated as
treasury stock.
35
Shareholder Rights Plan
Under the Shareholder Rights Plan, a dividend of one preferred share
purchase right for each outstanding common share was granted to
shareholders of record at the close of business on December 1, 1998. Under
certain conditions, each right entitles the holder to purchase one
one-hundredth of a Series A preferred share. The rights cannot be
exercised or transferred separately from common shares, unless a person or
group acquires 15% or more of the Company's outstanding common shares. The
rights will expire on December 1, 2008, unless earlier redeemed by the
Company.
Preferred Shares
The Company is authorized to issue up to 5 million preferred shares, of
which 4 million would have voting rights. At December 31, 2000 and 1999,
there were no preferred shares outstanding.
10. Stock-Based Compensation Plans
At December 31, 2000, the Company had authorized 30 million shares of
common stock for issuance under the Convergys Long-Term Incentive Plan
(Convergys LTIP). Since the Company's initial public offering in August
1998, certain Company employees have been granted stock options and other
stock-based awards under the Convergys LTIP. During 1998 and in prior
years, certain employees of the Company were granted stock options and
other stock-based awards under CBI's Long-Term Incentive Plan (CBI LTIP).
Effective December 31, 1998, awards outstanding under the CBI LTIP were
modified to the extent that, for each CBI option or share award, the
holder received, in addition, a Convergys option or share award pursuant
to the Convergys LTIP. The Convergys stock options or share awards issued
to holders of CBI options or share awards on December 31, 1998 have the
same vesting provisions, option periods and other terms and conditions as
the original CBI options. The exercise prices of the Company and CBI stock
options issued to holders of CBI options at the Distribution date were
established so the options had the same ratio of exercise price per share
to market value per share as the original stock option. Under both the
Convergys LTIP and the CBI LTIP, options are granted with exercise prices
that are no less than market value of the stock at the grant date.
Generally, stock options have a ten-year term and vesting terms of three
to four years. There were no Convergys stock appreciation rights granted
or outstanding during the three-year period ended December 31, 2000.
The Company follows the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board Opinion 25 and
related interpretations in accounting for its plans. If the Company had
elected to recognize compensation cost for the issuance of Company or CBI
options to Company employees based on the fair value at the grant dates
for awards consistent with the method prescribed by SFAS 123, net income
and earnings per share would have been impacted as follows:
Year Ended December 31,
----------------------------
2000 1999 1998
- ------------------------------------------------------------------------
Net income:
As reported $194.7 $137.0 $81.0
Pro forma compensation expense,
net of tax benefit (17.3) (10.8) (8.3)
------ ------ -----
Pro forma $177.4 $126.2 $72.7
Diluted earnings per share:
As reported $ 1.23 $ 0.89 $0.57
Pro forma $ 1.13 $ 0.82 $0.51
The weighted average fair value on the date of grant for the Convergys
options granted during 2000 and 1999 was $16.09 and $9.31, respectively.
The weighted average fair value at the date of grant for the CBI options
granted to Company employees during
36
1998 was $8.78. Such amounts were estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
Convergys CBI
----------------------------------------------------------------------------------------
2000 1999 1998 1998
----------------------------------------------------------------------------------------
Expected dividend yield........... -- -- -- 1.4%
Expected volatility............... 54.5% 47.8% 44.9% 25.0%
Risk free interest rate........... 6.5% 4.8% 5.4% 5.7%
Expected holding period, in years. 4 4 4 4
Presented below is a summary of Convergys stock options activity:
Weighted
Average
Exercise
Shares in Thousands Shares Price
- ----------------------------------------------------------------------------
Options granted in 1998............... 2,004 $15.01
Options forfeited in 1998............. (20) $15.00
Options issued to holders of
CBI options at December 31, 1998.... 7,284 $12.26
----- ------
Options outstanding at
December 31, 1998................... 9,268 $12.30
Options granted in 1999............... 2,509 $21.79
Options exercised in 1999............. (716) $9.17
Options forfeited in 1999............. (346) $18.68
----- ------
Options outstanding at
December 31, 1999................... 10,715 $14.52
Options granted in 2000............... 3,812 $32.21
Options exercised in 2000............. (1,837) $11.68
Options forfeited in 2000............. (534) $23.16
---- ------
Options outstanding at
December 31, 2000................... 12,156 $19.92
Options exercisable at
December 31, 2000................... 5,328 $13.17
The following table summarizes the status of the Company stock options
outstanding and exercisable at December 31, 2000:
Options Options
Shares in Thousands Outstanding Exercisable
- ------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
-----------------------------------------------------------------------
$4.72 to $6.62 1,678 2.8 $ 4.92 1,626 $ 5.08
$6.63 to $9.63 693 4.7 9.28 693 9.28
$9.64 to $14.03 1,710 7.5 14.95 927 14.91
$14.04 to $19.15 2,399 6.7 17.25 1,383 17.28
$19.16 to $22.75 2,146 7.9 21.88 561 21.70
$22.76 to $31.91 2,635 9.0 29.55 2 29.53
$31.92 to $42.16 764 9.3 38.86 102 38.91
$42.17 to $52.53 131 9.6 46.78 34 46.35
--- --- ----- -- -----
Total 12,156 7.1 $19.92 5,328 $13.17
37
11. Commitments and Contingencies
Commitments
The Company leases certain facilities and equipment used in its operations
under operating leases. Total rent expense was approximately $100.9,
$103.6 and $110.5 in 2000, 1999 and 1998, respectively.
At December 31, 2000, the total minimum rental commitments under
non-cancelable leases are as follows:
2001.......................................... $83.9
2002.......................................... 73.9
2003.......................................... 62.3
2004.......................................... 43.0
2005.......................................... 32.1
Thereafter.................................... 95.8
----
Total......................................... $391.0
Contingencies
The Company is from time to time subject to routine complaints incidental
to the business. The Company believes that the results of any complaints
and proceedings will not have a materially adverse effect on its financial
condition or results of operations.
12. Additional Financial Information
at December 31,
-----------------
2000 1999
- ------------------------------------------------------------------------
Property and equipment, net:
Land................................. $ 7.8 $ 6.2
Buildings............................ 47.0 47.9
Leasehold improvements............... 109.3 72.6
Equipment............................ 374.2 287.7
Software............................. 237.1 195.0
Construction in progress and other... 39.4 48.1
---- ----
814.8 657.5
Less: Accumulated depreciation....... (422.2) (321.9)
------- -------
$392.6 $ 335.6
Goodwill and intangibles, net:
Goodwill............................. $ 858.2 $ 829.6
Other intangible assets.............. 97.4 97.4
---- ----
955.6 927.0
Less: Accumulated amortization....... (215.4) (172.7)
------- -------
$ 740.2 $ 754.3
Investments in marketable securities:
Cost basis........................... $5.7 $5.6
Unrealized gains..................... 1.8 49.9
--- ----
$ 7.5 $ 55.5
38
Payables and other current liabilities:
Accounts payable..................... $ 36.1 $ 40.9
Accrued taxes........................ 29.3 38.3
Accrued payroll-related expenses..... 144.3 122.5
Accrued expenses, other.............. 78.3 67.6
Restructuring and exit costs......... 6.9 12.1
Advance billing and customer deposits 64.1 58.0
---- ----
$ 359.0 $ 339.4
OTHER COMPREHENSIVE INCOME
at December 31,
-----------------
2000 1999
- ------------------------------------------------------------------------
Accumulated other comprehensive income:
Currency translation adjustments..... $(5.7) $ 1.6
Unrealized loss on hedging activities (4.3) --
Unrealized gain on investments....... 1.8 50.0
--- ----
$(8.2) $ 51.6
Year Ended December 31,
----------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------
Comprehensive income:
Net income $194.7 $137.0 $81.0
Other comprehensive income, net of tax:
Currency translation adjustments (7.3) 2.2 (3.0)
Unrealized loss on hedging activities (4.3) -- --
Unrealized gain (loss) on investments (48.2) 52.0 (2.0)
------- ---- -----
Total comprehensive income $134.9 $191.2 $76.0
Cellular Partnership
Summarized financial information for the Cellular Partnership is as
follows:
at December 31,
-----------------------------
2000 1999 1998
- -------------------------------------------------------------------------
Current assets............... $ 55.6 $ 91.3 $ 63.0
Non-current assets........... 122.3 109.7 139.6
Current liabilities.......... 28.7 22.1 18.0
Non-current liabilities...... -- -- 2.0
Year Ended December 31,
------------------------------
2000 1999 1998
- --------------------------------------------------------------------------
Revenues..................... $195.0 $210.0 $203.9
Operating income............. 41.7 49.6 60.6
Net income................... 45.2 45.0 58.4
Note: The Cellular Partnership's results for 1999 reflect special charges
recorded by the partnership related to the acquisition of Ameritech, the
general partner, by SBC Communications (See Note 4).
39
13. Transactions and Agreements with CBI
The Company and CBI entered into the Plan of Reorganization and
Distribution Agreement dated July 20, 1998 (the Agreement). The Agreement
provides that, among other things, the Company will indemnify CBI for all
liabilities and contingent liabilities arising from the Company's business
and operations or otherwise assigned to the Company. The Agreement
provides for the equal sharing of contingent liabilities not allocated to
one of the two companies. In addition, the Company has a number of other
agreements with CBI regarding federal, state and local tax allocation and
sharing, employee benefits, general services, telecommunications support
services provided to the Company by CBI and billing, data processing and
customer management services provided by the Company to CBI. The Company
earned revenues from CBI totaling $49.8 and incurred expenses for
communication and other services from CBI of $10.1 in 1998. The Company
also incurred $10.6 in allocated overhead costs from CBI during 1998.
14. Industry Segment and Geographic Operations
Industry Segment Information
The Company operates in two industry segments, which are identified by
service offerings. IMG is principally engaged in providing and managing
complex billing information system services to the communications
industry. CMG provides comprehensive customer management services focused
on the needs of communications technology and financial service companies.
The Company does not allocate activities below the operating income level
to its reported segments. The Company's business segment information is as
follows:
Year Ended December 31,
-------------------------------
2000 1999 1998
- -------------------------------------------------------------------------
Revenues
IMG......................... $ 784.7 $ 687.1 $ 602.0
Less intersegment........... (17.7) (35.1) (24.6)
CMG......................... 1,395.5 1,110.9 869.9
Less intersegment........... -- -- (0.1)
------- ------- -------
........................ $2,162.5 $1,762.9 $1,447.2
Depreciation
IMG......................... $ 38.0 $ 29.7 $ 23.9
CMG......................... 68.3 55.2 44.2
Corporate................... 3.9 1.1 --
------- ------- -------
........................ $ 110.2 $ 86.0 $ 68.1
Amortization
IMG......................... $ 18.7 $ 12.8 $ 6.0
CMG......................... 31.9 31.5 27.2
------- ------- -------
........................ $ 50.6 $ 44.3 $ 33.2
Special items
IMG......................... $ -- $ 2.0 --
CMG........................ -- 6.9 $ 42.6
------- ------- -------
........................ $ -- $ 8.9 $ 42.6
Operating income
IMG......................... $ 164.2 $ 132.3 $ 116.5
CMG......................... 171.1 108.7 25.6
Corporate and other......... (7.4) (5.8) (2.2)
----- ----- -----
........................ $ 327.9 $ 235.2 $ 139.9
40
Capital expenditures
(excluding acquisitions)
IMG......................... $ 39.2 $ 41.1 $ 39.3
CMG......................... 130.1 101.9 53.9
Corporate and other......... 7.0 10.8 0.3
--- ---- ---
........................ $ 176.3 $ 153.8 $ 93.5
at December 31,
-------------------------
2000 1999
------------------------------------------------------------------------
Total assets
IMG................................. $ 571.1 $ 503.0
CMG................................. 962.1 953.1
Corporate and other................. 246.3 123.4
----- -----
................................ $1,779.5 $1,579.5
Geographic Operations
The following table presents certain geographic information regarding the
Company's operations:
Year Ended December 31,
-----------------------------
2000 1999 1998
--------------------------------------------------------------------
Revenues
North America............... $2,039.0 $1,653.8 $1,367.7
International............... 123.5 109.1 79.5
----- ----- ----
......................... $2,162.5 $1,762.9 $1,447.2
at December 31,
--------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------
Long-lived assets
North America................ $1,341.1 $1,058.6
International................ 131.6 104.5
----- -----
................................. $1,472.7 $1,163.1
Concentrations
Both of the Company's segments derive significant revenues from AT&T.
Revenues from AT&T were 40.9%, 40.2% and 35.4% of the Company's
consolidated revenues for 2000, 1999 and 1998, respectively. Related
accounts receivable from AT&T totaled $148.8 and $83.9 at December 31,
2000 and 1999, respectively. The relationship with AT&T includes the
Company's use of AT&T communication services, which is particularly
significant to the CMG segment. Spending for these services with AT&T was
$92.8, $100.7 and $83.7 in 2000, 1999 and 1998, respectively.
15. Earnings Per Share
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) computations:
41
Per Share
Income Shares Amount
--------------------------------------------------------------------
2000
Basic EPS.................... $194.7 152.7 $1.28
Effect of dilutive securities:
Stock-based compensation
arrangements................ -- 5.3 0.05
----- ----- ----
Diluted EPS.................. $194.7 158.0 $1.23
Per Share
Income Shares Amount
--------------------------------------------------------------------
1999
Basic EPS.................... $137.0 151.6 $0.90
Effect of dilutive securities:
Stock-based compensation
arrangements................ -- 2.9 0.01
----- ----- ----
Diluted EPS.................. $137.0 154.5 $0.89
Per Share
Income Shares Amount
--------------------------------------------------------------------
1998
Basic EPS.................... $81.0 142.7 $0.57
Effect of dilutive securities:
Stock-based compensation
arrangements................ -- 0.2 --
----- ----- ----
Diluted EPS.................. $81.0 142.9 $0.57
The EPS information for 1998 has been calculated giving retroactive
recognition of the share split, effective August 4, 1998, which increased
the number of then outstanding common shares to 137.0 million.
16. Financial Instruments
At December 31, 2000, the Company had derivative liabilities of $1.2
classified as accrued liabilities. In addition, the interest rate swap was
a liability with a fair value of $3.7 at December 31, 2000. As of December
31, 2000, a total of $4.3 of deferred net losses on derivative instruments
were accumulated in other comprehensive income and are expected to be
reclassified to earnings during the next twelve to twenty-four months.
17. Quarterly Financial Information (Unaudited)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------------
2000
Revenues...................... $ 513.6 $521.9 $544.5 $582.5 $2,162.5
Operating income.............. $ 74.6 $ 77.6 $ 83.2 $ 92.5 $ 327.9
Net income.................... $ 44.3 $ 45.6 $ 50.5 $ 54.3 $ 194.7
Earnings per share:
Basic....................... $ 0.29 $ 0.30 $ 0.34 $ 0.35 $ 1.28
Diluted...................... $ 0.28 $ 0.29 $ 0.32 $ 0.34 $ 1.23
1999
Revenues...................... $ 399.8 $426.2 $450.2 $486.7 $1,762.9
Operating income.............. $ 52.8 $ 54.1 $ 62.1 $ 66.2 $ 235.2
Net income.................... $ 32.4 $ 32.8 $ 39.7 $ 32.1 $ 137.0
Earnings per share:
Basic........................ $ 0.21 $ 0.22 (1) $ 0.26 $ 0.21(1) $ 0.90
Diluted..................... $ 0.21 $ 0.21 (1) $ 0.26 $ 0.21(1) $ 0.89
(1) See Notes 3 and 4 for a discussion of special items that were
recorded by the Company in the second and fourth quarters of 1999.
42
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 2000.
PART III
ITEMS 10 THROUGH 13.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by Item 10 is included on page 12 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The Executive Compensation section of the Company's proxy statement dated March
7, 2001 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Share Ownership of Directors and Officers section of the Company's proxy
statement dated March 7, 2001 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
ITEM 14(a)(1) AND (2). LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
The following consolidated financial statements of Convergys are included
in Item 8:
Page
(1) Consolidated Financial Statements:
Consolidated Statements of Income ................. 24
Consolidated Balance Sheets........................ 25
Consolidated Statements of Cash Flows.............. 26
Consolidated Statements of Shareholders' Equity
and Comprehensive Income....................... 27
Notes to Financial Statements...................... 28
Report of Independent Accountants ................ 23
(2) Financial Statement Schedule:
II - Valuation and Qualifying Accounts............ 47
Financial statement schedules other than that listed above have been
omitted because the required information is not required or applicable.
(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 Form
S-3 filed on August 10, 2000, File Number 333-43404.)
3.2 Regulations of the Company. (Exhibit 3.2 to Registration Statement No.
333-53619.)
44
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, 1998, File No. 001-14379.)
10.1 Convergys Corporation 1998 Long-Term Incentive Plan.
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 as amended
effective June 1, 2000.
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 Employment Agreement between the Company and 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 as amended
effective June 2, 2000.
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.)
12 Computation of Ratio of Earning to Fixed Charges.
21 Subsidiaries of the Company. (Exhibit 21 to Registration Statement No.
333-53619.)
45
23 Consent of PricewaterhouseCoopers LLP.
24 Powers of Attorney.
The Company will furnish, without charge, to a security holder upon request, a
copy of the documents, portions of which are incorporated by reference, and will
furnish any other exhibit at cost.
ITEM 14(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company in the fourth quarter of 2000.
ITEM 14 (c) AND (d). EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
The responses to these portions of Item 14 are submitted as a separate section
of this report.
46
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 2000
Allowance for
Doubtful Accounts $ 12.4 $ 2.6 --- $ 3.1(b) $11.9
Deferred Tax Asset
Valuation Allow. $ 2.8 --- $16.0 (c) --- $18.8
Restructuring
Reserve $ 6.6 --- --- $ 2.1 $ 4.5
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
(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
(loss).
47
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
February 28, 2001 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
- --------- ----- ----
Chairman of the Board;
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
48
Signature Title Date
- --------- ----- ----
ERIC C. FAST* Director
- -----------------------------
Eric C. Fast
ROGER L. HOWE* Director
- -----------------------------
Roger L. Howe
STEVEN C. MASON* Director
- -----------------------------
Steven C. Mason
JOSEPH E. GIBBS* Director
- -----------------------------
Joseph E. Gibbs
PHILIP A. ODEEN* Director
- -----------------------------
Philip A. Odeen
BRIAN H. ROWE* Director
- -----------------------------
Brian H. Rowe
*By /s/ Steven G. Rolls February 28, 2001
----------------------------
Steven G. Rolls
as attorney-in-fact and on his behalf
as Chief Financial Officer
49