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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Shares (no par value) New York Stock Exchange
Series A Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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At January 31, 2002, there were 172,531,425 common shares outstanding.
At January 31, 2002, the aggregate market value of the voting shares
owned by non-affiliates was $5,361,943,817.
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___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's definitive proxy statement dated March 8, 2002,
issued in connection with the annual meeting of shareholders (Part III)
TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business................................................................................... 3
2. Properties................................................................................. 13
3. Legal Proceedings.......................................................................... 13
4. Submission of Matters to a Vote of the Security Holders.................................... 13
PART II
5. Market for the Registrant's Common Equity and Related Security Holder Matters.............. 14
6. Selected Financial and Operating Data...................................................... 15
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 16
7a. Quantitative and Qualitative Disclosure about Market Risk.................................. 24
8. Financial Statements and Supplementary Data................................................ 24
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 47
PART III
10. Directors and Officers of the Registrant................................................... 48
11. Executive Compensation..................................................................... 48
12. Security Ownership of Certain Beneficial Owners and Management............................. 48
13. Certain Relationships and Related Transactions............................................. 48
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K............................. 49
See page 14 for Executive Officers of the Registrant.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This report and the documents incorporated by reference herein contain
"forward-looking" statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are based on current expectations, estimates and
projections. Statements that are not historical facts, including statements
about the beliefs and expectations of Convergys Corporation, are forward-looking
statements. Sometimes these statements will contain words such as "believes,"
"expects," "intends," "should," "will," "plans" and other similar words. 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 expressly states that it has no current intention of
updating 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: the consequence of terrorist attacks and the responses of
the United States and other nations to such attacks; the loss of a significant
client; difficulties in completing or integrating acquisitions; 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 software and
services. Convergys focuses on developing long-term strategic relationships with
clients in customer-intensive industries including telecommunications, cable,
broadband, direct satellite broadcasting, Internet services, technology and
financial services. The Company serves its clients through its two operating
segments: (i) the Information Management Group (IMG), which provides outsourced
billing and information services and software; and (ii) the Customer Management
Group (CMG), which provides outsourced marketing and customer support services
and outsourced employee care services.
Pursuant to Rule 12b-23 under the Securities Exchange Act of 1934, as amended,
the industry segment and geographic information included in Item 8, Note 14 of
Notes to Financial Statements, are incorporated herein by reference in partial
response to this Item 1.
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, customer management and employee care solutions, which utilize
software-based information systems and services
1
to identify, attract, bill and retain customers and care for employees' human
resource needs 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 competitive as a
result of deregulation, convergence, the development of new technologies and
global industry consolidation. Deregulation and the development of new
technologies have also created new entrants. Convergence and global 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 and employee care. Where companies once provided
customer support and employee care through paper or telephone-based care
centers, these emerging technologies and shifts in consumer preferences now
require support to be offered through multi-channel contact centers. In these
multi-channel contact centers, trained service agents provide customer support
and employee care 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 and employee care methodologies, 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 and employee care
services.
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 management, customer
management and employee care 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 where it focuses: explosive demand and competition in the
communications, technology and financial services industries; need for complex,
highly scalable communications billing systems; the continuing trend toward
outsourcing of billing, customer support and employee care services; a rising
trend for a single point provider of outsourced human resource services; and
demand for the use of new technologies (multi-channel contact centers) and new
disciplines (customer relationship management) in providing customer support
services. Specifics of the strategy include:
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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, wireline, cable, cable telephony, broadband, direct broadcast satellite
and Internet services. The strategy includes being positioned to provide billing
software to our current clients as they seek to introduce new services to
existing service providers who are not clients that outgrow their current
billing systems and to new entrants as they 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 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.
With respect to employee care services, Convergys seeks to leverage its core
strengths in operating complex enterprise-class software and in integrating
employee contact technologies and services to provide clients with a more cost
effective single point of outsourced human resource services. These services
include health and welfare administration, defined benefit and defined
contribution administration, payroll administration and payroll processing,
recruiting administration and training administration.
Pursuing International Growth
The Company believes that developments in the international communications
market position Convergys for significant international growth. Historically,
international revenues have accounted for less than 10% of the Company's
revenues. However, as deregulation in the international market leads to
increased competition and industry consolidation, Convergys believes that the
demand for its highly scalable, complex billing systems will increase.
Similarly, the auctions of new spectrum for third generation wireless services
(known as 3G) and the growth of wireless data communications in the
international markets will lead to new entrants who need billing systems and the
need for incumbents to replace their existing billing systems and software.
Convergys is investing heavily in its systems' capabilities, particularly its
global, end-to-end, wireless billing system, Atlys, and in its international
sales and marketing efforts to realize this market potential. The Company was
awarded its first major European Atlys wireless billing contract during the
third quarter of 2001. Under the terms of the contract, the Company is licensing
and managing the implementation and integration of Atlys to Orange France
(formerly known as France Telecom Mobile), part of the Orange France Telecom
Group. The contract also contains a significant international provision - a
framework agreement establishing a special relationship between Convergys and
France Telecom that would allow the Orange Group to use Atlys in its numerous
global affiliates. The Company also expanded its presence in the European cable
billing market with the signing of a license implementation and support
agreement with ISH, an affiliate of Callahan Associates International LLC
(Callahan). Additionally, the Company's international expansion was enhanced
with the April 2001 acquisition of Geneva Technology Ltd. (Geneva), a Cambridge,
UK based provider of convergent rating and billing software. Since the
acquisition of Geneva, the Company has successfully completed several Geneva
software license contracts in the international communications billing market.
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In addition to increasing its focus on Europe, Convergys is expanding in Latin
America and the Asia Pacific region. One example of the Company's commitment to
expanding its global billing market share was the formation of an Asia Pacific
joint venture that was announced in the fourth quarter of 2001. The joint
venture is already producing new customers as it signed a seven-year contract
with Tomen Mediacom, a leading Japanese media provider, to provide cable billing
and subscriber management support. Additionally, in January 2002, the Company's
sales office in Singapore, recently opened by Geneva, announced that it signed a
contract with Advance Info Service PLC (AIS), Thailand's largest wireless
operator and fastest growing service provider, to bill all of AIS's
telecommunication products and services using the Geneva product.
During 2001, Convergys expanded its international customer management presence
with the opening of a new integrated customer service contact center in India.
Deploying Aggressive Sales and Marketing Efforts
In recent years, Convergys has begun to increase its sales and marketing efforts
to fully realize its market potential. Convergys has significantly increased its
centralized sales force in order to penetrate existing clients more fully and to
capture new clients both domestically and internationally. Similarly, in recent
years, Convergys has been implementing 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 to meet market needs.
Pursuing Strategic Acquisitions and Alliances
Convergys has a history of enhancing internal growth through acquisitions (31
acquisitions in the past 16 years). The Company's April 2001 acquisition of
Geneva supports the Company's strategy in that it adds to the Company's
technology leadership, further enhances the Company's international presence and
augments the Company's sales and marketing efforts. Additionally, the Company
continues to pursue alliances with leading technology and systems integration
companies to expand the market leadership of its solutions and the Company's
distribution channels. The Company believes that consolidation in its industry
will continue and that the Company 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 software which addresses all segments of the communications
industry, including wireless, wireline, cable, cable telephony, broadband,
direct broadcast satellite and Internet services. IMG's component-based
next-generation framework supports the creation of billing and customer care
solutions ranging from a single module to the combination of modules into
application suites to a complete, end-to-end billing system. Its global
three-tiered billing product portfolio gives its clients a flexible migration
path to expand their billing and
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customer care systems without loss of their initial investment. IMG's clients
can upgrade if, and when, their economic models point to the need for additional
capabilities. IMG's three-tiered family of products includes:
End-to-End Products
-------------------
End-to-end products address the broad range of convergent billing and
customer care functionality for well-defined market segments such as
wireless, cable/broadband and the Internet. End-to-end products are
full-featured, with built-in business logic and business rules that map the
product to the needs of a particular target segment. The end-to-end
products are offered with a unique, core-custom option that allows
operators to modify the products to meet their specific requirements, while
still being able to take advantage of IMG-funded product upgrade release
plans. Convergys' end-to-end software systems include:
Atlys/(R)/
-----
Atlys is a comprehensive, end-to-end billing and customer care solution
that supports the needs of wireless network operators competing in a
global wireless voice and data market. The Atlys solution supports all
major mobile network standards, including UMTS, CDMA, TDMA, GSM and
AMPS, in an open, client-server solution capable of supporting over 20
million subscribers, real-time, in a single relational database. The
solution provides a total customer management solution by combining a
flexible, scalable billing platform with a complete suite of integrated
contact center services. Mobile operators use Atlys to differentiate
their products and services, maximize the value of each customer
interaction and expand their businesses strategically and with agility.
ICOMS
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The Integrated Communications Operations Management System (ICOMS)
solution is designed specifically for the broadband convergent video,
high-speed data and telephony market. It incorporates the power and
flexibility of Convergys' industry-proven cable television subscriber
management system with the market-leading integrated support of
high-speed data and wireline telephony. The net result is a convergent
solution uniquely designed to meet cable and broadband operators'
subscriber, billing and operations management requirements. The ICOMS
solution provides broadband operators with control and flexibility to
sharpen their competitive edge, expand market penetration, increase
revenues, decrease costs and differentiate themselves from their
competition.
WIZARD/TM/
------
The WIZARD solution is designed to serve new-generation multimedia
operators, allowing them to extend their offerings to support the new
convergent era that includes voice, video and data services. To address
this rapidly evolving industry, WIZARD combines a comprehensive
customer service system component and advanced billing and rating
capabilities.
Catalys/(R)/
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Catalys, IMG's proven billing and customer care solution for the
Internet marketplace, helps Internet service providers tackle
industry-wide challenges such as controlling costs, accelerating
revenue growth and supporting dynamic business
5
models. It also assists them in better differentiating their products
and services, maximizing the value of each customer interaction, and
expanding their business strategically and with agility.
Application Suites
For providers that require complex system enhancements or replacements to
address convergent services needs with broad functionality, IMG offers
application suites. These suites are pre-integrated to provide
cost-effective, add-on functionality or may be custom-configured using
standard application programming interfaces (APIs) to meet client-specific
needs when an out-of-the-box solution is not the best fit. Further, IMG's
application suites contain industry-specific business rules that ensure the
proper interoperation of the modules. Like IMG's application modules, these
suites have well-defined APIs and can be rapidly deployed in existing
operations support systems (OSS).
Application Modules
In cases where a service provider desires to implement a modular approach
to its OSS, or needs to upgrade or replace a specific part of its OSS
capability with a convergent software solution, Convergys offers a variety
of application modules. Convergys application modules support distinct
business functions with robust performance and well-documented APIs, and
are designed to be easily integrated into a client's existing OSS
environment or with IMG application suites and end-to-end products. For
example, the highly flexible and convergent rating and billing application
module, Geneva(TM) Active Revenue Management, reduces time to market and
achieves cost efficiencies through highly configurable applications rather
than time-consuming or costly customizations. Other examples of Convergys'
application modules include Convergys Mediation Manager, which provides a
simplified and standardized interface for the acquisition of billing data,
and Convergys Activation Manager, which provides an activation gateway that
isolates clients' billing functions from network complexities. Using IMG
modules, clients can build upon their initial investments with Convergys to
enhance continually their OSS capabilities.
IMG provides its software products in one of three delivery modes: outsourced,
licensed or build-operate-transfer (BOT). In the outsourced delivery mode, IMG
provides the billing services by running its software in one of its world class
data centers. In the licensed delivery mode, the software is licensed to clients
who prefer to perform billing and customer care internally. Finally, the BOT
delivery mode entails IMG implementing and initially running its software in the
client's data center with the option of turning the operation of the center over
to the client at a future date.
In addition to the end-to-end products described above, the Company also
provides outsourced billing services using legacy applications (i.e., Macrocell,
Cellware, Cablemaster/(R)/) that have been customized to meet specific needs of
clients.
During 2001, 59% of IMG's revenues were for outsourced data processing services
generated from recurring monthly payments from its clients based upon the number
of client 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 2001 revenues.
6
IMG's remaining revenues were primarily from software license arrangements,
international and other miscellaneous services. International revenues consist
of a mix of professional and consulting and license and other revenues.
CMG
---
CMG provides comprehensive, outsourced customer management and employee care
services for its clients utilizing its advanced information systems
capabilities, human resource management skills and industry experience. 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.
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 its clients an outsourcing solution that allows them to
deliver world class human resource and benefits administration services
efficiently to their employees (active and retired). CMG's services
support human resource activities that span the lifecycle of an
employee, including recruiting, hiring and staffing; annual benefits
enrollment and ongoing benefits administration; defined benefit and
defined contribution administration; payroll administration and payroll
processing; mergers and acquisitions; general human resource and
payroll inquiries.
Convergys' fully integrated Employee Service Centers provide its
clients' employees with a single point of contact in order to access
information, ask questions and enroll in various benefit programs.
Technologies such as the Internet, interactive voice response (IVR),
computer telephony integration (CTI) and knowledge-based management
(KBM) help create a virtual human resources department that provides
employees the information they need, when they need it. Our employee
self-service capabilities enable employees to access their human
resource information and perform various transactions 24 hours a day.
7
While CMG does provide traditional teleservices, the vast majority of its
revenues relate to dedicated services. Although traditional teleservices
programs require technological capabilities, systems scale and human resource
expertise similar to dedicated services, they are generally short-term and
require less experience within the client's industry.
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 training and 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.
Employee care services are generally billed on a rate per client employee or a
flat monthly rate.
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's billing and customer management software platforms process
billing information for monthly customer statements for approximately 40% of
U.S. wireless subscribers. At December 31, 2001, IMG's wireless billing clients
included AT&T Wireless, Sprint, Orange France, Telecorp, Telepak, Verizon,
ALLTEL, Cingular, Cincinnati Bell Wireless, Triton and Telesp Celular (Brazil).
IMG's clients licensing the Geneva Active Revenue Management software included
British Telecom, Vodacom, Energis, SWIFT, Caudwell, Connect, Slovak Telecom,
Xfera, Ola Internet, FirstMark Communications France and Zalto.
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, 2001, U.S. cable clients
served by IMG included AOL Time Warner, Cox Communications, Comcast, AT&T
Broadband, RCN and Insight Communications. International cable clients served by
IMG included Telewest, NTL, ONO (a Callahan affiliate), ISH, Chorus, Deutsche
Telekom, KabelNet, TeleKabel, PTK, ITV, Telstra, Cablemas and Tevel.
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 market segments
and their increasing need for more cost effective customer management services.
A representative listing of clients for which CMG provides a full range of
customer management services includes AT&T, AT&T Wireless, DIRECTV, Microsoft,
SBC Communications, Federal Express, American Express, Sprint,
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Telecorp and Procter & Gamble. The Company provides technical support services
to leading technology companies such as Microsoft, Dell, Broadwing, Hewlett-
Packard, Nortel, Prodigy and Compaq. The Company provides employee care services
to clients such as AT&T, Lucent, General Electric, Toys "R" Us and Bristol-Myers
Squibb.
Operations
The Company operates two data centers in Orlando, Florida and Cincinnati, Ohio
comprising approximately 150,000 square feet of space. Over 100,000 terminals
are connected via 60 external networks to the Company's data centers. Over 350
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 and turbine generators) and are
designed to withstand most natural disasters. Over 40 million bills are
processed on a monthly basis from the Company's mainframe and open systems
facilities. The facility infrastructure includes approximately 4,600 MIPS
(millions of instructions per second) mainframe capacity, over 400 production
servers and over 200 terabytes (trillion bytes) of information and provides
back-up capacity in the unlikely event that any one data center becomes
inoperative.
The Company operates 47 contact centers with twenty-four hour per day, seven day
a week availability, averaging approximately 75,000 square feet per center with
over 23,000 available production workstations.
The capacity of the Company's data center and contact 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 many of the costs of a full custom application.
This allows the Company to position itself as a 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 2001, the
Company spent $115.9 million for research and development to advance the
functionality, flexibility and scalability of its products and services. The
result of this investment led to the following recent IMG product enhancements:
Atlys /(R)/ Releases 7.0 and 8.0
Atlys Release 7.0 added many feature enhancements that are key to a
wireless operator's competitiveness as GPRS and 3G networks and services
are deployed. They permit the operator to accelerate the revenues
associated with delivering next-generation services, while increasing
usability and speed of implementation. Additionally, they provide stability
for both maintaining and creating subscriber relationships via more
extensive marketing retention and up-selling programs. In February 2002,
the Company announced the availability of Atlys Release 8.0. This
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enhanced version provides operators with multinetwork support to enhance
their movement from 2G to 2.5G/3G services. This release also provides
users with advanced prepaid support and open APIs for improved customer
relationship management.
Geneva/(TM)/ Release 5.0
Geneva version 5.0 addresses the needs of Geneva's expanding base of Tier 1
clients with significant new functionality and enhancements to the
software's capability. In particular, Geneva's ability to integrate pre-
and post-paid accounts enables operators to bundle and deliver innovative
content, commerce and communications services and discounts to all
customers, irrespective of payment option.
ICOMS Release 4.7
The latest ICOMS release incorporates numerous market-driven enhancements
including powerful new self-care and graphical user interface (GUI)
capabilities that help cable/broadband operators improve subscriber service
and reduce billing and customer care costs. ICOMS 4.7 provides the ability
to minimize or eliminate routine service calls. Expanded interactive voice
response (IVR) functionality allows subscribers greater self-care
capabilities.
Catalys/(R)/ Release 7.0
The latest Catalys release added key functionality including integrated
advanced collections capability and support of enhanced usage-based rating
and billing for Internet service providers utilizing Cisco and Lucent
gateways. The integrated collections functionality facilitates customer
payments and helps manage overdue accounts and bad debt within the Catalys
solution. This release also expands upon Catalys' Web self-care, real-time
technical support, tiered/dual-pass rating, event rating and
wholesale/retail billing functionality.
The Company's customer management contact 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 business
methods and software systems protected under copyright law, U.S. patents and
applications for U.S. and foreign patents, and trademarks and service marks that
are registered or pending in the U.S. Patent and Trademark Office as well as
registered or pending registration under the laws of more than 50 foreign
countries.
Employees
The Company employs approximately 46,000 people, 41,600 of whom work for CMG,
3,800 of whom work for IMG, with the remainder working in various corporate
functions.
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Competition
The industries in which the Company operates 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 Amdocs, CSG Systems International, DST Systems, Portal Software and
SchlumbergerSema (a unit of Schlumberger Limited); (iii) other customer
management companies, such as APAC Teleservices, SITEL Corporation, Sykes
International, TeleTech Holdings and West Teleservices Corporation; and (iv)
other employee care companies such as Hewitt Associates, Towers Perrin, Mellon
Financial Corporation, Exult, Fidelity, CitiStreet, Accenture and ePeopleServe.
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 Limited Partnership Interest
The Company owns a 45% limited partnership interest in the Cincinnati SMSA
Limited Partnership, 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 2001, the
Company's equity in earnings of the Cellular Partnership was $6.4 million and
the Company received $37.1 million in cash distributions of Cellular Partnership
earnings.
Cingular Wireless LLC is the general partner and a limited partner in the
Cellular Partnership with a combined partnership interest of approximately 53%.
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 Cellular Partnership Agreement authorizes the general
partner to conduct and manage the business of the Partnership. The Company, as a
limited partner, is generally prohibited from taking part in, or interfering
with, the day to day management of the Cellular Partnership by the general
partner. Limited partners are entitled to their percentage share of income and
cash distributions.
Item 2. Properties
The Company leases space for offices, data centers and contact centers on
commercially reasonable terms. Domestic facilities are located in Arizona,
California, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana,
Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Jersey, North Carolina,
Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington and
Wisconsin. International facilities are located in Brazil, Canada, England,
France, Germany, India, Israel, Japan, the Netherlands,
11
Portugal, Singapore, Spain and Sweden. 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 2001.
12
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 2/28/02)
James F. Orr (a) 56 Chairman of the Board,
President and Chief Executive Officer
William H. Hawkins 53 General Counsel and Secretary
David F. Dougherty 45 Chief Development Officer
Steven G. Rolls 47 Chief Financial Officer
Robert J. Marino 54 President of IMG
Ronald E. Schultz 47 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.
WILLIAM H. HAWKINS, General Counsel and Secretary of the Company since June 1,
2001; Associate General Counsel and Secretary of the Company, 2000-2001; Partner
of Frost & Jacobs, 1977-2000 (Chairman of Executive Committee, 1997-2000).
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.
RONALD E. SCHULTZ, President of CMG since June 1, 2000; Chief Operating Officer
of CMG, 1995-2000.
13
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, 2002, there were 19,564 holders of record of
the 172,531,425 outstanding common shares of the Company. The high, low and
closing prices of its common shares for each quarter in 2001 and 2000 are listed
below:
Quarter 1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
2001 High $50.250 $44.350 $32.870 $38.500
Low $30.330 $27.800 $25.140 $24.460
Close $36.070 $30.250 $27.750 $37.490
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
The Company did not declare any dividends during 2001 or 2000 and does not
anticipate doing so in the near future.
14
Item 6. Selected Financial and Operating Data
(Amounts in Millions Except Per Share Amounts) 2001 2000 1999 1998 1997
----------------------------------------------------------------------------------------------------------------
Results of Operations (1) (2)
Revenues....................................... $2,320.6 $2,196.6 $1,784.9 $1,457.3 $ 991.9
Costs and expenses before special items........ 1,954.2 1,876.0 1,540.8 1,275.1 842.8
Operating income before special items.......... 366.4 320.6 244.1 182.2 149.1
Special items (3) (5).......................... 89.8 -- 8.9 42.6 35.0
Operating income............................... 276.6 320.6 235.2 139.6 114.1
Equity in earnings of Cellular Partnership (4). 6.4 20.5 20.0 25.1 14.7
Other income (expense), net (5)................ (8.1) 2.2 0.3 (0.4) 7.4
Interest expense............................... (20.0) (33.1) (32.5) (33.9) (5.4)
Income before income taxes..................... 254.9 310.2 223.0 130.4 130.8
Income taxes................................... 116.1 121.0 85.9 49.5 44.1
Net income..................................... $ 138.8 $ 189.2 $ 137.1 $ 80.9 $ 86.7
Earnings per share: (6)
Basic....................................... $ 0.82 $ 1.13 $ 0.84 $ 0.53 $ 0.59
Diluted..................................... $ 0.80 $ 1.09 $ 0.81 $ 0.52 $ 0.59
Weighted average common shares outstanding:
Basic....................................... 169.4 167.6 162.7 154.0 147.0
Diluted..................................... 174.4 174.2 168.9 155.2 147.0
Financial Position
Total assets................................... $1,742.9 $1,804.1 $1,605.4 $1,456.0 $ 658.1
Total debt..................................... 133.5 292.0 298.8 467.0 66.1
Shareholders' equity........................... 1,226.6 1,124.0 943.7 733.9 433.5
Other Data
Cash provided (used) by:
Operating activities (7)...................... $ 334.7 $ 188.7 $ 462.0 $ 147.1 $ 127.8
Investing activities.......................... (150.4) (214.2) (278.0) (759.3) (75.2)
Financing activities.......................... (192.5) 29.4 (144.6) 613.7 (51.6)
Free cash flows (8) ............................ 316.2 46.1 154.7 52.7 66.5
EBITDA (9)...................................... 549.1 503.2 407.5 309.0 225.0
Operating margin (excluding special items)...... 15.8% 14.6% 13.7% 12.5% 15.0%
(1) The accompanying consolidated financial and operating data for all prior
periods have been restated to include the results of Geneva Technology
Ltd. (Geneva), which was acquired (on April 6, 2001) in a business
combination accounted for as a pooling-of-interests.
(2) Prior to the April 6, 2001 acquisition of Geneva by Convergys Corporation
(the Company), Geneva had a fiscal yearend of May 31 and the Company had
(and continues to have) a fiscal yearend of December 31. As a result, the
pooled data presented above for 1997 through 1999 includes Geneva's May 31
fiscal year data in combination with the Company's preceding December 31
data. In connection with the acquisition, Geneva changed its fiscal
yearend to December 31. Accordingly, the pooled data presented above for
2001 and 2000 includes both Geneva's and the Company's data on a December
31 yearend basis. Because of the difference in Geneva's fiscal yearends
for 2000 and 1999, Geneva's data for the five months ended May 31, 2000 is
included in the above information in both 1999 and 2000.
(3) See Notes 3 and 5 of Notes to Financial Statements for a discussion of
special items in 2001 and 1999. Special items in 1998 relate to purchased
research and development costs associated with a CMG acquisition. Special
items in 1997 relate to a restructuring of CMG's operations.
(4) Equity in earnings of Cellular Partnership includes $12.4 ($7.8 after
tax) for one-time charges recorded by the partnership during 1999.
(5) Other income (expense), net in 2001 includes a write-down of equity
investments of $6.5 ($6.5 after tax). During 1999, other income (expense)
included a $1.9 ($1.2 after tax) non-recurring investment gain.
(6) Earnings per share for all periods prior to the 1998 initial public
offering have been calculated using the number of common shares
outstanding immediately prior to the Company's initial public offering.
15
(7) Cash provided by operating activities in 2001, 2000 and 1999 was impacted
by the amount of receivables sold under the Company's accounts receivable
securitization. Excluding the impact of the securitization, cash provided
by operating activities was $429.7 in 2001, $224.7 in 2000 and $311.0 in
1999.
(8) 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.
(9) 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.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Amounts in Millions Except Per Share Amounts)
Background and Basis of Presentation
Convergys serves its clients through its two operating segments: (i) the
Information Management Group (IMG), which provides outsourced billing and
information services and software; and (ii) the Customer Management Group
(CMG), which provides outsourced marketing, customer support and employee
care services. The Company also has a 45% limited partnership interest in a
cellular communications services provider in southwestern and central Ohio
and northern Kentucky (the Cellular Partnership).
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 two operating segments described in the preceding paragraph and the 45%
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.
On April 6, 2001, Convergys acquired 100% of the outstanding shares and
stock options of Geneva Technology Ltd. (Geneva), based in Cambridge, UK,
for approximately 14.9 million shares of Convergys common stock and
approximately 2.7 million Convergys stock options. Geneva is a provider of
convergent billing software for the communications, e-commerce, utilities
and on-line services industries. The transaction was accounted for under
the pooling-of-interests method of accounting. Accordingly, the
consolidated financial statements have been restated for all periods prior
to the acquisition to reflect the combined results of both companies as if
the acquisition had occurred as of the earliest period presented.
Results of Operations
Consolidated Results
% Change % Change
2001 2000 01 vs. 00 1999 00 vs. 99
- -------------------------------------------------------------------------------------------------------------------
Revenues....................................... $2,320.6 $2,196.6 6 $1,784.9 23
Costs and Expenses:
Costs of products and services................. 1,268.7 1,237.4 3 1,005.9 23
Selling, general and administrative expenses... 393.3 374.2 5 298.2 25
Research and development costs................. 115.9 102.0 14 91.8 11
Depreciation................................... 125.5 111.5 13 86.7 29
Amortization................................... 50.8 50.6 -- 44.3 14
Year 2000 programming costs.................... -- 0.3 -- 13.9 --
Special items.................................. 89.8 -- -- 8.9 --
-------- -------- --------
Total costs and expenses...................... 2,044.0 1,876.0 9 1,549.7 21
-------- -------- --------
Operating Income............................... $ 276.6 $ 320.6 (14) $ 235.2 36
2001 vs. 2000
Revenues in 2001 totaled $2,320.6, a 6% increase over 2000. The revenue
increase is attributable to growth at IMG. Operating expenses for 2001
totaled $1,954.2 excluding special items, a 4% increase over 2000,
reflecting greater business volume, increased spending on sales and
marketing, research and development activities and higher depreciation
expense. Sales and marketing expenses increased as a result of the
Company's continued focus on revenue growth. The increase in research and
development spending reflects the Company's commitment to being the
technology leader in communications billing. The increase in depreciation
results from a full year of depreciation of new contact center facilities
opened during 2000. Operating income excluding special items was $366.4 in
2001, a 14% increase from 2000. Excluding the 2001 special items, operating
margin
17
increased to 15.8% in 2001 from 14.6% in 2000.
The Cellular Partnership earnings in 2001 were $6.4, a 69% decrease from
2000. The decrease was the result of lower subscriber levels and higher
operating costs experienced by the partnership. Interest expense decreased
40% in 2001 as a result of significantly lower borrowings and decreased
interest rates. The effective tax rate was 45.5% in 2001, up from 39.0% in
2000 due to the 2001 special items, which were not fully tax deductible.
The effective tax rate excluding special items was 38.6% in 2001. Net
income excluding special items was $215.5, or $1.24 per diluted share, a
14% increase compared to $189.2, or $1.09 per diluted share in 2000.
Earnings per diluted share from core operations, which excludes special
items and the non-core Cellular Partnership, increased 20% in 2001.
As discussed more fully in Notes 3 and 5 to Notes to Financial Statements,
the Company recorded several special items during 2001. The Company
approved a plan to rationalize CMG's contact center capacity, resulting in
a restructuring charge of $53.3. IMG recorded an impairment charge of $4.7
related to purchased software it does not intend to use. Relating to the
Geneva Acquisition, the Company recorded $31.8 in non-recurring transaction
and integration costs. Also included in non-operating expense was a $6.5
charge to reflect the permanent impairment of certain equity investments.
Including these items, the Company reported 2001 operating income of
$276.6, net income of $138.8 and diluted earnings per share of $0.80.
2000 vs. 1999
Revenues in 2000 totaled $2,196.6, a 23% increase from 1999, reflecting
growth in both operating segments. Operating expenses for 2000 totaled
$1,876.0, a 22% increase over 1999, excluding special items recorded in
1999. Operating income was $320.6 in 2000, a 31% increase over 1999,
excluding special items. Excluding the 1999 special items, the Company's
operating margin increased to 14.6% in 2000 from 13.7% in 1999.
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 decrease in
subscriber levels and an increase in operating costs during the year.
Interest expense increased 2% in 2000 over 1999 as a result of higher
interest rates partially offset by lower average borrowing levels. The
effective tax rate was 39.0% in 2000, up slightly from 38.5% in 1999. Net
income was $189.2, or $1.09 per diluted share, a 26% increase compared to
$150.0 or $0.89 per diluted share in 1999, excluding the 1999 special
items.
The Company recorded special items in 1999, which included $6.9 in facility
and staff organization consolidation costs and $2.0 for expensing in-
process research and development costs from an acquisition. Other income in
1999 included a $1.9 special item for a non-recurring investment gain.
Income from the Cellular Partnership in 1999 was reduced $12.4 by special
items recorded by the partnership related to the acquisition of Ameritech,
the partnership's former general partner, by SBC Communications, Inc.
Including these special items, the Company reported 1999 operating income
of $235.2, net income of $137.1 and diluted earnings per share of $0.81.
18
Information Management Group
% Change % Change
2001 2000 01 vs. 00 1999 00 vs. 99
- -------------------------------------------------------------------------------------------------------------------
Revenues:
Data processing................................ $543.6 $486.1 12 $418.0 16
Professional and consulting.................... 184.0 153.5 20 141.1 9
License and other.............................. 60.3 53.6 13 41.7 29
International.................................. 138.0 107.9 28 73.2 47
------ ------ ------
External revenues.............................. 925.9 801.1 16 674.0 19
Intercompany revenues.......................... 12.0 17.7 (32) 35.1 (50)
------ ------ ------
Total revenues................................ 937.9 818.8 15 709.1 15
Costs and Expenses:
Costs of products and services................. 446.3 410.5 9 365.7 12
Selling, general and administrative expenses... 133.2 106.5 25 83.6 27
Research and development costs................. 103.8 86.6 20 72.6 19
Depreciation................................... 38.7 39.3 (2) 30.4 29
Amortization................................... 18.2 18.7 (3) 12.8 46
Year 2000 programming costs.................... -- 0.3 -- 9.7 (97)
Special items.................................. 4.7 -- -- 2.0 --
------ ------ ------
Total costs and expenses...................... 744.9 661.9 13 576.8 15
------ ------ ------
Operating Income............................... $193.0 $156.9 23 $132.3 19
2001 vs. 2000
IMG's 2001 external revenues were $925.9, a 16% increase over 2000. Data
processing revenues increased 12%, primarily reflecting wireless subscriber
growth of 33%. The increase in data processing revenues was partially
offset by slower growth in wireline data processing revenues and by
wireless clients' contractual rate reductions. Professional and consulting
service revenues increased 20% in 2001 as a result of increased enhancement
projects from two large wireless clients. License and other revenues
increased $6.7 in 2001, reflecting growth from cable and broadband clients.
International revenues increased $30.1 in 2001 as a result of increased
sales of Geneva software, growth from cable clients and revenues generated
from the implementation of Atlys, IMG's wireless billing system, at Orange
France.
IMG's costs of products and services increased 9% as a result of increased
business volume. Selling, general and administrative expenses increased
25%, primarily as a result of increased focus on sales and marketing
efforts. Research and development costs increased 20%, reflecting continued
enhancements to Atlys; IMG's Internet protocol capabilities; ICOMS, the
Company's cable/broadband billing software; and Geneva. Research and
development spending on IMG's next-generation software framework also
increased. IMG's operating income increased in 2001 by 26% to $197.7,
excluding the 2001 special item. The operating margin increased to 21.4% in
2001 from 19.6% in 2000, excluding the 2001 special item. The 2001 special
item represents a $4.7 impairment charge related to purchased software that
the Company does not intend to use. Including the special item, IMG had
operating income of $193.0.
2000 vs. 1999
IMG's 2000 external revenues were $801.1, a 19% increase over 1999. Data
processing revenues increased 16%, 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. License and other revenues increased $11.9 in 2000,
reflecting growth in the Company's cable billing operations. International
revenues increased $34.7 in 2000, primarily as a result
19
of revenues from the implementation of Atlys at Telesp Celular in Brazil
and increased license and professional and consulting revenues from
Geneva.
IMG's costs of products and services increased 12% as a result of
increased business volume. Selling, general and administrative expenses
increased 27%, primarily as a result of increased focus on sales and
marketing efforts. Research and development costs increased 19%,
reflecting continued enhancements to Atlys and Geneva. Research and
development spending on IMG's next-generation framework also increased in
2000. Amortization expense increased 46% from 1999, as a result of the
acquisitions of Wiztec Solutions Ltd. (Wiztec) and Technology Applications
Inc. in 1999. These increased costs and expenses were partially offset by
a $9.4 reduction in Year 2000 programming costs. IMG's operating income
increased in 2000 by 17% to $156.9, excluding the impact of the 1999
special item. The operating margin decreased slightly to 19.6% in 2000
from 19.9% in 1999, excluding the 1999 special item. The 1999 special item
represents purchased software and development costs associated with the
Wiztec acquisition. Including the special item, 1999 operating income was
$132.3.
Customer Management Group
% Change % Change
2001 2000 01 vs. 00 1999 00 vs. 99
- ------------------------------------------------------------------------------------------------------------------------
Revenues:
Communications................................. $ 882.8 $ 919.8 (4) $ 699.8 31
Technology..................................... 233.2 183.0 27 107.1 71
Financial services............................. 74.0 86.2 (14) 94.4 (9)
Other.......................................... 204.7 206.5 (1) 209.6 (1)
-------- -------- --------
Total revenues.............................. 1,394.7 1,395.5 -- 1,110.9 26
Costs and Expenses:
Costs of products and services................. 834.4 844.6 (1) 675.3 25
Selling, general and administrative expenses... 263.8 264.2 -- 209.9 26
Research and development costs................. 12.1 15.4 (21) 19.2 (20)
Depreciation................................... 79.3 68.3 16 55.2 24
Amortization................................... 32.6 31.9 2 31.5 1
Year 2000 programming costs.................... -- -- -- 4.2 --
Special items.................................. 53.3 -- -- 6.9 --
-------- -------- --------
Total costs and expenses.................... 1,275.5 1,224.4 4 1,002.2 22
-------- -------- --------
Operating Income............................... $ 119.2 $ 171.1 (30) $ 108.7 57
2001 vs. 2000
CMG's 2001 revenues were $1,394.7, essentially flat compared to 2000. The
lack of CMG revenue growth in 2001 reflects general weakness in the U.S.
economy experienced throughout the year, which had an impact on clients'
customer support spending, and reduced spending by AT&T and AT&T Wireless.
These items offset significant growth from a number of other
communications, technology and employee care clients who sought to
outsource more services to CMG during 2001. Revenues from communications
clients were $882.8, a 4% decrease from 2000, resulting from reduced
spending by AT&T and AT&T Wireless, offset by increased services provided
to DIRECTV and Sprint. Revenues from technology clients increased 27%,
primarily due to increased services provided to Microsoft and
Hewlett-Packard and contributions from acquisitions made in the second
half of 2000 and in the first quarter of 2001. Revenues from financial
services clients decreased by 14% as a result of reduced marketing
activity in this sector caused by conditions in the U.S. economy. Other
revenues decreased 1% from 2000 to $204.7, primarily as a result of
general economic weakness offset by an increase in services provided to
Federal Express and increased demand for outsourced employee care
services.
20
Excluding the 2001 special items, CMG's costs and expenses were $1,222.2
in 2001, essentially flat compared to 2000. Depreciation expense increased
by $11.0 as a result of new contact centers opened in 2000 to support an
anticipated increase in business volume. CMG's operating margin, excluding
the 2001 special items, increased slightly to 12.4% from 12.3% in 2000.
The operating margins in the second half of 2001, however, were below the
comparable periods in 2000, reflecting the impact of lower revenues and
excess capacity. The 2001 special items represent restructuring and
impairment charges of $53.3 related to the rationalization of CMG's
contact center capacity. The charges consist of $29.0 in costs associated
with the closing of contact centers, $16.2 in asset impairment related to
software that will not be deployed into those contact center operations
and $8.1 to write-down investments in certain of CMG's European contact
center operations. Included in the contact center closing costs is $6.4 of
severance involving the elimination of approximately 550 employees in
contact center operations and administrative functions. The Company
substantially completed the closure of the contact centers during 2001 and
expects to complete the employee reductions by the end of the third
quarter of 2002. Including the special items, CMG had operating income of
$119.2 in 2001.
2000 vs. 1999
CMG's 2000 revenues were $1,395.5, a 26% increase from 1999. Revenues from
communications clients were $919.8, a 31% increase from 1999, resulting
from growth of customer support services provided to AT&T, AT&T Wireless
and DIRECTV. Revenues from technology clients increased 71% over 1999,
reflecting increased revenues from Microsoft, Compaq and Hewlett-Packard.
Revenues from financial services clients decreased 9%, primarily due to a
drop in revenues from American Express. Other revenues remained relatively
flat, decreasing 1%.
CMG's costs of products and services and selling, general and
administrative expenses grew at approximately the same rate as revenues in
2000, 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 partially offset by lower research and development costs and
Year 2000 programming costs. Operating income increased 48% in 2000,
excluding a special item recorded in 1999. This increase resulted from the
26% revenue increase and an improvement in operating margins to 12.3% 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.
The 1999 special item represented a $6.9 restructuring and impairment
charge 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. Included in this charge was $1.3 for
the severance of approximately 45 employees, with most of the severed
employees being associated with the closed data center. The restructuring
activities were substantially completed during 2000.
Client Concentration
The Company's four largest clients accounted for 53.6% of its revenues in
2001, down slightly from 54.2% in 2000. 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 19.9% of
revenues in 2001, is principally served under long-term information and
customer management contracts that expire in 2006. The Company serves AT&T
Wireless, its second largest customer with 16.8% of 2001 revenues, under
contracts that expire in 2006 and 2008. In January 2001, the Company
announced that IMG's contract with Sprint, the Company's third largest
client with 10.6% of 2001 revenues, was extended through December 31,
2004. IMG's extended contract with Sprint provides for rate reductions,
which will impact the Company's data processing revenue growth beginning
in the first quarter of 2002. DIRECTV, the Company's fourth largest client
in 2001, is served by CMG under a contract that expires at the end of
2003. Volumes under certain of the Company's long-term contracts with its
four largest clients are subject to variation based, among other things,
on the clients' spending on outsourced customer support and subscriber
levels.
21
Financial Condition, Liquidity and Capital Resources
2001 2000 1999
---- ---- ----
Cash flows from operations $334.7(a) $188.7(a) $462.0(a)
Capital expenditures 113.5 178.6 156.3
Net debt (b) 112.4 357.7 404.4
(a) Includes the impacts of the accounts receivable securitization.
Excluding the impacts of the securitization, cash flows from
operations were $429.7 in 2001, $224.7 in 2000 and $311.0 in 1999.
(b) Defined as outstanding debt plus net accounts receivable
securitization proceeds less cash and cash equivalents.
Operating cash flows have historically been more than sufficient to fund
the Company's cash needs, other than for very large acquisitions.
Historically, acquisitions have been financed with a combination of
borrowings and operating cash flows. 2001 was a record year for the
Company's cash generation, with free cash flows totaling $316.2 compared
to $46.1 in 2000 and $154.7 in 1999. Earnings growth, strong receivables
collection, reduced capital spending and $37.1 in cash distributions from
the Cellular Partnership all contributed to the strong cash flow. Cash
generated in 2001 was partially used to pay down debt, as net debt was
reduced by $245.3 to $112.4 during the year. The Company's borrowing
facilities include two revolving credit facilities that expire in November
2002, one with $100 in borrowing capacity and the other with a $250
borrowing capacity, and $100 in notes which expire in September 2002. The
Company also has a $150 accounts receivable securitization agreement,
under which it had sold $20.0 in accounts receivable at December 31, 2001.
Under this facility, the Company effectively borrows at a 2.1% commercial
paper rate. 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.
The Company is a party to a financing transaction related to its office
complex in Orlando, Florida, which was constructed for total costs of
approximately $65. Under the terms of the financing transaction, which was
structured as a synthetic lease, a special purpose trust owns the office
complex and leases it to the Company. No Company employee or director
holds any ownership interest in the trust. The lease has an initial term
of three years, with two one-year renewal options. As the initial term
expired at the end of 2001, the Company exercised the first one-year
renewal option and anticipates that it will elect to exercise the second.
The Company's lease payment includes a variable interest component, but
the Company has effectively converted it to a fixed rate of 4.49% through
an interest rate swap with a nominal value of $65.
As the lease qualifies as an operating lease and the bank, the owner of
the special purpose trust, has made a substantive residual equity
investment, neither the related assets nor obligations are reflected in
the Company's balance sheet and the related costs are reported as rent
expense. Furthermore, the lease agreement provides that the Company's
maximum obligation, including the guaranteed residual value, will not be
greater than 89.9% of the total construction costs. As of December 31,
2001, the assets and liabilities of the special purpose trust were
comprised primarily of the office complex and $65 bank debt used to fund
the construction of the office complex.
In connection with these financing transactions, the Company has made a
residual value guarantee for the leased property equal to 85% of the
financing, or $55.
22
The following summarizes the Company's contractual obligations at December
31, 2001, and the effect such obligations are expected to have on its
liquidity and cash flows in future periods:
Less Than After
Contractual Obligation Total 1 Year 1-3 Years 3 Years
---------------------- ----- ------ --------- -------
Long-term debt $133.5 $129.9 -- $ 3.6
Operating leases $393.7 $103.0 $141.6 $149.1
------ ------ ------ ------
Total $527.2 $232.9 $141.6 $152.7
Balance Sheet
Adjusting for a $95.0 reduction in the balance of receivables sold under
the Company's accounts receivable securitization program, accounts
receivable decreased $77.1 from December 31, 2000 to December 31, 2001,
reflecting significantly improved collections during 2001. Excluding the
effects of the securitization, days sales outstanding decreased by 11 days
during 2001 to 68 days. Treasury stock increased $67.1 during 2001,
reflecting the Company's repurchase of approximately 2.6 million shares in
September and October for a total cost of $68.3.
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. No costs
associated with this effort were incurred in 2001. The Company incurred
$0.3 and $13.9 in expenses during 2000 and 1999, 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.
Critical Accounting Policies
Revenue Recognition
For certain IMG contracts, the Company recognizes professional and
consulting and/or software license revenues using the percentage of
completion method of accounting by relating contract costs incurred to
date to total estimated contract costs at completion. This method of
accounting relies on estimates of total expected contract revenues and
costs. This method is used because reasonably dependable estimates of the
revenues and costs applicable to various stages of a contract can be made.
Since the financial reporting of these contracts depends on estimates,
which are assessed continually during the terms of the contracts,
recognized revenues are subject to revisions as the contracts progress to
completion. Revisions in estimates are reflected in the period in which
the facts that give rise to a revision become known. Accordingly,
favorable changes in estimates result in additional revenue recognition,
and unfavorable changes in estimates result in the reversal of previously
recognized revenues. When estimates indicate a loss under a contract, a
provision for such loss is recorded as a component of the costs of
providing services. As work progresses under a loss contract, revenues
continue to be recognized, and a portion of the contract loss incurred in
each period is charged to the contract loss reserve.
23
Goodwill
At December 31, 2001, the Company had goodwill and intangible assets
resulting from acquisitions with a net carrying value of $704.9. Goodwill
and other intangibles are evaluated periodically if events or
circumstances indicate a possible inability to recover their carrying
value. This evaluation is based on various analyses, including cash flow
and profitability projections. As disclosed in Note 2 of Notes to
Financial Statements, the Company is required to implement the new
accounting guidance for goodwill and other intangible assets in the first
quarter of 2002, which requires an initial and annual periodic evaluation
of impairment. During January 2002, the Company completed the initial
impairment tests of goodwill as of January 1, 2002, which indicated that
the Company had no goodwill impairment.
Deferred Tax Assets
As of December 31, 2001, the Company had operating and capital loss tax
carryforwards of $136.0 with a related tax benefit of $44.5. For those tax
carryforwards, where the Company has concluded that it is more likely than
not that these loss carryforwards will not be utilized, the Company has
provided a valuation allowance which amounted to $38.3 as of December 31,
2001. Including the tax loss carryforwards and the related valuation
allowance, the Company had a net deferred tax asset of $36.5. Based on the
Company's estimates of future taxable income, which were based on the same
assumptions and projections utilized in the Company's long-term plans, and
the short-term nature of many of the deferred tax assets included in the
$36.5, the Company believes that it is more likely than not that the net
deferred tax asset will be utilized.
Market Risk
The Company derived approximately 9% of its 2001 consolidated revenues
from 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
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 perform fully under the terms of the agreements and by
diversifying the number of financial institutions with which it enters
into such agreements.
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, 2001, the Company had $129.9 in outstanding variable rate
borrowings and had sold $20.0 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 agreements 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 $0.5.
24
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: economic cycles,
the timing of new contracts, the timing of increased expenses incurred in
support of new business, the timing and frequency of client spending for
system enhancement requests, the timing of contractual rate reductions
triggered by subscriber growth or the passage of time and the seasonal
pattern of the CMG business.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by Item 7A is included in Item 7 on pages 23 and
24 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data
Beginning on page 26 and continuing through page 47 are the consolidated
financial statements with applicable notes and the related Reports of
Independent Accountants, and the supplementary financial information
specified by Item 302 of Regulation S-K.
25
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 Ernst & Young LLP, independent accountants, in 2001 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 the following page.
/s/ Steven G. Rolls /s/ Andre S. Valentine
------------------- ----------------------
Steven G. Rolls Andre S. Valentine
Chief Financial Officer Chief Accounting Officer
26
Report of Independent Accountants
The Board of Directors and Shareholders of Convergys Corporation
We have audited the consolidated balance sheet of Convergys Corporation as
of December 31, 2001, and the related consolidated statements of income,
shareholders' equity and comprehensive income, and cash flows for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the 2001 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Convergys Corporation at December 31, 2001, and the consolidated results
of its operations and its cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Cincinnati, Ohio
February 4, 2002
27
Report of Independent Accountants
To the Board of Directors and Shareholders of Convergys Corporation:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheet 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 the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of Convergys Corporation with Geneva
Technology Ltd. on April 6, 2001 in a transaction accounted for as a
pooling-of-interests, as described in Note 1, to the consolidated
financial statements. We did not audit the financial statements of Geneva
Technology Ltd., which statements reflect total assets of $40.1 million as
of December 31, 2000 and the total revenues of $34.1 million and $22.0
million for each of the two years in the period ended December 31, 2000.
Those statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it
relates to the amounts included for Geneva Technology Ltd., is based
solely on the report of the other auditors. 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 and the
report of other auditors provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 12, 2001, except as to the pooling-of-interests with
Geneva Technology Ltd., which is as of June 18, 2001
28
Consolidated Statements of Income
Year Ended December 31,
-----------------------------------
(Amounts in Millions Except Per Share Amounts) 2001 2000 1999
----------------------------------------------------------------------------------------------------------------
Revenues.................................................................. $ 2,320.6 $ 2,196.6 $ 1,784.9
Costs and Expenses:
Costs of products and services......................................... 1,268.7 1,237.4 1,005.9
Selling, general and administrative expenses........................... 393.3 374.2 298.2
Research and development costs......................................... 115.9 102.0 91.8
Depreciation........................................................... 125.5 111.5 86.7
Amortization........................................................... 50.8 50.6 44.3
Year 2000 programming costs............................................ -- 0.3 13.9
Purchased research and development costs............................... -- -- 2.0
Restructuring and impairment charges................................... 58.0 -- 6.9
Acquisition and integration costs...................................... 31.8 -- --
--------- --------- ---------
Total costs and expenses............................................ 2,044.0 1,876.0 1,549.7
--------- --------- ---------
Operating Income.......................................................... 276.6 320.6 235.2
Equity in earnings of Cellular Partnership................................ 6.4 20.5 20.0
Other income (expense), net............................................... (8.1) 2.2 0.3
Interest expense.......................................................... (20.0) (33.1) (32.5)
--------- --------- ---------
Income before income taxes................................................ 254.9 310.2 223.0
Income taxes.............................................................. 116.1 121.0 85.9
--------- --------- ---------
Net Income................................................................ $ 138.8 $ 189.2 $ 137.1
========= ========= =========
Earnings per common share:
Basic.................................................................. $ 0.82 $ 1.13 $ 0.84
Diluted................................................................ $ 0.80 $ 1.09 $ 0.81
Weighted average common shares outstanding:
Basic.................................................................. 169.4 167.6 162.7
Diluted................................................................ 174.4 174.2 168.9
The accompanying notes are an integral part of the financial statements.
29
Consolidated Balance Sheets
at December 31,
(Amounts in Millions) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents........................................................... $ 41.1 $ 49.3
Receivables, net of allowances of $14.7 and $11.9................................... 413.6 395.7
Deferred income tax benefits........................................................ 31.9 28.1
Prepaid expenses and other current assets........................................... 36.5 43.1
---------- ----------
Total current assets............................................................. 523.1 516.2
Property and equipment, net............................................................ 350.4 397.6
Goodwill and other intangibles, net.................................................... 704.9 740.2
Investment in Cellular Partnership..................................................... 35.3 66.0
Deferred charges....................................................................... 87.8 33.2
Other assets........................................................................... 41.4 50.9
---------- ----------
Total Assets........................................................................... $ 1,742.9 $ 1,804.1
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Debt maturing within one year....................................................... $ 129.9 $ 0.6
Payables and other current liabilities.............................................. 362.5 370.8
---------- ----------
Total current liabilities........................................................ 492.4 371.4
Long-term debt......................................................................... 3.6 291.4
Other long-term liabilities............................................................ 20.3 17.3
---------- ----------
Total liabilities................................................................ 516.3 680.1
Commitments and Contingencies
Shareholders' Equity
Preferred Shares -- without par value, 5.0 authorized; none outstanding............. -- --
Common shares--without par value, 500.0 authorized;
172.2 outstanding in 2001 and 169.7 in 2000........................................ 206.0 206.0
Additional paid-in capital.......................................................... 590.4 549.5
Treasury stock--2.8 shares in 2001 and 0.4 shares in 2000........................... (68.9) (1.8)
Retained earnings................................................................... 517.9 379.1
Accumulated other comprehensive loss................................................ (18.8) (8.8)
---------- ----------
Total shareholders' equity....................................................... 1,226.6 1,124.0
---------- ----------
Total Liabilities and Shareholders' Equity............................................. $1,742.9 $1,804.1
========== ==========
The accompanying notes are an integral part of the financial statements.
30
Consolidated Statements of Cash Flows
Year Ended December 31,
---------------------------------
(Amounts in Millions) 2001 2000 1999
----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income............................................................. $ 138.8 $ 189.2 $ 137.1
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization....................................... 176.3 162.1 131.0
Deferred income tax expense (benefit)............................... 9.6 (8.9) (20.9)
Restructuring, impairment and integration costs..................... 45.2 -- 6.9
Purchased research and development costs............................ -- -- 2.0
Cellular Partnership distributions in excess of earnings............ 30.7 13.4 2.2
Income tax benefit from stock option exercises...................... 7.8 14.2 6.7
Proceeds from (repayments of) receivables securitization, net....... (95.0) (36.0) 151.0
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in receivables.................................. 77.1 (136.3) (52.5)
Decrease (increase) in other current assets......................... 6.6 (6.5) 4.9
Decrease (increase) in deferred charges and other assets............ (68.6) (25.7) 10.8
Increase (decrease) in payables and other current liabilities....... (11.4) 22.5 85.8
Other, net.......................................................... 17.6 0.7 (3.0)
------- -------- --------
Net cash provided by operating activities......................... 334.7 188.7 462.0
Cash Flows From Investing Activities:
Capital expenditures................................................... (113.5) (178.6) (156.3)
Acquisitions, net of cash acquired..................................... (36.3) (36.5) (122.4)
Other, net............................................................. (0.6) 0.9 0.7
------- -------- --------
Net cash used in investing activities............................. (150.4) (214.2) (278.0)
Cash Flows From Financing Activities:
Borrowings (repayments) of debt, net................................... (158.5) (6.8) (168.1)
Purchase of treasury shares............................................ (68.3) (4.9) (16.9)
Issuance of treasury shares............................................ 1.2 15.0 --
Issuance of common shares.............................................. 33.1 26.1 35.5
Other, net............................................................. -- -- 4.9
------- -------- --------
Net cash provided by (used in) financing activities............... (192.5) 29.4 (144.6)
Net increase (decrease) in cash and cash equivalents...................... (8.2) 3.9 39.4
Cash and cash equivalents at beginning of year............................ 49.3 45.4 6.0
------- -------- --------
Cash and cash equivalents at end of year.................................. $ 41.1 $ 49.3 $ 45.4
Supplemental Cash Flow Information:
Cash paid for interest................................................. $ 18.1 $ 30.8 $ 32.2
Income taxes paid, net of refunds...................................... $ 101.6 $ 129.5 $ 87.0
The accompanying notes are an integral part of the financial statements.
31
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Number Accumulated
Of Additional Other
Common Common Paid-In Treasury Retained Comprehensive
Shares Shares Capital Stock Earnings Income (Loss) Total
(Amounts in Millions)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 163.2 $206.0 $477.8 $ 52.9 $ (2.8) $ 733.9
Issuance of common shares 4.6 35.5 35.5
Repurchase of common shares (5.0) $(11.9) (16.9)
Net income 137.1 137.1
Other comprehensive income 54.1 54.1
---------
Balance at December 31, 1999 167.8 206.0 508.3 (11.9) 190.0 51.3 943.7
Adjustment to conform reporting
periods of pooled entities 0.9 4.7 (0.1) 4.6
Issuance of common shares 1.0 40.4 15.0 55.4
Repurchase of common shares (4.7) (4.9) (9.6)
Net income 189.2 189.2
Other comprehensive loss (60.1) (60.1)
Amortization of stock-based
compensation 0.8 0.8
---------
Balance at December 31, 2000 169.7 206.0 549.5 (1.8) 379.1 (8.8) 1,124.0
Issuance of common shares 2.5 39.0 1.2 40.2
Repurchase of common shares (68.3) (68.3)
Net income 138.8 138.8
Other comprehensive loss (10.0) (10.0)
Amortization of stock-based
compensation 1.9 1.9
---------
Balance at December 31, 2001 172.2 $206.0 $590.4 $(68.9) $517.9 $(18.8) $ 1,226.6
The accompanying notes are an integral part of the financial statements.
32
Notes to Financial Statements
(Amounts in Millions Except Share and Per Share Amounts)
1. Background and Basis of Presentation
Convergys Corporation (the Company or Convergys) serves its clients
through its two operating segments: (i) the Information Management Group
(IMG), which provides outsourced billing and information services and
software; and (ii) the Customer Management Group (CMG), which provides
outsourced marketing, customer support and employee care services. The
Company also has a 45% limited partnership interest in a cellular
communications services provider in southwestern and central Ohio and
northern Kentucky (the Cellular Partnership).
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 two operating segments described in the preceding paragraph and the
45% 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.
On April 6, 2001, Convergys acquired 100% of the outstanding shares and
stock options of Geneva Technology Ltd. (Geneva), based in Cambridge, UK,
for 14.9 million Convergys common shares and 2.7 million Convergys stock
options (the Geneva Acquisition). Geneva is a provider of convergent
rating and billing software for the communications, e-commerce, utilities
and on-line services industries. The transaction was accounted for under
the pooling-of-interests method of accounting. Accordingly, the
consolidated financial statements have been restated for all periods prior
to the acquisition to reflect the combined results of both companies as if
the acquisition had occurred as of the earliest period presented.
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. All significant
intercompany accounts and transactions are eliminated upon consolidation.
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 three- to 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, 2001 and 2000, all capitalized
costs for software to be marketed were fully amortized.
33
Internal Use Software--The Company follows 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
generally over a three-year life.
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 generates its revenues from three primary
sources: data processing, professional and consulting services and license
and other services. Data processing revenues consist of monthly fees for
processing client transactions in IMG's data centers using IMG's
proprietary software. Professional and consulting revenues consist of fees
generated for installation, implementation, customization, project
management and training services related either to the clients' use of
IMG's software in IMG's data centers or in their own processing
environments. License and other revenues consist of revenues generated
from the sale of licenses to use IMG's proprietary software and related
maintenance and support fees. IMG revenues are generally recognized in
conformity with SOP 97-2, "Software Revenue Recognition," as amended, and
SOP 81-1 "Accounting for Performance of Construction Type and Certain
Production Type Contracts." Data processing revenues are recognized as
services are performed on a rate per subscriber basis using rates that are
detailed in the client contract. Professional and consulting service
revenues are also recognized as the related services are performed. IMG's
contracts call for professional and consulting services to be provided
either on a time and materials basis or on a fixed fee basis. Revenues for
professional and consulting services contracted on a time and materials
basis are recognized based on the hours of service provided and the
contracted hourly rates. Revenues for professional and consulting services
contracted on a fixed fee basis are recognized under the percentage of
completion method of accounting by relating contract costs incurred to
date to total estimated contract costs at completion. Depending on the
length of the contract and the extent of customer modification required,
revenues from software licenses are recognized upon delivery and
acceptance of the licensed software or under the percentage of completion
method. Revenues for software maintenance and post-contract support are
recognized over the related agreement period. Many of the Company's
software license agreements include the delivery of the 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 revenues from these arrangements to each
element based on its fair value. The revenues associated with each element
are recognized using the respective methodology discussed above. If no
specific objective evidence of fair value exists for each element,
revenues for the entire arrangement are recognized ratably over the
license period.
CMG revenues for outsourced customer management and employee care services
are generally recognized as the related services are performed based on an
hourly, per call or per employee rate detailed in the client contract.
Currency Translation--Assets and liabilities of foreign operations, where
the functional currency is the local currency, are translated to U.S.
dollars at yearend 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.
34
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--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
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. Additionally, the Company enters into interest
rate swap agreements to effectively fix the interest rates of variable
rate borrowings.
Effective July 1, 2000, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by two subsequent
statements. 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
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, 2001 and 2000, no hedges were
determined to be ineffective.
New Accounting Pronouncements--In June 2001, the Financial Accounting
Standards Board issued SFAS No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets." Under this new guidance, goodwill
will no longer be amortized, but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company is required
to implement the new guidance on the accounting for goodwill and other
intangible assets in the first quarter of 2002. Application of the
non-amortization provisions of these Statements are expected to result in
a decrease in annual operating expenses of approximately $37 and an
increase in annual net income of approximately $29. During January 2002,
the Company completed the first of the required impairment tests of
goodwill as of January 1, 2002, which indicated that the Company currently
has no goodwill impairment.
35
3. Acquisition of Geneva
The Geneva Acquisition occurred on April 6, 2001 and was accounted for
under the pooling-of-interests method of accounting. Accordingly, all
amounts presented have been adjusted to reflect the combined results of
both companies as if the Geneva Acquisition had occurred as of the
beginning of the earliest period presented. The following table reflects
the results of the previously separate companies:
Quarter Ended March 31, 2001 Convergys Geneva Combined
---------------------------- --------- ------- --------
Revenues $ 577.8 $ 13.7 $ 591.5
Net income (loss) 53.5 (1.4) 52.1
Basic earnings per share $ 0.35 $ 0.31
Diluted earnings per share $ 0.34 $ 0.30
Year Ended December 31, 2000 Convergys Geneva Combined
---------------------------- --------- ------ --------
Revenues $2,162.5 $ 34.1 $2,196.6
Net income (loss) 194.7 (5.5) 189.2
Basic earnings per share $ 1.28 $ 1.13
Diluted earnings per share $ 1.23 $ 1.09
Year Ended December 31, 1999 Convergys Geneva Combined
---------------------------- --------- ------ --------
Revenues $1,762.9 $ 22.0 $1,784.9
Net income 137.0 0.1 137.1
Basic earnings per share $ 0.90 $ 0.84
Diluted earnings per share $ 0.89 $ 0.81
Geneva results for the five months ended May 31, 2000 have been included
in both 1999 and 2000 combined results in connection with conforming the
companies' yearends (revenues and net income of $11.1 and $0.1,
respectively). Only twelve months of Geneva results have been included in
the restated 1999 and 2000 results.
In connection with the acquisition of Geneva, the Company recorded
one-time costs of $31.8 in the second quarter of 2001 to expense
transaction costs and certain costs to integrate the combined businesses.
Transaction costs totaled $20.6, of which all but $2.0 had been paid at
December 31, 2001. The integration costs totaled $11.2, which includes
$1.0 for lease terminations and other costs associated with the
consolidation of facilities, $6.2 for severance associated with the
consolidation of facilities and certain functions, $3.0 for the expensing
of software that will not be deployed by the combined businesses and $1.0
for other integration costs. Of the integration costs, $6.8 had been
incurred at December 31, 2001. The remaining $4.4 is expected to be paid
as plan activities are carried out through the second quarter of 2002. The
after-tax impact of the charge was $26.3.
4. Other Acquisitions
In February 2001, the Company paid approximately $16 to acquire the
customer support business of Keane, Inc. The acquisition was accounted for
under the purchase method of accounting with the resulting goodwill to be
amortized over a twenty-five year life.
In June 2000, the Company paid approximately $11 to acquire the assets of
MAXWorldwide LLC, a provider of loyalty programs for Fortune 500
corporations. In September 2000, the Company 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, the Information Management segment paid approximately $123 in
a series of transactions to increase its ownership
36
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.
5. Business Restructuring and Special Charges
During 2001, the Company approved a plan to rationalize CMG's contact
center capacity. The plan resulted in a pre-tax restructuring charge of
$53.3. The charge consists of $29.0 in costs associated with the closing
of contact centers, $16.2 in asset impairment related to software that
will not be deployed into those contact center operations and $8.1 to
write-down investments in certain of CMG's European contact center
operations. The contact center closing costs include $11.8 for lease
terminations, $6.4 in severance pay under existing severance plans and
$10.8 related to the impairment of leasehold improvements. The $6.4 charge
for severance under the plan involves the elimination of approximately 550
employees in contact center operations and administrative functions. The
total cash cost of the plan is expected to be approximately $20.2.
The Company substantially completed the closure of the centers by the end
of 2001 and expects to complete the employee reductions by the third
quarter of 2002. During 2001, $6.5, consisting primarily of severance
payments for approximately 385 employees and facility closing costs, was
paid by the Company. The Company expects to pay substantially all of the
remaining $13.7 in restructuring costs by the third quarter of 2002.
Unrelated to the CMG restructuring charges, IMG recorded an impairment
charge of $4.7 related to purchased software that will not be deployed as
determined by management in 2001.
The 2001 restructuring and impairment charges included the following
components:
CMG IMG Total
--- --- -----
Facility Closing Costs:
Severance costs............................. $ 6.4 -- $ 6.4
Lease terminations.......................... 11.8 -- 11.8
------ ------
Subtotal................................. 18.2 -- 18.2
Impairment Costs and Other Special Items:
Leasehold improvements....................... 10.8 -- 10.8
Software..................................... 16.2 $ 4.7 20.9
Investments in European contact centers...... 8.1 -- 8.1
------ ----- ------
Subtotal................................. 35.1 4.7 39.8
------ ----- ------
Total.......................................... $ 53.3 $ 4.7 $ 58.0
====== ===== ======
Also during 2001, the Company recorded a non-operating expense of $6.5,
included in other income (expense), net to reflect the permanent
impairment of certain equity investments whose valuations have been
adversely affected by recent economic conditions.
In addition to a $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 acquisition of Ameritech,
the general partner, by SBC Communications, Inc. 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
37
consolidation activities of $6.9 reflects costs associated with the
closure of a data center, the impairment of certain software and the
combination of certain staff organizations between the Company's two
operating segments. This charge includes $1.3 for the severance of
approximately 45 employees, most of whom were associated with the data
center. The Company made these severance payments during 2000 and 2001.
6. Income Taxes
The Company's provision for income taxes consists of the following:
Year Ended December 31,
-----------------------------
2001 2000 1999
---- ---- ----
Current:
Federal..................... $ 82.3 $ 107.5 $ 81.7
Foreign..................... 19.6 10.3 15.9
State and local............. 4.6 12.1 9.2
------- ------- -------
Total current............. 106.5 129.9 106.8
Deferred..................... 9.6 (8.9) (20.9)
------- -------- -------
Total........................ $ 116.1 $ 121.0 $ 85.9
======= ======== =======
The following is a reconciliation of the statutory federal income tax rate
with the effective tax rate for each year:
Year Ended December 31,
2001 2000 1999
------------------------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal income tax benefit 1.5 2.3 2.5
Research tax credits (2.5) (2.1) (1.3)
Non-deductible amortization of
intangible assets 2.2 1.7 2.3
Foreign rate differential and
valuation allowances 4.8 0.6 0.2
Non-deductible transaction costs 2.1 -- --
Other 2.4 1.5 (0.2)
----- ----- -----
Effective rate 45.5% 39.0% 38.5%
===== ===== =====
The components of deferred tax assets and liabilities are as follows:
At December 31,
-----------------------
2001 2000
---- ----
Deferred tax asset:
Loss carryforwards.................. $ 44.5 $ 25.4
Pension and employee benefits....... 10.8 11.4
Advance billings.................... 10.9 10.8
Restructuring charges............... 6.2 6.4
State income taxes.................. 4.5 5.7
Allowance for doubtful accounts..... 9.1 2.9
Other............................... 17.1 14.3
Valuation allowance................. (38.3) (19.8)
------ ------
Total deferred tax asset............ $ 64.8 $ 57.1
Deferred tax liability:
Depreciation and amortization....... $ 27.1 $ 14.7
Other............................... 1.2 1.5
------ ------
Total deferred tax liability........ 28.3 16.2
------ ------
Net deferred tax asset.............. $ 36.5 $ 40.9
====== ======
38
At December 31, 2001, the Company had a $62.0 U.S. capital loss
carryforward, of which $55.5 expires in December 2005. The Company had
international operating loss carryforwards of $74.0, of which $58.7 has no
expiration date and $15.3 expires in the years 2004 - 2010. Of the
international operating loss carryforwards, $27.8 will be credited to
additional paid in capital when realized. The net change in the valuation
allowance during 2001 is principally due to valuation allowances being
recorded for the international operating and capital loss carryforwards.
The Company has not provided for U.S. federal income taxes or foreign
withholding taxes on $54.3 of undistributed earnings of its foreign
subsidiaries at December 31, 2001, 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.
7. Debt
Debt consists of the following:
At December 31,
------------------
2001 2000
---- ----
Commercial paper............. -- $175.4
Medium-term notes............ $100.0 100.0
Other........................ 33.5 16.6
------ ------
Total........................ $133.5 $292.0
Less current maturities..... 129.9 0.6
------ ------
Long-term debt............... $ 3.6 $291.4
Weighted average interest rates:
Commercial paper -- 7.2%
Medium-term notes 7.8% 7.8%
Other 5.5% 8.2%
At December 31, 2001, the Company's borrowing facilities included two
variable rate revolving credit facilities that expire in November 2002,
one with a $100 borrowing capacity and the other with a $250 borrowing
capacity. Additionally, at December 31, 2001, the Company had $100 in
variable rate notes outstanding, which expire in September 2002. At
December 31, 2000, the Company issued $175.4 of commercial paper, backed
by the revolving credit facilities. Other debt of $33.5 and $16.6 at
December 31, 2001 and 2000, respectively, consisted primarily of
uncommitted short-term lines of credit with banks. At December 2000, the
Company classified $188.2 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.
39
8. Sales of Receivables
In October 1999, the Company entered into an agreement to sell a portion
of 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, 2001 and 2000, the Company had sold $20.0 and $115.0 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 $7.2 and $32.1 at December 31, 2001
and 2000, respectively. Gross receivables sold under the program were
$520.0 and $1,135.1 in 2001 and 2000, respectively. Gross amounts received
under the program were $558.1 and $1,132.0 in 2001 and 2000, respectively.
The sales have been reflected as a reduction of accounts receivable and as
a component of cash flows from operating activities. The cost of the
program was $4.4 in 2001 and $11.4 in 2000. This cost is based on the
amount and timing of outstanding sold receivables and is recorded as a
component of interest expense.
9. Employee Benefit Plans
Pensions
The Company sponsors a defined benefit pension plan, which includes both a
qualified and a non-qualified portion, for all eligible employees (the
cash balance plan). The Company also sponsors a non-qualified, unfunded
executive deferred compensation plan and a supplemental, non-qualified,
unfunded plan for certain senior executives. 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, matching contributions and investment earnings on
participant accounts. Benefits for the supplemental plan are based on age,
years of service and eligible pay. Funding of the cash balance plan has
been achieved through contributions made to a 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,
----------------------------------------
2001 2000 1999
-------------------------------------------------------------------------------------
Service cost (benefits earned
during the period) $ 18.9 $ 13.7 $ 12.8
Interest cost on projected
benefit obligation 13.4 10.6 7.7
Expected return on plan assets (17.6) (14.1) (12.0)
Amortization and deferrals--net (3.2) (2.4) (0.4)
------ ------ ------
Pension cost $ 11.5 $ 7.8 $ 8.1
40
The following table sets forth the pension plans' funded status:
at December 31,
--------------------
2001 2000
- ------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $165.5 $137.4
Service cost 18.9 13.7
Interest cost 13.4 10.6
Amendments 1.4 2.3
Actuarial loss 21.3 11.7
Benefits paid (10.8) (10.2)
------ ------
Benefit obligation at end of year $209.7 $165.5
Change in plan assets:
Fair value of plan assets at beginning of year $170.3 $178.8
Actual return on plan assets (17.6) (1.4)
Acquisitions 24.8 --
Employer contribution 3.6 3.1
Benefits paid (10.8) (10.2)
------ ------
Fair value of plan assets at end of year 170.3 170.3
Funded status (39.4) 4.8
Unrecognized transition asset (1.0) (1.4)
Unrecognized prior service cost 6.7 5.8
Unrecognized net (gain) loss 6.1 (28.7)
------ ------
Accrued benefit expense $(27.6) $(19.5)
The benefit obligation related to the unfunded plans was $72.9 and $58.2
at December 31, 2001 and 2000, respectively.
Plan assets include $17.2 and $22.0 of Company common shares at December
31, 2001 and 2000, 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,
----------------------------
2001 2000 1999
---------------------------------------------------------------------
Discount rate--projected
benefit obligation................ 7.25% 7.50% 7.75%
Future compensation growth rate....... 4.75% 4.75% 4.75%
Expected long-term rate of return
on plan assets.................... 9.00% 9.00% 9.00%
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 or a percentage of
employee earnings. Total Company contributions to the defined contribution
plans were $11.1, $11.5 and $8.7 for 2001, 2000 and 1999, respectively.
Employee Postretirement Benefits Other Than Pensions
The Company sponsors postretirement health and life insurance plans for
certain eligible employees. The Company funds life insurance benefits of
certain retirees through a Voluntary Employee Benefit Association (VEBA)
trust. Contributions to the VEBA are subject to IRS limitations developed
using the aggregate cost method. The Company's postretirement benefit cost
was $2.3, $1.7 and $2.0 for 2001, 2000 and 1999, respectively.
41
10. Common and Preferred Shares
Share Repurchases
During 1999 and 2000, the Company spent $11.9 and $4.9 to repurchase
580,000 and 140,000 shares, respectively. In January 2000, Geneva
repurchased a portion of its shares with an equivalency of 1.0 million
Convergys shares for $4.7.
In September 2001, the Securities and Exchange Commission (SEC) issued an
exemptive order temporarily easing pooling-of-interest accounting
qualification provisions and other restrictions under the federal
securities laws related to issuers repurchasing their own common stock.
Accordingly, during the exemptive period, which expired in October 2001,
the Company repurchased 2,613,000 shares for $68.3.
On January 18, 2002, the Company's Board of Directors authorized the
repurchase of up to 10 million of its common shares. As of February 4,
2002, the Company had repurchased 831,700 additional shares at a cost of
$25.6. Under its plan, the Company is authorized to repurchase an
additional 9,168,300 shares.
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, 2001 and 2000,
there were no preferred shares outstanding.
11. Stock-Based Compensation Plans
At December 31, 2001, the Company had authorized 30 million shares of
common stock for issuance under the Convergys Corporation 1998 Long-Term
Incentive Plan (Convergys LTIP). The Convergys LTIP provides for the
issuance of stock options and other stock-based awards to certain
employees. In general, stock options are granted with exercise prices that
are no less than market value of the stock at the grant date, have a
ten-year term and have 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, 2001. In connection with the Geneva
Acquisition in April 2001, all outstanding options to acquire Geneva
common shares were converted into options to acquire 2.7 million Convergys
shares at exercise prices ranging from $0.92 to $8.19. During 2000, Geneva
issued options with an aggregate intrinsic value of $9.8. The Company's
operating results for 2001 and 2000 reflect the recognition of $1.9 and
$0.8, respectively, in compensation expense related to these options. The
remaining unamortized portion is being recognized over the remaining
vesting period.
The Convergys LTIP also permits the granting of other restricted stock
awards, which generally have vesting terms of three to five years. During
the restriction period, restricted stock awards entitle the holder to all
the rights of a holder of common shares, including dividend and voting
rights. Unvested shares are restricted as to disposition and subject to
forfeiture under certain circumstances. The amount of compensation expense
recognized for restricted stock was $7.2, $7.5 and $5.3 in 2001, 2000 and
1999, respectively.
The Company follows the disclosure-only provisions of SFAS No. 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 Geneva options to employees of the Company and
Geneva based on the fair value at the grant dates for awards consistent
with the method prescribed by SFAS No. 123, net income and earnings per
share would have been impacted as follows:
42
Year Ended December 31,
--------------------------
2001 2000 1999
- ------------------------------------------------------------------------
Net income:
As reported $ 138.8 $ 189.2 $ 137.1
Pro forma compensation expense,
net of tax benefit (43.5) (26.2) (17.1)
-------- -------- --------
Pro forma $ 95.3 $ 163.0 $ 120.0
Diluted earnings per share:
As reported $ 0.80 $ 1.09 $ 0.81
Pro forma $ 0.54 $ 0.94 $ 0.71
The weighted average fair value on the date of grant for the Convergys
options granted during 2001, 2000 and 1999 was $16.03, $22.30 and $10.23,
respectively. Such amounts were estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
Convergys
--------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------
Expected volatility................. 39.7% 54.5% 47.8%
Risk free interest rate............. 4.7% 6.4% 4.9%
Expected holding period, in years... 4 4 4
Presented below is a summary of Company stock option activity:
Weighted
Average
Exercise
Shares in Thousands Shares Price
---------------------------------------------------------------------
Options outstanding at
January 1, 1999..................... 11,211 $ 10.33
Options granted in 1999............... 2,721 $ 20.26
Options exercised in 1999............. (1,086) $ 6.35
Options forfeited in 1999............. (355) $ 18.24
-------- -------
Options outstanding at
December 31, 1999................... 12,491 $ 12.60
Options granted in 2000............... 4,971 $ 25.94
Options exercised in 2000............. (1,909) $ 11.35
Options forfeited in 2000............. (684) $ 18.31
------- -------
Options outstanding at
December 31, 2000................... 14,869 $ 16.96
Options exercisable at
December 31, 2000................... 6,069 $ 11.70
Options granted in 2001............... 3,924 $ 42.59
Options exercised in 2001............. (2,749) $ 6.81
Options forfeited in 2001............. (853) $ 31.09
------- -------
Options outstanding at
December 31, 2001................... 15,191 $ 24.55
Options exercisable at
December 31, 2001................... 6,857 $ 17.10
43
The following table summarizes the status of the Company stock options
outstanding and exercisable at December 31, 2001:
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
-----------------------------------------------------------------------
$0.92 to $4.83 1,746 4.2 $ 3.08 746 $ 3.92
$4.84 to $9.64 1,000 3.2 7.68 910 7.67
$9.65 to $15.00 1,559 6.5 14.96 1,209 14.94
$15.01 to $17.44 1,848 5.5 17.11 1,841 17.10
$17.45 to $19.36 336 6.9 18.68 252 18.70
$19.37 to $22.22 1,821 7.0 22.03 913 22.00
$22.23 to $29.53 2,397 8.0 29.51 577 29.53
$29.54 to $43.62 1,378 8.8 37.63 357 37.83
$43.63 to $43.95 3,000 9.0 43.62 -- --
$43.96 to $52.53 106 8.6 47.28 52 46.82
-------- --- ----- ------- -----
Total 15,191 6.9 $24.55 6,857 $17.10
12. Commitments and Contingencies
Commitments
The Company leases certain facilities and equipment used in its operations
under operating leases. Total rent expense was $110.3, $101.9 and $104.0
in 2001, 2000 and 1999, respectively.
At December 31, 2001, the total minimum rental commitments under non-
cancelable leases are as follows:
2002.......................................... $ 103.0
2003.......................................... 86.7
2004.......................................... 54.9
2005.......................................... 38.9
2006.......................................... 29.3
Thereafter.................................... 80.9
-------
Total......................................... $ 393.7
The above amounts include the Company's obligations related to the lease
of its office complex in Orlando, Florida. Under the terms of the
financing transaction, which was structured as a synthetic lease, a
special purpose trust owns the office complex and leases it to the
Company. The lease has an initial term of three years, with two one-year
renewal options. As the initial term expired at the end of 2001, the
Company exercised the first one-year renewal option and anticipates that
it will elect to exercise the second. The Company pays a variable lease
rate, but has effectively converted it into a fixed amount through an
interest rate swap with a nominal value of $65, which equals the amount
borrowed by the special purpose entity to finance the construction of the
office complex. In connection with this transaction, the Company has made
a residual value guarantee for the leased property equal to 85% of the
financing, or $55.
44
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.
13. Additional Financial Information
at December 31,
-----------------
2001 2000
--------------------------------------------------------------------
Property and equipment, net:
Land....................................... $ 7.8 $ 7.8
Buildings.................................. 49.1 47.0
Leasehold improvements..................... 118.0 109.3
Equipment.................................. 399.5 381.4
Software................................... 268.7 237.1
Construction in progress and other......... 31.9 39.4
-------- --------
875.0 822.0
Less: Accumulated depreciation............. (524.6) (424.4)
-------- --------
$ 350.4 $ 397.6
Goodwill and intangibles, net:
Goodwill................................... $ 865.4 $ 858.2
Other intangible assets.................... 97.4 97.4
-------- --------
962.8 955.6
Less: Accumulated amortization............. (257.9) (215.4)
-------- --------
$ 704.9 $ 740.2
Investments in marketable securities:
(Classified with other assets)
Cost basis................................. $ -- $ 5.7
Unrealized gains........................... -- 1.8
-------- --------
$ -- $ 7.5
Payables and other current liabilities:
Accounts payable........................... $ 38.3 $ 38.2
Accrued taxes.............................. 32.7 30.3
Accrued payroll-related expenses........... 154.2 144.3
Accrued expenses, other.................... 69.4 87.0
Restructuring and exit costs............... 25.1 6.9
Advance billing and customer deposits...... 42.8 64.1
-------- --------
$ 362.5 $ 370.8
Other Comprehensive Income
at December 31,
---------------
2001 2000
--------------------------------------------------------------------
Accumulated other comprehensive income:
Currency translation adjustments........... $ (13.5) $ (6.3)
Unrealized loss on hedging activities...... (5.3) (4.3)
Unrealized gain on investments............. -- 1.8
-------- --------
$ (18.8) $ (8.8)
Year Ended December 31,
--------------------------
2001 2000 1999
-------------------------------------------------------------------------------
Comprehensive income:
Net income $ 138.8 $ 189.2 $ 137.1
Other comprehensive income, net of tax:
Currency translation adjustments (7.2) (7.6) 2.1
45
Unrealized loss on hedging activities (1.0) (4.3) --
Unrealized gain (loss) on investments (1.8) (48.2) 52.0
-------- -------- --------
Total comprehensive income $ 128.8 $ 129.1 $ 191.2
Cellular Partnership
Summarized financial information for the Cellular Partnership is as
follows:
at December 31,
-----------------------------
2001 2000 1999
-------------------------------------------------------------------
Current assets............... $ 19.3 $ 55.6 $ 91.3
Non-current assets........... 173.3 122.3 109.7
Current liabilities.......... 21.8 28.7 22.1
Non-current liabilities...... 90.1 -- --
Year Ended December 31,
------------------------------
2001 2000 1999
--------------------------------------------------------------------
Revenues..................... $ 180.3 $ 195.0 $ 210.0
Operating income............. 14.0 41.7 49.6
Net income................... 13.8 45.2 45.0
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 5).
14. Industry Segment and Geographic Operations
Industry Segment Information
The Company operates in two industry segments, which are identified by
service offerings. IMG provides outsourced billing and information services
and software to the communications industry. CMG provides outsourced
marketing, customer support and employee care services to 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,
------------------------------
2001 2000 1999
--------------------------------------------------------------------
Revenues
IMG......................... $ 937.9 $ 818.8 $ 709.1
CMG......................... 1,394.7 1,395.5 1,110.9
Less intersegment........... (12.0) (17.7) (35.1)
-------- -------- --------
........................ $2,320.6 $2,196.6 $1,784.9
Depreciation
IMG......................... $ 38.7 $ 39.3 $ 30.4
CMG......................... 79.3 68.3 55.2
Corporate................... 7.5 3.9 1.1
-------- -------- --------
........................ $ 125.5 $ 111.5 $ 86.7
46
Amortization
IMG......................... $ 18.2 $ 18.7 $ 12.8
CMG......................... 32.6 31.9 31.5
-------- -------- --------
........................ $ 50.8 $ 50.6 $ 44.3
Special items
IMG......................... $ 4.7 $ -- $ 2.0
CMG......................... 53.3 -- 6.9
Corporate and other......... 31.8 -- --
-------- -------- --------
........................ $ 89.8 $ -- $ 8.9
Operating income
IMG......................... $ 193.0 $ 156.9 $ 132.3
CMG......................... 119.2 171.1 108.7
Corporate and other......... (35.6) (7.4) (5.8)
-------- -------- --------
........................ $ 276.6 $ 320.6 $ 235.2
Capital expenditures
IMG......................... $ 43.4 $ 41.1 $ 42.6
CMG......................... 56.6 130.5 102.9
Corporate and other......... 13.5 7.0 10.8
-------- -------- --------
........................ $ 113.5 $ 178.6 $ 156.3
At December 31,
----------------------
2001 2000
--------------------------------------------------------------------
Total assets
IMG................................. $ 483.4 $ 595.7
CMG................................. 875.0 962.1
Corporate and other................. 384.5 246.3
-------- --------
................................ $1,742.9 $1,804.1
Intersegment revenues are for services charged at rates which approximate
cost.
Geographic Operations
The following table presents certain geographic information regarding the
Company's operations:
Year Ended December 31,
------------------------------
2001 2000 1999
--------------------------------------------------------------------
Revenues
North America............... $2,102.9 $2,039.0 $1,653.8
International............... 217.7 157.6 131.1
-------- -------- --------
......................... $2,320.6 $2,196.6 $1,784.9
At December 31,
----------------------
2001 2000
--------------------------------------------------------------------
Long-lived assets
North America............... $1,069.9 $1,341.1
International............... 124.5 136.6
-------- --------
......................... $1,194.4 $1,477.7
47
Concentrations
Both of the Company's segments derive significant revenues from AT&T
Corporation (AT&T) and AT&T Wireless Services, Inc. (AT&T Wireless), which
was spun off from AT&T in July 2001. Revenues from AT&T were 19.9%, 22.3%
and 21.7% of the Company's consolidated revenues for 2001, 2000 and 1999,
respectively. Related accounts receivable from AT&T totaled $49.4 and
$95.0 at December 31, 2001 and 2000, respectively. The relationship with
AT&T includes the Company's use of AT&T communication services, which is
particularly significant to CMG. Spending for these services with AT&T was
$86.6, $104.3 and $94.3 in 2001, 2000 and 1999, respectively. Revenues
from AT&T Wireless were 16.8%, 18.3% and 17.9% of the Company's
consolidated revenues for 2001, 2000 and 1999, respectively. Related
accounts receivable from AT&T Wireless totaled $58.1 and $61.0 at December
31, 2001 and 2000, respectively.
Additionally, revenues from Sprint Corporation were 10.6% of the Company's
consolidated revenues for 2001 and less than 10% in 2000 and 1999.
15. Earnings Per Share
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) computations:
Net Per Share
Income Shares Amount
---------------------------------------------------------------------
2001
Basic EPS......................... $138.8 169.4 $0.82
Effect of dilutive securities:
Stock-based compensation
arrangements..................... -- 5.0 0.02
------ ----- -----
Diluted EPS....................... $138.8 174.4 $0.80
Net Per Share
Income Shares Amount
---------------------------------------------------------------------
2000
Basic EPS......................... $189.2 167.6 $1.13
Effect of dilutive securities:
Stock-based compensation
arrangements..................... -- 6.6 0.04
------ ----- -----
Diluted EPS....................... $189.2 174.2 $1.09
Net Per Share
Income Shares Amount
---------------------------------------------------------------------
1999
Basic EPS......................... $137.1 162.7 $0.84
Effect of dilutive securities:
Stock-based compensation
arrangements..................... -- 6.2 0.03
------ ------ -----
Diluted EPS....................... $137.1 168.9 $0.81
48
16. Financial Instruments
The Company had derivative liabilities related to interest rate swaps with
a fair value of $5.7 and $3.7 at December 31, 2001 and 2000, respectively.
Additionally, the Company had derivative liabilities related to
outstanding forward exchange contracts, consisting primarily of Canadian
dollar and British pound contracts with a notional value of $97.5 and
$46.5, respectively, classified as accrued liabilities of $2.7 and $0.6 at
December 31, 2001 and 2000, respectively. In addition, in 2001 the Company
recorded deferred tax assets related to these derivatives in the amount of
$3.1. A total of $1.0 of deferred net losses on derivative instruments in
2001 were accumulated in other comprehensive income and are expected to be
reclassified to earnings during the next twelve months.
17. Quarterly Financial Information (Unaudited)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
----------------------------------------------------------------------------------------
2001
Revenues...................... $ 591.5 $ 571.2 $ 567.2 $ 590.7 $ 2,320.6
Operating income.............. $ 90.5 $ 57.4 $ 32.6 $ 96.1 $ 276.6
Net income.................... $ 52.1 $ 27.3 $ 3.0 $ 56.4 $ 138.8
Earnings per share:
Basic........................ $ 0.31 $ 0.16 (1) $ 0.02 (1) $ 0.33 $ 0.82
Diluted...................... $ 0.29 $ 0.16 (1) $ 0.02 (1) $ 0.33 $ 0.80
2000
Revenues...................... $ 518.2 $ 530.9 $ 553.5 $ 594.0 $ 2,196.6
Operating income.............. $ 73.5 $ 77.8 $ 79.7 $ 89.6 $ 320.6
Net income.................... $ 43.5 $ 45.9 $ 47.6 $ 52.2 $ 189.2
Earnings per share:
Basic........................ $ 0.26 $ 0.27 $ 0.28 $ 0.31 $ 1.13
Diluted...................... $ 0.25 $ 0.26 $ 0.27 $ 0.30 $ 1.09
(1) See Notes 3 and 5 for a discussion of special items that were
recorded by the Company in the second and third quarters of 2001.
49
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 2001.
PART III
Item 10. Directors and Officers of the Registrant
The information required by Item 10 is incorporated herein by reference to the
sections of the Company's proxy statement dated March 8, 2002 entitled "Board of
Directors" and "Executive Compensation." Certain information concerning the
executive officers of the Company is contained on Page 14 of this Form 10-K.
Item 11. Executive Compensation
The Executive Compensation section of the Company's proxy statement dated March
8, 2002 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 8, 2002 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Not applicable.
50
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 ...................... 28
Consolidated Balance Sheets............................. 29
Consolidated Statements of Cash Flows................... 30
Consolidated Statements of Shareholders' Equity
and Comprehensive Income............................. 31
Notes to Financial Statements........................... 32
Reports of Independent Accountants ..................... 26
(2) Financial Statement Schedule:
II - Valuation and Qualifying Accounts................. 51
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. (Incorporated by
reference to Exhibit 3.1 to Form S-3 filed on August 10, 2000, File
Number 333-43404.)
3.2 Regulations of the Company. (Incorporated by reference to Exhibit 3.2
to Registration Statement No. 333-53619.)
51
4 Rights Agreement dated November 30, 1998 between Convergys Corporation
and The Fifth Third Bank. (Incorporated by reference to Exhibit 4.1 to
Form 8-A filed December 23, 1998, File No. 001-14379.)
10.1 Convergys Corporation 1998 Long-Term Incentive Plan. (Incorporated by
reference to Exhibit 10.1 to the Company's 2000 Annual Report on Form
10-K.)
10.2 Convergys Corporation Deferred Compensation Plan for Non-Employee
Directors. (Incorporated by reference to 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 as of October 29, 2001.
10.4 Employment Agreement between the Company and James F. Orr and December
16, 1998 Amendment to Employment Agreement. (Incorporated by reference
to Exhibit 10.8 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. (Incorporated by
reference to 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. (Incorporated by
reference to 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. (Incorporated by
reference to 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. (Incorporated by
reference to Exhibit 10.14 to the Company's 1998 Annual Report on Form
10-K.)
10.10 June 26, 2001 Amendment to Employment Agreement between the Company and
Ronald E. Schultz.
10.11 Convergys Corporation Supplemental Executive Retirement Plan.
(Incorporated by reference to Exhibit 10.10 to the Company's 2000
Annual Report on Form 10-K.)
52
10.12 Convergys Corporation Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 4.2.1 to post-effective Amendment No. 2 to
Registration Statement No. 333-69633 filed on July 7, 2000.)
12 Computation of Ratio of Earning to Fixed Charges.
21 Subsidiaries of the Company.
23 a Consent of Ernst & Young LLP.
23 b Consent of PricewaterhouseCoopers LLP.
23 c Consent of KPMG.
24 Powers of Attorney.
The Company will furnish, without charge, to a security holder upon request, a
copy of the documents, or the portions thereof, 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 2001.
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.
53
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 2001
- ---------
Allowance for
Doubtful Accounts $11.9 $18.5 --- $15.7 (a) $14.7
Deferred Tax Asset
Valuation Allow. $19.8 $ 9.5 (c) $ 9.0 (c) --- $38.3
Restructuring
Reserve $ 4.5 $26.4 --- $11.3 $19.6
Year 2000
- ---------
Allowance for
Doubtful Accounts $12.5 $ 2.5 --- $ 3.1 (a) $11.9
Deferred Tax Asset
Valuation Allow. $ 2.8 $ 1.0 $16.0 (b) --- $19.8
Restructuring
Reserve $ 6.6 --- --- $ 2.1 $ 4.5
Year 1999
- ---------
Allowance for
Doubtful Accounts $ 9.8 $ 9.8 --- $ 7.1 (a) $12.5
Deferred Tax Asset
Valuation Allow. $21.0 --- --- $18.2 (b) $ 2.8
Restructuring
Reserve $10.6 --- --- $ 4.0 $ 6.6
(a) Primarily includes amounts written off as uncollectible.
(b) Amounts were recorded as a component of other comprehensive income (loss).
(c) Amounts relate to valuation allowances being recorded for international,
operating and capital loss carryforwards.
54
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, 2002 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
55
Signature Title Date
- --------- ----- -----
ERIC C. FAST* Director
- --------------------------------------------
Eric C. Fast
JOSEPH E. GIBBS* Director
- --------------------------------------------
Joseph E. Gibbs
ROGER L. HOWE* Director
- --------------------------------------------
Roger L. Howe
STEVEN C. MASON* Director
- --------------------------------------------
Steven C. Mason
PHILIP A. ODEEN* Director
- --------------------------------------------
Philip A. Odeen
SIDNEY A. RIBEAU* Director
- --------------------------------------------
Sidney A. Ribeau
BRIAN H. ROWE* Director
- --------------------------------------------
Brian H. Rowe
JAMES M. ZIMMERMAN* Director
- --------------------------------------------
James M. Zimmerman
*By /s/ Steven G. Rolls February 28, 2002
- --------------------------------------------
Steven G. Rolls
as attorney-in-fact and on his behalf
as Chief Financial Officer
56