convergys corp

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convergys corp
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
Commission file number 1-14379
CONVERGYS CORPORATION
An Ohio
Corporation
I.R.S. Employer
No. 31-1598292
201 East Fourth Street, Cincinnati, Ohio 45202
Telephone Number (513) 723-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares (no par value)
Series A Preferred Share Purchase Rights
Name of each exchange
on which registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
No
Yes X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer X
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No X
The aggregate market value of the voting shares owned by non-affiliates of the registrant was $3,301,588,596, computed by
reference to the closing sale price of the stock on the New York Stock Exchange on June 30, 2007, the last trading day of the
registrant’s most recently completed second fiscal quarter.
At January 31, 2008, there were 126,756,263 common shares outstanding, excluding amounts held in treasury of 54,967,047.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2008 Annual Meeting of Shareholders are incorporated by reference into Part III of this
report to the extent described herein.
Table of Contents
TABLE OF CONTENTS
Item
Page
PART I
1.
Business
2
1A.
Risk Factors
11
1B.
Unresolved Staff Comments
11
2.
Properties
11
3.
Legal Proceedings
12
4.
Submission of Matters to a Vote of the Security Holders
12
PART II
5.
Market for the Registrant’s Common Equity, Related Security Holder Matters
and Issuer Purchases of Equity Securities
15
6.
Selected Financial and Operating Data
17
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Quantitative and Qualitative Disclosures about Market Risk
42
8.
Financial Statements and Supplementary Data
42
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
76
9A.
Controls and Procedures
76
9B.
Other Information
76
7A.
PART III
10. Directors and Officers of the Registrant
77
11.
Executive Compensation
77
12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
77
13.
Certain Relationships and Related Transactions
77
14.
Principal Accounting Fees and Services
77
PART IV
15.
Exhibits, Financial Statement Schedule
78
Signatures
82
Convergys Corporation 2007 Annual Report 1
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Safe Harbor Statement and Part I, Item 1. Business
Private Securities
Litigation Reform Act Of 1995
Safe Harbor Cautionary Statement
This report and the documents incorporated by reference 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,” “could,” “should,” “will,” “plans,”
“anticipates” 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 to update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Important factors that may affect these projections or expectations include, but are not limited to: the loss of a significant client or
significant business from a client; difficulties in completing a contract or implementing its provisions, or completing or integrating an
acquisition; consolidation within the industries in which the Company’s clients operate; changes in competition in markets in which
the Company operates; the consequence of potential terrorist activities and the responses of the United States and other nations to
such activities; changes in the legal or regulatory environment in which the Company and its clients operate; changes in the overall
economy; changes in the demand for the Company’s services; changes in technology that impact both the markets served and the
types of services offered; changes in accounting principles generally accepted in the United States of America; and difficulties in
conducting business internationally. The “Risk Factors” set forth in Part I, Item 1A of this report could also cause actual results to
differ materially from the forward-looking statements.
Part I
Item I. Business
Overview
Convergys Corporation (the Company or Convergys) is a global leader in relationship management. We provide solutions that drive
more value from the relationships our clients have with their customers and employees. Convergys turns these everyday
interactions into a source of profit and strategic advantage for our clients. For 25 years, our unique combination of domain
expertise, operational excellence and innovative technologies has delivered process improvement and actionable business insight
to clients’ customers and employees that now span more than 70 countries and 35 languages.
Our unified business focus is serving one overriding business need: relationship management. Our clients depend on our solutions
and expertise, allowing them to focus more of their resources on their core competencies. By providing a wide range of relationship
management solutions for our clients, we have developed a base of recurring revenues, generally under multiple year contracts.
We provide our clients with comprehensive solutions to support their customers (Customer Solutions) and employees (HR
Solutions). Our Customer Solutions enhance the value of their customer relationships, turning customer experience into a strategic
differentiator. Our HR Solutions help transform large enterprises to drive more value from employee relationships, fostering greater
organizational effectiveness and lowering costs. These solutions are supported by the business segments which are detailed
below.
Our principal executive offices are located at 201 East Fourth Street, Cincinnati, Ohio 45202, and the telephone number at that
address is (513) 723-7000. We file annual, quarterly, current reports and proxy statements with the SEC. These filings are available
to the public over the Internet on the SEC’s Web site at http://www.sec.gov and at our Web site at http://www.convergys.com. You
may also read and copy any document we file with the SEC at its public reference facilities in Washington, D.C. You can
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also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference
facilities. You can also inspect reports, proxy statements and other information about Convergys at the offices of the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
Business Segments
The Company has three segments: Customer Management, which provides outsourced customer care solutions as well as
professional and consulting services to in-house customer care operations; Information Management, which provides convergent
rating, charging and billing solutions for the global communications industry; and Human Resources Management, which provides
human resource business process outsourcing (HR BPO) solutions and learning solutions. The Company’s business segments
were renamed in 2007 to align with the Company’s rebranding efforts.
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 12 of Notes to Consolidated Financial Statements, are incorporated by reference in partial
response to this Item 1.
Customer Management
Our Customer Management (formerly Customer Care) segment partners with clients to deliver customer solutions that enhance the
value of their customer relationships, turning the customer experience into a strategic differentiator. We combine consulting and
innovative technology services to optimize the customer experience and strengthen customer relationships. We provide
comprehensive and integrated multi-channel care using a global service delivery infrastructure of live agent and automated
services that operate 24 hours a day, 7 days a week and 365 days a year. Our services include multi-lingual program support.
Solutions provided by Customer Management include:
Customer Service Solutions
Customer Service Solutions include comprehensive outsourced business and consumer customer support functions, as well as
services for in-house contact center operations. We provide a full range of automated and live agent solutions that provide
consumer support, business-to-business support and technical support.
Customer Acquisition Solutions
Our Customer Acquisition Solutions identify and secure high-value consumer and business customers, maximize sales conversion
rates and increase revenue per customer. Utilizing a full range of 24 by 7 automated and live agent solutions, we provide
comprehensive sales and order support. In addition, we offer Direct Response Solutions to address the customer support needs
of direct response marketing.
Customer Retention Solutions
We combine agent services, automation and analytics to optimize the level of customer satisfaction, build customer loyalty and
address customer churn. Our programs are designed to help our clients retain their customers and increase their lifetime value.
Back Office Solutions
We offer complete outsourced Back Office Solutions that combine integrated document management, data entry and transaction
processing capabilities with process expertise and workflow management. This helps our clients provide a more integrated and
comprehensive service experience to their customers. We also provide Finance & Accounting Solutions, which includes Accounts
Receivable Management Solutions and Accounts Payable Solutions. Our global labor pool supports a 24 by 7 customer support
environment.
Convergys Corporation 2007 Annual Report 3
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Item 1. Business (continued)
Customer Management Effectiveness Solutions
We offer Customer Management Effectiveness Solutions consisting of a combination of consulting, services and enabling
technology designed to drive more proactive and customer-centric care. We focus on improving the customer experience and
driving higher value from contact center operations and the broader enterprise, whether operations are in-house, fully outsourced
or blended. Key solutions include: Customer Intelligence Services, Dynamic Decisioning Solution, Speech Solutions, Agent
Performance Learning Solutions and Infinys Customer Service Manager.
In 2007, a new group was established to accelerate the development of technology-enabled solutions that improve the quality and
value of interactions across live agent and self-care channels. This group, called Relationship Technology Management, will focus
on leveraging the latest advanced technologies in speech automation, real-time decisioning, web-based self-care, and multichannel integration enhanced with analytics to capture and analyze intelligence from customer interactions. Revenues from these
services are included within our Customer Management segment.
Over 90% of Customer Management’s revenues are derived from agent-related services. We typically recognize these revenues as
services are performed, based on staffing hours or the number of contacts handled by service agents using contractual rates. In a
limited number of engagements where the client pays a fixed fee, we recognize revenues based on the specific facts and
circumstances of the engagement, using the proportional performance method or upon final completion of the engagement.
Customer Management’s remaining revenues are derived from collection services and professional and consulting services.
Revenues for professional and consulting services are recognized as the services are performed or upon completion of the
engagement based on specific facts and circumstances of the engagement.
Information Management
Our Information Management segment partners with global communications clients to provide convergent rating, charging and
billing solutions. Convergys combines our innovative business support system (BSS) software and unique operational expertise in
customer and account management to provide solutions that enable clients to rapidly and cost-effectively provide innovative
services, maximizing customer lifetime value.
Our Information Management convergent rating, charging and billing solutions include:
Convergys Infinys ® Solutions
The Convergys Infinys Solution is our modular and convergent business support system software. It enables operators to
implement a comprehensive business support system, or to choose single applications, such as the Convergys Infinys Rating and
Billing Manager, configured to the operator’s specific business and operational requirements. Infinys delivers innovative support of
convergent services — regardless of service channel or payment method. Our solutions enable clients to take products and
services to market faster, leverage real-time marketing innovation, minimize risk and reduce operational costs. Infinys uses a
modular, pre-integrated approach to reduce both capital and operating expenditures, while speeding the launch of convergent
services and services bundles. Infinys’ flexibility is a function of its three-layer design incorporating platform, applications and
extensions.
Infinys Series 3, the current version of the software, provides clients the ability to support the following:
Content Enablement Solutions
Our end-to-end content enablement solution — a strong combination of products and services — provides essential
merchandising, charging, policy management, digital rights management and partner/customer services capabilities. Focusing
on providing a solution that fits the needs of our clients (end-to-end or a subset of applications), we make
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content services coherent, user-friendly and available to support the rapid launch of new offerings.
Convergent Charging Solutions
Our Convergent Charging Solutions facilitate the rollout of all new and advanced services and bundles to subscribers. This
enables a real-time interface to, and/or co-location with, intelligent network platforms, supporting a single subscriber database
and enterprise-wide product catalogue. The outcome is shared usage bundles within a single account, delivering engineeringgrade scalability, availability and latency, and sustaining the major charging standards.
Enterprise Product Management Solutions
Using a blend of products and services, our Enterprise Product Management Solution can increase efficiencies across product
management processes. This includes the ability to drive product consistency across the enterprise, centralize product data into
a single enterprise-wide catalogue, create, manage and control products end-to-end, and provide a single view of all product
and services customized for each customer.
Convergys ICOMS Solution
The Integrated Communications Operations Management System (ICOMS) solution is designed specifically for the broadband
convergent video, high-speed data and telephony markets. It incorporates the power and flexibility of our cable television
subscriber management system with the integrated support of high-speed data and wireline telephony.
Convergys WIZARD Solution
The WIZARD solution is designed to serve multimedia operators including direct broadcast satellite, direct-to-home, cable and
cable telephony providers, by enabling them to extend their offerings to support voice, video and data services.
Consulting and Professional Services:
Consulting and Technology Services
Convergys provides strategic assessment, program management and program enhancements to help clients strengthen their
competitive advantage.
Software Solutions
We deliver applications and solutions that support more innovative propositions and services for clients, including Infinys Series
3.
Global Service Delivery Options
We provide our software in one of three delivery modes: outsourced (service bureau), licensed or build-operate-transfer (BOT).
In the outsourced delivery mode, we provide the billing services by running our software in one of our data centers. In the
licensed delivery mode, the software is licensed to clients who perform billing internally. Finally, under the BOT delivery mode,
Information Management implements and initially runs our software in the client’s data center where the client has the option to
transfer the operation of the software to itself at a future date. Information Management has a rich history of building,
implementing and operating a variety of BSS solutions for global providers.
Managed Operations
Managed Operations allows clients to maintain control of IT operations without operational responsibility. From business case
development to implementation, execution and knowledge transfer, we can help determine the best model for each unique
business situation. The objective of Convergys’ operations practice is to help clients achieve measurable cost savings while
continually driving efficiency through innovation. Our end-to-end services for managing client’s operations include Application
Management Services, Application Support Services and Infrastructure Services.
Convergys Corporation 2007 Annual Report 5
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Item 1. Business (continued)
These operations address a broad range of software solutions from Convergys products to commercial, off-the-shelf or homegrown applications. Day-to-day operations can be hosted either at a Convergys data center or the client’s location. Our
personnel models are created to provide the most optimal solution. It can include Convergys dedicated resources and shared
resources.
License and related support and maintenance fees, which accounted for 31% of Information Management’s revenues, are earned
under perpetual and term license arrangements. We invoice our clients for licenses either up-front or monthly based on the number
of subscribers, events or units processed using the software. We typically recognize professional and consulting services and
license revenues using the percentage-of-completion method. Fees for support and maintenance normally are charged in advance
either on an annual, quarterly or monthly basis and are recognized ratably over the term of the agreement. Professional services
revenues, which accounted for 36% of Information Management’s revenues, consist of fees charged for installation,
implementation, customization, enhancement and managed services. We invoice our clients for these services based on time and
material costs at contractually agreed upon rates, or in some instances, for a fixed fee. Information Management’s remaining
revenues consist of monthly fees for processing client transactions in Information Management’s data centers and, in some cases,
the clients’ data centers, using Information Management’s proprietary software. These data processing revenues are recognized
based on the number of invoices, subscribers or events that are processed by Information Management using contractual rates.
We sometimes earn supplemental revenues depending on the satisfaction of certain service levels or achievement of certain
performance measurement targets. We recognize such supplemental revenues only after we achieve the required measurement
target.
HR Management
Our Human Resources Management (formerly Employee Care) segment partners with clients to deliver HR BPO and learning
solutions that help transform large enterprises to drive more value from employee relationships, fostering greater organizational
effectiveness and lowering costs. For 25 years, Convergys Human Resource (HR) Solutions have enabled Global 1000 companies
to optimize employee relationships through business process outsourcing. Convergys utilizes a transformational approach to help
clients harmonize HR processes, standardize global HR technology, and improve service delivery. The result is a greater level of
workforce insight that enables enterprises to make better decisions and better manage global talent as a corporate asset.
Our large suite of HR BPO solutions includes the following:
Benefits Administration Solutions
We manage the complexities of benefits administration and provide clients the business intelligence they need to improve benefitrelated processes, services and costs. Our solution combines self-service tools and state-of-the-art multilingual service centers to
provide services to employees, including health and welfare administration services, retirement services and pension
administration, absence management, carrier administration and tuition reimbursement.
Compensation Solutions
We help companies improve the clarity and parity of their global compensation plans while assuming global administration to
lower overall costs and deliver key analytics. By aligning global compensation with other key HR processes, Convergys can help
improve employee understanding of compensation strategies resulting in increased employee engagement.
Human Resource Administration Solutions
We help organizations transform the task of managing global employee paperwork and data into a harmonized, automated and
highly-efficient process. Our solution incorporates process improvements and technology innovations to streamline global HR
administration.
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Learning Solutions
Learning helps companies manage the employee life cycle to get more from the talent that they have and develop the talent they
need. Convergys integrates comprehensive learning services into its HR BPO solutions. By outsourcing select learning functions
such as administration, operations, content development and sourcing to us, companies gain a better return on their investment.
Organizational Development/Performance Management Solutions
As a full-service HR BPO solutions provider, we offer effective Organizational Development and Performance Management that
integrates aspects of Recruiting and Resourcing, Compensation, Learning and Workforce Intelligence to increase employee
engagement and improve employee performance.
Payroll Administration Solutions
Our payroll services range from end-to-end payroll outsourcing to targeted process management for each point between
employee time entry and payroll check production. We can manage the complexities of global payroll, including controls for
accuracy and compliance to local regulations.
Recruiting and Resourcing Solutions
Our global Recruiting and Resourcing Solution can free HR departments from the administrative aspects of finding, hiring and onboarding employees so that they can focus on higher-value activities such as staffing strategies and hiring decisions.
Workforce Intelligence Solutions
We offer comprehensive Workforce Intelligence solutions that turn HR information into business insight. Our solutions give HR the
business intelligence it needs to make better decisions and better manage the global workforce.
We are a market leader in HR BPO solutions, the fastest growing HR services segment and a multibillion-dollar industry, by
providing:
Established global footprint — Our operations encompass North America, Latin America, EMEA and the Asian Pacific regions.
Our clients gain the benefits of worldwide capacity, coupled with local and regional delivery capabilities.
Comprehensive service delivery model — Our delivery model includes services for employees, managers and HR staff. We offer
both self-service capabilities and live agent support from client-dedicated teams. Additionally, we focus on back-office
requirements, compliance issues and more.
Unifying technologies and ERP expertise — Convergys technologies provide a cohesive system for managing workforce
information, which allows companies to make fact-based decisions that add to business success.
Recognized HR and BPO expertise — Our wins with several large, global companies and our long-standing relationships with our
existing clients are a testament to our world-class capabilities.
We typically recognize revenues produced by HR Management once services are performed based on the number of employees or
participants served by HR Management using contractual rates. We sometimes earn supplemental revenues depending on the
satisfaction of certain service levels or achievement of certain performance measurement targets. We recognize such supplemental
revenues only after we achieve the required measurement target. Prior to commencing our HR Management services for a client,
we normally perform significant implementation activities including the installation and configuration of software, migration of
participant data and development of methods and procedures. These set-up activities or implementations can take anywhere from
one year to in excess of two years. We capitalize all direct and incremental set-up or implementation costs. To the extent
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Item 1. Business (continued)
a client pays directly for the set-up activities, we defer the proceeds. Once we begin to render services, we recognize the
capitalized costs and fees ratably over the term of the arrangement.
Strategy
Our strategy is to enable our clients to gain more value from the relationships with their customers and employees. This value
drives improved business performance and a sustainable competitive advantage for our clients. Key elements of our strategy
include:
Deliver a Differentiated Value Proposition to Clients . As a global leader in Relationship Management, Convergys provides
solutions that drive more value from the relationships our clients have with both their customers and employees. We will continue
to provide operationally superior solutions by cost-effectively enabling the best technology and processes to deliver performance
improvements for our clients. We leverage our unique blend of capabilities and strengths in four critical areas: business and
customer strategy development, business and customer analytics, technology enablement and operational excellence to deliver
superior operating performance and create a highly differentiated market position. Our strategy development capability helps
clients to better define their customer experience and workforce effectiveness strategies. Our analytics and continuous
improvement capabilities help clients better understand their customer loyalties, behaviors and segments, as well as the root
causes of challenges in key business processes. Our technology knowledge enables our clients to implement intelligent self-care
strategies for both their customers and employees. Our experience delivering excellent customer and employee operations allows
us to help clients drive revenue generation and transform the HR workforce life cycle.
Invest in Our Business to Expand our Addressable Markets and Strengthen our Solutions . Our growth strategy is to continue to
broaden and deepen our offer portfolio to provide our clients with comprehensive solutions to support their customers and
employees. We will invest in the business wherever required (i.e., acquire new capabilities, expand into new global locations,
attract and retain employee personnel with desired talent) to expand our addressable markets. We continue to identify and to
operate in attractive markets where we can effectively provide differentiated value and deliver superior returns. We intend to
expand operations globally with employees and partners who strengthen our ability to successfully serve and satisfy the demands
of multinational clients.
Expand Our Relationships with Existing Clients . We focus on client satisfaction to maintain and grow our base business. Our
intent is to grow by cross-selling new solutions and expanding our relationship management footprint within our clients’
organizations. Our clients have generally renewed their agreements, reflecting what we believe is a high degree of satisfaction
and stability in our client base.
Aggressively Grow Our Client Base . We believe that the global market for relationship management solutions is large and
underserved, and we intend to make significant investments to aggressively pursue this market. We continue to emphasize a
consultative selling approach to further strengthen our leadership in the customer management and HR outsourcing markets by
cross-selling other services. We are growing our consulting and professional services capabilities that leverage our combined
expertise in communications business support software and services development, and customer care and HR outsourcing
operating best practices.
Sustain Our High-Performance Culture to Drive Business Results . We believe that people drive performance, and we are
committed to hiring and retaining the best performers and ensuring that they are committed to the success of our clients. Our
competencies include our proven strength in recruiting, training, equipping, deploying and effectively managing very large groups
of people with diverse skills on a global basis (people), expertise in operations and cost-effective service delivery (process), and
design, development and
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delivery of innovative, scalable transactions and interaction applications (technology). We adhere to the principles of strategic HR,
including emphasizing collaboration, goal alignment, pay for performance, continuous improvement and focus on accountability
and results. We believe this approach drives superior execution, enabling us to consistently deliver significant value to our
customers.
Clients
Both our Customer Management and Information Management segments derive significant revenues from AT&T Inc. (AT&T).
Revenues from AT&T were 16.3%, 17.3% and 22.2% of our consolidated revenues for 2007, 2006 and 2005, respectively.
Customer Management
Our Customer Management segment principally focuses on developing long-term strategic outsourcing relationships with large
companies in customer-intensive industries and governmental agencies. We focus on these types of clients 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. In terms of Convergys’ revenues, our largest Customer Management clients during 2007 were
AT&T, Comcast Corporation (Comcast), The DirecTV Group, Inc. (DirecTV), General Motors Corporation and Sprint Nextel Corp.
(Sprint Nextel). We provide customer management services to Sprint Nextel as a subcontractor to International Business Machines
(IBM).
Information Management
Our Information Management segment serves clients principally by providing and managing complex billing and information
software that addresses all segments of the communications industry. In terms of Convergys’ revenues, our largest Information
Management clients during 2007 were AT&T, ALLTEL Corporation, Inc. (ALLTEL), Sprint Nextel, Time Warner Inc. and Virgin
Media, Inc.
Human Resource Management
Our Human Resource Management (HR Management) segment primarily focuses on implementing human resource and learning
services and solutions with large companies and governmental agencies. In terms of Convergys’ revenues, our largest HR
Management clients during 2007 were Boston Scientific Corporation, E.I. du Pont de Nemours & Co. (DuPont), the State of Florida,
the State of Texas and Whirlpool Corporation.
Operations
We operate approximately 80 contact centers averaging approximately 63,000 square feet per center, with approximately 42,000
production workstations with 24 hours per day and 7 days per week availability. Our contact centers are located in various parts of
the world including the United States, Canada, India and the Philippines. New contact centers are established to accommodate
anticipated growth in business or in response to a specific customer need. We are currently adding contact centers to
accommodate client needs.
Our contact centers employ a broad range of state-of-the- art technology including digital switching, intelligent call routing and
tracking, proprietary workforce management systems, case management tools, proprietary software systems, computer telephony
integration, interactive voice response, advanced speech recognition, web-based tools and relational database management
systems. This technology enables us to improve our call, web and e-mail handling and personnel scheduling, thereby increasing
our efficiency and enhancing the quality of the services we deliver to our clients and their customers and employees. With this
technology, we are able to respond to changes in client call volumes and move call volume traffic based on agent availability.
Additionally, we use this technology to collect information concerning the contacts, including number, response time, duration and
results of the contact. This information is reported to the client on a periodic basis for purposes of monitoring quality of service and
accuracy of the related billing.
Convergys Corporation 2007 Annual Report 9
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Item 1. Business (continued)
We operate two primary data centers, one in Orlando, Florida, and the other in Cincinnati, Ohio, comprising, in total, approximately
170,000 square feet of space. Our technologically advanced data centers provide 24 hours per day and 7 days per week availability
(with redundant power and communication feeds and emergency power back-up) and are designed to withstand most natural
disasters.
The capacity of our data center and contact center operations, coupled with the scalability of our billing, customer management and
HR management systems, enables us to meet initial and ongoing needs of large-scale and rapidly growing companies and
government entities. By employing the scale and efficiencies of common application platforms, we are able to provide client-specific
enhancements and modifications without incurring many of the costs of a full custom application. This allows us to be in a position
to be a value-added provider of billing, customer and employee support products and services.
Technology, Research and Development
We intend to continue to emphasize the design, development and deployment of scalable billing, customer management and HR
management systems to increase our market share, both domestically and internationally. During 2007, 2006 and 2005, we spent
$73.4 million, $84.9 million and $76.9 million, respectively, for research and development to advance the functionality, flexibility and
scalability of our products and services. The majority of this spending is incurred in Information Management and reflects our
commitment to further develop our proprietary solutions. The success of both our Customer Management and HR Management
segments depends, in part, on our advanced technology used in the delivery of services to clients. As a result, we continue to
invest in the enhancement and development of our contact center and human resource technology. We are being selective in our
approach to research and development spending, focusing our efforts on only the highest impact areas. We are also adding some
development efforts in Asia.
Our intellectual property consists primarily of proprietary business methods and software systems protected under copyright law, by
U.S. and foreign patents and applications, and by registered or pending trademarks and service marks.
We own 42 patents, 32 of which relate to Customer Management and HR Management and ten of which relate to Information
Management. Patents protect our technology and business methods that we use both to manage our internal systems and
processes effectively and give us competitive advantages in developing innovative technologies to provide customer management,
HR management and billing services to our clients. The first of these patents was issued in May 1998, while the most recent patent
was granted in September 2007. These patents generally have a life of 17 years. Additional applications for U.S. and foreign
patents currently are pending.
Our name and logo and the names of our primary software products are protected by trademarks and service marks that are
registered or pending in the U.S. Patent and Trademark Office and under the laws of more than 50 foreign countries.
Employees
We employ approximately 75,000 people, approximately 67,000 of whom work for Customer Management, approximately 4,000 of
whom work for Information Management, approximately 3,000 of whom work for HR Management, with the remainder working in
various corporate functions.
Competition
The industries in which we operate are extremely competitive. Our competitors include: (i) existing clients and potential clients with
substantial resources and the ability to provide billing and customer management and HR management capabilities internally;
(ii) other customer management companies, such as Accenture Ltd. (Accenture), APAC Customer Services Inc., IBM, ICT Group
Inc., SITEL Corp., Sykes Enterprises Inc., Teleperformance, TeleTech Holdings Inc., West Corporation and Wipro Spectramind
Services; (iii) other HR management companies, such as Accenture, Affiliated Computer Services Inc.,
10 Convergys Corporation 2007 Annual Report
Table of Contents
Items 1. (continued) , 1A., 1B. and 2.
ExcellerateHRO, Hewitt Associates Inc. and IBM; and (iv) other billing software and/or services companies such as Amdocs Ltd.,
Comverse Technology Inc. and CSG Systems International Inc. In addition, niche providers or new entrants could capture a
segment of the market by developing new systems or services that could impact our market potential.
Interests in Cellular Partnerships
We own limited partnership interests in Cincinnati SMSA Limited Partnership, a provider of wireless communications in central and
southwestern Ohio and northern Kentucky, and Cincinnati SMSA Tower Holdings LLC, an operator of cellular tower space (the
Cellular Partnerships). We account for our interests in the Cellular Partnerships under the equity method of accounting. In June
2005, the general partner of Cincinnati SMSA Limited Partnership merged certain operating assets acquired from AT&T Wireless
into the partnership. Although we had the option of contributing cash into the partnership in order to maintain our 45% ownership
interest in the partnership, we did not exercise this option. As a result of this merger, our ownership interest in this partnership
decreased to 33.8%. The merger did not impact the carrying value of our investment in the partnership. Our 45% ownership interest
in the Cincinnati SMSA Tower Holdings LLC did not change.
Cincinnati SMSA Limited Partnership conducts its operations as a part of AT&T. AT&T is the general partner and a limited partner
of Cincinnati SMSA Limited Partnership with a partnership interest of approximately 66%. AT&T is the general partner and a limited
partner of Cincinnati SMSA Tower Holdings LLC, with a partnership interest of approximately 53%.
The general partners are authorized to conduct and manage the business of the Cellular Partnerships. We, as a limited partner, do
not take part in the day-to-day management of the Cellular Partnerships. Limited partners are entitled to their percentage share of
earnings and cash distributions and are responsible for their share of losses.
Item 1A. Risk Factors
The information required by Item 1A is included in Item 7 beginning on page 38 of this Form 10-K.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own our corporate headquarters facility in Cincinnati, Ohio, which is used by the three segments, and an office complex in
Jacksonville, Florida, which is used predominantly by Customer Management and HR Management. As discussed more fully in
Note 10 of Notes to Consolidated Financial Statements, in July 2006, we sold a data center facility in Jacksonville, Florida and
entered into an agreement with the buyer to lease part of the building back for 10 years.
We lease space for offices, data centers and contact centers on commercially reasonable terms. Domestic facilities are located in
Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Kansas, Kentucky, Louisiana, Minnesota, Missouri, Nebraska, New
Mexico, New Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Utah, Virginia and Wisconsin.
International facilities are located in Argentina, Australia, Brazil, Canada, China, Egypt, England, France, Germany, Hong Kong,
Hungary, India, Indonesia, Israel, Japan, Malaysia, the Philippines, Scotland, Singapore, Spain, Sri Lanka, Switzerland, Thailand
and the United Arab Emirates. Customer Management and HR Management use the majority of these facilities. Upon the expiration
or termination of any such leases, we believe we could obtain comparable office space. As discussed more fully in Note 10 of
Notes to Consolidated Financial Statements, we lease an office complex in Orlando, Florida under an agreement that expires June
2010. Upon termination or expiration, we must either purchase the property from the lessor for $65.0 million or arrange to have the
office complex sold to a third party.
Convergys Corporation 2007 Annual Report 11
Table of Contents
Items 2. (continued) , 3. and 4.
We also lease some of the computer hardware, computer software and office equipment necessary to conduct our business. In
addition, we own computer, communications equipment, software and leasehold improvements. We depreciate these assets using
the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of
their estimated useful life or the term of the associated lease.
We believe that our facilities and equipment are adequate and have sufficient productive capacity to meet our current needs.
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 during the fourth quarter of 2007.
12 Convergys Corporation 2007 Annual Report
Table of Contents
Executive Officers of the Registrant
The following information responds to the provisions of Part III, Item 10.
As of February 28, 2008 our Executive Officers were:
Name
Age
Title
51
President and Chief Executive Officer
Andrea J. Ayers
44
President, Relationship Technology Management
Karen R. Bowman
44
General Counsel and Corporate Secretary
James P. Boyce
50
President, Communications, Technology, Media, Entertainment and
Canada Groups
John B. Gibson
41
President, HR Management
Clark D. Handy
52
Senior Vice President, Human Resources
Jean-Hervè Jenn
50
President, Information Management International
Robert A. Lento
47
President, Information Management
Earl C. Shanks
51
Chief Financial Officer
Clint F. Streit
51
President, Customer Management
Timothy M. Wesolowski
49
Senior Vice President, Controller and Treasurer
David F. Dougherty
[a]
[a]Member of the Board of Directors.
Officers are elected annually, but are removable at the discretion of the Board of Directors.
DAVID F. DOUGHERTY, President and Chief Executive Officer since April 17, 2007; President and Chief Operating Officer, 20052007; Executive Vice President, Global Information Management, 2003-2005; Chief Development Officer of the Company, 20002003.
ANDREA J. AYERS, President, Relationship Technology Management since September 1, 2007; President, Government and New
Markets, 2005-2007; Vice President, Customer Management Marketing, 2003–2005; General Manager, DBS Division, 2000–2003.
KAREN R. BOWMAN, General Counsel and Corporate Secretary since September 1, 2007; President, Human Resource
Management, 1999-2007.
JAMES P. BOYCE, President, Communications, Technology, Media, Entertainment and Canada Groups since December 1, 2007;
President, Communications, Media and Entertainment Group, 2007; President, AT&T Group, 2005–2006; Senior Vice President,
Customer Management Client Business Development, 2002-2005.
JOHN B. GIBSON, President, HR Management since September 1, 2007; Senior Vice President, HR Management Client Services,
2007; Senior Vice President, HR Management Global Operations, 2005–2007; Senior Vice President, HR Management Operations,
Americas and India, 2004–2005; Executive Vice President, EPIX Holding Corporation, 2001-2004.
CLARK D. HANDY, Senior Vice President, Human Resources since December 11, 2006; Executive Vice President, Human
Resources of Teleflex, Incorporated, 2003–2006; Vice President, Human Resources in the Global Research and Development
Division of Wyeth Pharmaceuticals, 2000–2003.
JEAN-HERVÈ JENN, President, Information Management International since August 1, 2007; President, EMEA, 2003–2007; Vice
President at Goldman-Sachs, 2000-2003.
ROBERT A. LENTO, President, Information Management since August 1, 2007; President, Communications, Technology,
Automotive Group, 2003-2007; Senior Vice President, Global Information Management Sales, 2002-2003.
EARL C. SHANKS, Chief Financial Officer since November 13, 2003; Senior Vice President and Chief Financial Officer of NCR
Corporation, 2001-2003.
CLINT F. STREIT, President, Customer Management since September 1, 2007: Executive Vice President, Global Customer
Management Operations, 2006–2007; Executive Vice President, North American Customer Management
Convergys Corporation 2007 Annual Report 13
Table of Contents
Operations, 2005-2006; Chief Operating Officer, RMH Teleservices, 2002-2004.
TIMOTHY M. WESOLOWSKI , Senior Vice President, Controller and Treasurer since December 5, 2007; Senior Vice President
and Controller, 2005-2007: Vice President and Treasurer, 2004–2005; Director of Finance/Group Controller, Fiberglass-Composite
Pipe Group of Ameron International, 2002-2004.
14 Convergys Corporation 2007 Annual Report
Table of Contents
Part II
Item 5. Market for the Registrant’s Common Equity, Related Security Holder Matters and Issuer
Purchases of Equity Securities
Convergys Corporation (symbol: CVG) common shares are listed on the New York Stock Exchange. As of January 31, 2008, there
were 11,252 holders of record of the 126,756,263 common shares of Convergys, excluding amounts held in Treasury (181,723,310
outstanding common shares of Convergys, of which 54,967,047 were held in Treasury).
The high, low and closing prices of our common shares for each quarter in 2007 and 2006 are listed below:
Quarter
2007
High
Low
Close
2006
High
Low
Close
1st
2nd
3rd
4th
$27.18
$23.84
$25.41
$27.26
$23.95
$24.24
$24.85
$14.67
$17.36
$19.18
$15.86
$16.46
$18.67
$15.43
$18.21
$19.87
$17.73
$19.50
$21.26
$18.09
$20.65
$24.93
$19.91
$23.78
We did not declare any dividends during 2007 or 2006 and do not anticipate doing so in the near future.
During 2007, the Company fully utilized the previous share repurchase authorizations. On August 14, 2007, the Company’s Board
of Directors authorized the repurchase of an additional 20 million of the Company’s common shares. We repurchased 9.9 million
shares of Convergys common shares for $184.0 million during 2007 pursuant to these authorizations. At December 31, 2007, the
Company was authorized to repurchase up to 14.7 million additional common shares.
From January 1, 2008 to February 22, 2008, we purchased 1.9 million shares of Convergys stock for $29.0 million pursuant to
these authorizations.
Our fourth quarter 2007 repurchases of common shares were as follows:
Period
Total
Number
Of Shares
Purchased
Average
Price Paid
Per Share
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans Or
Programs
Maximum Number
of Shares That
May Yet Be
Purchased Under
The Plans
or Programs at
12/31/07
October
1,013,247
$
17.52
1,013,247
16,862,111
November
1,047,868
$
17.13
1,047,868
15,814,243
December
1,071,144
$
16.80
1,071,144
14,743,099
Convergys Corporation 2007 Annual Report 15
Table of Contents
Performance Graph
The following Performance Graph compares, for the period from December 31, 2002 through December 31, 2007, the percentage
change of the cumulative total shareholder return on the Company’s common shares with the cumulative total return of the S&P
500 Stock Index and the Custom Composite Index. The Custom Composite Index consists of our peer groups.
Dec02
Dec03
Dec04
Dec05
Dec06
Dec07
Convergys Corp.
$100
$115
$ 99
$105
$157
$109
S&P 500 ®
$100
$129
$143
$150
$173
$183
Custom Composite Index
$100
$138
$162
$170
$180
$167
The Custom Composite Index consists of Affiliated Computer Services, Inc., Amdocs LTD, APAC Customer Services Inc.,
Comverse Technology Inc., CSG Systems International Inc., Hewitt Associates Inc. (beginning 3Q 2002), ICT Group, Inc., Sykes
Enterprises, Inc., and Teletech Holdings Inc.
Copyright © 2008, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
16 Convergys Corporation 2007 Annual Report
Table of Contents
Item 6. Selected Financial and Operating Data
2007
2006
2005
2004
2003
$2,844.3
$2,789.8
$2,582.1
$2,487.7
$2,288.8
2,599.5
2,536.9
2,358.5
2,302.2
1,996.4
244.8
252.9
223.6
185.5
292.4
14.3
11.8
12.4
2.0
(12.6)
4.0
2.7
(1.4)
(3.8)
(1.3)
Interest expense
(17.5)
(22.8)
(21.2)
(10.3)
(6.9)
Income before income taxes
245.6
244.6
213.4
173.4
271.6
76.1
78.4
90.8
61.9
100.0
$ 169.5
$ 166.2
$ 122.6
$ 111.5
$ 171.6
Basic
$
1.26
$
1.20
$
0.88
$
0.79
$
1.18
Diluted
$
1.23
$
1.17
$
0.86
$
0.77
$
1.15
(Amounts in Millions Except Per Share Amounts)
Results of Operations
Revenues
Costs and expenses
[1]
Operating income
Equity in earnings (loss) of Cellular
Partnerships [2]
Other income (expense), net
Income taxes [3]
Net income
Earnings per share:
Weighted average common shares outstanding:
Basic [4]
Diluted
[4]
134.1
138.4
140.0
141.4
145.7
137.7
141.7
142.9
145.4
148.8
$2,564.2
$2,540.3
$2,411.4
$2,198.8
$1,810.2
259.9
343.5
432.2
351.7
134.8
1,521.7
1,455.1
1,355.1
1,285.3
1,151.7
$ 209.9
$ 353.4
$ 232.7
$ 195.4
$ 373.5
Financial Position
Total assets
Total debt
Shareholders’ equity
Other Data
Cash provided (used) by:
Operating activities
Investing activities
(74.8)
(127.5)
(138.3)
(364.9)
(237.2)
Financing activities
(250.7)
(186.0)
43.2
190.7
(111.3)
108.6
256.9
206.8
114.2
174.7
Free cash flows
[1]
[2]
[3]
[4]
[5]
[5]
This includes restructuring charges of $3.4, $12.5, $21.2 and $30.4 recorded during 2007, 2006, 2005 and 2004, respectively.
Equity in earnings (loss) of Cellular Partnerships includes a $9.9 ($6.4 after tax) loss from the settlement of a lawsuit during 2003.
In 2005, we incurred $11.4 in incremental tax expenses related to the repatriation of approximately $187 in funds from foreign subsidiaries.
Basic and diluted common shares outstanding at December 31, 2007 were 128.6 and 131.8, respectively.
Free cash flows are not defined under accounting principles generally accepted in the United States and are calculated as cash flows from operations excluding the impact
of the accounts receivable securitization less capital expenditures (net of proceeds from disposals). The Company uses free cash flow to assess the financial performance
of the Company. Management believes that free cash flow is useful to investors because it relates the operating cash flow of the Company to the capital that is spent to
continue and improve business operations, such as investment in the Company’s existing businesses. Further, free cash flow facilitates management’s ability to strengthen
the Company’s balance sheet, to repurchase the Company’s common shares and to repay the Company’s debt obligations. Limitations associated with the use of free
cash flow include that it does not represent the residual cash flow available for discretionary expenditures as it does not incorporate certain cash payments including
payments made on capital lease obligations or cash payments for business acquisitions. Management compensates for these limitations by using both the non-GAAP
measure, free cash flow, and the GAAP measure, cash from operating activities, in its evaluation of performance. There are no material purposes for which we use this
non-GAAP measure beyond the purposes described above. For more detail and a reconciliation of cash flows from operations to free cash flows, see the Financial
Condition, Liquidity and Capital Resources section of this report.
Convergys Corporation 2007 Annual Report 17
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
(Amounts in Millions Except Per Share Amounts)
Overview
Customer Management
Our Customer Management segment (formerly Customer Care), which accounted for 66% of our consolidated revenues in 2007,
manages customer relationships on behalf of our clients through our multi-channel customer management contact centers and
through consulting engagements. Phone and Web-based agent-assisted service channels provide customers with assistance
across the entire customer lifecycle. We deliver these services using a variety of tools including computer telephony integration,
interactive voice response, advanced speech recognition, knowledge-based management and the Internet through agent-assisted
and self-service channels.
Customer Management principally focuses on developing long-term strategic outsourcing relationships with large companies and
governmental agencies with the need for more cost-effective customer management services. As a global leader in Relationship
Management, we provide solutions that enhance the value of customer relationships, turning customer experience into a strategic
differentiator.
As more fully described below under the heading, “Customer Management,” Customer Management’s revenues increased 3% from
the prior year to $1,866.1. The revenue growth in 2007 came from the communications vertical. Customer Management’s 2007
operating income and operating margin were $176.7 and 9.5%, respectively, compared with $202.4 and 11.2% in 2006. The
decline in operating income and operating margin in 2007 reflects additional foreign exchange-related expense due to the
weakened U.S. dollar as well as capacity expansion costs associated with ramping new business. We continue to address these
challenges and are focused on driving growth in revenue and operating income for 2008 as the demand for outsourcing and
automated solutions is strong.
Information Management
Our Information Management segment serves clients principally by providing and managing complex billing and information
software that addresses all segments of the communications industry. We provide our software products in one of three delivery
modes: licensed, build-operate-transfer (BOT) or outsourced.
In 2007, Information Management accounted for 25% of our consolidated revenues. Data processing revenues accounted for 33%
and professional and consulting services accounted for 36% of Information Management’s revenues in 2007. The remaining
Information Management revenues consisted of license and related support and maintenance fees earned under perpetual and
term license arrangements. As more fully described below under the heading “Information Management,” Information
Management’s revenues of $723.0 decreased 7% compared to the prior year mainly due to two large North American client
migrations. Information Management’s 2007 operating income and operating margin were $130.9 and 18.1%, respectively,
compared with $124.5 and 16.1%, respectively, in 2006. This significant improvement resulted primarily from our continued focus
on reducing costs.
Information Management continues to face competition as well as consolidation within the communications industry. In December
2006, AT&T and Bell South Corporation (Bell South) merged. Prior to the merger, Cingular (a joint venture between AT&T and Bell
South) was our largest client in terms of revenue. As a result of the merger, AT&T is now our largest client in terms of revenue. We
have assisted AT&T with its strategy to migrate subscribers off of the AT&T Wireless billing systems (that we supported) onto
AT&T’s two systems (one of which we support through a managed services agreement). The migration was completed during early
2007. In January 2008, AT&T informed us that it intends to migrate its subscribers from the system that we currently support
through a managed services agreement onto AT&T’s other system over the next two years. Once this migration is complete, AT&T
will continue to be an important client. In September 2005, Sprint PCS, a large data processing outsourcing client, completed its
acquisition of Nextel Communications. In
18 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
2006, Sprint Nextel informed us that it intended to consolidate its billing systems onto a competitor’s system. Sprint Nextel’s current
plan is to complete the migration of most of its subscribers from our billing system during 2008. The migration began in 2006.
Information Management continues to make steady progress around the world, while dealing with the near-term challenges due to
client migrations in North America. During the past year, we entered into new Infinys license arrangements with multiple clients. We
believe this is evidence of the market’s acceptance of Infinys, and we see an opportunity to build on these successes.
Human Resource Management
Our Human Resource Management (HR Management) segment (formerly Employee Care) provides a full range of human resource
business processing outsourcing solutions including benefits administration, compensation, human resource administration,
learning, payroll administration, performance management, recruiting and sourcing services to large companies and governmental
entities. We take advantage of our economies of scale in order to standardize human resource processes across departments,
business lines, language differences and national borders. For 25 years, our unique combination of domain expertise, operational
excellence and innovative technologies has delivered process improvement and actionable business insight to clients’ customers
and employees that now span more than 70 countries and 35 languages.
HR Management accounted for 9% of our consolidated revenues in 2007. As more fully described below under the heading
“Human Resource Management,” HR Management’s revenues increased 21% to $255.2 from the prior year and its operating loss
remained essentially flat at $38.3 reflecting additional costs incurred during early stages of new client programs. During the past
few years, we have transformed HR Management into a leading player in the growing human resource outsourcing market. In
connection with our efforts to grow the business and build a global infrastructure of human resource expertise and know-how, we
have incurred significant start-up costs. Furthermore, despite our success in winning long-term outsourcing arrangements with
several clients, the sales cycles for these arrangements have ranged from twelve to twenty-four months. For these reasons,
coupled with the fact that we are in the early stages with many of our outsourcing arrangements, where margins tend to be lower,
we have generated significant operating losses over the past few years.
Demand for human resource outsourcing is strong and we are one of the leaders in the large and growing human resource
outsourcing market. Based on the contracts signed to date and opportunities in our sales pipeline, we remain confident that we will
become profitable with this business in the future.
Convergys Corporation 2007 Annual Report 19
Table of Contents
Results of Operations
Consolidated Results
% Change
% Change
2007
2006
$2,844.3
$2,789.8
2
$2,582.1
8
1,837.9
1,754.8
5
1,583.0
11
554.9
542.0
2
530.1
2
73.4
84.9
(14)
76.9
10
Depreciation
115.4
130.1
(11)
126.1
3
Amortization
14.5
12.6
15
21.2
(41)
3.4
12.5
(73)
21.2
(41)
2,599.5
2,536.9
244.8
252.9
14.3
11.8
4.0
2.7
Interest expense
(17.5)
Income Before Income Taxes
Revenues
07 vs. 06
2005
06 vs. 05
Costs and Expenses:
Costs of products and services [1]
Selling, general and administrative expenses
Research and development costs
Restructuring charges
Total costs and expenses
2,358.5
8
(3)
223.6
13
21
12.4
(5)
48
(1.4)
—
(22.8)
(23)
(21.2)
8
245.6
244.6
0
213.4
15
76.1
78.4
(3)
90.8
(14)
Net Income
$ 169.5
$ 166.2
2
$ 122.6
36
Diluted Earnings Per Common Share
$
$
5
$
36
Operating Income
Equity in earnings of Cellular Partnerships
Other income/(expense), net
Income taxes
Operating Margin
[1]
1.23
8.6%
1.17
9.1%
2
0.86
8.7%
Exclusive of depreciation and amortization, with the exception of amortization of deferred charges as disclosed in Note 2 of Notes to Consolidated Financial Statements.
2007 vs. 2006
Consolidated revenues for 2007 were $2,844.3, up 2% from 2006. The increase reflects 3% growth in Customer Management
revenues and 21% growth in HR Management revenues. Revenues from Information Management declined 7% compared to prior
year, primarily due to anticipated client migrations. Operating income was $244.8 compared to $252.9 in the previous year. The
decline in operating income in 2007 was primarily due to $25.7 decline in Customer Management’s operating income, which was
partially offset by a decrease of $11.6 in long-term incentive plan expenses recorded at Corporate, largely reflecting the impact of
our recent share price performance and Convergys’ pay-for-performance policy, as well as a $6.4 increase in operating income at
Information Management. Operating income included restructuring charges of $3.4 and $12.5 during 2007 and 2006, respectively.
As a percentage of revenues, costs of products and services were 64.6% compared to 62.9% in the prior year. The 170 basis point
increase in costs of products and services as a percentage of revenues was due to an increase in Customer Management costs
due to the negative impact of the weakening U.S. dollar as well as higher labor costs, and an increase in HR Management costs
largely due to new client programs and implementations. These increases were partially offset by lower costs of products and
services as a percentage of revenues incurred at Information Management. Selling, general and administrative expense of $554.9
increased 2% compared to the prior year. As a percentage of revenues, selling, general and administrative expenses were 19.5%
compared to 19.4% in the prior year. This increase primarily reflects additional capacity expansion costs at Customer Management.
The 14% decrease in research and development costs largely reflects increased efficiency and focused spending on Infinys
software. The 11% decrease in depreciation expense primarily reflects assets that became fully depreciated. The 15% increase in
amortization expense reflects impairment of certain acquired intangible assets in the fourth quarter of 2007.
As discussed more fully under the heading, “Restructuring Charges,” we recorded net restructuring charges of $3.4 in 2007 versus
$12.5 in 2006. In addition, operating income for 2007 was positively impacted by a decrease of $11.6 in long-term incentive plan
expense recorded at Corporate
20 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
largely reflecting the impact of our recent share price performance and Convergys’ pay-for-performance policy. In 2007, we
recorded equity income in the Cellular Partnerships of $14.3 compared to $11.8 recorded in 2006. Interest expense of $17.5
decreased from $22.8 in the prior year primarily reflecting a lower level of debt. The $1.3 increase in other income/(expense), net in
2007 was mainly due to decrease in our foreign exchange transaction losses. Our effective tax rate was 31.0% for 2007 compared
to 32.0% in the prior year. The lower effective tax rate in 2007 was largely due to an increase in income in countries with current tax
holidays. See Note 6 of Notes to Consolidated Financial Statements for further discussion related to effective tax rates.
As a result of the foregoing, 2007 net income and earnings per diluted share increased to $169.5 and $1.23 compared with $166.2
and $1.17 in 2006. Beginning January 1, 2007, we adopted FIN 48, “Accounting for Uncertainty in Income Taxes.” Refer to Note 6
of the Notes to Consolidated Financial Statements for details related to the adoption of this Standard. The adoption of this Standard
resulted in a reduction of $7.8 to our retained earnings at January 1, 2007.
2006 vs. 2005
Consolidated revenues for 2006 were $2,789.8, up 8% from 2005. The increase reflects 10% growth in Customer Management
revenues and 30% growth in HR Management revenues. Revenues from Information Management were relatively flat compared to
the prior year. Operating income of $252.9 increased 13% compared to the prior year, while operating margin grew to 9.1% versus
8.7% in 2005. Revenue growth with existing and new clients and increased productivity, utilization and efficiency contributed to the
improvement in results. Operating income included restructuring charges of $12.5 in 2006 and $21.2 in 2005.
As a percentage of revenues, costs of products and services were 62.9% compared to 61.3% in the prior year. The 160 basis point
increase in costs of products and services as a percentage of revenues was due to an increase in HR Management costs due to
new client programs and implementations, and an increase in Information Management costs largely due to a change in the
revenue mix from data processing to relatively lower margin professional and consulting services. These increases were partially
offset by lower costs of products and services as a percentage of revenues incurred at Customer Management. Selling, general
and administrative expense of $542.0 increased 2% compared to the prior year. As a percentage of revenues, selling, general and
administrative expenses were 19.4% compared to 20.5% in the prior year, reflecting savings from ongoing cost actions and
operational efficiencies. The 10% increase in research and development costs reflects increased spending by Information
Management on Infinys software. The 41% decrease in amortization expense primarily reflects acquired client contracts that
became fully amortized during the first quarter of 2006.
As discussed more fully under the heading, “Restructuring Charges,” we incurred net restructuring charges of $12.5 in 2006 versus
$21.2 in 2005. In addition, operating income for 2006 was negatively impacted by an increase of approximately $12 in long-term
compensation expenses, recorded at corporate, related to restricted stock awards, stock options and long-term performance cash
awards. The increase in the long-term compensation expense in 2006 primarily related to restricted stock units awarded in 2006
pursuant to the Company’s long-term incentive plan. Beginning January 1, 2006, we adopted SFAS 123(R), “Accounting for StockBased Compensation.” The primary effect of the adoption of SFAS 123(R) resulted in compensation expense being recorded for
stock options. See Note 9 to the Notes to Consolidated Financial Statements for further discussion related to stock-based
compensation plans. The impact of adoption of this accounting Standard in 2006 was an additional expense of approximately $1.
In 2006, we recorded equity income in the Cellular Partnerships of $11.8 compared to $12.4 recorded in 2005. Interest expense of
$22.8, compared to $21.2 in the prior year, reflects higher interest rates on lower levels of debt.
Convergys Corporation 2007 Annual Report 21
Table of Contents
Other income of $2.7 compared to other expense of $1.4 in the prior year, mainly as a result of higher interest income. Our effective
tax rate was 32.0% for 2006 compared to 42.6% in 2005. The lower effective tax rate in 2006 was largely due to improved
international performance allowing the realization of previously unrecognized foreign deferred tax assets and an increase in income
in countries with current tax holidays. See Note 6 of Notes to Consolidated Financial Statements for further discussion related to
effective tax rates. The higher effective rate in 2005 largely related to additional tax expense resulting from repatriating
approximately $187 in funds from foreign subsidiaries.
As a result of the foregoing, 2006 net income and earnings per diluted share increased to $166.2 and $1.17 compared with $122.6
and $0.86 in 2005.
Customer Management
% Change
2007
2006
07 vs. 06
% Change
2005
06 vs. 05
Revenues:
Communications
$1,075.0
$ 953.2
Technology
155.2
157.1
Financial services
259.0
Other
376.9
1,866.1
1,803.1
1,244.1
380.7
Total revenues
13
$ 886.6
8
(1)
139.3
13
262.2
(1)
246.3
6
430.6
(12)
369.3
17
3
1,641.5
10
1,180.4
5
1,077.2
10
335.8
13
308.2
9
—
Costs and Expenses:
Costs of products and services
Selling, general and administrative expenses
Research and development
costs
4.6
8.6
(47)
8.6
Depreciation
55.9
65.4
(15)
68.7
(5)
Amortization
4.1
4.0
3
10.7
(63)
—
6.5
13.8
(53)
1,689.4
1,600.7
6
1,487.2
8
$ 176.7
$ 202.4
(13)
$ 154.3
31
Restructuring charges
Total costs and expenses
Operating
Income
Operating
Margin
9.5%
11.2%
(100)
9.4%
2007 vs. 2006
Revenues
Customer Management’s revenues for 2007 were $1,866.1, up 3% from 2006. Revenue growth resulted from several existing
clients in the communication vertical.
Revenues from the communication vertical increased 13% from the prior year, reflecting growth with several large wireless and
cable clients, partially offset by a reduction in spending from a large communication client reflecting lower call volume due to a
reduction in their programs. Volumes from this client have stabilized by the end of the year. Revenues from the technology vertical
and financial services vertical decreased 1%, respectively, reflecting completion of programs with clients. Other revenues, which
are comprised of clients outside of Customer Management’s three largest industries, decreased 12% from the prior year. This was
primarily due to declines in transportation and government programs.
Costs and Expenses
Customer Management’s total costs and expenses were $1,689.4, a 6% increase from the prior year. Customer Management’s
costs of products and services increased 5% to $1,244.1 from the prior year. As a percentage of revenues, costs of products and
services were 66.7% for 2007 compared to 65.5% in the prior year. The impact of revenue growth and cost saving initiatives were
offset by higher expenses of approximately $18 resulting from the impact of a weakened U.S. dollar, net of gains realized from the
settlement of hedged instruments, as well as higher labor costs. Customer Management serves a number of its U.S.-based clients
using contact center capacity in Canada, India and the Philippines. Although the contracts with these clients are typically priced in
U.S. dollars, a substantial portion of the costs incurred to operate these non-U.S. contact centers is denominated in Canadian
dollars, Indian rupees or Philippine pesos, which represents a foreign exchange exposure. During 2007 and 2006, these currencies
strengthened against the U.S. dollar. Accordingly, the expenses of operating these contact centers, once translated into U.S.
dollars, have increased.
22 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
As discussed in further detail in the section titled “Market Risk,” we hedge this exposure by entering into foreign currency forward
contracts and options.
Selling, general and administrative expenses of $380.7 increased 13% compared to the prior year. This reflects higher costs from
capacity expansions during the current year and also costs from adding sales and consulting resources. As a percentage of
revenues, selling, general and administrative expenses were 20.4% for 2007 compared to 18.6% in the prior year. Compared to the
prior year, research and development costs decreased $4, reflecting reduced spending on a Customer Management application.
The 15% decrease in depreciation expense mostly reflects data center assets, which are now being managed in a shared service
environment. As discussed more fully under the heading, “Restructuring Charges,” Customer Management recorded a $6.5
restructuring charge in 2006.
Operating Income
As a result of the foregoing, Customer Management’s operating income and operating margin were $176.7 and 9.5%, respectively,
compared with $202.4 and 11.2%, respectively, in the prior year.
2006 vs. 2005
Revenues
Customer Management’s revenues for 2006 were $1,803.1, up 10% from 2005. This increase reflects strong revenue growth from
several clients in each of Customer Management’s verticals — Communications, Technology, Financial Services and Other.
Revenues from the communication services vertical increased 8% from the prior year, reflecting growth with several large
broadband and wireless clients, partially offset by a reduction in spending from two wireless providers including AT&T. The lower
spending by AT&T in 2006 compared to the prior year reflects lower call volume due to a number of factors including cancellation of
certain AT&T Wireless programs. This impacted the revenues for the first half of the year. AT&T revenues for the second half of
2006 increased compared to the prior year. The 13% increase in revenues from technology clients reflects increased spending from
hardware clients. Revenues from financial services vertical were up 6% from the prior year, reflecting growth from several credit
card issuers. Other revenues, which are comprised of clients outside of Customer Management’s three largest verticals, increased
17%, reflecting revenues generated from a large global manufacturing client and increased spending by several healthcare and
retail clients.
Costs and Expenses
Customer Management’s total costs and expenses were $1,600.7, an 8% increase from the prior year. Customer Management’s
costs of products and services increased 10% to $1,180.4 from the prior year. As a percentage of revenues, costs of products and
services were 65.5% for 2006, down 10 basis points from the prior year. This decrease reflects improved agent utilization as well as
the impact of restructuring and other cost actions taken to streamline the business, partially offset by higher expenses of
approximately $26 resulting from the impact of a weakened U.S. dollar, net of gains realized from the settlement of hedged
instruments. As discussed in further detail in the section titled “Market Risk,” we hedge this exposure by entering into foreign
currency forward contracts and options.
Selling, general and administrative expenses of $335.8 increased 9% compared to the prior year. As a percentage of revenues,
selling, general and administrative expenses were 18.6%, down 20 basis points from 18.8% in the prior year. Savings realized from
ongoing cost actions were partially offset by higher expenses of approximately $6 resulting from the impact of a weakened U.S.
dollar. The 63% decrease in amortization expense reflects acquired client contracts, which became fully amortized in early 2006.
As discussed more fully under the heading, “Restructuring Charges,” Customer Management incurred $6.5 in restructuring charges
in 2006. This compares to a net restructuring charge of $13.8 recorded in 2005.
Convergys Corporation 2007 Annual Report 23
Table of Contents
Operating Income
As a result of the foregoing, Customer Management’s operating income and operating margin were $202.4 and 11.2%,
respectively, compared with $154.3 and 9.4%, respectively, in the prior year.
Information Management
% Change
2007
2006
07 vs. 06
% Change
2005
06 vs. 05
Revenues:
Data processing
$239.6
$301.1
(20)
$340.5
Professional and consulting
262.8
287.2
(8)
267.6
7
License and other
220.6
187.0
18
170.0
10
723.0
775.3
(7)
778.1
—
Costs of products and services
382.7
420.1
(9)
400.2
5
Selling, general and administrative expenses
101.4
114.4
(11)
125.9
(9)
Research and development costs
67.2
75.0
(10)
66.6
13
Depreciation
32.4
33.6
(4)
32.3
4
Amortization
5.0
6.9
(28)
8.0
(14)
Restructuring charges
3.4
0.8
NA
—
—
592.1
650.8
(9)
633.0
3
$130.9
$124.5
5
$145.1
(14)
Total revenues
(12)
Costs and Expenses:
Total costs and expenses
Operating Income
Operating Margin
18.1%
16.1%
18.6%
2007 vs. 2006
Revenues
Information Management’s revenues of $723.0 in 2007 were down 7% compared to the prior year, primarily due to the negative
impact of the AT&T and Sprint Nextel client migrations.
Data processing revenues of $239.6 decreased 20% from the prior year. This decrease reflects the changing dynamics of
Information Management’s billing relationship with AT&T, as AT&T migrated AT&T subscribers to an in-house managed service
environment. The AT&T migration was completed earlier in 2007. Professional and consulting revenues of $262.8 decreased 8%
from the prior year. This decrease was also largely attributable to AT&T, due to a reduction in migration services. License and other
revenues increased 18% to $220.6 from the prior year, reflecting strong license revenue increases with several international clients.
Revenues from Sprint Nextel were down 13% from the prior year. We expect revenues from Sprint Nextel to continue to decline as
they migrate subscribers from our billing system during 2008.
Costs and Expenses
Information Management’s total costs and expenses were $592.1, down 9% from the prior year. Information Management costs of
products and services decreased 9% to $382.7 from the prior year. As a percentage of revenues, costs of products and services
were 52.9% for 2007 compared to 54.2% in the prior year. This decrease primarily reflects cost reductions and growth in license
and other revenues. Selling, general and administrative expenses decreased 11% from the prior year, reflecting benefits from
continued focus on reducing costs. As a percentage of revenues, selling, general and administrative expenses decreased to 14.0%
from 14.8% in 2006. The 10% decrease in research and development costs reflects increased efficiency and focused spending on
Infinys software. The 28% decrease in amortization expense mostly reflects accelerated amortization of acquired software in the
second quarter of 2006. Additionally, as discussed in further detail under the heading, “Restructuring Charges,” Information
Management recorded a restructuring charge of $3.4 in the third quarter of 2007. This compares to a net restructuring charge of
$0.8 in 2006.
Operating Income
As a result of the foregoing, Information Management’s operating income and operating margin were $130.9 and 18.1%,
respectively, compared with $124.5 and 16.1%, respectively, in the prior year.
24 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
2006 vs. 2005
Revenues
Information Management’s revenues of $775.3 in 2006 were relatively flat compared to the prior year. Increased revenues from
professional and consulting and license and other revenues were offset by a decline in data processing revenues.
Data processing revenues of $301.1 decreased 12% from the prior year. This decrease reflects the changing dynamics of
Information Management’s billing relationship with AT&T, as AT&T migrates subscribers from its outsourced environment to an inhouse managed service environment. The decrease from AT&T was partially offset by increases from a large wireless client.
Professional and consulting revenues of $287.2 increased 7% from the prior year. This increase was attributable to the increased
spending by a large Latin American client and several other international customers, partially offset by reduced spending by AT&T.
License and other revenues increased 10% to $187.0 from the prior year, reflecting the continuing demand for convergent services
and broad acceptance of our billing system capabilities.
Costs and Expenses
Information Management’s total costs and expenses were $650.8, up 3% from the prior year. Information Management costs of
products and services increased 5% to $420.1 from the prior year. As a percentage of revenues, costs of products and services
were 54.2% for 2006, up 280 basis points from 51.4% in the prior year. This increase primarily reflects the shift in revenue mix from
data processing to relatively lower margin professional and consulting services. Selling, general and administrative expenses
decreased 9% from the prior year. As a percentage of revenues, these expenses decreased to 14.8% from 16.2% in 2005,
reflecting savings realized from ongoing operational improvements and benefits from cost actions. The 13% increase in research
and development costs reflects increased spending on Infinys software. The 14% decrease in amortization expense reflects the
impact of acquired software, which became fully amortized during the second quarter of 2005, partially offset by accelerated
amortization of acquired software in the second quarter of 2006. Additionally, as discussed in further detail under the heading,
“Restructuring Charges,” Information Management recorded a net $0.8 in restructuring charges in 2006.
Operating Income
As a result of the foregoing, Information Management’s operating income and operating margin were $124.5 and 16.1%,
respectively, compared with $145.1 and 18.6%, respectively, in the prior year.
Human Resource Management
% Change
Revenues
2007
2006
$255.2
$211.4
211.1
66.7
07 vs. 06
% Change
2005
06 vs. 05
21
$162.5
30
154.0
37
105.4
46
77.9
(14)
90.6
(14)
(24)
Costs and Expenses:
Costs of products and services
Selling, general and administrative expenses
Research and development costs
1.6
1.3
23
1.7
Depreciation
8.7
12.8
(32)
11.4
12
Amortization
5.4
1.7
NA
2.5
(32)
—
2.1
(100)
1.3
62
293.5
249.8
17
212.9
17
$ (38.3)
$ (38.4)
0
$ (50.4)
24
Restructuring charges
Total costs and expenses
Operating Income
2007 vs. 2006
Revenues
HR Management’s revenues for 2007 were $255.2, up 21% from 2006. Revenue growth was largely from clients in early stage, live
operation.
Costs and Expenses
HR Management’s total costs and expenses were $293.5, up 17% from 2006. HR Management’s costs of products and services for
2007 were $211.1, up 37% from 2006. As a percentage of revenues, costs of providing services were 82.7% for 2007 compared to
72.8% in 2006. This increase
Convergys Corporation 2007 Annual Report 25
Table of Contents
largely related to recent client program implementations. In the early stages of client programs, margins tend to be lower. However,
as we become more efficient with the delivery of the services, our margins tend to improve. Further, there were some
implementation costs that were expensed during the current year. As discussed more fully in the “Deferred Charges” section of
Note 2 of the Notes to Consolidated Financial Statements, we typically defer implementation costs associated with a contract and
amortize them ratably over the life of the contract. When implementation costs are deemed not recoverable in accordance with our
accounting policy, we expense such excess costs even if the contract is profitable over its term. Additionally, $25.3 of revenue
recognized in this period was pass-through in nature. Selling, general and administrative expenses of $66.7 decreased 14% from
2006, reflecting improved employee productivity. As a percentage of revenues, selling, general and administration expenses were
26.1% in 2007 compared to 36.8% in 2006, primarily reflecting revenue growth.
The $3.7 increase in amortization expense largely reflects impairment of an acquired intangible asset in the fourth quarter of 2007.
Additionally, as discussed in further detail under the heading, “Restructuring Charges,” HR Management recorded a restructuring
charge of $2.1 in 2006.
Operating Income
As a result of the foregoing, HR Management’s 2007 operating loss remained essentially flat at $38.3 compared to the prior year.
2006 vs. 2005
Revenues
HR Management’s revenues for 2006 were $211.4, up 30% from 2005. Revenue growth was largely due to the DuPont and State
of Texas programs.
Costs and Expenses
HR Management’s total costs and expenses were $249.8, up 17% from 2005. HR Management’s costs of products
and services for 2006 were $154.0, up 46% from 2005. As a percentage of revenues, costs of providing services increased to
72.8% from 64.9% in 2005. This increase largely related to recent client program implementations. In the early stages of client
programs, margins tend to be lower. However, as we become more efficient with the delivery of the services, our margins tend to
improve. Further, there were some additional costs incurred in the current year primarily related to the impact of client scope and
schedule changes that were not eligible for capitalization. Selling, general and administrative expenses of $77.9 decreased 14%
from 2005. This decrease primarily reflects savings realized from cost reduction initiatives. As a percentage of revenues, selling,
general and administration expenses decreased to 36.8% from 55.8% in 2005.
Research and development, depreciation and amortization expense incurred by HR Management in 2006 were 7.5% of revenue
compared with 9.6% in 2005. Additionally, as discussed in further detail under the heading, “Restructuring Charges,” HR
Management incurred a restructuring charge of $2.1 in 2006 versus $1.3 in 2005.
Operating Income
As a result of the foregoing, HR Management’s 2006 operating loss improved to $38.4 from $50.4 in 2005.
Restructuring Charges
As discussed more fully in Note 4 to Notes to Consolidated Financial Statements, we recorded the following restructuring charges:
2007
During the third quarter of 2007, we recorded a restructuring charge of $3.4 at Information Management related to a facility closure
in the United Kingdom. This action was a result of the facility consolidation in the United Kingdom that started during the fourth
quarter of 2006 as discussed in more detail below. The $3.4 accrual is equal to the future costs associated with the abandoned
facility, net of the proceeds from any probable future sublease agreements. We used estimates, based on consultation with our real
estate advisors, to arrive at the
26 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
proceeds from any future sublease agreements. We will continue to evaluate such estimates in recording the facilities
abandonment charge. Consequently, there may be additional reversals or charges relating to this facility closure in the future. At
December 31, 2007, this restructuring reserve had an outstanding balance of $2.6, which will be paid over several years until the
lease expires.
2006
We initiated a restructuring plan in the fourth quarter of 2006 to rationalize facility costs, further streamline our operations in order to
align our resources to support growth, and to shift the geographic mix of some of our resources. The plan resulted in a net
restructuring charge of $12.5 and included $24.1 of severance costs, $0.5 of facility closure costs and the reversal of $12.1 in
facility abandonment costs. Restructuring actions were taken in each business segment, of which $6.5 related to Customer
Management, $0.8 related to Information Management, $2.1 related to HR Management and $3.1 related to Corporate.
The $24.1 severance charge is being paid pursuant to our existing severance policy and employment agreements and includes
cash-related payments of $21.3 and a non-cash charge of $2.8 related to the acceleration of equity-based awards. These actions,
which affected approximately 700 professional employees, were completed in 2007. The $0.5 of facility closure costs relate to an
additional accrual, resulting from changes in the sublease estimates, for a property that was abandoned in 2005. Our 2002
restructuring charges included facility abandonment costs related to certain U.K. locations. In the fourth quarter of 2006, we made a
decision to consolidate our operations in the U.K. and move into one of the facilities that was originally abandoned in 2002. This
resulted in the reversal of $12.1 at December 31, 2006. Completion of the facility consolidation at this location resulted in the
recording of additional reserves in the third quarter of 2007, as discussed above.
Below is the summary of the 2006 net restructuring charge of $12.5 ($8.5 after tax) by segment:
Severance costs
Facility related costs/(reversal)
Customer
Management
$
6.5
—
Information
Management
$
12.9
(12.1)
HR
Management
$
1.6
0.5
Corp.
$ 3.1
—
Total
$ 24.1
(11.6)
Net restructuring
$
$
$
$ 3.1
$ 12.5
6.5
0.8
2.1
Restructuring liability activity for the fourth quarter 2006 plan consisted of the following:
2007
Balance at January 1
Restructuring charge
Lease termination payments
Severance costs
Balance at December 31
2006
$ 20.5
—
—
$ 24.6
(0.5)
—
(16.9)
(4.1)
$ 3.1
$ 20.5
The remaining accrual of $3.1 at December 31, 2007 mostly reflects the timing of payments to employees who are no longer with
the Company and will be fully paid during the first quarter of 2008.
2002
In connection with a restructuring plan initiated in 2002, the Company made headcount reductions affecting professional and
administrative employees worldwide and closed certain Customer Management and Information Management facilities.
Restructuring liability activity for the 2002 plan consisted of the following:
Balance at January 1
Reversal
Lease termination payments
Other
Balance at December 31
2007
2006
$ 3.0
$ 16.0
—
(12.1)
(3.1)
(2.4)
0.1
1.5
$ —
$ 3.0
Convergys Corporation 2007 Annual Report 27
Table of Contents
Client Concentration
In December 2006, AT&T and Bell South Corporation (Bell South) merged. Prior to the merger, Cingular (a joint venture between
AT&T and Bell South) was our largest client in terms of revenue. As a result of the merger, AT&T is now our largest client in terms
of revenue. We serve AT&T under information management, customer management and HR management contracts. See further
discussion of risks associated with client consolidation under the “Risks Relating to Convergys and Its Business” section of
Management Discussion and Analysis.
Our three largest clients accounted for 32.9% of our revenues in 2007, down from 33.3% in 2006. We serve AT&T, our largest
client with 16.3% of 2007 revenues under information management, customer management and HR management contracts. We
serve Sprint Nextel, our second largest client, under information management and customer management contracts. We provide
customer management services to Sprint Nextel under a contract between Sprint Nextel and IBM, as a subcontractor to IBM. We
serve Comcast, our third largest client in 2007, under customer management and information management contracts. Volumes
under certain of our long-term contracts are subject to variation based on, among other things, the spending by clients on
outsourced customer support and subscriber levels.
Business Outlook
In 2008, we are taking action in many areas that have the ability to drive overall growth in revenue and operating income. We
expect 2008 revenues of $2.85 to $3 billion, and earnings per share between $1.31 and $1.36, despite the potential for some shortterm disruption from a challenging economic environment.
Expectations for Customer Management include a year-over-year increase in revenue of approximately seven to twelve percent,
consistent with expected industry growth, and operating margin of approximately ten percent for the full year. On a sequential
basis, first quarter 2008 revenue and profitability will be approximately the same as the fourth quarter of 2007. Year-over-year
comparison of Customer Management operating performance in the first quarter of 2008 will be negatively impacted by the 100
basis point margin benefit in the first quarter of 2007 related to a one-time resolution of a prior cost. We expect to see strong
sequential and year-over-year quarterly revenue growth in the second half of the year, once new large client programs are fully
ramped. The negative impact of the weakened U.S. dollar on operating income for 2008 will be significantly higher than the 2007
impact of approximately $20.
Expectations for Information Management include revenues of approximately $625 and an operating margin exceeding 15% for the
full year. After a significant, more than $30 year-over-year, decline in revenue in the first quarter, largely due to North American
billing platform consolidation, we expect Information Management revenues to be relatively flat over the course of the year.
Expectations for HR Management include revenues of approximately $250 and an operating loss improvement to less than $15 for
the full year. Sequentially, revenue will decline slightly in the first quarter of 2008 due to completion of open enrollments and some
legacy programs. We expect modest sequential and year-over-year quarterly revenue growth in the second half of the year as we
begin recognizing revenue upon completion of a key implementation phase for a large client. We expect to see a substantial
reduction in our operating loss in the second half of the year because of this large implementation.
For the full year, cash flow from operations should exceed $250 and free cash flow should be in line with net income.
To be successful in 2008, there are challenges and opportunities we must address. Challenges in 2008 include: offsetting marketbased labor cost increases in Customer Management with productivity improvements; increasing asset utilization across multiple
geographies to counter the negative impact of the weak U.S. dollar; delivering HR Management implementations on time and on
budget over
28 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
the course of the year to successfully reach key go-live milestones; and growing Information Management international operations
to offset the North American revenue declines.
Opportunities for growth in revenue, operating income and earnings per share include: Customer Management revenue growth
from recent wins, volume and price increases with existing clients, and new client ramps from the strong pipeline; further Customer
Management operational efficiencies through improved agent training, agent retention and asset utilization; successfully completing
HR Management implementations which will improve results in the second half of the year; stabilization and continuing
improvement with HR Management clients in early-stage operations; and further streamlining of Information Management costs to
better fit its software and services business model. We will also continue to identify and take additional cost actions across the
Company.
Financial Condition, Liquidity and Capital Resources
Liquidity and Cash Flows
Cash flows from operating activities provided us with a significant source of funding for our investing and financing activities. Also,
we have borrowing facilities available, including a $400 Million Five-Year Revolving Credit Facility to fund these activities. See
further discussion of these borrowing facilities under the next section titled, “Capital Resources, Off-Balance Sheet Arrangements
and Contractual Commitments.”
Summarized cash flow information for the three years ended December 31, 2007, 2006 and 2005 was as follows:
Net cash flows from operations
Net cash flows used in investing
Net cash flows from (used in) financing
2007
2006
2005
$ 209.9
$ 353.4
$ 232.7
(74.8)
(127.5)
(138.3)
(250.7)
(186.0)
43.2
Computation of Free Cash Flows:
Net cash flows from operations
Change in accounts receivable securitization
Capital expenditures, net of proceeds from disposal of assets
Free Cash Flows
$ 209.9
$ 353.4
—
—
(101.3)
$ 108.6
(96.5)
$ 256.9
$ 232.7
100.0
(125.9)
$ 206.8
Cash flows from operating activities totaled $209.9 in 2007, compared to $353.4 in 2006 and $232.7 in 2005. Compared to the prior
year, the $143.5 decline in cash flows from operating activities was driven by changes in working capital. The working capital
increases were mostly due to lower bonus accruals in 2007, a decrease in advance billing amounts in 2007 and the timing of both
accounts payable and restructuring payments. Also in 2007, the increase in deferred charges, net of amortization and
implementation revenue received, related to client implementations incurred primarily at HR Management was approximately $30.
The increase in cash flows from operating activities during 2006 was driven by improvements in working capital. In addition, during
2005, there was a $100 net decrease in accounts receivable sold under the securitization program. During 2006, we terminated the
securitization program and there were no accounts receivable sold under the securitization program. These improvements were
partially offset by an increase in deferred charges related to client implementations incurred primarily at HR Management.
We used $74.8 for investing activities during 2007 compared to $127.5 in 2006 and $138.3 in 2005. The decrease in amounts used
in investing activities during 2007 was due to the sale of our short-term investments. The Company used $101.3 in cash flow for
capital expenditures during 2007 compared to $96.5 during 2006. The 8% decrease in amounts used for investing activities during
2006 compared to 2005 was due to lower amounts utilized on acquisitions and net capital expenditures. Also, during 2006, we
invested $30 in auction rate securities. These securities were intermediate-to-long-term securities structured with short-term
interest rates. We held no auction rate securities at December 31, 2007.
We used $250.7 for financing activities during 2007 compared to $186.0 in 2006. We provided $43.2 in cash flow for financing
activities in 2005. The 2007 activities include $83.6 in debt repayments and $181.3 to repurchase 9.9 million of the Company’s
common shares. The cash flow for financing activities during 2006 was
Convergys Corporation 2007 Annual Report 29
Table of Contents
largely due to $126.5 used to repurchase 6.1 million of the Company’s common shares.
In connection with the implementation of the existing HR Management contracts, we expect to continue to incur a significant
amount of implementation costs and, in 2008, deferred charges, net of implementation revenue received, will be significantly more
than the amount incurred during 2007. This will negatively impact cash flows from operation and free cash flows. As further
described in Note 8 of Notes to Consolidated Financial Statements, the Company expects to make payments of approximately $27
related to its pension plans in 2008. This compares to approximately $19 in 2007. Excluding funding requirements related to
acquisitions, we believe that our cash flows from operations and available capital resources will be sufficient to fund these
investments. At this point, we are not aware of any capital calls from the general partner of Cincinnati SMSA Limited Partnership.
The Company’s free cash flow, defined as cash flow from operating activities less capital expenditures (net of proceeds related to
disposals), was $108.6, $256.9 and $206.8 for 2007, 2006 and 2005, respectively. Compared to the prior year, the decrease in free
cash flow of $148.3 was due to a decrease in cash flow from operating activities during 2007. The Company uses free cash flow to
assess the financial performance of the Company. The Company believes that free cash flow is useful to investors because it
relates the operating cash flow of the Company to the capital that is spent to continue and improve business operations, such as
investment in the Company’s existing businesses. Further, free cash flow facilitates management’s ability to strengthen the
Company’s balance sheet, to repurchase the Company’s common shares and to repay the Company’s debt obligations. Limitations
associated with the use of free cash flow include that it does not represent the residual cash flow available for discretionary
expenditures as it does not incorporate certain cash payments including payments made on capital lease obligations or cash
payments for business acquisitions. Management compensates for these limitations by utilizing both the non-GAAP measure, free
cash flow, and the GAAP measure, cash from operating activities, in its evaluation of performance. There are no material purposes
for which we use this non-GAAP measure beyond the purposes described above.
Capital Resources, Off-Balance Sheet Arrangements and Contractual Commitments
We believe that our financial structure and condition are solid. At December 31, 2007, total capitalization was $1,781.6, consisting
of $259.9 of short-term and long-term debt and $1,521.7 of equity. At December 31, 2006, total capitalization was $1,798.6,
consisting of $343.5 of short-term and long-term debt and $1,455.1 of equity. This results in a debt-to-capital ratio of 14.6%, which
compares to 19.1% at December 31, 2006.
The Company’s debt is considered investment grade by the rating agencies. At December 31, 2007, our borrowing facilities
included a $400 Million Five-Year Competitive Advance and Revolving Credit Facility. As of December 31, 2007, we had no
amounts borrowed under this facility. The commitment fee on this facility at December 31, 2007 was 0.1%. The maturity date of the
Credit Facility Agreement is October 20, 2011, provided, however, that upon satisfaction of certain conditions contained in the
Credit Facility Agreement, we may extend the maturity date by one year. The participating agents in the credit facility include
JPMorgan Chase Bank, Citicorp USA, PNC Bank and Deutsche Bank AG. The Company’s credit facility includes certain restrictive
covenants including maintenance of interest coverage and debt-to-EBITDA ratios. Our interest coverage ratio, defined as the ratio
of consolidated earnings before interest, tax, depreciation and amortization (EBITDA) to consolidated interest expense, cannot be
less than 4.00 to 1.00 for four consecutive quarters. Our debt-to-EBITDA ratio cannot be greater than 3.25 to 1.0 at any time. We
were in compliance with all covenants throughout 2007.
In December 2004, we issued $250.0 in 4.875% unsecured senior notes due December 15, 2009. The notes were offered and sold
pursuant to our universal shelf registration statement, previously declared effective in June 2003. Under the registration statement,
we have the
30 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
ability to offer up to $250.0 in additional debt securities, common shares, preferred shares and/or warrants to purchase such
securities. At December 31, 2007 and 2006, the senior notes had an outstanding balance of $249.4 and $249.0, respectively.
As discussed in Note 10 of Notes to Consolidated Financial Statements, we lease certain facilities and equipment used in our
operations under operating leases. This includes our office complex in Orlando, Florida, which is leased from Wachovia
Development Corporation (Lessor), a wholly owned subsidiary of Wachovia Corporation, under an agreement that expires in June
2010. Upon termination or expiration of the lease, we must either purchase the property from the Lessor for $65.0 or arrange to
have the office complex sold to a third party. If the office complex is sold to a third party for an amount less than the $65.0, the
amount paid by the Lessor for the purchase of the complex from an unrelated third party, we have agreed under a residual value
guarantee to pay the Lessor up to $55.0. If the office complex is sold to a third party for an amount in excess of $65.0, Convergys is
entitled to collect the excess. At the inception of the lease, we recognized a liability of approximately $5 for the related residual
value guarantee. The value of the guarantee was determined by computing the estimated present value of probability-weighted
cash flows that might be expended under the guarantee. We have recorded a liability for the fair value of the obligation with a
corresponding asset recorded as prepaid rent, which is being amortized to rental expense over the lease term. The liability will
remain on the balance sheet until the end of the lease term. Under the terms of the lease, we also provide certain indemnities to the
Lessor, including environmental indemnities. Due to the nature of such potential obligations, it is not possible to estimate the
maximum amount of such exposure or the fair value. We do not expect such amounts, if any, to be material. We have concluded
that we are not required to consolidate the Lessor pursuant to Financial Accounting Standards Board Financial Interpretation
No. 46R, “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51.
We believe that our present ability to borrow is greater than our established credit facilities in place. If market conditions change
and we experience a significant decline in revenues or increase in costs, our cash flows and liquidity could be reduced. This could
cause rating agencies to lower our credit ratings, thereby increasing our borrowing costs, or even causing a reduction in or
elimination of our access to debt and ability to raise additional equity.
During 2007, we fully utilized the previous share purchase authorizations. On August 14, 2007, our Board of Directors authorized
the repurchase of an additional 20 million of our common shares. We repurchased 9.9 million common shares for $184.0 during
2007 and through December 31, 2007, we repurchased 35.3 million shares of Convergys common stock for $582.3 pursuant to all
authorizations. We may continue to execute share repurchases from time to time as determined by management. The timing and
terms of the transactions depend on a number of considerations including market conditions and our liquidity. At December 31,
2007, we have authority to purchase an additional 14.7 million common shares pursuant to the current authorization. From
January 1, 2008 to February 22, 2008, we purchased 1.9 million shares of Convergys stock pursuant to these authorizations.
The following summarizes our contractual obligations at December 31, 2007, and the effect such obligations are expected to have
on liquidity and cash flows in future periods:
Contractual
Obligations
Debt [1]
$ 259.9
Operating leases [2]
Pension contributions [3]
Unrecognized tax benefits
Purchase commitments
Total
Less Than
1 Year
Total
[5]
[4]
$
0.6
1-3 Years
$
249.5
After
3 Years
$
9.8
196.1
53.4
71.6
71.1
27.0
27.0
—
—
1.5
1.5
—
—
46.7
28.4
18.3
—
$ 531.2
$
110.9
$
339.4
$
80.9
Convergys Corporation 2007 Annual Report 31
Table of Contents
(1) See Note 7 of Notes to Consolidated Financial Statements for further information.
(2) See Note 10 of Notes to Consolidated Financial Statements for further information.
(3) In order to meet ERISA funding requirements, the Company expects to contribute $13.5 to fund its cash balance pension plans and $13.5 in payments to its executive
pension plans in 2008. There is no estimate available for 2009 and beyond.
(4) The remaining unrecognized tax benefits of $81.4 are excluded from this table as the uncertainty related to the amount and period of any cash settlement prevent the
Company from making a reasonably reliable estimate.
(5) Consists of contractual obligations to purchase services that are enforceable and legally binding. Excludes issuance of purchase orders made in the ordinary course of
business that are short-term or cancelable, as well as renewable support and maintenance arrangements.
At December 31, 2007, we had outstanding letters of credit of $42.3 related to performance and payment guarantees, of which
$19.1 is set to expire by the end of 2008, $10.4 is set to expire within 1 to 3 years and $12.8 is set to expire after 3 years. We do
not believe that any obligation that may arise will be material.
Market Risk
We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates.
Market risk is the potential loss arising from adverse changes in market rates and prices. Our risk management strategy includes
the use of derivative instruments to reduce the effects on our 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, we expose ourselves to counterparty credit risk. We manage 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 we enter into such agreements.
Interest Rate Risk
At December 31, 2007, we had $0.7 in outstanding variable rate borrowings. The carrying amount of our borrowings reflects fair
value due to their short-term and variable interest rate features.
We sometimes use interest rate swaps to hedge our interest rate exposure. These instruments are hedges of the variability of cash
flows to be received or paid related to a recognized asset or liability. 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 interest rates. There were no
outstanding interest rate swaps covering interest rate exposure at December 31, 2007.
Based upon our exposure to variable rate borrowings, a one percentage point change in the weighted average interest rate would
change our annual interest expense by less than $1.
Foreign Currency Exchange Rate Risk
Our Company serves many of our U.S.-based clients using contact center capacity in Canada, India and the Philippines. Although
the contracts with these clients are typically priced in U.S. dollars, a substantial portion of the costs incurred to render services
under these contracts are denominated in Canadian dollars (CAD), Philippine peso (PHP) or Indian rupees (INR), which represents
a foreign exchange exposure. We have hedged a portion of our exposure related to the anticipated cash flow requirements
denominated in these foreign currencies by entering into forward contracts with several financial institutions to acquire a total of
CAD 104.0 at a fixed price of $104.4 through November 2008, PHP 7,952.3 at a fixed price of $174.0 through December 2010 and
INR 15,292.7 at a fixed price of $345.0 through December 2011. Additionally, we had entered into option contracts to purchase
approximately CAD 79.0 for a fixed price of $78.2 through July 2008. The fair value of these derivative instruments as of
December 31, 2007 is presented in Note 14 of Notes to Consolidated Financial Statements. The potential loss in fair value at
December 31, 2007 for such contracts resulting from a hypothetical 10% adverse change in all foreign currency exchange rates is
approximately $70. This loss would be mitigated by corresponding gains on the underlying exposures.
Other foreign currency exposures arise from transactions denominated in a currency other than the functional currency and foreign
denominated revenue and profit
32 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
translated into U.S. dollars. We periodically enter into forward exchange contracts that are not designated as hedges. The purpose
of these derivative instruments is to protect the Company against foreign currency exposure pertaining to receivables and payables
that are denominated in currencies different from the functional currencies of the Company or the respective subsidiaries. As of
December 31, 2007, the fair value of these derivatives was $0.1.
In 2008, we entered into treasury lock derivative instruments for $200 in anticipation of a probable debt issuance later in 2008. The
treasury locks enable us to lock in a treasury yield so that we are no longer exposed to treasury yield movements, which would
impact our cost of funds.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with accounting principles generally accepted in the United States. Our
significant accounting policies are disclosed in Note 2 of Notes to Consolidated Financial Statements. The preparation of financial
statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and
assumptions that affect reported amounts and related disclosures. On an ongoing basis, we evaluate our estimates and judgments
in these areas based on historical experience and other relevant factors. Our estimates as of the date of the financial statements
reflect our best judgment giving consideration to all currently available facts and circumstances. As such, these estimates may
require adjustment in the future, as additional facts become known or as circumstances change.
We have identified below the accounting policies and estimates that we believe are most critical in compiling our statements of
financial condition and operating results. We have reviewed these critical accounting policies and estimates and related disclosures
with the Audit Committee of our Board of Directors.
Goodwill
At December 31, 2007, we had goodwill with a net carrying value of $896.2. As disclosed in Note 5 of Notes to Consolidated
Financial Statements, we are required to test goodwill for impairment annually and at other times if events have occurred or
circumstances exist that indicate the carrying value of goodwill may no longer be recoverable. The impairment test for goodwill
involves a two-step process. The first step compares the fair value of a reporting unit with its carrying amount, including the
goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, the second step requires the
comparison of the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any excess
of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an
impairment loss. Fair value of the reporting unit was determined using a combination of the market approach and the income
approach. Under the market approach, fair value is based on actual stock price or transaction prices of comparable companies.
The market approach requires significant judgment regarding the selection of comparable companies. Under the income approach,
value is dependent on the present value of net cash flows to be derived from the ownership. The income approach requires
significant judgment including estimates about future cash flows and discount rates.
As required, during the fourth quarter of 2007, we completed our annual impairment tests for our reporting units: Information
Management International, Information Management North America, Customer Management and HR Management. Based on the
results of the first step, we had no goodwill impairment related to our four reporting units. We believe we make every reasonable
effort to ensure that we accurately estimate the fair value of the reporting units. However, future changes in the assumptions used
to make these estimates could result in the recording of an impairment loss.
Convergys Corporation 2007 Annual Report 33
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Deferred Charges
In connection with our Information Management data processing and HR Management outsourcing arrangements, we often
perform a significant amount of set-up activities or implementations, which include the installation and customization of our
proprietary software in our centers. Under these arrangements, clients do not take possession of the software nor have the right to
take possession of the software without incurring a significant penalty. In accordance with Emerging Issues Task Force (EITF)
Issue 00-03, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on
Another Entity’s Hardware,” the implementations are not treated as separate elements for revenue recognition purposes. Any
proceeds collected for the implementations are deferred and recognized over the service period. Additionally, with respect to
certain multiple-element arrangements, we defer all revenue related to the contracts until the final element is delivered. We
capitalize all direct and incremental implementation and multiple-element costs, to the extent recovery is probable, and amortize
them ratably over the life of the arrangements as costs of providing service.
At inception and throughout the term of the contract, we evaluate recoverability by considering profits to be earned during the term
of the contract, the creditworthiness of the client and, if applicable, contract termination penalties payable by the client in the event
that the client terminates the contract early. Our estimate of profitability is dependent in large part on our estimate of costs.
Although we make every reasonable effort to accurately estimate costs, revisions may be made based on actual costs incurred that
could result in the recording of an impairment loss. Additionally, if the financial condition of a client were to deteriorate, resulting in a
reduced ability to make payments, we may be unable to recover the costs, which would result in an impairment loss. Finally, our
entitlement to termination fees may be subject to challenge if a client were to allege that we were in breach of contract. However,
based on our evaluation of the related contracts, we believe that the $304.3 of deferred charges is recoverable.
Revenue Recognition
Our revenue recognition policies are discussed in detail in Note 2 of Notes to Consolidated Financial Statements. A portion of our
revenues is derived from transactions that require a significant level of judgment. This includes:
Percentage of Completion —We recognize some software license and related professional and consulting revenues using the
percentage-of-completion method of accounting by relating contract costs incurred to date to total estimated contract costs at
completion. During 2007, approximately 5% of our consolidated revenues were recognized using the percentage-of-completion
method. 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.
Because the financial reporting of these contracts depends on estimates, which are assessed continually during the term 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 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.
License Arrangements —Approximately 8% of our 2007 consolidated revenues were derived from license and support and
maintenance arrangements. The accounting for these arrangements can be complex and requires a significant amount of
judgment. Some of the factors that we must assess include: the separate elements of the arrangement; vendor-specific objective
evidence of
34 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
fair value for the various undelivered elements of the arrangement; whether the software fees are fixed or determinable; whether
the fees are considered collectible and whether services included in the arrangement represent significant production,
customization or modification of the software.
Multiple Element Outsourcing Arrangements —HR Management, which accounted for 9% of our consolidated revenues in 2007,
delivers multiple services under our client arrangements (e.g., benefits administration, recruiting, payroll and learning). In
connection with these arrangements, we must assess these multiple-element arrangements to determine whether they can be
separated into more than one unit of accounting. Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangements
with Multiple Deliverables,” establishes the following criteria, all of which must be met, in order for a deliverable to qualify as a
separate unit of accounting:
• The delivered items have value to the client on a stand-alone basis.
• There is objective and reliable evidence of the fair value of the undelivered items.
• If the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered
items is considered probable and substantially in the control of the Company.
If these criteria are met, each of the contractual services included in the contract is treated as a separate unit of accounting and
revenue is recognized as we deliver each of the contractual services. If these criteria are not met, all of the services included are
accounted for as a single unit of accounting. Revenue is then recognized either using a proportional performance method such as
recognizing revenue based on transactional services delivered or on a straight-line basis once HR Management begins to deliver
the final service.
The assessments of these areas require us to make a significant amount of judgments. The judgments made in these areas could
have a significant effect on revenues recognized in any period by changing the amount and/or the timing of the revenue
recognized. We believe that we make a reasonable effort to ensure accuracy in our judgment and estimates.
Contingencies
The Company is from time to time subject to claims and administrative proceedings that are filed in the ordinary course of business.
We believe that the results of any such claims or administrative proceedings, either individually or in the aggregate, will not have a
materially adverse effect on our financial condition. However, the outcome of any litigation cannot be predicted with certainty. An
unfavorable resolution of one or more pending matters could have a material adverse impact on our financial statements in the
future.
Restructuring Accrual
During the last four years, we have recorded significant restructuring charges related to reductions in headcount and facility
closures. As of December 31, 2007, we had a restructuring accrual of $5.7, $2.6 of which relates to facility closure costs, which will
be paid over several years until the leases expire. The accrual is equal to the future costs associated with those abandoned
facilities, net of the proceeds from any probable future sublease agreements. We have used estimates, based on consultation with
real estate advisors, to arrive at the proceeds from any future sublease agreements. We will continue to evaluate our estimates in
recording the facilities abandonment charge. As a result, there may be additional charges or reversals in the future.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting For Income Taxes,” which recognizes
deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of
assets and liabilities. The deferred tax assets and liabilities are determined based on the enacted tax rates expected to apply in the
periods in which the deferred tax assets or liabilities are expected to be settled or realized.
Convergys Corporation 2007 Annual Report 35
Table of Contents
The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance if it is more likely
than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset
will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence. This evidence
includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary
differences and the implementation of tax planning strategies. Projected future taxable income is based on expected results and
assumptions as to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary
differences is based on current tax law and the Company’s tax methods of accounting.
The Company also reviews its tax activities and records a liability for its uncertain tax positions in accordance with FIN 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109.” The interpretation contains a two-step approach
to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to
measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The
Company’s policy is to recognize interest and penalties accrued on unrecognized tax benefits as part of income tax expense.
Significant judgment is required in determining our liability for uncertain tax positions. The application of tax laws and regulations is
subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as
a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual
liability for U.S. or foreign taxes may be significantly different from our estimates, which could result in the need to record additional
tax liabilities or potentially reverse previously recorded tax liabilities. We believe that we make a reasonable effort to ensure
accuracy in our judgment and estimates.
Other
We have made certain other estimates that, while not involving the same degree of judgment, are important to understanding our
financial statements. These estimates are in the areas of measuring our obligations related to our defined benefit plans, selfinsurance accruals and assessing recoverability of intangible assets.
New Accounting Pronouncements
On January 1, 2007, the Company adopted the provisions of Financial Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (FIN 48). FIN 48 creates a single model to address uncertainty in income tax positions. FIN 48 prescribes the minimum
recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides
guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition and excludes income taxes from Statement of Financial Accounting Standard (SFAS) No. 5, “Accounting for
Contingencies.” FIN 48 applies to all tax positions related to income taxes subject to SFAS No. 109, “Accounting for Income
Taxes.” This includes tax positions considered to be “routine” as well as those with a high degree of uncertainty. As a result of the
adoption of FIN 48, the Company recognized a $7.8 increase in the liability for unrecognized tax benefits, which was accounted for
as a reduction to the retained earnings balance as of January 1, 2007. Additionally, adoption of FIN 48 caused balance sheet
reclassifications from deferred tax and accrued tax accounts to a FIN 48 liability for unrecognized tax benefits. See Note 6 of Notes
to Consolidated Financial Statements for further discussion related to the adoption of this Standard.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This new Standard defines fair value, establishes
a framework for measuring fair value in
36 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require
new fair value measurements, rather it applies under existing accounting pronouncements that require or permit fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In November 2007, the FASB
agreed to defer the effective date of SFAS No. 157 for non-financial assets and liabilities until fiscal years and interim periods
beginning after November 15, 2008. The Company will adopt this Standard beginning January 1, 2008 for financial assets and
liabilities. Adoption of this Standard at January 1, 2008 will not have an impact on the Company’s financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS
No. 159 allows entities to voluntarily choose, at specified election dates, to measure many financial and certain non-financial assets
and liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is
elected for an instrument, SFAS No. 159 specifies that all subsequent changes in fair value for that instrument shall be reported in
earnings. This Statement is effective as of the first fiscal year that begins after November 15, 2007. The adoption of this Standard
will not have a material impact on the Company’s financial statements.
In April 2007, the FASB issued EITF 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split Dollar Life Insurance Arrangements.” This Standard requires an employer to recognize a liability for future
benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” if, in
substance, a postretirement benefit plan exists. The adoption of EITF 06-04 is effective for fiscal years beginning after
December 15, 2007 and the provision will be applied through a cumulative effect adjustment to retained earnings as of
the beginning of the year of adoption. Adoption of this Standard will not have a material impact on the Company’s financial
statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” which replaces SFAS No. 141.
SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any resulting goodwill and any noncontrolling interest in the acquiree. The
Statement also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of
the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15,
2008 and must be applied prospectively to business combinations completed on or after that date. Accordingly, any business
combinations the Company engages in will be recorded and disclosed following existing GAAP until December 31, 2008. Adoption
of SFAS No. 141R will have an impact on the Company’s consolidated financial statements when effective, but the nature and
magnitude of the specific effects will depend upon the terms and size of the acquisitions consummated after the effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51.” SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling
interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. In addition, this
statement requires the amount of net income attributable to the noncontrolling interest to be included on the face of the
consolidated income statement. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact of the adoption of
this Standard on its financial statements.
Convergys Corporation 2007 Annual Report 37
Table of Contents
Risks Relating to Convergys and Its Business
Client consolidations could result in a loss of clients and adversely affect our operating results.
We serve clients in industries that have experienced a significant level of consolidation. We cannot assure that additional
consolidations will not occur in which our clients acquire additional businesses or are acquired. Such consolidations may result in
the termination of an existing client contract, which could have an adverse effect on our operating results.
In September 2005, Sprint PCS, a large Information Management data processing outsourcing client, completed its acquisition of
Nextel Communications. In 2006, the client informed us that it intended to consolidate its billing systems onto a competitor’s
system. Their current plan is to complete migrating most of their subscribers from our billing system during 2008. The migration
began in 2006. We are supporting Sprint Nextel with its migration efforts. If the migration proceeds as planned, it will negatively
impact Information Management’s revenues and operating results.
In December 2006, AT&T and Bell South merged. The Company has long-standing relationships with both AT&T and Bell South.
Prior to the merger, Cingular (a joint venture between AT&T and Bell South) was our largest client in terms of revenue. Beginning in
2005, we have assisted AT&T with its strategy to migrate subscribers off of the AT&T Wireless billing systems (which we
supported) onto AT&T’s two systems, one of which we support. The migration was completed earlier this year and has negatively
impacted Information Management revenues and operating results. In January 2008, AT&T informed us that it intends to migrate its
subscribers from the system that we currently support through a managed services agreement onto AT&T’s other system over the
next two years. Once this migration is complete, we expect AT&T to continue to remain an important client.
A large portion of our revenue is generated from a limited number of clients, and the loss of one or more of our clients could cause a reduction in our revenues
and earnings.
We rely on several clients for a large percentage of our revenues. Our three largest clients, AT&T, Sprint Nextel and Comcast,
collectively represented 32.9% of our 2007 revenues. Our relationship with AT&T is represented by separate contracts/work orders
with Information Management, Customer Management and HR Management. Our relationship with Sprint Nextel is represented by
separate information management and customer management contracts. Since February 2004, we have provided customer
management services to Sprint Nextel under a contract between Sprint Nextel and IBM, whereby we serve as a subcontractor to
IBM. We serve Comcast under customer management and information management contracts. As a result, we do not believe that it
is likely that our entire relationship with AT&T, Sprint Nextel or Comcast would terminate at one time; and, therefore, we are not
substantially dependent on any particular contract/work order with these clients. However, the loss of all of the contracts/work
orders with a particular client at the same time or the loss of one or more of the larger contracts/work orders with a client would
adversely affect our total revenues if the revenues from such client were not replaced with revenues from that client or other clients.
A large portion of our accounts receivable are payable by a limited number of clients and the inability of any of these clients to pay its accounts receivable could
cause a reduction in our revenues and earnings.
Several significant clients account for a large percentage of our accounts receivable. As of December 31, 2007, our three largest
clients, AT&T, Sprint Nextel and Comcast, collectively accounted for 31.7% of our accounts receivable. During the past three years,
each of these clients has generally paid its accounts receivable on a timely basis, and write-downs that we have incurred in
connection with such accounts receivable were consistent with write-downs that we incurred with other clients. We anticipate that
several clients will continue to account for a large
38 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
percentage of our accounts receivable. Although we currently do not expect payment issues with any of these clients, if any of them
were unable or unwilling, for any reason, to pay our accounts receivable, our income would decrease. We also carry significant
receivable balances with other clients whose declaration of bankruptcy could decrease our income.
If our clients are not successful, the amount of business that they outsource and the prices that they are willing to pay for such services may diminish and could
result in a reduction of our revenues and earnings.
Our revenues depend on the success of our clients. If our clients or their specific programs are not successful, the amount of
business that they outsource may be diminished. Thus, although we have signed contracts, many of which contain minimum
revenue commitments, to provide services to our clients, there can be no assurance that the level of revenues generated by such
contracts will meet expectations. In addition, several clients, particularly in the communications and technology industries, have
experienced substantial price competition. We may continue to face price pressure from such clients, which could negatively affect
our operating results.
We process, transmit and store personally identifiable information, and unauthorized access to or the unintended release of this information could result in a
claim for damage or loss of business and create unfavorable publicity.
We process, transmit and store personally identifiable information, both in our role as a service provider and as an employer. This
information may include social security numbers, financial and health information, as well as other personal information. As a result,
we are subject to certain contractual terms, as well as federal, state and foreign laws and regulations designed to protect personally
identifiable information. We take measures to protect against unauthorized access and to comply with these laws and regulations.
Unauthorized access or failure to comply with these laws and regulations may subject us to contractual liability and damages, loss
of business, damages from individual claimants, fines, penalties, criminal prosecution and unfavorable publicity, any of which could
negatively affect our operating results and financial condition.
The global scope, size and complexity of implementations in our HR Management business could cause delays and cost overruns in those projects, which could
adversely affect revenues and profits.
We have won several long-term, human resource outsourcing contracts with global clients. These contracts are complex as they
involve providing multiple services such as payroll, recruiting, benefits administration, learning, compensation and human resources
administration, across many countries. Implementations of the contracts can take more than two years to complete. Due to the
complexity of the implementations and changes in customer requirements (i.e., an acquisition by a customer during the
implementation), implementation cost overruns and delays are possible. Cost overruns can result in additional expense during the
implementation period and over the life of the contract, which would likely affect the profitability of the contract. Given the size of
some of these contracts, the impact from these cost overruns or schedule delays can have a significant impact on our revenues
and profits. Delays in completing the implementations can cause us to recognize revenue and profit from the contracts later than
we anticipated when the initial contract was signed.
Our ability to deliver our services is at risk if the technology and network equipment that we rely upon is not maintained or upgraded in a timely manner.
Technology is a critical foundation in our service delivery. We utilize and deploy internally developed and third party software
solutions across various hardware environments. We operate an extensive internal communications network that links our global
sites together in a multi-hub model that enables the rerouting of data and voice traffic. Also, we rely on multiple public
communication channels for connectivity to our clients. Maintenance of and investment in these foundational components are
critical to our success. If the reliability of technology or network operations fall below required service levels, or a systemic fault
Convergys Corporation 2007 Annual Report 39
Table of Contents
affects the organization broadly, business from our existing and potential clients may be jeopardized and cause our revenue to
decrease.
Emergency interruption of data centers and customer management and HR management contact centers could have a materially adverse effect on our financial
condition and results of operations.
In the event that we experience a temporary or permanent interruption at one or more of our data or contact centers, through
casualty, operating malfunction or other causes, we may be unable to provide the data processing, customer management and HR
management services we are contractually obligated to deliver. This could result in us being required to pay contractual damages
to some clients or to allow some clients to terminate or renegotiate their contracts. Notwithstanding contingency plans and
precautions instituted to protect our clients and us from events that could interrupt delivery of services (including property and
business interruption insurance that we maintain), there is no guarantee that such interruptions would not result in a prolonged
interruption in our ability to provide support services to our clients or that such precautions would adequately compensate us for
any losses we may incur as a result of such interruptions.
Defects or errors within our software could adversely affect our business and results of operations.
Design defects or software errors may delay software introductions or reduce the satisfaction level of clients and may have a
materially adverse effect on our business and results of operations. Our billing software is highly complex and may, from time to
time, contain design defects or software errors that may be difficult to detect and/or correct. Since both our clients and we use our
billing software to perform critical business functions, design defects, software errors or other potential problems within or outside of
our control may arise from the use of our software. It may also result in financial or other damages to our clients, for which we may
be held responsible. Although our license agreements with our clients may often contain provisions designed to limit our exposure
to potential claims and liabilities arising from client problems, these provisions may not effectively protect us against such claims in
all cases and in all jurisdictions. Claims and liabilities arising from client problems could result in monetary damages to us and could
cause damage to our reputation, adversely affecting our business and results of operations.
If the global trend toward outsourcing does not continue, our financial condition and results of operations could be materially affected.
Revenue growth depends, in large part, on the trend toward outsourcing, particularly as it relates to our customer management and
HR management outsourcing operations. Outsourcing involves companies contracting with a third party, such as Convergys, to
provide customer management and HR management services rather than performing such services in-house. There can be no
assurance that this trend will continue, as organizations may elect to perform such services in-house. A significant change in this
trend could have a materially adverse effect on our financial condition and results of operations.
A longer sales cycle could adversely affect our business and results of operations.
During the past few years, we have focused on transforming the HR Management segment into a leading provider in the growing
human resource outsourcing market. Although we won long-term global human resource outsourcing arrangements with several
clients, the sales cycles for large global human resource outsourcing arrangements have ranged from 12 to 24 months. The sales
cycle is long due to complexities associated with outsourcing human resource functions, including decisions regarding what
functions to outsource, locations and timing of outsourcing. This longer sales cycle can result in delays in the execution of the
contracts, increase selling costs and negatively impact our revenues and operating results.
40 Convergys Corporation 2007 Annual Report
Table of Contents
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
If we are unable to identify and complete appropriate acquisitions, we may not be able to achieve historical growth rates.
Our growth since inception of the business has been enhanced through acquisitions of other businesses including their service
offerings and licenses. We continue to pursue strategic acquisitions. If we are unable to make appropriate acquisitions on
reasonable terms, whether for cash, Convergys securities or both, it may be difficult for us to achieve the same level of growth as
achieved historically.
We are susceptible to business and political risks from domestic and international operations that could result in reduced revenues or earnings.
We operate a global business and have facilities located throughout North and South America, Europe, the Middle East and the
Asian Pacific region. As part of our strategy, we plan to capture more of the international billing, customer management and HR
management markets. Additionally, North American companies require offshore customer management outsourcing capacity. As a
result, we expect to continue expansion through start-up operations and acquisitions in foreign countries. Expansion of our existing
international operations and entry into additional countries will require management attention and financial resources. In addition,
there are certain risks inherent in conducting business internationally including: exposure to currency fluctuations, longer payment
cycles, greater difficulties in accounts receivable collection, difficulties in complying with a variety of foreign laws, changes in legal
or regulatory requirements, difficulties in staffing and managing foreign operations, political instability and potentially adverse tax
consequences. To the extent that we are adversely affected by these risks, our business could be adversely affected and our
revenues and/or earnings could be reduced.
In addition, there has been political discussion and debate related to worldwide competitive sourcing, particularly from the United
States to offshore locations. Federal and state legislation has been proposed that relates to this issue. Future legislation, if enacted,
could have an adverse effect on our results of operations and financial condition.
Our earnings are affected by changes in foreign currency.
Customer Management serves an increasing number of its U.S.-based customer management clients using contact center capacity
in Canada, India and the Philippines. Although the contracts with these clients are typically priced in U.S. dollars, a substantial
portion of the costs incurred by Customer Management to render services under these contracts is denominated in Canadian
dollars, Indian rupees or Philippine pesos, which represents a foreign exchange exposure to the Company. We enter into forward
exchange contracts and options to limit potential foreign currency exposure. As the U.S. dollar weakened during 2006 and 2007,
the operating expenses of these contact centers, once translated into U.S. dollars, increased. The increase in operating expenses
was partially offset by gains realized through the settlement of the hedged instruments. However, if the U.S. dollar weakens further,
our earnings will continue to be negatively impacted.
If we do not effectively manage our capacity, our results of operations could be adversely affected.
Our ability to profit from the global trend toward outsourcing depends largely on how effectively we manage our Customer
Management and HR Management contact center capacity. In order to create the additional capacity necessary to accommodate
new or expanded outsourcing projects, we must open new contact centers. The opening or expansion of a contact center may
result, at least in the short term, in idle capacity until we fully implement the new or expanded program. We periodically assess the
expected long-term capacity utilization of our contact centers. As a result, we may, if deemed necessary, consolidate, close or
partially close under-performing contact centers to maintain or improve targeted utilization and margins. There can be no guarantee
that we will be able to achieve or maintain optimal utilization of our contact center capacity.
Convergys Corporation 2007 Annual Report 41
Table of Contents
Items 7. (continued) , 7A. and 8.
As part of our effort to consolidate our facilities, we seek to sublease a portion of our surplus space, if any, and recover certain
costs associated with it. To the extent that we fail to sublease such surplus space, our expenses will increase.
If we are unable to hire or retain qualified personnel in certain areas of our business, our ability to execute our business plans in those areas could be impaired
and revenues could decrease.
We employ approximately 75,000 employees worldwide. At times, we have experienced difficulties in hiring personnel with the
desired levels of training or experience. Staffing personnel with appropriate technical expertise is particularly critical in connection
with the recent contracts signed by HR Management. Additionally, in regard to the labor-intensive business of Customer
Management, quality service depends on our ability to control personnel turnover. Any increase in the employee turnover rate could
increase recruiting and training costs and could decrease operating effectiveness and productivity. We may not be able to continue
to hire, train and retain a sufficient number of qualified personnel to adequately staff new client projects. Because a significant
portion of our operating costs relates to labor costs, an increase in wages, costs of employee benefits or employment taxes could
have a materially adverse effect on our business, results of operations or financial condition.
Continued war and terrorist attacks or other civil disturbances could lead to economic weakness and could disrupt our operations resulting in a decrease of our
revenues and earnings.
War and terrorist attacks have caused uncertainty in the global financial markets and in the United States economy. The war in Iraq
and any additional terrorist attacks may lead to continued armed hostilities or further acts of terrorism and civil disturbances in the
United States or elsewhere, which may contribute to economic instability in the United States and disrupt our operations in the U.S.
and abroad. Such disruptions could cause service interruptions or reduce the quality level of the services that we provide, resulting
in a reduction of our revenues. These activities may also cause our clients to delay or defer decisions regarding their use of our
services and, thus, delay receipt of additional revenues. In addition, war and terrorist attacks in other regions could disrupt our
operations and/or create economic uncertainty with our clients, which could cause a reduction in revenues and earnings.
A significant or prolonged economic downturn could have a materially adverse effect on our revenues and profit margin.
Our results of operations are affected directly by the level of business activity of our clients, which in turn are affected by the level of
economic activity in the industries and markets that they serve. Economic slowdowns in some markets, particularly in the United
States, may cause reductions in technology and discretionary spending by our clients, which may result in reductions in the growth
of new business as well as reductions in existing business. If our clients enter bankruptcy or liquidate their operations, our revenues
could be adversely affected. There can be no assurance that weakening economic conditions throughout the world will not
adversely impact our results of operations and/or financial position. Reduced demand for our services could increase price
competition.
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk
The information required by Item 7A is included in Item 7 beginning on page 32 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data
Beginning on page 44 are the consolidated financial statements with applicable notes and the related Reports of Independent
Registered Public Accounting Firm and the supplementary financial information specified by Item 302 of Regulation S-K.
42 Convergys Corporation 2007 Annual Report
Table of Contents
Report of Management
Management’s Responsibilities for and Audit Committee Oversight of the Financial Reporting Process
The management of Convergys Corporation is responsible for the preparation, integrity and fair presentation 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 accounting principles generally accepted in the United States and include certain amounts,
which are estimates based upon currently available information, and management’s judgment of current conditions and
circumstances.
The Audit Committee, consisting entirely of independent directors, meets regularly with management, the compliance officer,
internal auditors and the independent registered public accounting firm, and reviews audit plans and results, as well as
management’s actions taken in discharging responsibilities for accounting, financial reporting and internal control. Ernst & Young
LLP, independent registered public accounting firm, and the internal auditors have direct and confidential access to the Audit
Committee at all times to discuss the results of their examinations.
Management’s Report on Internal Control over Financial Reporting
Convergys’ management is also responsible for establishing and maintaining adequate internal control over financial reporting that
is designed to produce reliable financial statements in conformity with accounting principles generally accepted in the United
States. The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability
through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any internal control
system, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and may not be detected. Also, because of changes in conditions,
internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only
reasonable assurance with respect to financial statement preparation and presentation.
Convergys’ management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control—Integrated Framework. Based on its assessment, management has concluded that, as of
December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria.
Convergys engaged Ernst & Young LLP in 2007 to perform an integrated audit of the consolidated financial statements in
accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Their report appears on
page 45. Additionally, Ernst & Young LLP has issued an audit report on the Company’s internal control over financial reporting. This
report appears on page 44.
/s/ David F. Dougherty
David F. Dougherty
Chief Executive Officer
/s/ Earl C. Shanks
Earl C. Shanks
Chief Financial Officer
Convergys Corporation 2007 Annual Report 43
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Convergys Corporation
We have audited Convergys Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Convergys Corporation’s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Report of Management. Our responsibility is to express an opinion on the company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Convergys Corporation maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Convergys Corporation as of December 31, 2007 and 2006, and the related consolidated
statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2007 of Convergys Corporation and our report dated February 27, 2008 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Ernst & Young LLP
Cincinnati, Ohio
February 27, 2008
44 Convergys Corporation 2007 Annual Report
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Convergys Corporation
We have audited the accompanying consolidated balance sheets of Convergys Corporation as of December 31, 2007 and 2006,
and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of
the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Convergys Corporation at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule for each of the three years ended December 31, 2007, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Notes 2 and 8 in Notes to the Consolidated Financial Statements, at December 31, 2006, Convergys Corporation
changed its method of accounting for certain of its employee benefit plans with the adoption of Statement of Financial Accounting
Standard No. 158, “Employer’s Accounting for Deferred Benefit Pension and Other Postretirement Plans—an Amendment of SFAS
No. 87, 88, 106 and 132(R).” Additionally, as discussed in Notes 2 and 6 to the Consolidated Financial Statements, at January 1,
2007, Convergys Corporation changed its method of accounting for income taxes with the adoption of Financial Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes.”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Convergys Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 27, 2008, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Ernst & Young LLP
Cincinnati, Ohio
February 27, 2008
Convergys Corporation 2007 Annual Report 45
Table of Contents
Consolidated Statements of Income and Comprehensive Income
Year Ended December 31,
2007
2006
2005
$2,844.3
$2,789.8
$2,582.1
1,837.9
1,754.8
1,583.0
554.9
542.0
530.1
73.4
84.9
76.9
Depreciation
115.4
130.1
126.1
Amortization
14.5
12.6
21.2
3.4
12.5
21.2
2,599.5
2,536.9
2,358.5
244.8
252.9
223.6
14.3
11.8
12.4
4.0
2.7
(1.4)
Interest expense
(17.5)
(22.8)
(21.2)
Income before income taxes
245.6
244.6
213.4
76.1
78.4
90.8
$ 169.5
$ 166.2
$ 122.6
$
$
$
(Amounts in Millions Except Per Share Amounts)
Revenues
Operating Costs and Expenses:
Costs of providing services and products sold [1]
Selling, general and administrative expenses
Research and development costs
Restructuring charges
Total costs and expenses
Operating Income
Equity in earnings of Cellular Partnerships
Other income/(expense), net
Income taxes
Net Income
Other Comprehensive Income, Net of Tax:
Foreign currency translation adjustments
Change related to pension liability (net of tax of ($0.9), ($0.6) and $15.2)
Unrealized gain/(loss) on hedging activities (net of tax of ($17.3), $1.3 and
$9.3)
Total Comprehensive Income
12.9
5.5
5.9
1.6
1.1
(28.1)
32.1
(2.2)
(14.0)
$ 216.1
$ 170.6
$
86.4
Basic
$
1.26
$
1.20
$
0.88
Diluted
$
1.23
$
1.17
$
0.86
Earnings per common share:
Weighted average common shares outstanding:
[1]
Basic
134.1
138.4
140.0
Diluted
137.7
141.7
142.9
Exclusive of depreciation and amortization, with the exception of amortization of deferred charges as disclosed in Note 2 of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of the financial statements.
46 Convergys Corporation 2007 Annual Report
Table of Contents
Consolidated Balance Sheets
At December 31,
(In Millions)
2007
2006
$ 120.3
$ 235.9
557.7
545.6
32.4
53.5
Assets
Current Assets
Cash and cash equivalents
Receivables, net of allowances of $7.6 and $12.0
Deferred income tax benefits
Prepaid expenses
Other current assets
Total current assets
36.2
37.3
115.0
57.9
861.6
930.2
Property and equipment, net
364.4
368.6
Goodwill, net
896.2
880.2
Other intangibles, net
39.7
49.9
Investments in Cellular Partnerships
55.0
49.5
304.3
228.0
43.0
33.9
$2,564.2
$2,540.3
$
$
Deferred charges
Other assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Debt maturing within one year
Payables, deferred revenue and other current liabilities
0.6
83.9
426.3
512.0
426.9
595.9
259.3
259.6
Deferred income tax liability
80.6
43.9
Accrued pension liability
84.7
105.0
Unrecognized tax benefits
81.4
—
109.6
80.8
1,042.5
1,085.2
—
—
Total current liabilities
Long-term debt
Deferred revenue and other long-term liabilities
Total liabilities
Commitments and Contingencies
Shareholders’ Equity
Preferred shares—without par value, 5.0 authorized; none outstanding
Common shares—without par value, 500.0 authorized;
181.2 outstanding in 2007 and 179.6 in 2006
Treasury stock—53.0 shares in 2007 and 43.1 shares in 2006
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
1,007.4
(933.4)
965.1
(749.4)
1,397.4
1,235.7
50.3
3.7
1,521.7
1,455.1
$2,564.2
$2,540.3
The accompanying notes are an integral part of the financial statements.
Convergys Corporation 2007 Annual Report 47
Table of Contents
Consolidated Statements of Cash Flows
(Amounts in Millions)
2007
Year Ended December 31,
2006
2005
$ 169.5
$ 166.2
$ 122.6
129.9
142.7
147.3
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income tax expense
Equity in earnings of Cellular Partnerships
Stock compensation expense
Decrease in amounts sold under receivables securitization, net
46.6
0.1
53.5
(14.3)
(11.8)
(12.4)
25.6
31.3
—
—
23.5
(100.0)
Changes in assets and liabilities, net of effects from acquisitions:
Change in receivables
(19.3)
(24.5)
27.5
Change in other current assets
(25.4)
8.5
(10.4)
Change in deferred charges, net
(47.5)
(62.5)
(4.2)
8.2
52.1
24.3
(58.4)
63.3
(43.6)
(5.0)
(12.0)
4.6
Change in other assets and liabilities
Change in payables and other current liabilities
Other, net
Net cash provided by operating activities
209.9
353.4
232.7
(102.3)
(104.9)
(131.4)
Cash Flows From Investing Activities:
Capital expenditures
Investments in Cellular Partnerships
Sales (purchases) of variable rate securities, net
Return of capital from Cellular Partnerships
Acquisitions, net of cash acquired
Proceeds from disposal of property and equipment
Net cash used in investing activities
—
—
(0.8)
20.5
(30.0)
—
8.8
5.8
4.3
(2.8)
(6.8)
(15.9)
1.0
8.4
5.5
(74.8)
(127.5)
(138.3)
Cash Flows From Financing Activities:
Repayments of commercial paper and other debt, net
(7.8)
(6.9)
(31.2)
(Repayments) borrowings under Canadian credit facility, net
(55.4)
(30.3)
85.7
(Repayments) borrowings under UK credit facility, net
(20.4)
(5.6)
26.0
(45.9)
—
Repayment of mortgage note
Excess tax benefits from share-based payment arrangements
Purchase of treasury shares
—
7.6
6.2
—
(126.5)
(44.9)
23.0
7.6
(186.0)
43.2
(115.6)
39.9
137.6
235.9
196.0
58.4
$ 120.3
$ 235.9
$ 196.0
Cash paid for interest
$ 17.5
$ 23.0
$ 21.2
Income taxes paid, net of refunds
$ 36.2
$ 34.5
$ 51.1
Issuance of common shares
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(181.3)
6.6
(250.7)
Supplemental Cash Flow Information:
The accompanying notes are an integral part of the financial statements.
48 Convergys Corporation 2007 Annual Report
Table of Contents
Consolidated Statements of Shareholders’ Equity
Number
Of
Common
Common
Shares
Treasury
Stock
Retained
Earnings
175.3
$ 873.6
$(573.3)
$ 946.9
1.5
7.6
7.6
1.9
1.9
(Amounts in Millions)
Shares
Balance at January 1, 2005
Issuance of common shares
Accumulated
Other
Comprehensive
Income tax benefit from stock
option exercises
Repurchase of common shares
Income (Loss)
$
(49.6)
Net income
122.6
122.6
(36.2)
Amortization of stock-based
compensation
Issuance of common shares
23.5
23.5
906.6
2.8
23.0
23.0
6.2
6.2
Repurchase of common shares
(622.9)
1,069.5
1.9
(126.5)
Net income
166.2
166.2
Adoption of SFAS No. 158
Amortization of stock-based
compensation
4.4
(2.6)
(2.6)
965.1
29.3
(749.4)
Adoption of FIN 48
1,235.7
3.7
(7.8)
1.6
Excess tax benefits from sharebased payment arrangements
(7.8)
6.6
7.6
7.6
(184.0)
Net income
(184.0)
169.5
169.5
Other comprehensive income
46.6
Amortization of stock-based
compensation
28.1
181.2
1,455.1
6.6
Repurchase of common shares
Balance at December 31, 2007
4.4
29.3
179.6
1,355.1
(126.5)
Other comprehensive income
Issuance of common shares
(36.2)
176.8
Income tax benefit from stock
option exercises
Balance at December 31, 2006
$1,285.3
(49.6)
Other comprehensive loss
Balance at December 31, 2005
38.1
Total
$1,007.4
46.6
28.1
$(933.4)
$1,397.4
$
50.3
$1,521.7
The accompanying notes are an integral part of the financial statements.
Convergys Corporation 2007 Annual Report 49
Table of Contents
Notes to Consolidated Financial Statements
(Amounts in Millions Except Share and Per Share Amounts)
1. Background and Basis of Presentation
Convergys Corporation (the Company or Convergys) is a global leader in relationship management. The Company provides
solutions that drive more value from the relationships its clients have with their customers and employees. Convergys turns these
everyday interactions into a source of profit and strategic advantage for the Company’s clients. For 25 years, the Company’s
unique combination of domain expertise, operational excellence and innovative technologies has delivered process improvement
and actionable business insight to clients’ customers and employees that now span more than 70 countries and 35 languages. The
Company reports three segments: (i) Customer Management, which provides outsourced customer care solutions as well as
professional and consulting services to in-house customer care operations; (ii) Information Management, which provides
convergent rating, charging and billing solutions for the global communications industry; and (iii) HR Management, which provides
human resource business process outsourcing solutions and learning solutions. The Company’s business segments were renamed
in 2007 to align with the Company’s rebranding efforts as a global relationship management company.
2. Accounting Policies
Consolidation — The consolidated financial statements include the accounts of the Company’s majority-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated upon consolidation.
Use of Estimates — Preparation of financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the amounts reported. These estimates include project
completion dates, time and cost required to complete projects for purposes of revenue recognition and future revenue, expense
and cash flow estimates for purposes of impairment analysis and loss contract evaluation. Actual results could differ from those
estimates.
Foreign Currency — Assets and liabilities of foreign operations 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. Gains or losses resulting from foreign exchange transactions are recorded in
the Consolidated Statements of Income and Comprehensive Income within other income/(expense), net.
Revenue Recognition — Revenues from Customer Management and HR Management, which accounted for 66% and 9%,
respectively, of the Company’s 2007 consolidated revenues, consist of fees generated from outsourced services provided to the
Company’s clients. Information Management, which accounted for 25% of 2007 consolidated revenues, generates its revenues
from three primary sources: data processing, professional and consulting services and license and other services.
The Company’s revenues are recognized in conformity with Securities and Exchange Commission Staff Accounting Bulletin
No. 104, “Revenue Recognition,” Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables,” and Statement of Position (SOP) 97-2, “Software Revenue Recognition.” Revenues are recognized only when there
is evidence of an arrangement and the Company determines that the fee is fixed and determinable and collection of the fee
included in the arrangement is considered probable. When determining whether the fee is considered fixed and determinable and
collection is probable, the Company considers a number of factors including the creditworthiness of the client and the contractual
payment terms. If a client is not considered creditworthy, all revenue under arrangements with that client is recognized upon receipt
of cash. If payment terms extend beyond what is considered customary or standard in the related industry and geographic location,
the related fees are considered extended and deferred until they become due and payable.
Over 90% of Customer Management’s revenues are derived from agent-related services. The Company typically
50 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
recognizes these revenues as services are performed based on staffing hours or the number of contacts handled by service agents
using contractual rates. In a limited number of engagements where the client pays a fixed fee, the Company recognizes revenues,
based on the specific facts and circumstances of the engagement, using the proportional performance method or upon final
completion of the engagement. Customer Management’s remaining revenues are derived from collection services and professional
and consulting services. Revenues for collection-related services are recognized in the month collection payments are received
based on a percentage of cash collected or other agreed upon contractual parameters. Revenues for professional and consulting
services are recognized as the services are performed or upon final completion of the engagement based on the specific facts and
circumstances of the engagement.
Data processing, which accounted for 33% of the 2007 Information Management revenues, consists of monthly fees for processing
client transactions in Information Management’s data centers and, in some cases, the clients’ data centers, using Information
Management’s proprietary software. Data processing revenues are recognized based on the number of invoices, subscribers or
events that are processed by Information Management using contractual rates. In connection with any new data processing
outsourcing arrangements, Information Management often must perform significant set-up activities or implementations, including
the installation and customization of its proprietary software in its centers. Under these arrangements, a client does not take
possession of the software nor has the right to take possession of the software without incurring a significant penalty. In
accordance with EITF Issue 00-03, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to
Use Software Stored on Another Entity’s Hardware,” the implementations are not treated as separate elements. Accordingly, any
proceeds collected for the implementations are deferred and recognized over the service period once Information Management
begins to deliver the data processing services.
Professional and consulting revenues accounted for 36% of the 2007 Information Management revenues. These revenues consist
of fees generated for installation, implementation, customization, training and managed services related either to the clients’ use of
Information Management’s software in Information Management’s data centers or in their own processing environments. The
professional and consulting fees are either invoiced monthly to the Company’s clients based on time and materials incurred at
contractually agreed upon rates or, in some instances, the Company invoices for professional and consulting services based upon
a fixed fee. Professional and consulting services provided in connection with license arrangements are evaluated to determine
whether those services are essential to the client’s functionality of the software. When significant customization or modification of
the software and the development of complex interfaces are required to meet the client’s functionality, those services are
considered essential. Accordingly, the related professional and consulting revenue is recognized together with the license fee using
the percentage-of-completion method. The Company calculates the percentage of work completed by comparing contract costs
incurred to date to total estimated contract costs at completion. Payment for these services sometimes is dependent on milestones
(e.g., commencement of work, completion of design plan, completion of configuration, completion of customization). These
milestone payments normally do not influence the Company’s revenue recognition as the scheduled payments coincide with the
period of time the Company completes the work. When the professional and consulting services provided in connection with license
arrangements are not considered essential or when professional and consulting services are provided in connection with
outsourcing arrangements, the revenues are recognized as the related services are delivered.
Convergys Corporation 2007 Annual Report 51
Table of Contents
License and other revenues, which accounted for 31% of the 2007 Information Management revenues, consist of revenues
generated from the sale of licenses to use Information Management’s proprietary software and related software support and
maintenance fees. License arrangements are contracted as either perpetual or term licenses, depending on the software product.
As noted above, when Information Management provides professional and consulting services that are considered essential to the
software’s functionality, the license element is recognized together with the professional and consulting element using the
percentage-of-completion method. In circumstances where the Company is providing professional and consulting services that are
considered essential to the software’s functionality, and the Company is unable to determine the pattern in which Information
Management’s professional and consulting services will be utilized, the license revenue is recognized on a straight-line basis over
the implementation period. When Information Management is not required to provide services that are considered essential to the
software’s functionality, the license element is recognized upon delivery of the software, assuming all other revenue recognition
criteria have been met.
In connection with its license arrangements, Information Management typically is engaged to provide support and maintenance
services. Revenues for support and maintenance services are recognized ratably over the term of the agreement. For these
arrangements, Information Management allocates the contract value to the elements based on fair value of the individual elements.
Fair value is determined using vendor specific objective evidence (VSOE), which represents the normal pricing for these elements
when sold separately. For a very limited number of its arrangements, the Company has not had sufficient VSOE of fair value of its
undelivered elements, principally related to support and maintenance. As a result, revenue for the entire arrangement, including
license fees and related professional and consulting fees, has been deferred and recognized over the term of the support and
maintenance period. There may be cases in which there is VSOE of fair value of the undelivered item but no such evidence for the
delivered items. In these cases, the residual method is used to allocate the arrangement consideration. Under the residual method,
the amount of consideration allocated to the delivered items equals the total arrangement consideration less the aggregate VSOE
of fair value of the undelivered elements.
HR Management’s arrangements typically span several years and entail delivery of multiple services (e.g., benefits administration,
compensation, payroll administration, recruiting and learning) in different countries. These multiple-element arrangements are
assessed to determine whether they can be separated into more than one unit of accounting. EITF Issue 00-21 establishes the
following criteria, all of which must be met, in order for a deliverable to qualify as a separate unit of accounting: (i) the delivered
items have value to the client on a stand-alone basis, (ii) there is objective and reliable evidence of the fair value of the undelivered
items, and (iii) if the arrangement includes a general right of return relative to the delivered items, delivery or performance of the
undelivered items is considered probable and substantially in the control of the Company. If these criteria are met, each of the
contractual services included in the contract is treated as a separate unit of accounting and revenue is recognized as services are
performed based on the number of employees or participants served. If the above criteria are not met all of the services included
are accounted for as a single unit of accounting. Revenue is then recognized either using a proportional performance method such
as recognizing revenue based on transactional services delivered or on a straight-line basis once HR Management begins to
deliver the final service.
Similar to Information Management’s data processing arrangements, HR Management’s arrangements normally involve significant
implementation activities including the installation and configuration of software, migration of participant data and development of
methods and procedures. To the extent the client pays directly for the implementations, the Company defers the proceeds and
52 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
recognizes it over the service period once HR Management begins to deliver the services. Revenues for services provided outside
the scope of the implementation activities are recognized as services are performed or upon completion of the engagement based
on specific facts and circumstances of the engagement.
The Company considers the criteria established by EITF Issue 99-19, “Reporting Revenue Gross as a Principal versus Net as an
Agent,” in determining whether revenue should be recognized on a gross versus a net basis. Factors considered in determining if
gross or net basis recognition is appropriate include whether the Company is primarily responsible to the client for the services, has
discretion on vendor selection, or bears credit risk. The Company provides certain services to clients using third party vendors.
Typically, the costs incurred with third party vendors related to these services are passed through to the clients. In consideration of
the above mentioned criteria, total payments the Company receives from clients related to these services are recorded as revenue
and payments the Company makes to third party vendors are recorded as cost of providing services. During 2007, the Company
recorded $25.3 to both revenues and cost of providing services related to services that were pass through in nature.
The Company sometimes earns supplemental revenues in each of the three segments depending on the satisfaction of certain
service levels or achievement of certain performance measurement targets. The supplemental revenues are recognized only after
required measurement targets are met.
Stock Compensation — Convergys provides stock-based awards to certain employees and Directors. In addition, in the past,
the Company provided stock options to certain employees. Beginning January 1, 2006, the Company accounts for these awards
pursuant to Statement of Financial Accounting Standard (SFAS) No. 123(R), “Share-Based Payment” using the modified
prospective method. Under SFAS No. 123(R), the Company has elected to recognize the compensation cost of all share-based
awards on a straight-line basis over the vesting period of the award. Benefits of tax deductions in excess of recognized
compensation expense are reported as a financing cash flow. Further, upon the adoption of SFAS No. 123(R) beginning January 1,
2006, the Company applies an estimated forfeiture rate to unvested awards when computing the stock compensation-related
expenses. Previously, the Company recorded forfeitures as incurred. The Company estimated the forfeiture rate for unvested
awards based on its historical experience during the preceding two calendar years. Prior to 2006, the Company accounted for
these awards using the intrinsic value method pursuant to Accounting Principles Board Opinion (APB) No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations.
If the Company had elected to recognize compensation cost for the issuance of options to Company employees based on the fair
value at the grant dates, prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” net income and earnings per
share would have been impacted as follows:
Year Ended
December 31,
2005
Net income:
Net income, as reported
$
122.6
Add: Stock-based employee compensation expense determined under the intrinsic method, net of related tax effects
14.8
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related
tax effects
Pro forma
(18.4)
$
119.0
As reported
$
0.88
Pro forma
$
0.85
As reported
$
0.86
Pro forma
$
0.83
Basic earnings per share:
Diluted earnings per share:
Income Taxes — The Company accounts for income taxes pursuant to SFAS No. 109, “Accounting for Income Taxes,” which
requires recognition of deferred tax assets
Convergys Corporation 2007 Annual Report 53
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and liabilities for the expected future income tax consequences of transactions that have been included in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are reduced by a valuation allowance for amounts that do not satisfy the realization criteria of SFAS
No. 109.
The Company also reviews its tax activities and records a liability for its uncertain tax positions in accordance with FIN 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109.” The interpretation contains a two-step approach
to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to
measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The
Company’s policy is to recognize interest and penalties accrued on unrecognized tax benefits as part of income tax expense.
Other Comprehensive Income (Loss) — Components of other comprehensive income include currency translation
adjustments, changes related to pension liabilities, net of tax, and unrealized gains (losses) on hedging activities, net of tax.
Foreign currency translation adjustments generally are not adjusted for income taxes as they relate to indefinite investments in nonU.S. operations. Accumulated other comprehensive income also includes, net of tax, actuarial gains or losses, prior service costs or
credits and transition assets and obligations that are not recognized as components of net periodic pension cost pursuant to FASB
No. 87, “Employers’ Accounting for Pensions,” and FASB No. 106, “Employers’ Accounting for Postretirement Benefits Other than
Pensions.”
Concentration of Credit Risk — In the normal course of business, the Company is exposed to credit risk. The principal
concentrations of credit risk are short-term investments, accounts receivable and derivative instruments. The Company regularly
monitors credit risk exposures and takes steps to mitigate the likelihood of these exposures resulting in a loss. Historically, credit
losses on accounts receivable have not been material because of the large concentration of revenues with a small number of large,
established companies. The Company does not require collateral or other security to support accounts receivable. The Company
evaluates the creditworthiness of its clients in conjunction with its revenue recognition processes, as discussed above, as well as
through its ongoing collectability assessment processes for accounts receivable. The Company maintains an allowance for doubtful
accounts receivable based upon factors surrounding the credit risk of specific clients, historical trends and other information.
Cash Equivalents — Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or
less.
Receivables — Trade receivables are comprised primarily of amounts owed to the Company through its billing and information
services and software, customer management and HR management services and are presented net of an allowance for doubtful
accounts of $7.6 and $12.0 at December 31, 2007 and 2006, respectively. Contracts with individual clients determine when
receivables are due, generally within 30-60 days, and whether interest is accrued on late payments.
Property and Equipment — Property and equipment are stated at cost. Depreciation is based on the straight-line method over
the estimated useful lives of the assets. Buildings are depreciated over a 30-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.
54 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
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 five years or less. The Company did not capitalize any software development
costs during the periods reported.
Internal Use Software — The Company follows SOP 98-1, “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use,” that requires the capitalization of certain expenditures for software that is purchased or internally
developed for use in the business. During 2007 and 2006, internally developed software amounts capitalized were $14.7 and
$12.2, respectively. 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 — As discussed more fully in Note 5, goodwill is tested at least annually for impairment. Other
intangibles, primarily customer relationship assets, are amortized over a straight-line basis with lives ranging from three to twelve
years and are evaluated periodically if events or circumstances indicate a possible inability to recover their carrying amounts.
Deferred Charges — As more fully described under the heading “Revenue Recognition,” the Company often performs, in
connection with its outsourcing arrangements, certain set-up activities or implementations, including the installation and
customization of its proprietary software in its centers. Additionally, with regard to arrangements where all of the services are
accounted for as a single unit of accounting, the Company defers all revenue until it begins to deliver the final service. In connection
with these arrangements, the Company capitalizes all direct and incremental multiple-element costs (by analogy to SFAS No. 91,
“Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases” (SFAS No. 91), to the extent recovery of these costs is probable. All implementation and set-up activity costs are
amortized ratably over the life of the arrangements as costs of providing service. Deferred amounts are periodically evaluated for
impairment or when circumstances indicate a possible inability to recover their carrying amounts. In the event these costs are not
deemed recoverable, the costs are expensed as incurred. The Company evaluates probability of recovery by considering profits to
be earned during the term of the related contract, the creditworthiness of the client and, if applicable, contract termination penalties
payable by the client in the event that the client terminates the contract early.
In connection with certain of the Company’s outsourcing arrangements, the Company from time to time will incur costs that are nonrefundable cash payments to clients to acquire or extend a contractual relationship. To the extent recovery of these costs is
probable, the Company capitalizes these client acquisition costs (by analogy to SFAS No. 91) and amortizes them ratably over the
life of the contract as a reduction of revenue.
During 2007, 2006 and 2005, the Company capitalized $129.5, $126.5 and $56.4 of client acquisition and implementation costs,
respectively. The related amortization for these years was $53.2, $54.3 and $52.2, respectively.
Investments — Until June 2005, the Company owned 45% limited partnership interests in Cincinnati SMSA Limited Partnership
and Cincinnati SMSA Tower Holdings LLC (the Cellular Partnerships). Cincinnati SMSA Limited Partnership, a provider of wireless
communications in central and southwestern Ohio and northern Kentucky, conducts its operations as a part of AT&T. AT&T is the
general partner as well as a limited partner with a combined partnership interest of approximately 66%. AT&T is the general partner
and a limited partner of Cincinnati SMSA Tower Holdings LLC, an operator of cellular tower space, with a combined partnership
interest of approximately 53%.
Convergys Corporation 2007 Annual Report 55
Table of Contents
On June 27, 2005, AT&T, the general partner of Cincinnati SMSA Limited Partnership (the Partnership), merged certain operating
assets acquired from AT&T Wireless into the Partnership. Although the Company had the option of contributing cash into the
Partnership in order to maintain its 45% ownership in the Partnership, it did not exercise this option. Accordingly, as a result of the
merger, the Company’s ownership interest in the Partnership decreased to 33.8%. The merger did not impact the Company’s
carrying value of its investment in the Partnership. The Company’s 45% ownership interest in Cincinnati SMSA Tower Holdings
LLC did not change.
The general partners are authorized to conduct and manage the business of the Cellular Partnerships. The Company, as a limited
partner, does not take part in, or interfere with, the day-to-day management of the Cellular Partnerships. Limited partners are
entitled to their percentage share of earnings and cash distributions, and responsible for their share of losses. The Company
accounts for its interest in the Cellular Partnerships under the equity method of accounting.
Postemployment Benefits — The Company provides severance benefits to certain employees. Pursuant to SFAS No. 112,
“Employers’ Accounting for Postemployment Benefits,” the Company accrues the benefits when it becomes probable that such
benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid.
Deferred Revenue and Government Grants — As more fully described under the heading “Revenue Recognition,” amounts
billable to the client for implementation or set-up activities are deferred and recognized as revenue evenly over the service period
the outsourcing services are provided. Additionally, billings and collections in excess of revenues recognized are recorded as
deferred revenues until revenue recognition criteria are met.
From time to time, the Company receives grants from local or state governments as an incentive to locate or retain operations in
their jurisdictions. Depending on the arrangement, the grants are either received up-front or at the point the Company achieves the
milestones set forth in the grant. The Company’s policy is to record the grant monies received as deferred income and recognize
income as either a reduction of costs of service expense, selling, general and administrative expense or depreciation expense as
the milestones are met over the term of the grant. The terms of the grants range from 6 to 15 years.
Short-term deferred revenues are included within payables and other current liabilities and long-term deferred revenues are
included within other long-term liabilities in the Company’s Consolidated Balance Sheets. The Company’s total deferred revenue
and government grants amounted to $132.5 and $135.1 at December 31, 2007 and 2006, respectively. For 2007, $72.9 was shortterm and $59.6 was long-term in nature. For 2006, $100.7 was short-term and $34.4 was long-term in nature.
Derivative 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. The
Company currently uses cash flow and fair value 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 and options expiring within 48 months 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 from time to time enters into interest rate swap
agreements to effectively fix the interest rates of variable rate borrowings. In using derivative financial instruments to hedge
exposures to changes in exchange rates and interest rates, the Company exposes itself to counterparty credit risk.
All derivatives, including foreign currency exchange contracts, are recognized in the balance sheet at fair
56 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
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 or cash flow hedge. Changes in the fair
value of derivatives that are highly effective 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
and designated as cash flow hedges are recorded in other comprehensive income, until the underlying transactions occur. Any
realized gains or losses resulting from the cash flow hedges are recognized together with the hedged transaction 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 or cash flow 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, 2007 and 2006, all hedges were determined to be
effective.
The Company also periodically enters into forward exchange contracts and options that are not designated as hedges. The
purpose of the majority of these derivative instruments is to protect the Company against foreign currency exposure pertaining to
receivables and payables that are denominated in currencies different from the functional currencies of the Company or the
respective subsidiaries. The Company records changes in the fair value of these derivative instruments in the Consolidated
Statements of Income and Comprehensive Income within other income (expense), net.
Fair Value of Financial Instruments — Fair values of cash equivalents, short-term investments and current accounts receivable
and payable approximate the carrying amounts because of their short-term nature. Long-term debt carried on the Company’s
Consolidated Balance Sheets at December 31, 2007 and 2006 has a carrying value that approximates its estimated fair value. The
fair value of the Company’s $250 unsecured senior notes that are due in December 2009 (see Note 7 for further explanation) was
approximately $249. The fair value is based on discounting future cash flows using current interest rates adjusted for risk. The fair
value of short-term debt approximates its recorded value because of its short-term nature.
New Accounting Pronouncements — On January 1, 2007, the Company adopted the provisions of Financial Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 creates a single model to address uncertainty in income tax
positions. FIN 48 prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the
financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition and excludes income taxes from Statement of Financial Accounting Standard (SFAS)
No. 5, “Accounting for Contingencies.” FIN 48 applies to all tax positions related to income taxes subject to SFAS No. 109,
“Accounting for Income Taxes.” This includes tax positions considered to be “routine” as well as those with a high degree of
uncertainty. As a result of the adoption of FIN 48, the Company recognized a $7.8 increase in the liability for unrecognized tax
benefits, which was accounted for as a reduction to the retained earnings balance as of January 1, 2007. Additionally, adoption of
Convergys Corporation 2007 Annual Report 57
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FIN 48 caused balance sheet reclassifications from deferred tax and accrued tax accounts to a FIN 48 liability for unrecognized tax
benefits. See Note 6 of Notes to Consolidated Financial Statements for further discussion related to the adoption of this Standard.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This new Standard defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 does not require new fair value measurements, rather it applies under existing accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. In November 2007, the FASB agreed to defer the effective date of SFAS No. 157 for non-financial assets and
liabilities until fiscal years and interim periods beginning after November 15, 2008. The Company will adopt this Standard beginning
January 1, 2008 for financial assets and liabilities. Adoption of this Standard at January 1, 2008 will not have an impact on the
Company’s financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS
No. 159 allows entities to voluntarily choose, at specified election dates, to measure many financial and certain non-financial assets
and liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is
elected for an instrument, SFAS No. 159 specifies that all subsequent changes in fair value for that instrument shall be reported in
earnings. This Statement is effective as of the first fiscal year that begins after November 15, 2007. The adoption of this Standard
will not have a material impact on the Company’s financial statements.
In April 2007, the FASB issued EITF 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split Dollar Life Insurance Arrangements.” This Standard requires an employer to recognize a liability for future
benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” if, in
substance, a postretirement benefit plan exists. The adoption of EITF 06-04 is effective for fiscal years beginning after
December 15, 2007 and the provision will be applied through a cumulative effect adjustment to retained earnings as of the
beginning of the year of adoption. Adoption of this Standard will not have a material impact on the Company’s financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” which replaces SFAS No. 141.
SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any resulting goodwill and any non controlling interest in the acquiree. The
Statement also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of
the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15,
2008 and must be applied prospectively to business combinations completed on or after that date. Accordingly, any business
combinations the Company engages in will be recorded and disclosed following existing GAAP until December 31, 2008. Adoption
of SFAS No. 141R will have an impact on the Company’s consolidated financial statements when effective, but the nature and
magnitude of the specific effects will depend upon the terms and size of the acquisitions consummated after the effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51.” SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling
interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. In addition, this
statement requires the amount of net
58 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
income attributable to the noncontrolling interest to be included on the face of the consolidated income statement. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. The Company is currently evaluating the impact of the adoption of this Standard on its financial statements.
3. Common and Preferred Shares
The Company’s Board of Directors has authorized the repurchase of up to 50 million common shares as of December 31, 2007.
Through December 31, 2007, the Company repurchased 35.3 million shares for total costs of $582.3 pursuant to these
authorizations.
Below is a summary of the Company’s share repurchases for the years ended December 31, 2007, 2006 and 2005:
2007
9.9 million
$
184.0
2006
6.1 million
$
126.5
2005
3.7 million
$
49.6
At December 31, 2007, the Company has the authorization to repurchase of up to 14.7 million additional common shares pursuant
to these authorizations.
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,
2007 and 2006, there were no preferred shares outstanding.
4. Restructuring and Impairment
2007
During the third quarter of 2007, the Company recorded a restructuring charge of $3.4 at Information Management related to a
facility closure in the United Kingdom. This action was a result of the facility consolidation in the United Kingdom that started during
the fourth quarter of 2006 as discussed in more detail below. The $3.4 accrual is equal to the future costs associated with the
abandoned facility, net of the proceeds from any probable future sublease agreements. The Company used estimates, based on
consultation with its real estate advisors, to arrive at the proceeds from any future sublease agreements. The Company will
continue to evaluate such estimates in recording the facilities abandonment charge. Consequently, there may be additional
reversals or charges relating to this facility closure in the future. At December 31, 2007, this restructuring reserve had an
outstanding balance of $2.6, which will be paid over several years until the lease expires.
2006
The Company initiated a restructuring plan in the fourth quarter of 2006. The plan was initiated to rationalize facility costs, further
streamline the Company’s operations in order to align resources to support growth, and to shift the geographic mix of some of the
Company’s resources. The plan resulted in a net restructuring charge of $12.5 and included $24.1 of severance costs, $0.5 of
facility closure costs and reversal of $12.1 in facility abandonment costs. Restructuring actions were taken in each business
segment, of which $6.5 related to Customer Management, $0.8 related to Information Management, $2.1 related to HR
Management and $3.1 related to Corporate.
The $24.1 severance charge is being paid pursuant to the Company’s existing severance policy and employment agreements and
includes cash-related payments of $21.3 and a non-cash charge of $2.8 related to acceleration of equity-based awards. These
actions, which affected approximately 700 professional employees, were completed in 2007. The $0.5 of facility closure costs relate
Convergys Corporation 2007 Annual Report 59
Table of Contents
to an additional accrual, resulting from changes in the sublease estimates, for a property that was abandoned in 2005. The
Company’s 2002 restructuring charges included facility abandonment costs related to certain U.K. locations. In the fourth quarter of
2006, the Company made a decision to consolidate its current operations in the U.K. and move into one of the facilities that was
originally abandoned in 2002. This resulted in the reversal of $12.1 at December 31, 2006. Completion of the facility consolidation
at this location resulted in the recording of additional reserves in the third quarter of 2007, as discussed above.
Below is the summary of the 2006 net restructuring charge of $12.5 ($8.5 after tax) by segment:
Severance costs
Customer
Management
Information
Management
HR
Management
Corp.
Total
$
$
$
1.6
$ 3.1
$ 24.1
0.5
—
2.1
$ 3.1
Facility related costs/
(reversal)
Net restructuring
6.5
—
$
6.5
12.9
(12.1)
$
0.8
$
(11.6)
$ 12.5
Restructuring liability activity for the fourth quarter 2006 plan consisted of the following:
2007
Balance at January 1
Restructuring charge
Lease termination payments
Severance costs
Balance at December 31
2006
$ 20.5
—
—
$ 24.6
(0.5)
—
(16.9)
(4.1)
$ 3.1
$ 20.5
The remaining accrual of $3.1 at December 31, 2007 mostly reflects the timing of payments to employees who are no longer with
the Company and will be fully paid during the first quarter of 2008.
2002
In connection with a restructuring plan initiated in 2002, the Company made headcount reductions affecting professional and
administrative employees worldwide and closed certain Customer Management and Information Management facilities.
Restructuring liability activity for the 2002 plan consisted of the following:
Balance at January 1
Reversal
Lease termination payments
Other
Balance at December 31
2007
2006
$ 3.0
$ 16.0
—
(12.1)
(3.1)
(2.4)
0.1
1.5
$ —
$ 3.0
5. Goodwill and Other Intangible Assets
The Company is required to test goodwill for impairment annually and at other times if events have occurred or circumstances exist
that indicate the carrying value of goodwill may no longer be recoverable. The impairment test for goodwill involves a two-step
process. The first step compares the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each
reporting unit. If the carrying amount is in excess of the fair value, the second step requires the comparison of the implied fair value
of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any excess of the carrying value of the
reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss. Fair value of
the reporting unit was determined using a combination of the market approach and the income approach. Under the market
approach, fair value is based on actual stock price or transaction prices of comparable companies. Under the income approach,
value is dependent on the present value of net cash flows to be derived from the ownership. Based on the results of its first-step
impairment tests performed during the three years ended December 31, 2007, the Company had no goodwill impairment related to
its four reporting units: Information Management International, Information Management North America, Customer Management
and Human Resources Management. The Company believes it makes every reasonable effort to ensure that it accurately
estimates the fair value of the reporting units. However, future changes in the assumptions used to make these estimates could
result in the recording of an impairment loss.
60 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
Goodwill increased to $896.2 at December 31, 2007 from $880.2 at December 31, 2006. Below is a progression of goodwill for the
Company’s segments for 2007 and 2006.
Balance at January 1, 2006
Customer
Management
Information
Management
HR
Management
$
$
$
Earn-out payments
Other
Balance at December 31, 2006
Acquisitions
Other
Balance at December 31, 2007
$
559.6
182.4
Total
128.6
$870.6
6.8
—
—
6.8
(0.1)
1.9
1.0
2.8
566.3
184.3
129.6
880.2
—
2.8
—
2.8
12.2
0.7
0.3
13.2
129.9
$896.2
578.5
$
187.8
$
The earn-out payment of $6.8 in 2006 at Customer Management related to the Encore acquisition completed during 2004. The
other changes to goodwill in 2007 and 2006 principally reflect foreign currency translation adjustments.
The Company’s other intangible assets, primarily acquired through business combinations, are evaluated periodically if events or
circumstances indicate a possible inability to recover their carrying amounts. Evaluation of intangible assets in 2007 resulted in
recording an impairment charge of $5.9 related to certain acquired intangible assets. As of December 31, 2007 and 2006, the
Company’s other intangible assets consisted of the following:
Gross
Carrying
Amount
Accumulated
Amortization
Net
2007:
Software (classified with Property, Plant & Equipment)
$
Customer relationships and other intangibles
37.9
$
141.4
Total
$
(36.8)
$
1.1
(101.7)
39.7
$ 40.8
179.3
$
(138.5)
44.3
$
(39.0)
2006:
Software (classified with Property, Plant & Equipment)
$
Customer relationships and other intangibles
141.1
Total
$
185.4
$
$
5.3
(91.2)
49.9
(130.2)
$ 55.2
The intangible assets are being amortized using the following amortizable lives: five years for software and three to twelve years for
customer relationships and other. The remaining weighted average amortization period for intangible assets is seven years (two
years for software and seven years for customer relationships and other).
Intangible amortization expense for the year ended December 31, 2007 was $14.5 and includes $5.9 of impairment charges
discussed above. Estimated intangible amortization expense for the five subsequent fiscal years is as follows:
For the year ended 12/31/08
$7
For the year ended 12/31/09
$7
For the year ended 12/31/10
$6
For the year ended 12/31/11
$6
For the year ended 12/31/12
$5
Thereafter
$9
6. Income Taxes
The Company’s provision (benefit) for income taxes consists of the following:
Year Ended December 31,
2007
2006
2005
$ 3.8
$ 55.9
$ 19.5
Current:
United States federal
Foreign
State and local
Total current
22.9
16.1
17.3
2.8
6.3
0.5
29.5
78.3
37.3
Deferred:
United States federal
47.6
4.3
45.4
Foreign
(5.4)
(0.2)
(0.2)
4.4
(4.0)
8.3
46.6
0.1
53.5
$ 76.1
$ 78.4
$ 90.8
State and local
Total deferred
Total
The Company’s combined pre-tax earnings from foreign subsidiaries or branches were $93.1, $81.0 and $37.9 during 2007, 2006
and 2005, respectively.
Convergys Corporation 2007 Annual Report 61
Table of Contents
The following is a reconciliation of the statutory federal income tax rate with the effective tax rate for each year:
Year Ended December 31,
2007
2006
2005
35.0%
35.0%
35.0%
Permanent differences
0.1
0.5
0.9
State and local income taxes, net of federal income tax benefit
2.2
1.6
1.6
(5.1)
(2.7)
(1.2)
0.4
(3.5)
0.5
U.S. federal statutory rate
Foreign taxes
Foreign valuation allowances
Cash repatriations
—
—
5.3
Other
(1.6)
1.1
0.5
Effective rate
31.0%
32.0%
42.6%
The Company’s foreign taxes for 2007, 2006 and 2005 included $11.8 (4.8%), $7.4 (3.0%) and $4.9 (2.3%), respectively, of benefit
derived from tax holidays in the Philippines and India. The diluted earnings per share impact of these items for 2007, 2006 and
2005 were $0.09, $0.05 and $0.03, respectively. The Company’s foreign taxes for 2007, 2006 and 2005 include $11.0, $7.2 and
$3.8, respectively, related to a tax holiday in India scheduled to expire March 2009. The tax holidays in the Philippines are
scheduled to expire between August 2008 and December 2012. The Company has applied for one- or two-year extensions of the
Philippine tax holidays in accordance with local law.
On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law. The Act created a temporary incentive
for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for
certain dividends from controlled foreign corporations. During the fourth quarter of 2005, the Company repatriated approximately
$187 from its controlled foreign corporations. As part of the repatriation, the Company triggered $24.3 of capital gains which were
entirely offset by utilizing $24.3 of its $27.6 federal capital loss carryforward, for which a full valuation allowance previously had
been recorded, the remaining $3.3 carryforward expired unutilized. Overall, the repatriations resulted in additional income tax
expense of $11.4 (5.3%) or $0.08 per diluted share in 2005.
The components of deferred tax assets and liabilities are as follows:
At December 31,
2007
2006
$ 89.8
$ 109.8
53.5
55.9
Deferred tax asset:
Loss & credit carryforwards
Pension and employee benefits
Restructuring charges
2.0
8.3
38.1
28.1
Other comprehensive income
—
12.9
Other
—
Deferred revenue
Valuation allowance
0.8
(56.0)
(73.6)
127.4
142.2
Depreciation and amortization
74.3
59.5
Deferred implementation costs
91.2
72.7
Other comprehensive income
5.4
—
Other
1.3
—
172.2
132.2
Total deferred tax asset
Deferred tax liability:
Total deferred tax liability
Net deferred tax (liability)/asset
$ (44.8)
$ 10.0
As of December 31, 2007 and 2006, $32.1 and $35.8, respectively, of the valuation allowance relates to the Company’s foreign
operations. During 2007, the operating results of the foreign entity that accounts for $22.1 of this valuation allowance continued to
improve. In the event the Company later concludes that there is sufficient positive evidence that it is more likely than not that the
related deferred tax assets will be realized, the valuation allowance will be reversed in full or in part. Of the $22.1, $15.2 will be
credited to additional paid in capital when the related tax benefits are realized.
As of December 31, 2007, $12.3 of the valuation allowance relates to operating loss carryforwards acquired in connection with the
business combinations made during 2004. Realization of these operating loss carryforwards will be recorded as a reduction of
goodwill.
62 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
At December 31, 2007, the Company had the following operating loss carryforwards:
Category
Amount
Expiration
Federal
$
96.2
State & Local
$
342.1
Begin to expire in 2010 and can be utilized through 2023.
$65.6 has no expiration date. Remainder begins to expire in 2008 and can be utilized through 2026.
Foreign
$
102.3
$86.0 has no expiration date. Remainder begins to expire in 2009 and can be utilized through 2022.
The $96.2 of federal operating loss carryforwards and $113.9 of the state loss carryforwards were acquired in connection with
business combinations. Utilization of the acquired federal and state tax loss carrryforwards may be limited pursuant to Section 382
of the Internal Revenue Code of 1986. In addition at December 31, 2007, the Company had $11.1 in state tax credits that expire
from 2008 to 2010.
The Company has not provided for U.S. federal income taxes or foreign withholding taxes on $134.1 of undistributed earnings of its
foreign subsidiaries at December 31, 2007, 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 were distributed.
As discussed in Note 2 of Notes to Consolidated Financial Statements, on January 1, 2007, the Company adopted the provisions of
FIN 48. As a result of the adoption of FIN 48, the Company recognized a $7.8 increase in the liability for unrecognized tax benefits,
which was accounted for as a reduction to the retained earnings balance as of January 1, 2007. Additionally, adoption of FIN 48
caused balance sheet reclassifications from deferred tax and accrued tax accounts to a FIN 48 liability for unrecognized tax
benefits. The FIN 48 tax liability for unrecognized tax benefits of $88.8 as of January 1, 2007 included an accrual for interest and
penalties of $17.6. The impact of timing differences and tax attributes are considered when calculating interest and penalty accruals
associated with the tax reserve. The total amount of net unrecognized tax benefits that would affect income tax expense, if ever
recognized in the financial statements, is $62.4. This amount includes net interest and penalties of $12.9.
As of December 31, 2007, the liability for unrecognized tax benefits was $82.9 of which $1.5 is recorded within other current
liabilities and $81.4 is recorded as a long-term liability in the accompanying Consolidated Financial Statements.
A reconciliation of the beginning and ending total amounts of unrecognized tax benefits (exclusive of interest and penalties) is as
follows:
Balance, January 1, 2007
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Balance, December 31, 2007
$ 71.2
0.9
6.5
(18.2)
$ 60.4
The Company is currently attempting to resolve income tax audits relating to prior years in various jurisdictions. The Company has
received assessments from these jurisdictions including transfer pricing, research credits, accounting methods, deductibility of
expenses and apportionment of income. The Company believes that it is appropriately reserved with regard to these assessments
as of December 31, 2007. Furthermore, the Company believes that it is reasonably possible that the total amounts of unrecognized
tax benefits will decrease between $25.0 to $35.0 prior to December 31, 2008, based upon resolution of audits; however, actual
developments in this area could differ from those currently expected.
The Company’s policy is to recognize interest and penalties accrued on unrecognized tax benefits as part of income tax expense.
During the year ended December 31, 2007, the Company recognized approximately $6.4 in interest and penalties. Included in the
December 31, 2007 balance are accruals for interest and penalties of $22.5. The impact of timing differences and tax attributes are
considered when calculating interest and penalty accruals associated the tax reserve.
Convergys Corporation 2007 Annual Report 63
Table of Contents
The total amount of net unrecognized tax benefits that would affect income tax expense, if ever recognized in the financial
statements is $68.4. This amount includes net interest and penalties of $16.8.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With a few
exceptions, the Company is no longer subject to examinations by tax authorities for years before 2002.
7. Debt
Debt consists of the following:
At December 31,
2007
2006
$249.4
$249.0
Canadian credit facility
—
55.4
UK credit facility
—
20.4
10.5
18.7
259.9
343.5
0.6
83.9
$259.3
$259.6
Senior notes
Other
Total debt
Less current maturities
Long-term debt
Weighted average effective interest rates:
Senior notes
5.0%
5.0%
Canadian credit facility
5.0%
4.9%
UK credit facility
6.4%
5.6%
Other
5.0%
5.1%
The Company’s debt is considered investment grade by the rating agencies. At December 31, 2007, the Company’s borrowing
facilities included a $400 Million Five-Year Competitive Advance and Revolving Credit Facility. As of December 31, 2007, the
Company had no amounts borrowed under this facility. The commitment fee on this facility at December 31, 2007 was 0.1%. The
maturity date of the Credit Facility Agreement is October 20, 2011, provided, however, that upon satisfaction of certain conditions
contained in the Credit Facility Agreement, the Company may extend the maturity date by one year. The participating agents in the
credit facility include JPMorgan Chase Bank, Citicorp USA, PNC Bank and Deutsche Bank AG. The Company’s credit facility
includes certain restrictive covenants including maintenance of interest coverage and debt-to-EBITDA ratios. The Company’s
interest coverage ratio, defined as the ratio of consolidated earnings before interest, tax, depreciation and amortization (EBITDA) to
consolidated interest expense, cannot be less than 4.00 to 1.00 for four consecutive quarters. The Company’s debt-to-EBITDA ratio
cannot be greater than 3.25 to 1.0 at any time. The Company was in compliance with all covenants during 2007.
In December 2004, the Company issued $250.0 in 4.875% unsecured senior notes due December 15, 2009. The notes were
offered and sold pursuant to the universal shelf registration statement, previously declared effective in June 2003. Under the
registration statement, the Company has the ability to offer up to $250.0 in additional debt securities, common shares, preferred
shares and/or warrants to purchase such securities. In connection with the issuance of this 4.875% unsecured senior notes, the
Company entered into an interest rate swap agreement with a notional value of $250.0, which was designated as a hedge. The
purpose of the swap was to protect the notes against changes in fair value due to changes in interest rates. Under the terms of the
interest rate swap, the Company received interest at a fixed rate of 4.875% and paid interest at a variable rate based on LIBOR.
Based on market conditions, the Company terminated this swap agreement on June 1, 2005. In connection with the settlement of
the derivative instrument, the Company paid the counterparty $1.7, the fair value of the swap on June 1, 2005. The $1.7 paid on the
termination has been treated as a debt discount and, hence, is being amortized as interest expense over the term of the notes. The
senior notes had an outstanding balance of $249.4 and $249.0 at December 31, 2007 and 2006, respectively.
In November 2005, one of the Company’s Canadian subsidiaries entered into a senior unsecured revolving credit facility of 100.0
Canadian dollars with The Bank of Nova Scotia. The proceeds were used to repatriate funds
64 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
from the foreign subsidiary. The credit facility was paid in full during December 2007. As of December 31, 2006, the Company had
borrowings under this facility of $55.4. This credit facility also included certain restrictive covenants. Our interest coverage ratio
could not be less than 4.00 to 1.00 for four consecutive quarters. Our debt-to-capitalization ratio could not be greater than 0.6 to 1.0
at any time. We were in compliance with all covenants throughout 2007 and 2006.
In December 2005, one of the Company’s United Kingdom subsidiaries entered into a credit overdraft facility of 15.0 British pounds
with Wachovia Bank. The Company repaid this facility in full during 2007. There was $20.4 outstanding under this facility as of
December 31, 2006. The proceeds from this facility were used to fund the Company’s international operations.
Other debt of $10.5 and $18.7 at December 31, 2007 and 2006, respectively, consisted of capital leases and miscellaneous
domestic and international borrowings.
At December 31, 2007, future minimum payments of the Company’s debt arrangements are as follows:
2008
$
2009
0.6
249.5
2010
—
2011
3.8
2012
—
6.0
Thereafter
Total
$
259.9
8. Employee Benefit Plans
Pensions
The Company sponsors a defined benefit pension plan, which includes both a qualified and 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 executive pension plans). The pension benefit
formula for the cash balance plan is determined by a combination of compensation and age-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 qualified portion 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 Company’s measurement date for all plans is
December 31. The projected unit credit cost method is used for determining the unfunded executive pension cost for financial
reporting purposes. Pension costs for the cash balance plan were determined based on the traditional unit credit cost method. The
plan assumptions are evaluated annually and are updated as necessary.
On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158. This Standard required
the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit
obligations) of its pension plans in the December 31, 2006 statement of financial position, with a corresponding adjustment to
accumulated other comprehensive income, net of tax. The negative adjustment to accumulated other comprehensive income of
$4.0 ($2.6, net of tax) at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs and
unrecognized transition obligation remaining from the initial adoption of SFAS No. 87, all of which were previously netted against
the plans funded status in the Company’s statement of financial position pursuant to the provisions of SFAS No. 87. These
amounts are subsequently recognized as net periodic pension cost pursuant to the Company’s historical accounting policy for
amortizing such amounts.
Convergys Corporation 2007 Annual Report 65
Table of Contents
Components of pension cost and other amounts recognized in other comprehensive income for the cash balance plan are as
follows:
Year Ended December 31,
Service cost (benefits earned during the period)
Interest cost on projected benefit obligation
2007
2006
2005
$ 17.9
$ 21.9
$ 21.9
11.7
10.6
10.3
Expected return on plan assets
(14.6)
(14.7)
(16.0)
Amortization and deferrals—net
2.5
1.7
0.5
Total pension cost
$ 17.5
$ 19.5
$ 16.7
Other comprehensive (income) loss
$ (0.3)
$ (10.1)
$ 41.2
Beginning January 1, 2007, the cash balance plan was amended to reduce the amount of pension credit earned on covered
compensation. The decline in service costs in 2007 compared to 2006 and 2005 reflects this amendment. In 2008, a decision was
made to amend the Company’s cash balance plan to cease future benefit accruals and to close participation effective March 31,
2008. After March 31, 2008, participants will not earn future accruals or credits to their cash balance account with respect to
compensation earned after March 31, 2008, but will continue to be credited with interest to their cash balance account after
March 31, 2008.
The reconciliation of the cash balance plan’s projected benefit obligation and the fair value of plan assets for the years ended
December 31, 2007 and December 31, 2006 are as follows:
At December 31,
2007
2006
Change in benefit obligation:
Benefit obligation at beginning of year
$ 214.7
$ 202.3
Service cost
17.9
21.9
Interest cost
11.7
10.6
—
2.2
Change in plan provisions
Actuarial (gain) loss
(1.1)
Benefits paid
Benefit obligation at end of year
—
(27.6)
(22.3)
$ 215.6
$ 214.7
At December 31,
2007
2006
$ 182.0
$ 166.9
9.8
23.6
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Other
19.5
13.8
(27.6)
(22.3)
1.4
—
Fair value of plan assets at end of year
$ 185.1
$ 182.0
Funded status
$ (30.5)
$
(32.7)
$
$
32.7
Amounts recognized in the Consolidated Balance Sheets consisted of:
Non-current liability
Accumulated other comprehensive loss
30.5
35.8
36.1
Included in accumulated other comprehensive income at December 31, 2007 are unrecognized prior service costs of $4.2 ($2.7,
net of tax) and unrecognized actuarial losses of $31.6 ($20.6, net of tax). Included in accumulated other comprehensive income at
December 31, 2006 are unrecognized prior service costs of $5.0 ($3.3, net of tax) and unrecognized actuarial losses of $31.1
($20.2, net of tax). The prior service cost and actuarial loss included in accumulated other comprehensive income and expected to
be recognized in net periodic pension cost during the fiscal year ended December 31, 2008 is $0.2 and $1.5, respectively. The
accumulated benefit obligation for the cash balance plan was $215.6 and $214.7 at December 31, 2007 and 2006, respectively.
Estimated future benefit payments from the cash balance plan for the following five years are as follows:
2008
$
17.4
2009
16.0
2010
14.5
2011
13.9
2012
13.6
2013-2017
65.9
Total
66 Convergys Corporation 2007 Annual Report
$
141.3
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
In October 2006, the Company approved an amendment to the supplemental, unfunded plan for senior executives reducing the
benefit provided under that plan. Components of pension cost and other amounts recognized in other comprehensive income for
the unfunded executive pension plans are as follows:
Year Ended December 31,
2007
2006
$ 3.6
$ 4.0
Interest cost on projected benefit obligation
4.4
4.3
4.7
Settlement
0.7
—
0.9
Amortization and deferrals—net
1.1
1.2
1.5
Pension cost
$ 9.8
$ 9.5
$ 11.6
Other comprehensive loss (income)
$ (6.2)
$ 8.4
$
Service cost (benefits earned during the period)
2005
$
4.5
2.1
The reconciliation of the unfunded executive pension plans’ projected benefit obligation for the years ended December 31, 2007
and December 31, 2006 are as follows:
At December 31,
2007
2006
Change in benefit obligation:
Benefit obligation at beginning of year
$ 85.9
$ 94.0
Service cost
3.6
4.0
Interest cost
4.4
4.3
Change in plan provisions
(2.3)
(0.7)
Actuarial gain
(1.6)
(3.3)
Settlement/curtailment charge
(5.5)
Benefits paid
(9.4)
—
(12.4)
Benefit obligation at end of year
$ 75.1
$ 85.9
Funded status
$ (75.1)
$ (85.9)
Amounts recognized in the Consolidated Balance Sheets consist of:
Current liability
$ 21.2
$ 13.6
Non-current liability
53.9
72.3
Accumulated other comprehensive loss
14.2
20.4
Included in accumulated other comprehensive income at December 31, 2007 is the following amounts that have not yet been
recognized in net periodic pension cost: unrecognized prior service costs of ($0.4) (($0.3), net of tax) and unrecognized actuarial
losses of $14.6 ($9.5, net of tax). Included in accumulated other comprehensive income at December 31, 2006 is the following
amounts that have not yet been recognized in net periodic pension cost: unrecognized prior service costs of $1.7 ($1.1, net of tax)
and unrecognized actuarial losses $18.7 ($12.1, net of tax). The accumulated benefit obligation for the unfunded executive pension
plans were $71.8 and $80.6 at December 31, 2007 and 2006, respectively. The prior service cost and actuarial loss included in
accumulated other comprehensive income and expected to be recognized in net periodic pension cost during the fiscal year ended
December 31, 2008 is ($0.1) and $0.5, respectively.
Estimated future benefit payments from the unfunded executive plans for the following five years are as follows:
2008
$
21.2
2009
7.0
2010
6.1
2011
6.4
2012
5.3
2013-2017
Total
The following rates were used in determining the benefit obligations at December 31:
22.2
$
68.2
At December 31,
2007
Discount rate—projected benefit obligation
Future compensation growth rate
Expected long-term rate of return on plan assets
2006
6.25%
5.75%
4.00-5.00%
4.00-5.00%
8.50%
8.50%
Convergys Corporation 2007 Annual Report 67
Table of Contents
The following rates were used in determining the pension cost for all years ended December 31:
Year Ended December 31,
2007
Discount rate—projected benefit obligation
Future compensation growth rate
Expected long-term rate of return on plan assets
2006
2005
5.75%
5.25-5.50%
5.25-5.75%
4.00-5.00%
4.00-5.00%
4.00-4.75%
8.50%
8.50%
8.50%
As of December 31, 2007 and 2006, plan assets for the cash balance plan consisted of approximately 70% of equity securities and
30% of fixed income instruments, respectively, which is consistent with the Company’s targeted allocation. Plan assets for the cash
balance plan included $6.8 and $9.8 of Company common shares at December 31, 2007 and 2006. The investment objectives for
the plan assets are to generate returns that will enable the plan to meets its future obligations. The Company’s expected long-term
rate of return was determined based on the asset mix of the plan, past performance and other factors. The Company contributed
$19.5 and $13.8 in 2007 and 2006, respectively, to fund its cash balance plan in order to satisfy its ERISA funding requirements.
The Company expects to make $13.5 in contributions in 2008 to fund its cash balance plan and $13.5 in payments related to its
executive pension plans. No plan assets are expected to be returned to the Company during 2008.
Savings Plans
The Company sponsors a defined contribution plan covering substantially all U.S. employees. The Company’s contributions to the
plan are based on matching a portion of the employee contributions. Total Company contributions to the defined contribution plan
were $14.3, $14.1 and $13.9 for 2007, 2006 and 2005, respectively. Plan assets for these plans included 3.0 million ($48.8) and
3.6 million ($85.2) of Company common shares at December 31, 2007 and 2006, 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. At December 31, 2006, the Company eliminated the
postretirement life insurance plan benefits for non-retirement eligible employees. The Company’s postretirement benefit cost was
$0.2, $3.4 and $3.2 for 2007, 2006 and 2005, respectively. The accrued benefit costs pertaining to these benefits of $20.5 and
$15.8 at December 31, 2007 and 2006, respectively, are classified with other long-term liabilities. The amount included within
accumulated other comprehensive income related to these benefits were $3.3 and $7.3 at December 31, 2007 and 2006,
respectively.
9. Stock-Based Compensation Plans
At December 31, 2007, the Company had authorized 38 million common shares for issuance under the Convergys Corporation
1998 Long-Term Incentive Plan (Convergys LTIP), as amended on February 24, 2004. The Convergys LTIP provides for the
issuance of stock-based awards to certain employees and Directors. From time to time, the Company grants restricted stock
awards that generally vest over terms of three to five years, pursuant to the plan. During the restriction period, restricted stock
awards entitle the holder to all the rights of a holder of common shares (other than the right to transfer the shares). Unvested
shares are restricted as to disposition and subject to forfeiture under certain circumstances. The Company also granted stock
options with exercise prices that are no less than market value of the stock at the grant date and have a ten-year term and vesting
terms of three to four years. Since early 2004, the Company has not issued any stock options to employees or Directors. Instead,
the Company began granting certain employees and Directors restricted stock units. Unlike the restricted stock awards discussed
above, the restricted stock units do not possess dividend or voting rights. The restricted
68 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
stock units consist of both time-related and performance-related units. The restrictions for the time-related restricted stock units
lapse three years after the grant date. The performance-related units vest upon the Company’s satisfaction of certain financial
performance conditions (relative shareholder return versus the S&P 500 return). Performance-related units that have not vested by
the end of three years from the grant date (i.e., the performance conditions for vesting of those units have not been met within that
period) are forfeited.
The following table shows certain information as of December 31, 2007, with respect to compensation plans under which our
common shares are authorized for issuance:
No. of
Common
Shares to
be Issued
Upon
Exercise
Common
Shares
Available
for
Future
Issuance
Weighted
Average
Exercise
Price
Equity compensation plans approved by shareholders [1]
Stock options
Restricted stock
Restricted stock units
Equity compensation plans not approved by shareholders
Total
[1]
10,940,719
29.55
7,029,531
75,000
N/A
[1]
3,443,153
N/A
[1]
—
—
—
29.55
7,029,531
14,458,872
$
$
The Company had authorized 38 million common shares for issuance under the Convergys Corporation 1998 Long-Term Incentive Plan.
On January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective method. Under this method, the
Company has not restated results for prior periods. Under SFAS No. 123(R), the Company has elected to recognize the
compensation cost of all share-based awards on a straight-line basis over the remaining vesting period of the award. Benefits of tax
deductions in excess of recognized compensation expense are now reported as a financing cash flow, rather than an operating
cash flow as prescribed under the prior accounting rules. Further, upon the adoption of SFAS No. 123(R), the Company applied an
estimated forfeiture rate to unvested awards when computing the stock compensation related expenses. Previously, the Company
recorded forfeitures as incurred. The Company estimated the forfeiture rate for unvested awards based on its historical experience
during the preceding two calendar years. The Company has historically applied a nominal vesting approach for employee stockbased compensation awards with retirement eligible provisions. Under the nominal vesting approach, the Company recognizes
compensation cost over the vesting period and, if the employee retires before the end of the vesting period, the Company
recognizes any remaining unrecognized compensation cost at the date of retirement. Upon adoption of SFAS No. 123(R), the
Company applied a non-substantive vesting period approach whereby expense is accelerated for those employees that receive
awards and are eligible to retire prior to the award vesting.
Prior to January 1, 2006, Convergys accounted for its stock-based compensation plan under the intrinsic value method of
accounting as defined by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and
related interpretations. Under APB Opinion No. 25, no compensation expense was recognized for non-qualified stock option
awards as the exercise price of the awards on the date of grant was equal to the current market price of the Company’s stock.
However, the Company did recognize compensation expense in connection with the issuance of restricted stock and restricted
stock units. The primary effect of the adoption of SFAS No. 123(R) resulted in compensation expense being recorded for stock
options.
The Company’s operating results reflect long-term incentive plan expense of $24.5, $36.1 and $23.5 for the years ended
December 31, 2007, 2006 and 2005, respectively. Long-term incentive plan expenses both incentive plan expense that is paid in
cash based on relative shareholder return as well as stock-based compensation expense. The Company’s operating results reflect
stock-based compensation expenses of $25.6, $31.3 and
Convergys Corporation 2007 Annual Report 69
Table of Contents
$23.5 for the years ended December 31, 2007, 2006 and 2005, respectively.
Stock Options
Presented below is a summary of Company stock option activity:
Shares (in Thousands)
Weighted
Average
Exercise
Price
Shares
Options outstanding at January 1, 2005
19,467
Options exercised in 2005
(1,159)
8.97
Options forfeited in 2005
(1,424)
28.74
Options outstanding at December 31, 2005
16,884
$
25.91
Options exercisable at December 31, 2005
15,349
$
27.31
Options exercised in 2006
(3,490)
$
14.50
Options forfeited in 2006
$
25.10
(566)
33.19
Options outstanding and exercisable at December 31, 2006
12,828
$
28.69
Options exercised in 2007
(1,112)
$
14.73
Options forfeited in 2007
(775)
Options outstanding and exercisable at December 31, 2007
10,941
35.95
$
29.55
The weighted average remaining contractual term for both the outstanding and exercisable options at December 31, 2007 was
approximately 2.8 years. The weighted average grant date fair value per share for the outstanding and exercisable options at
December 31, 2007 was $12.39.
The following table summarizes the status of the Company stock options outstanding and exercisable at December 31, 2007:
Options Outstanding and
Exercisable
Shares in Thousands
Range of Exercise Prices
Shares
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price
$11.55 to
$11.55
1,197
4.7
$12.01 to
$17.44
1,245
2.3
14.89
$17.62 to
$21.81
287
1.5
19.21
$22.22 to
$22.22
1,204
1.0
22.22
$24.75 to
$29.32
185
3.6
27.68
$29.53 to
$29.53
1,787
1.9
29.53
$29.77 to
$36.49
187
3.1
33.67
$36.67 to
$36.67
2,170
3.9
36.67
$37.13 to
$43.50
453
2.5
38.99
$43.63 to
$52.53
2,226
2.9
43.71
10,941
2.8
Total
$
$
11.55
29.55
Restricted Stock Awards and Restricted Stock Units
During 2007, 2006 and 2005, the Company granted 1.5 million, 1.8 million and 2.0 million of restricted stock and restricted stock
units, respectively. The weighted average fair values of these grants were $24.08, $18.10 and $13.97, respectively. Included in the
total grants were 0.4 million, 0.6 million and 0.6 million of performance-related restricted stock units for 2007, 2006 and 2005.
As a part of our adoption of SFAS No. 123(R), the Company used a Monte Carlo simulation model to estimate the fair value for
performance-based restricted stock units issued during 2007 and 2006. The assumptions used in the Monte Carlo simulation model
for performance-based restricted stock units granted during 2007 are noted in the table below. Expected volatilities are based on
historical volatility and daily returns for the three-year period
70 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
ended January 1, 2007 of the Company’s stock and the S&P 500 companies. The total stock return for the Company over the
performance period is based on comparing Convergys’ average closing price from the fourth quarter of 2006 with the average
closing price for the fourth quarter of 2009. The total stock return of the S&P 500 companies is computed by comparing the closing
price of the S&P 500 companies on December 29, 2006 with the closing price at the end of December 2009. The risk-free interest
rate for the expected term of the award granted is based on the U.S. Treasury yield curve in effect at the time of grant.
December 31,
2007
Expected volatility
27.5%
Expected term (in years)
3.0
Risk-free interest rate
4.6%
The total compensation cost related to non-vested restricted stock and restricted stock units not yet recognized as of December 31,
2007 was approximately $24.1, which is expected to be recognized over a weighted average of 1.3 years. Changes to non-vested
restricted stock and restricted stock units for the years ended December 31, 2007 and December 31, 2006 were as follows:
Amounts in millions
Non-vested at December 31, 2005
Number of
Weighted
Average Fair
Value at Date
Shares
Of Grant
3.9
$
14.72
Granted
1.8
18.10
Vested
(1.0)
(22.29)
Forfeited
(0.3)
(15.94)
4.4
15.76
Non-vested at December 31, 2006
Granted
1.5
24.08
Vested
(2.1)
(13.36)
Forfeited
(0.3)
(18.84)
Non-vested at December 31, 2007
3.5
$
20.35
10. Commitments and Contingencies
Commitments
The Company leases certain facilities and equipment used in its operations under operating leases. Total rent expense was $86.4,
$86.2 and $98.9 in 2007, 2006 and 2005, respectively.
At December 31, 2007, the total minimum rental commitments under non-cancelable operating leases are as follows:
2008
$
53.4
2009
41.4
2010
30.2
2011
20.1
2012
14.2
Thereafter
36.8
Total
$
196.1
The Company leases certain equipment and facilities used in its operations under operating leases. This includes its office complex
in Orlando, Florida, which is leased from Wachovia Development Corporation (Lessor), a wholly owned subsidiary of Wachovia
Corporation, under an agreement that expires in June 2010. Upon termination or expiration of the lease, the Company must either
purchase the property from the Lessor for $65.0 or arrange to have the office complex sold to a third party. If the office complex is
sold to a third party for an amount less than the $65.0, the amount paid by the Lessor for the purchase of the complex from an
unrelated third party, the Company has agreed under a residual value guarantee to pay the Lessor up to $55.0. If the office
complex is sold to a third party for an amount in excess of $65.0, the Company is entitled to collect the excess. At the inception of
the lease, the Company recognized a liability of approximately $5 for the related residual value guarantee. The value of the
guarantee was determined by computing the estimated present value of probability-weighted cash flows that might be expended
under the guarantee. The Company recorded a liability for the fair value of the obligation with a corresponding asset recorded as
prepaid
Convergys Corporation 2007 Annual Report 71
Table of Contents
rent, which is being amortized to rental expense over the lease term. The liability will remain on the balance sheet until the end of
the lease term. Under the terms of the lease, the Company will also provide certain indemnities to the Lessor, including
environmental indemnities. Due to the nature of such potential obligations, it is not possible to estimate the maximum amount of
such exposure or the fair value. The Company does not expect such amounts, if any, to be material. The Company has concluded
that it is not required to consolidate the Lessor pursuant to Financial Accounting Standards Board Financial Interpretation No. 46R,
“Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51.
In July 2006, the Company sold its data center facilities in Jacksonville, Florida and entered into an agreement with the buyer to
lease part of the building back for 10 years at $1.6 per year. As part of the agreement, the Company has a right of first offer and
can prevent the buyer from selling the property to certain parties at the end of the lease term. Therefore, in accordance with SFAS
No. 66, “Accounting For Sales of Real Estate,” the Company is deemed to have a continuing involvement with the buyer and,
hence, has not accounted for this transaction as a sale. Therefore, no gain or loss on this transaction was recorded. The
transaction is accounted under the financing method in accordance with SFAS No. 98, “Accounting for Leases.”
At December 31, 2007, the Company had outstanding letters of credit of approximately $42 related to performance and payment
guarantees. The Company believes that any guarantee obligation that may arise will not be material.
The Company also has purchase commitments with three telecommunications providers of $28.4 and $18.3 in 2008 and 2009,
respectively.
Contingencies
The Company from time to time is involved in various loss contingencies, including tax and legal contingencies that arise in the
ordinary course of business. Pursuant to SFAS No. 5, “Contingent Liabilities,” the Company accrues for a loss contingency when it
is probable that a liability has been incurred and the amount of such loss can be reasonably estimated. At December 31, 2007, the
Company has recorded a $6.0 liability related to various ongoing disputes that have arisen in the ordinary course of business. The
Company believes that the results of any such claims or administrative proceedings, either individually or in the aggregate, will not
have a materially adverse effect on the Company’s financial condition. However, the outcome of any litigation cannot be predicted
with certainty. An unfavorable resolution of one or more pending matters could have a material adverse impact on the Company’s
financial statements in the future.
11. Additional Financial Information
At December 31,
2007
2006
Property and equipment, net:
Land
$
17.0
$
17.0
Buildings
151.3
147.2
Leasehold improvements
183.2
170.4
Equipment
643.5
599.7
Software
418.8
387.0
30.4
28.8
1,444.2
1,350.1
Construction in progress and other
Less: Accumulated depreciation
(1,079.8)
$
364.4
$
31.2
(981.5)
$ 368.6
Payables and other current liabilities:
Accounts payable
Accrued taxes
Accrued payroll-related expenses
Pension liability
Accrued expenses, other
Restructuring and exit costs
Deferred revenue and government grants
$
$
27.2
27.6
94.7
137.3
152.1
22.0
8.6
129.6
105.2
5.7
23.5
72.9
100.7
426.3
$ 512.0
Accumulated other comprehensive income:
Foreign currency translation adjustments
Changes related to pension liability, net of tax benefit of $16.3 and $17.2
Unrealized gain on hedging activities, net of tax of $21.7 and $4.4
$
40.3
$
27.4
(30.4)
(32.0)
40.4
8.3
$
72 Convergys Corporation 2007 Annual Report
50.3
$
3.7
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
Cellular Partnerships
See Note 2 to the Notes to Consolidated Financial Statements for details on the Company’s ownership interest in the Cellular
Partnerships. Summarized financial information for the entire Cellular Partnerships is as follows:
At December 31,
2007
Current assets
$
2006
65.5
Non-current assets
$
236.7
Current liabilities
Non-current liabilities
2005
36.3
$
268.2
49.4
235.7
28.5
36.2
36.2
108.8
106.8
104.7
Year Ended December 31,
2007
Revenues
$
2006
434.8
$
2005
394.0
$
338.7
Depreciation and amortization
64.3
53.3
43.1
Operating income
44.8
37.8
30.1
Net income
40.3
34.1
32.6
12. Industry Segment and Geographic Operations
Industry Segment Information
As described in Note 1, the Company has three segments, which are identified by service offerings. Customer Management
provides outsourced customer care solutions as well as professional and consulting services to in-house customer care operations.
Information Management provides convergent rating, charging and billing solutions for the global communications industry. HR
Management provides human resource business process outsourcing solutions and learning solutions. These segments are
consistent with the Company’s management of the business and reflect its internal financial reporting structure and operating focus.
The Company’s business segments were renamed in 2007 to align with the Company’s rebranding efforts as a global relationship
management company.
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,
2007
2006
2005
Revenues:
Customer Management
$
1,866.1
$
1,803.1
$
1,641.5
Information Management
723.0
775.3
778.1
HR Management
255.2
211.4
162.5
$
2,844.3
$
2,789.8
$
2,582.1
$
55.9
$
65.4
$
68.7
Depreciation:
Customer Management
Information Management
HR Management
Corporate and other [2]
32.4
33.6
32.3
8.7
12.8
11.4
18.4
18.3
13.7
$
115.4
$
130.1
$
126.1
$
4.1
$
4.0
$
10.7
Amortization:
Customer Management
Information Management
5.0
6.9
8.0
HR Management
5.4
1.7
2.5
$
14.5
$
12.6
$
21.2
$
—
$
6.5
$
13.8
Restructuring Charges:
Customer Management
Information Management
3.4
0.8
—
HR Management
—
2.1
1.3
Corporate and other
—
3.1
6.1
$
3.4
$
12.5
$
21.2
$
176.7
$
202.4
$
154.3
Operating Income (Loss):
Customer Management
Information Management
130.9
124.5
145.1
HR Management
(38.3)
(38.4)
(50.4)
Corporate and other
(24.5)
(35.6)
(25.4)
$
244.8
$
252.9
$
223.6
$
32.4
$
39.8
$
44.8
Capital Expenditures: [1]
Customer Management
Information Management
18.4
33.4
26.0
HR Management
17.1
10.3
14.2
34.4
21.4
46.4
Corporate and other
[2]
$
102.3
$
104.9
$
131.4
Convergys Corporation 2007 Annual Report 73
Table of Contents
At December 31
2007
2006
Total Assets:
Customer Management
$
[2]
$
1,101.7
548.5
616.3
HR Management
530.6
422.1
Corporate and other
349.7
400.2
$
[1]
1,135.4
Information Management
2,564.2
$
2,540.3
Excluding proceeds from the disposal of property and equipment.
Includes shared services-related capital expenditures and depreciation.
Geographic Operations
The following table presents certain geographic information regarding the Company’s operations:
Year Ended December 31,
2007
2006
2005
Revenues:
North America
$
2,449.8
Rest of World
$
394.5
$
2,475.4
$
2,353.7
314.4
2,844.3
$
228.4
2,789.8
$
2,582.1
At December 31,
2007
2006
2005
Long-lived Assets:
North America
$
Rest of World
1,465.5
$
230.2
$
1,415.5
$
1,375.1
187.9
1,695.7
$
165.5
1,603.4
$
1,540.6
Concentrations
The Customer Management and Information Management segments derive significant revenues from AT&T. Revenues from AT&T
were 16.3%, 17.3% and 22.2% of the Company’s consolidated revenues for 2007, 2006 and 2005, respectively. Related accounts
receivable from AT&T totaled $82.7 and $82.2 at December 31, 2007 and 2006, respectively.
13. Earnings Per Share
The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations:
Net
Income
Shares (in Millions)
Per
Share
Amount
Shares
2007:
Basic EPS
$
169.5
134.1
$
1.26
—
3.6
$
169.5
137.7
$
1.23
$
166.2
138.4
$
1.20
—
3.3
$
166.2
141.7
$
1.17
$
122.6
140.0
$
0.88
—
2.9
Effect of dilutive securities:
Stock-based compensation arrangements
Diluted EPS
(0.03)
2006:
Basic EPS
Effect of dilutive securities:
Stock-based compensation arrangements
Diluted EPS
(0.03)
2005:
Basic EPS
Effect of dilutive securities:
Stock-based compensation arrangements
(0.02)
Diluted EPS
$
122.6
142.9
$
0.86
The diluted EPS calculation excludes the effect of 8.8 million, 7.5 million and 11.4 million outstanding stock options for the years
ended December 31, 2007, 2006 and 2005, respectively, because they are anti-dilutive.
14. Financial Instruments
The Company had derivative assets and liabilities related to outstanding forward exchange contracts and options maturing within
48 months, consisting of Canadian dollars, Indian rupees and Philippine pesos with a notional value of $701.6 and $562.7 at
December 31, 2007 and 2006, respectively. These derivatives were classified as other current assets of $67.1 and $16.9 and other
current liabilities of $3.2 and $3.2 at December 31, 2007 and 2006, respectively. The Company recorded deferred tax liabilities of
$21.7 and $4.4 related to these derivatives at December 31, 2007 and 2006, respectively.
74 Convergys Corporation 2007 Annual Report
Table of Contents
Notes to Consolidated Financial Statements (continued)
(Amounts in Millions Except Share and Per Share Amounts)
A total of $40.4 and $8.3 of deferred gains, net of tax, on derivative instruments in 2007 and 2006, respectively, were accumulated
in other comprehensive income. The amount expected to be reclassified to earnings from other comprehensive income during the
next 12 months is $29.6, net of tax.
During 2007, 2006 and 2005, the Company recorded net gains of $46.4, $22.8 and $31.3, respectively, related to the settlement of
forward contracts and options which were designated as cash flow hedges. These amounts have been classified together with the
hedged transactions in the consolidated statement of income as costs of providing service.
The gain/loss recognized during 2007 and 2006 related to changes in the fair value of derivative instruments not designated as
hedges were not material. The Company recognized a gain of $5.4 during 2005 related to changes in the fair value of derivative
instruments not designated as hedges. This was classified within other income/(expense), net in the accompanying consolidated
statements of income.
In 2008, the Company entered into treasury lock derivative instruments for $200 in anticipation of a probable debt issuance later in
2008. The treasury locks enable the Company to lock in a treasury yield so that the Company is no longer exposed to treasury yield
movements which would impact its cost of funds.
15. Quarterly Financial Information (Unaudited)
1 st
Quarter
2 nd
Quarter
3 rd
Quarter
4 th
Quarter
Total
2007:
Revenues
$
719.9
$
707.0
$
703.7
$
713.7
$
2,844.3
Operating income
$
65.2
$
58.1
$
63.0
$
58.5
$
244.8
Net income
$
43.6
$
38.8
$
41.8
$
45.3
$
169.5
Basic
$
0.32
$
0.28
$
0.31
$
0.35
$
1.26
Diluted
$
0.31
$
0.28
$
0.30
$
0.34
$
1.23
Earnings per share:
1 st
Quarter
2 nd
Quarter
3 rd
Quarter
4 th
Quarter
Total
Revenues
$ 675.3
$ 691.8
$ 702.7
$ 720.0
$2,789.8
Operating income
$ 62.0
$ 62.8
$ 69.7
$ 58.4
$ 252.9
Net income
$ 36.7
$ 39.8
$ 45.2
$ 44.5
$ 166.2
Basic
$ 0.26
$ 0.29
$ 0.33
$ 0.32
$
1.20
Diluted
$ 0.26
$ 0.28
$ 0.32
$ 0.32
$
1.17
Revenues
$ 469.0
$ 460.6
$ 462.9
$ 473.6
$1,866.1
Operating income
$ 56.3
$ 44.7
$ 40.4
$ 35.3
$ 176.7
$ 434.0
$ 446.2
$ 454.8
$ 468.1
2006:
Earnings per share:
Segment Data:
Customer Management
2007:
2006:
Revenues
Operating income
$ 46.2
$ 48.2
$ 54.5
$ 185.9
$ 183.4
$ 177.6
$ 53.5
$1,803.1
[1]
$ 202.4
Information Management
2007:
Revenues
Operating income
$ 25.3
$ 38.4
$ 34.1
$ 188.8
$ 195.4
$ 197.1
[2]
$ 176.1
$ 723.0
$ 33.1
$ 130.9
2006:
Revenues
Operating income
$ 31.5
$ 30.5
$ 31.3
$ 194.0
$ 31.2
$ 775.3
[3]
$ 124.5
Human Resource Management
2007:
Revenues
$ 65.0
$ 63.0
$ 63.2
$ 64.0
$ 255.2
Operating income
$
$ (17.1)
$
$
$
$ 50.2
$ 50.8
(7.4)
(8.3)
(5.5)
(38.3)
2006:
Revenues
Operating income
$ 52.5
$
(9.6)
$
(8.2)
$
(8.6)
$ 57.9
$ (12.0)
$ 211.4
[4]
$
(38.4)
[1]
Includes $6.5 in restructuring charges.
Includes $3.4 in restructuring charges.
[3] Includes $0.8 in restructuring charges.
[4] Includes $2.1 in restructuring charges.
[2]
Convergys Corporation 2007 Annual Report 75
Table of Contents
Item 9., 9A. and 9B.
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 2007.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer evaluated, together with General Counsel, the Chief Accounting
Officer and other key employees, the effectiveness of design and operation of the Company’s “disclosure controls and
procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Act)) as of the
year ended December 31, 2007 (Evaluation Date). Based on this evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the Evaluation Date
such that the information required to be disclosed by the Company in the reports that it files or submits under the Act is
accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure, and are effective to ensure that such information is
recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules
and forms.
Attestation Report on Internal Control Over Financial Reporting
Convergys’ management is responsible for establishing and maintaining adequate internal control over financial reporting (as such
term is defined in Exchange Act Rule 13a-15(f)) that is designed to produce reliable financial statements in conformity with
accounting principles generally accepted in the United States. Management conducted an evaluation of the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework. Based on its assessment, management concluded that, as of December 31, 2007, the Company’s internal control over
financial reporting was effective based on those criteria. The Company’s independent registered accounting firm, Ernst & Young
LLP, has issued an attestation report on internal control over financial reporting, which appears on page 44.
Changes in Internal Control
There have been no material changes in the Company’s internal control over financial reporting that occurred during the quarter
ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Item 9B. Other Information
None.
76 Convergys Corporation 2007 Annual Report
Table of Contents
Part III, Item 10. through 14.
Part III
Item 10. Directors and Officers of the Registrant
The information required by Item 10 with respect to directors, the Audit Committee of the Board of Directors, Audit Committee
financial experts, Financial Code of Ethics and Section 16 compliance is incorporated herein by reference to the section of the
Company’s proxy statement relating to its annual meeting of shareholders to be held on April 22, 2008.
Certain information concerning the executive officers of the Company is contained on Pages 13-14 of this Form 10-K.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference to the Company’s proxy statement relating to its annual
meeting of shareholders to be held on April 22, 2008.
The remaining information called for by this Item relating to “securities authorized for issuance under equity compensation plans” is
incorporated by reference to Note 9 of Notes to Consolidated Financial Statements.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The Share Ownership of Directors and Officers section is incorporated herein by reference to the Company’s proxy statement
relating to its annual meeting of shareholders to be held on April 22, 2008.
Item 13. Certain Relationships and Related Transactions
Relationships and related transactions section is incorporated herein by reference to the Company’s proxy statement relating to its
annual meeting of shareholders to be held on April 22, 2008.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is incorporated by reference to the Company’s proxy statement relating to its annual meeting of
shareholders to be held on April 22, 2008.
Convergys Corporation 2007 Annual Report 77
Table of Contents
Part IV, Items 15., 15(a)(1) and (2)
Part IV
Item 15. Exhibits, Financial Statement Schedule
Item 15(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)
(2)
Consolidated Financial Statements:
Consolidated Statements of Income and Comprehensive Income
46
Consolidated Balance Sheets
47
Consolidated Statements of Cash Flows
48
Consolidated Statements of Shareholders’ Equity
49
Notes to Consolidated Financial Statements
50
Report of Independent Registered Public Accounting Firm
45
Financial Statement Schedule:
II—Valuation and Qualifying Accounts
81
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 from Exhibit 3.1 to Form S-3 Registration
Statement (File No. 333-43404) filed on August 10, 2000.)
3.2
Code of Regulations of the Company. (Incorporated by reference from Exhibit 3.2 from Form S-1/A Registration Statement
(File No. 333-53619) filed on July 17, 1998.)
4
Rights Agreement dated November 30, 1998 between Convergys Corporation and The Fifth Third Bank. (Incorporated by
reference from Exhibit 4.1 to Form 8-A Registration Statement (File No. 001-14379) filed on December 23, 1998.
10.1
Employment Agreement between the Company and James F. Orr and Amendment to Employment Agreement dated
December 16, 1998. *
10.2
Employment Agreement between the Company and David F. Dougherty. (Incorporated by reference from Exhibit 10.1 to
the Company’s Form 8-K filed on August 27, 2007.) *
10.3
Employment Agreement between the Company and Earl C. Shanks. (Incorporated by reference from Exhibit 10.2 to the
Company’s Form 8-K filed on August 27, 2007.) *
10.4
Employment Agreement between the Company and Karen R. Bowman. (Incorporated by reference from Exhibit 10.3 to
Form 10-Q filed on November 6, 2007.) *
10.5
Employment Agreement between the Company and Jean-Hervè Jenn. *
10.6
Employment Agreement between the Company and Clark D. Handy. (Incorporated by reference from Exhibit 10.9 to the
Company’s Annual Report on Form 10-K filed on February 28, 2007.) *
10.7
Convergys Corporation Deferred Compensation and LTIP Award Deferral Plan for Non-Employee Directors as amended
and restated effective February 24, 2004. (Incorporated by reference from Exhibit 10.24 to Form 10-Q filed on August 9,
2004.) *
10.8
Convergys Corporation Amended and Restated 1998 Long-Term Incentive Plan as amended effective as of February 20,
2007. *
10.9
Convergys Corporation Executive Deferred Compensation Plan as amended October 29, 2001. *
78 Convergys Corporation 2007 Annual Report
Table of Contents
Part IV (continued)
10.10
Amendment to Convergys Corporation Executive Deferred Compensation Plan effective as of February 24, 2004.
(Incorporated by reference from Exhibit 10.25 to Form 10-Q filed on August 9, 2004.) *
10.11
Convergys Corporation Supplemental Executive Retirement Plan effective as of February 20, 2007. (Incorporated by
reference from Exhibit 10.1 to Form 10-Q filed on August 7, 2007.) *
10.12
Convergys Corporation Employee Stock Purchase Plan. (Incorporated by reference from Appendix IV of the Company’s
Definitive Schedule 14A filed on March 12, 2004.) *
10.13
Convergys Corporation Retirement and Savings Plan. (Incorporated by reference from Exhibit 4.2 to Form S-8 Registration
Statement (File No. 333-96733) filed on July 19, 2002.) *
10.14
Convergys Corporation Canadian Employee Share Plan. (Incorporated by reference from Exhibit 4.2 to Form S-8
Registration Statement (File No. 333-86137) filed on December 29, 1999.) *
10.15
Annual Executive Incentive Plan. (Incorporated by reference from Appendix IV of the Company’s Definitive Schedule 14A
filed on March 13, 2007.) *
10.16
2005 Form of Time-Based Restricted Stock Unit Award Agreement for Non-Employee Directors. (Incorporated by reference
from Exhibit 10.23 to Form 10-K filed on March 3, 2005.) *
10.17
2006 Form of Time-Based Restricted Stock Unit Award Agreement for Employees. (Incorporated by reference from Exhibit
10.24 to Form 10-K filed March 6, 2006.) *
10.18
2006 Form of Performance-Based Restricted Stock Unit Award Agreement. (Incorporated by reference from Exhibit 10.25
to Form 10-K filed March 6, 2006.) *
10.19
2006 Form of Performance-Based Restricted Stock Unit Award Agreement for Senior Executives. (Incorporated by
reference from Exhibit 10.26 to Form 10-K filed March 6, 2006.) *
10.20
2007 Form of Performance-Based Restricted Stock Unit Award Agreement. (Incorporated by reference from Exhibit 10.26.1
to Form 10-K filed on February 28, 2007.) *
10.21
2005 Form of Performance Unit Award Agreement. (Incorporated by reference from Exhibit 10.27 to Form 10-K filed on
March 3, 2005.) *
10.22
2007 Form of Performance Unit Award Agreement. (Incorporated by reference from Exhibit 10.27.1 to Form 10-K filed on
February 28, 2007.)
10.23
Form of Restricted Stock Award Agreement. (Incorporated by reference from Exhibit 10.1 to Form 8-K filed on September
15, 2005.) *
10.24
$400,000,000 Five-Year Competitive Advance and Revolving Credit Facility Agreement dated as of October 20, 2006.
(Incorporated by reference to Form 8-K filed October 20, 2006.)
10.25
Participation Agreement between Convergys Corporation, Various Guarantors and Wachovia Development Corporation
dated as of June 30, 2003. (Incorporated by reference from Exhibit 10.1 to Form 10-Q filed on August 12, 2003.)
10.26
Amended and Restated Lease Agreement between Wachovia Development Corporation and Convergys Corporation as of
June 30, 2003. (Incorporated by reference from Exhibit 10.2 to Form 10-Q filed on August 12, 2003.)
10.27
Security Agreement between Wachovia Development Corporation and Wachovia Bank, National Association and accepted
and agreed to by Convergys Corporation as of June 30, 2003. (Incorporated by reference from Exhibit 10.3 to Form 10-Q
filed on August 12, 2003.)
Convergys Corporation 2007 Annual Report 79
Table of Contents
Part IV (continued) , Item 15(b) and (c).
10.28
Assignment and Recharacterization Agreement between Convergys Corporation, Wells Fargo Bank Northwest, National
Association, and Bank of America, N.A. (Incorporated by reference from Exhibit 10.4 to Form 10-Q filed on August 12,
2003.)
10.29
Supplemental Indenture No. 1 for the $250,000,000 of 4.875% Senior Notes dated December 16, 2004. (Incorporated by
reference from Item 8.01 to Form 8-K filed on December 22, 2004.)
12
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends.
14
Convergys Corporation Financial Code of Ethics.
21
Subsidiaries of the Company.
23
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
24
Powers of Attorney.
31.1
Rule 13(a) - 14(a) Certification by Chief Executive Officer.
31.2
Rule 13(a) - 14(a) Certification by Chief Financial Officer.
32
Section 1350 Certifications.
* Management contract or compensatory plan or arrangement.
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 15(b) and (c). Exhibits and Financial Statement Schedule
The responses to these portions of Item 15 are submitted as a separate section of this report.
80 Convergys Corporation 2007 Annual Report
Table of Contents
Convergys Corporation
Schedule II — Valuation and Qualifying Accounts
(Millions of Dollars)
COL. A
COL. B
COL. C
Additions
(1)
(2)
Charged
Charged
to
Expense
to Other
Accounts
COL. D
COL. E
Deductions
Balance
at End
of Period
Balance at
Beginning
Description
of Period
Year 2007
Allowance for Doubtful Accounts
$
12.0
$
12.3
Deferred Tax Asset Valuation Allow.
$
73.6
$
5.4 [b]
Restructuring Reserve
$
23.5
$
3.4
—
Allowance for Doubtful Accounts
$
10.0
$
8.4
—
Deferred Tax Asset Valuation Allow.
$
78.0
$
3.6 [b]
Restructuring Reserve
$
28.1
$
24.6
—
Allowance for Doubtful Accounts
$
17.9
$
4.8
—
Deferred Tax Asset Valuation Allow.
$
75.7
$
3.5 [f]
Restructuring Reserve
$
61.2
$
18.1
—
$
(18.0)
16.7 [a]
$
7.6
5.0 [d]
$
56.0
$
21.2
$
5.7
$
6.4 [a]
$
12.0
—
$
73.6
$
29.2
$
23.5
$
12.7 [a]
$
10.0
—
$
78.0
51.2
$
28.1
$
[c]
Year 2006
$
(8.0)
[e]
Year 2005
[a]
[b]
[c]
[d]
[e]
[f]
[g]
$
(1.2)
—
[g]
$
Primarily includes amounts written off as uncollectible.
Amounts relate to valuation allowances recorded for state and foreign operating loss carryforwards.
Includes adjustments to fully valued deferred tax assets and foreign currency translation adjustments on foreign deferred tax assets.
Primarily includes the release of foreign valuation allowances related to the utilization of foreign net operating losses in the current year.
$3.4 includes the impact of foreign currency translation adjustments related to foreign deferred taxes offset by ($11.4) which primarily includes the release of foreign
valuation allowances related to the utilization of foreign net operating losses in the current year.
Amounts relate to valuation allowances recorded for state and foreign operating loss carryforwards and domestic capital loss carryforwards.
Includes valuation allowances related to operating loss carryforwards acquired in connection with business combinations made during 2004, as well as the impact of
foreign currency translation adjustment.
Convergys Corporation 2007 Annual Report 81
Table of Contents
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, 2008
By
/s/ Earl C. Shanks
Earl C. Shanks
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
/s/ DAVID F. DOUGHERTY
Principal Executive Officer;
Chief Executive Officer and Director
February 28, 2008
Principal Financial Officer;
Chief Financial Officer
February 28, 2008
Principal Accounting Officer;
Senior Vice President,
Controller and Treasurer
February 28, 2008
Timothy M. Wesolowski
ZOË BAIRD*
Director
David F. Dougherty
/s/ EARL C. SHANKS
Earl C. Shanks
/s/ TIMOTHY M. WESOLOWSKI
Zoë Baird
JOHN F. BARRETT*
Director
John F. Barrett
DAVID B. DILLON*
Director
David B. Dillon
JOSEPH E. GIBBS*
Director
Joseph E. Gibbs
STEVEN C. MASON*
Director
Steven C. Mason
THOMAS L. MONAHAN III*
Director
Thomas L. Monahan III
PHILIP A. ODEEN*
Director
Philip A. Odeen
SIDNEY A. RIBEAU*
Director
Sidney A. Ribeau
RICHARD F. WALLMAN*
Director
Richard F. Wallman
DAVID R. WHITWAM*
Director
David R. Whitwam
*By: /s/ Earl C. Shanks
Earl C. Shanks
as attorney-in-fact
82 Convergys Corporation 2007 Annual Report
February 28, 2008
Exhibit 10.1 To 2007 10-K
EMPLOYMENT AGREEMENT
This Agreement is made as of the Effective Date between Convergys Corporation, an Ohio corporation (“Employer”), and James F. Orr
(“Employee”). For purposes of this Agreement, “Effective Date” means the date on which the initial public offering of Employer’s common
shares is closed.
Employer and Employee agree as follows:
1. EMPLOYMENT. By this Agreement, Employer and Employee set forth the terms of Employer’s employment of Employee on and after the
Effective Date. Any prior agreements or understandings with respect to Employee’s employment by Employer, including Employee’s
Employment Agreement with Cincinnati Bell Inc. dated August 19, 1994, are canceled as of the Effective Date.
2. TERM OF AGREEMENT. The term of this Agreement initially shall be the four year period commencing on the Effective Date. On the third
anniversary of the Effective Date and on each subsequent anniversary of the Effective Date, the term of this Agreement automatically shall be
extended for a period of one additional year. Notwithstanding the foregoing, the term of this Agreement is subject to termination as provided in
Section 13.
3. DUTIES.
A. Employee will serve as President and Chief Executive Officer of Employer or in such other equivalent capacity as may be designated by the
Board of Directors of Employer. Employee will report to the Board of Directors of Employer.
B. Employee shall furnish such managerial, executive, financial, technical, and other skills, advice, and assistance in operating Employer and its
Affiliates as Employer may reasonably request. For purposes of this Agreement, “Affiliate” means each corporation which is a member of a
controlled group of corporations (within the meaning of section 1563(a) of the Internal Revenue Code of 1986, as amended (the “Code”)) which
includes Employer.
C. Employee shall also perform such other duties as are reasonably assigned to Employee by the Board of Directors of Employer.
D. Employee shall devote Employee’s entire time, attention, and energies to the
business of Employer and its Affiliates. The words “entire time, attention, and energies” are intended to mean that Employee shall devote
Employee’s full effort during reasonable working hours to the business of Employer and its Affiliates and shall devote at least 40 hours per week
to the business of Employer and its Affiliates. Employee shall travel to such places as are necessary in the performance of Employee’s duties.
4. COMPENSATION.
A. Employee shall receive a base salary (the “Base Salary”) of at least $660,000 per year, payable not less frequently than monthly, for each year
during the term of this Agreement, subject to proration for any partial year. Such Base Salary, and all other amounts payable under this
Agreement, shall be subject to withholding as required by law.
B. In addition to the Base Salary, Employee shall be entitled to receive an annual bonus (the “Bonus”) for each calendar year for which services
are performed under this Agreement. Any Bonus for a calendar year shall be payable after the conclusion of the calendar year in accordance with
Employer’s regular bonus payment policies. Each year, Employee shall be given a Bonus target, by Employer’s Compensation Committee, of
not less than $429,000, subject to proration for a partial year.
C. On at least an annual basis, Employee shall receive a formal performance review and be considered for Base Salary and/or Bonus target
increases.
5. EXPENSES. All reasonable and necessary expenses incurred by Employee in the course of the performance of Employee’s duties to
Employer shall be reimbursable in accordance with Employer’s then current travel and expense policies.
6. BENEFITS.
A. While Employee remains in the employ of Employer, Employee shall be entitled to participate in all of the various employee benefit plans
and programs, or equivalent plans and programs, set forth in Attachment B.
B. Notwithstanding anything contained herein to the contrary, the Base Salary and Bonuses otherwise payable to Employee shall be reduced by
any benefits paid to Employee by Employer under any disability plans made available to Employee by Employer.
C. As of the Effective Date, Employee shall be granted options to purchase 350,000 common shares of Employer under Employer’s 1998 Long
Term Incentive Plan. In each year of this Agreement after 1998, Employee will be granted stock options under Employer’s 1998 Long Term
Incentive Plan or any similar plan made available to employees of Employer.
D. As of the Effective Date, Employee shall receive a restricted stock award of 150,000 common shares of Employer. Such award shall be made
under Employer’s 1998 Long Term Incentive Plan on the terms set forth in Attachment A.
E. In each year of this Agreement after 1998, Employee will be given a long term incentive target under Employer’s 1998 Long Term Incentive
Plan. In no event will the value of Executive’s long term incentives (stock options and performance share targets) for any year, as determined by
Employer’s Compensation Committee, be less than $1,353,000.
F. As long as Employee remains employed under this Agreement, Employee shall be entitled to participate in Employer’s Pension Program.
7. CONFIDENTIALITY. Employer and its Affiliates are engaged in the outsourced customer care industry within the U.S. and world wide.
Employee acknowledges that in the course of employment with the Employer, Employee will be entrusted with or obtain access to information
proprietary to the Employer and its Affiliates with respect to the following (all of which information is referred to hereinafter collectively as the
“Information”); the organization and management of Employer and its Affiliates; the names, addresses, buying habits, and other special
information regarding past, present and potential customers, employees and suppliers of Employer and its Affiliates; customer and supplier
contracts and transactions or price lists of Employer, its Affiliates and their suppliers; products, services, programs and processes sold, licensed
or developed by the Employer or its Affiliates; technical data, plans and specifications, present and/or future development projects of Employer
and its Affiliates; financial and/or marketing data respecting the conduct of the present or future phases of business of Employer and its
Affiliates; computer programs, systems and/or software; ideas, inventions, trademarks, business information, know-how, processes,
improvements, designs, redesigns, discoveries and developments of Employer and its Affiliates; and other information considered confidential
by any of the Employer, its Affiliates or customers or suppliers of Employer, its Affiliates. Employee agrees to retain the Information in absolute
confidence and not to disclose the Information to any person or organization except as required in the performance of Employee’s duties for
Employer, without the express written consent of Employer; provided that Employee’s obligation of confidentiality shall not extend to any
Information which becomes generally available to the public other than as a result of disclosure by Employee.
8. NEW DEVELOPMENTS. All ideas, inventions, discoveries, concepts, trademarks, or other developments or improvements, whether
patentable or not, conceived by the Employee, alone or with others, at any time during the term of Employee’s employment, whether or not
during working hours or on Employer’s premises, which are within the scope of or related to the business operations of Employer or its
Affiliates (“New Developments”), shall be and remain the exclusive property of Employer. Employee shall do all things reasonably necessary to
ensure ownership of such New Developments by Employer, including the execution of documents assigning and transferring to Employer, all of
Employee’s rights, title and interest in and to such New Developments, and the execution of all documents required to enable Employer to file
and obtain patents, trademarks, and copyrights in the United States and foreign countries on any of such New Developments.
9. SURRENDER OF MATERIAL UPON TERMINATION. Employee hereby agrees that upon cessation of Employee’s employment, for
whatever reason and whether voluntary or involuntary, Employee
will immediately surrender to Employer all of the property and other things of value in his possession or in the possession of any person or entity
under Employee’s control that are the property of Employer or any of its Affiliates, including without any limitation all personal notes, drawings,
manuals, documents, photographs, or the like, including copies and derivatives thereof, relating directly or indirectly to any confidential
information or materials or New Developments, or relating directly or indirectly to the business of Employer or any of its Affiliates.
10. REMEDIES.
A. Employer and Employee hereby acknowledge and agree that the services rendered by Employee to Employer, the information disclosed to
Employee during and by virtue of Employee’s employment, and Employee’s commitments and obligations to Employer and its Affiliates herein
are of a special, unique and extraordinary character, and that the breach of any provision of this Agreement by Employee will cause Employer
irreparable injury and damage, and consequently the Employer shall be entitled to, in addition to all other remedies available to it, injunctive and
equitable relief to prevent a breach of Sections 7, 8, 9, 11 and 12 of this Agreement and to secure the enforcement of this Agreement.
B. Except as provided in Section 10.A., the parties agree to submit to final and binding arbitration any dispute, claim or controversy, whether for
breach of this Agreement or for violation of any of Employee’s statutorily created or protected rights, arising between the parties that either party
would have been otherwise entitled to file or pursue in court or before any administrative agency (herein “claim”), and waives all right to sue the
other party.
(i) This agreement to arbitrate and any resulting arbitration award are enforceable under and subject to the Federal Arbitration Act, 9 U.S.C.
Section 1 et seq. (“FAA”). If the FAA is held not to apply for any reason then Ohio Revised Code Chapter 2711 regarding the enforceability of
arbitration agreements and awards will govern this Agreement and the arbitration award.
(ii) (a) All of a party’s claims must be presented at a single arbitration hearing. Any claim not raised at the arbitration hearing is waived and
released. The arbitration hearing will take place in Cincinnati, Ohio.
(b) The arbitration process will be governed by the Employment Dispute Resolution Rules of the American Arbitration Association (“AAA”)
except to the extent they are modified by this Agreement.
(c) Employee has had an opportunity to review the AAA rules and the requirements that Employee must pay a filing fee for which the Employer
has agreed to split on an equal basis.
(d) The arbitrator will be selected from a panel of arbitrators chosen by the AAA in White Plains, New York. After the filing of a Request for
Arbitration, the AAA will send simultaneously to Employer and Employee an identical list of names of five persons chosen from the panel. Each
party will have 10 days from the transmittal date in which to strike up to two names, number the remaining names in order of preference and
return the list to the AAA.
(e) Any pre-hearing disputes will be presented to the arbitrator for expeditious, final and binding resolution.
(f) The award of the arbitrator will be in writing and will set forth each issue considered and the arbitrator’s finding of fact and conclusions of
law as to each such issue.
(g) The remedy and relief that may be granted by the arbitrator to Employee are limited to lost wages, benefits, cease and desist and affirmative
relief, compensatory, liquidated and punitive damages and reasonable attorney’s fees, and will not include reinstatement or promotion. If the
arbitrator would have awarded reinstatement or promotion, but for the prohibition in this Agreement, the arbitrator may award front pay. The
arbitrator may assess to either party, or split, the arbitrator’s fee and expenses and the cost of the transcript, if any, in accordance with the
arbitrator’s determination of the merits of each party’s position, but each party will bear any cost for its witnesses and proof.
(h) Employer and Employee recognize that a primary benefit each derives from arbitration is avoiding the delay and costs normally associated
with litigation. Therefore, neither party will be entitled to conduct any discovery prior to the arbitration hearing except that: (i) Employer will
furnish Employee with copies of all non-privileged documents in Employee’s personnel file; (ii) if the claim is for discharge, Employee will
furnish Employer with records of earnings and benefits relating to Employee’s subsequent employment (including self-employment) and all
documents relating to Employee’s efforts to obtain subsequent employment; (iii) the parties will exchange copies of all documents they intend to
introduce as evidence at the arbitration hearing at least 10 days prior to such hearing; (iv) Employee will be allowed (at Employee’s expense) to
take the depositions, for a period not to exceed four hours each, of two representatives of Employer, and Employer will be allowed (at its
expense) to depose Employee for a period not to exceed four hours; and (v) Employer or Employee may ask the arbitrator to grant additional
discovery to the extent permitted by AAA rules upon a showing that such discovery is necessary.
(i) Nothing herein will prevent either party from taking the deposition of any witness where the sole purpose for taking the deposition is to use
the deposition in lieu of the witness testifying at the hearing and the witness is, in good faith, unavailable to testify in person at the hearing due to
poor health, residency and employment more than 50 miles from the hearing site, conflicting travel plans or other comparable reason.
(iii) Arbitration must be requested in writing no later than 6 months from the date of the party’s knowledge of the matter disputed by the claim.
A party’s failure to initiate arbitration within the time limits herein will be considered a waiver and release by that party with respect to any
claim subject to arbitration under this Agreement.
(iv) Employer and Employee consent that judgment upon the arbitration award may be entered in any federal or state court that has jurisdiction.
(v) Except as provided in Section 10.A., neither party will commence or pursue any litigation on any claim that is or was subject to arbitration
under this Agreement.
(vi) All aspects of any arbitration procedure under this Agreement, including the hearing and the record of the proceedings, are confidential and
will not be open to the public, except to the extent the parties agree otherwise in writing, or as may be appropriate in any subsequent proceedings
between the parties, or as may otherwise be appropriate in response to a governmental agency or legal process.
11. COVENANT NOT TO COMPETE. For purposes of this Section 11 only, the term “Employer” shall mean, collectively, Employer and each
of its Affiliates. During the two-year period following termination of Employee’s employment with Employer for any reason (or if this period is
unenforceable by law, then for such period as shall be enforceable) Employee will not engage in any business offering services related to the
current business of Employer, whether as a principal, partner, joint venturer, agent, employee, salesman, consultant, director or officer, where
such position would involve Employee (i) in any business activity in competition with Employer; (ii) in any position with any customer of
Employer which involves such customer’s billing and/or billing related systems or; or (iii) in any business that provides billing and/or billing
related systems to third parties engaged in the communication business (including wireless, wireline and cable communication businesses). This
restriction will be limited to the geographical area where Employer is then engaged in such competing business activity or to such other
geographical area as a court shall find reasonably necessary to protect the goodwill and business of the Employer.
During the two-year period following termination of Employee’s employment with Employer for any reason (or if this period is unenforceable
by law, then for such period as shall be enforceable) Employee will not interfere with or adversely affect, either directly or indirectly,
Employer’s relationships with any person, firm, association, corporation or other entity which is known by Employee to be, or is included on any
listing to which Employee had access during the course of employment as a customer, client, supplier, consultant or employee of Employer and
that Employee will not divert or change, or attempt to divert or change, any such relationship to the detriment of Employer or to the benefit of
any other person, firm, association, corporation or other entity.
During the two-year period following termination of Employee’s employment with Employer for any reason (or if this period is unenforceable
by law, then for such period as shall be enforceable) Employee shall not, without the prior written consent of Employer, accept employment, as
an employee, consultant, or otherwise, with any company or entity which is a customer or supplier of Employer at any time during the final year
of Employee’s employment with Employer.
Employee will not, during or at any time within three years after the termination of Employee’s employment with Employer, induce or seek to
induce, any other employee of Employer to terminate his or her employment relationship with Employer.
12. GOODWILL. Employee will not disparage Employer or any of its Affiliates in any way which could adversely affect the goodwill,
reputation and business relationships of Employer or any of its Affiliates with the public generally, or with any of their customers, suppliers or
employees. Employer will not disparage Employee.
13. TERMINATION.
A. (i) Employer or Employee may terminate this Agreement upon Employee’s failure or inability to perform the services required hereunder
because of any physical or mental infirmity for which Employee receives disability benefits under any disability benefit plans made available to
Employee by Employer (the “Disability Plans”), over a period of one hundred twenty consecutive working days during any twelve consecutive
month period (a “Terminating Disability”).
(ii) If Employer or Employee elects to terminate this Agreement in the event of a Terminating Disability, such termination shall be effective
immediately upon the giving of written notice by the terminating party to the other.
(iii) Upon termination of this Agreement on account of Terminating Disability, Employer shall pay Employee Employee’s accrued compensation
hereunder, whether Base Salary, Bonus or otherwise (subject to offset for any amounts received pursuant to the Disability Plans), to the date of
termination. For as long as such Terminating Disability may exist, Employee shall continue to be an employee of Employer for all other
purposes and Employer shall provide Employee with disability benefits and all other benefits according to the provisions of the Disability Plans
and any other Employer plans in which Employee is then participating.
(iv) If the parties elect not to terminate this Agreement upon an event of a Terminating Disability and Employee returns to active employment
with Employer prior to such a termination, or if such disability exists for less than one hundred twenty consecutive working days, the provisions
of this Agreement shall remain in full force and effect.
B. This Agreement terminates immediately and automatically on the death of the Employee, provided, however, that the Employee’s estate shall
be paid Employee’s accrued compensation hereunder, whether Base Salary, Bonus or otherwise, to the date of death.
C. Employer may terminate this Agreement immediately, upon written notice to Employee, for Cause. For purposes of this Agreement,
Employer shall have “Cause” to terminate this Agreement only if Employer’s Board of Directors determines that there has been fraud,
misappropriation or embezzlement on the part of Employee.
D. Employer may terminate this Agreement immediately, upon written notice to Employee, for any reason other than those set forth in Sections
13.A., B. and C.; provided,
however, that Employer shall have no right to terminate under this Section 13.D. within two years after a Change in Control. In the event of a
termination by Employer under this Section 13.D., Employer shall, within five days after the termination, pay Employee an amount equal to the
greater of (i) two times the sum of the annual Base Salary rate in effect at the time of termination plus the Bonus target in effect at the time of
termination or (ii) if the Current Term is longer than two years, the sum of the Base Salary for the remainder of the Current Term (at the rate in
effect at the time of termination) plus the Bonus targets (at the amount in effect at the time of termination) for each calendar year commencing or
ending during the remainder of the Current Term (subject to proration in the case of any calendar year ending after the Current Term). For the
remainder of the Current Term, Employer shall continue to provide Employee with medical, dental, vision and life insurance coverage
comparable to the medical, dental, vision and life insurance coverage in effect for Employee immediately prior to the termination; and, to the
extent that Employee would have been eligible for any post-retirement medical, dental, vision or life insurance benefits from Employer if
Employee had continued in employment through the end of the Current Term, Employer shall provide such post-retirement benefits to Employee
after the end of the Current Term. For purposes of any stock option or restricted stock grant outstanding immediately prior to the termination,
Employee’s employment with Employer shall not be deemed to have terminated until the end of the Current Term. In addition, Employee shall
be entitled to receive, as soon as practicable after termination, an amount equal to the sum of (i) any forfeitable benefits under any qualified or
nonqualified pension, profit sharing, 401(k) or deferred compensation plan of Employer or any Affiliate which would have vested prior to the
end of the Current Term if Employee’s employment had not terminated plus (ii) if Employee is participating in a qualified or nonqualified
defined benefit plan of Employer or any Affiliate at the time of termination, an amount equal to the present value of the additional vested
benefits which would have accrued for Employee under such plan if Employee’s employment had not terminated prior to the end of the Current
Term and if Employee’s annual Base Salary and Bonus target had neither increased nor decreased after the termination. For purposes of this
Section 13.D., “Current Term” means the longer of (i) the two year period beginning at the time of termination or (ii) the unexpired term of this
Agreement at the time of the termination, determined as provided in Section 2 but assuming that there is no automatic extension of the
Agreement term after the termination. For purposes of this Section 13.D. and Section 13.E., “Change in Control” means a change in control as
defined in Employer’s 1998 Long Term Incentive Plan.
E. This Agreement shall terminate automatically in the event that there is a Change in Control and either (i) Employee elects to resign within 90
days after the Change in Control or (ii) Employee’s employment with Employer is actually or constructively terminated by Employer within two
years after the Change in Control for any reason other than those set forth in Sections 13.A., B. and C. For purposes of the preceding sentence, a
“constructive” termination of Employee’s employment shall be deemed to have occurred if, without Employee’s consent, there is a material
reduction in Employee’s authority or responsibilities or if there is a reduction in Employee’s Base Salary or Bonus target from the amount in
effect immediately prior to the Change in Control or if Employee is required by Employer to relocate from the city where Employee is residing
immediately prior to the Change in Control. In the event of a termination under this Section 13.E., Employer shall pay Employee an amount
equal to three times the sum
of the annual Base Salary rate in effect at the time of termination plus the Bonus target in effect at the time of termination, all stock options shall
become immediately exercisable (and Employee shall be afforded the opportunity to exercise them), the restrictions applicable to all restricted
stock shall lapse and any long term awards shall be paid out at target. For the remainder of the Current Term, Employer shall continue to provide
Employee with medical, dental, vision and life insurance coverage comparable to the medical, dental, vision and life insurance coverage in effect
for Employee immediately prior to the termination; and, to the extent that Employee would have been eligible for any post-retirement medical,
dental, vision or life insurance benefits from Employer if Employee had continued in employment through the end of the Current Term,
Employer shall provide such post-retirement benefits to Employee after the end of the Current Term. Employee’s accrued benefit under any
nonqualified pension or deferred compensation plan maintained by Employer or any Affiliate shall become immediately vested and
nonforfeitable and Employee also shall be entitled to receive a payment equal to the sum of (i) any forfeitable benefits under any qualified
pension or profit sharing or 401(k) plan maintained by Employer or any Affiliate plus (ii) if Employee is participating in a qualified or
nonqualified defined benefit plan of Employer or any Affiliate at the time of termination, an amount equal to the present value of the additional
benefits which would have accrued for Employee under such plan if Employee’s employment had not terminated prior to the end of the Current
Term and if Employee’s annual Base Salary and Bonus target had neither increased nor decreased after the termination. Finally, to the extent that
Employee is deemed to have received an excess parachute payment by reason of the Change in Control, Employer shall pay Employee an
additional sum sufficient to pay (i) any taxes imposed under section 4999 of the Code plus (ii) any federal, state and local taxes applicable to any
taxes imposed under section 4999 of the Code. For purposes of this Section 13.E., “Current Term” means the longer of (i) the three year period
beginning at the time of termination or (ii) the unexpired term of this Agreement at the time of the termination, determined as provided in
Section 2 but assuming that there is no automatic extension of the Agreement term after the termination.
F. Employee may resign upon 60 days’ prior written notice to Employer. In the event of a resignation under this Section 13.F., this Agreement
shall terminate and Employee shall be entitled to receive Employee’s Base Salary through the date of termination, any Bonus earned but not paid
at the time of termination and any other vested compensation or benefits called for under any compensation plan or program of Employer.
G. Employee may retire upon one year’s prior written notice to Employer at any time after Employee has attained age 55 and completed at least
ten years of service with Employer and its Affiliates. For purposes of the preceding sentence, service with Cincinnati Bell Inc. and its
subsidiaries prior to the Effective Date shall be deemed to be service with Employer. In the event of a retirement under this Section 13.G., this
Agreement shall terminate and Employee shall be entitled to receive Employee’s Base Salary through the date of termination and any Bonus
earned but not paid at the time of termination. In addition, Employee shall be entitled to receive any compensation or benefits made available to
retirees under Employer’s standard policies and programs, including retiree medical and life insurance benefits, a prorated Bonus for the year of
termination, and the right to exercise options after retirement.
H. Upon termination of this Agreement as a result of an event of termination described in this Section 13 and except for Employer’s payment of
the required payments under this Section 13 (including any Base Salary accrued through the date of termination, any Bonus earned for the year
preceding the year in which the termination occurs and any nonforfeitable amounts payable under any employee plan), all further compensation
under this Agreement shall terminate.
I. The termination of this Agreement shall not amend, alter or modify the rights and obligations of the parties under Sections 7, 8, 9, 10, 11, and
12 hereof, the terms of which shall survive the termination of this Agreement.
14. ASSIGNMENT. As this is an agreement for personal services involving a relation of confidence and a trust between Employer and
Employee, all rights and duties of Employee arising under this Agreement, and the Agreement itself, are non-assignable by Employee.
15. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient, if in writing, and if delivered personally or
by certified mail to Employee at Employee’s place of residence as then recorded on the books of Employer or to Employer at its principal office.
16. WAIVER. No waiver or modification of this Agreement or the terms contained herein shall be valid unless in writing and duly executed by
the party to be charged therewith. The waiver by any party hereto of a breach of any provision of this Agreement by the other party shall not
operate or be construed as a waiver of any subsequent breach by such party.
17. GOVERNING LAW. This agreement shall be governed by the laws of the State of Ohio.
18. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties with respect to Employee’s employment by Employer.
There are no other contracts, agreements or understandings, whether oral or written, existing between them except as contained or referred to in
this Agreement.
19. SEVERABILITY. In case any one or more of the provisions of this Agreement is held to be invalid, illegal, or unenforceable in any respect,
such invalidity, illegality, or other enforceability shall not affect any other provisions hereof, and this Agreement shall be construed as if such
invalid, illegal, or unenforceable provisions have never been contained herein.
20. SUCCESSORS AND ASSIGNS. Subject to the requirements of Paragraph 14 above, this Agreement shall be binding upon Employee,
Employer and Employer’s successors and assigns.
21. CONFIDENTIALITY OF AGREEMENT TERMS. The terms of this Agreement shall be held in strict confidence by Employee and shall not
be disclosed by Employee to anyone other than Employee’s spouse, Employee’s legal counsel, and Employee’s other advisors, unless required
by law. Further, except as provided in the preceding sentence, Employee shall not reveal the
existence of this Agreement or discuss its terms with any person (including but not limited to any employee of Employer or its Affiliates)
without the express authorization of the Board of Directors of Employer. To the extent that the terms of this Agreement have been disclosed by
Employer, in a public filing or otherwise, the confidentiality requirements of this Section 21 shall no longer apply to such terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.
CONVERGYS CORPORATION
By:
EMPLOYEE
James F. Orr
Attachment B
EMPLOYEE BENEFITS
Automobile Allowance
Cellular Telephone
Executive Deferred Compensation Plan
Group Accident Life
Legal/Financial/Insurance Allowance
Parking
Annual Physical
Short Term Disability Supplement
Travel Insurance (Spouse)
Vacation
Company-leased automobile
Yes
Yes
$500,000
$10,000 per year
Yes
Yes
Yes
$50,000
5 weeks per year
AMENDMENT TO EMPLOYMENT AGREEMENT
The Employment Agreement between Convergys Corporation (“Employer”) and James F. Orr (“Employee”), made as of the date on which the
initial public offering of Employer’s common shares was closed, is hereby amended in the following respects:
1. Section 4.A. is hereby amended to read as follows:
A. Employee shall receive a base salary (the “Base Salary”) of at least $765,000 per year, payable not less frequently than monthly, for each year
after 1998 during the term of this Agreement, subject to proration for any partial year. Such Base Salary, and all other amounts payable under
this Agreement, shall be subject to withholding as required by law.
2. Section 4.B. is hereby amended to read as follows:
B. In addition to the Base Salary, Employee shall be entitled to receive an annual bonus (the “Bonus”) for each calendar year for which services
are performed under this Agreement. Any Bonus for a calendar year shall be payable after the conclusion of the calendar year in accordance with
Employer’s regular bonus payment policies. The Bonus target for the period from August 13, 1998 through December 31, 1998 shall be
$165,723 ($429,000 on an annualized basis). Each year after 1998, Employee shall be given a minimum Bonus target, by Employer’s
Compensation Committee, of not less than $324,000, subject to proration for a partial year.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed on December
CONVERGYS CORPORATION
By:
James F. Orr
, 1998.
Exhibit 10.5 to 2007 10-K
CONFIDENTIAL
Jean-Hervé JENN
CONVERGYS EUROPE,
MIDDLE EAST AND AFRICA
Cambourne Business Park
Cambourne Cambridge
CB3 6DN United Kingdom
Tel +44 (0) 1223 705000
Fax + 44 (0) 1223 705001
e-mail [email protected]
www.convergys.com
www.genevatechnology.com
13 August 2003
Dear Jean-Hervé
Thank you for attending the recent series of meetings with my colleagues and myself. We have
enjoyed our discussions with you, and feel that you would make a very positive contribution to this
organisation.
As a result, I have pleasure in offering you the post of “President, EMEA” based at the Cambourne
office, at a starting salary of £165,000pa. In addition you will be eligible for participation in the
Convergys Incentive Plan with a value of £110,000 in a full year, this bonus will be pro-rated and
guaranteed for 2003 and payable in equal instalments monthly from your start date until
December 31st 2003. You will also be eligible for a car allowance of £12,000 p.a., paid monthly.
Your official start with Convergys will be 1st September 2003, however in any dealings you have with
Convergys prior to this date you agree that you will not at any time disclose or improperly use any
confidential information of the Company, or any corporation related to or affiliated with the Company.
The term “confidential information” will include all information not generally known to the public, or
in the trade, which tends to give a competitive advantage to the Company relative to competitors who
do not possess the information. Confidential information includes, but is not limited to, organization
and management strategies of the Company; the names, addresses, buying habits and other special
information regarding past, present and potential customers, employees and suppliers of the Company;
employee lists; customer relationships; customer and supplier contracts and transactions; pricing; price
lists of the Company and suppliers; products, services, programs and processes sold, licensed or
developed by the Company; technical data, plans and specifications relating to present and / or future
development projects of the Company; financial and / or marketing data regarding the conduct of the
present or future phases of business of the Company; computer programs, systems and / or software;
ideas, inventions, trademarks, trade secrets, business information, know-how, processes,
improvements, designs, redesigns, discoveries and developments of the Company; and other
information considered confidential by the Company or customers or suppliers of the Company.
We are exploring the possibility of structuring your employment contract under a dual contract
agreement or through a split payroll arrangement under Article 15 of tax treaties. This is in order to
take advantage of any overall reduction of your tax burden due to taxation being at a lower bracket in
each tax
Convergys Europe, Middle East
and Africa is the trading name
of Geneva Technology Ltd
Registered in England No. 2412849
jurisdiction. However, we will only implement this arrangement where the company is satisfied that
it is wholly legal to do so and that it does not carry any additional financial implications for the
company.
The company reviews the Incentive Plan each year and reserves the right to alter its terms.
Achievement will be calculated on a number of factors including performance of Convergys against
revenue and profitability targets. The terms of the Incentive Plan as they relate to you for 2003 and
2004 are detailed in the attached annual incentive plans.
In addition you will be entitled to a one off signing on bonus of £75,000 payable as a lump sum in the
month following your start date this amount will be subject to the usual deductions. The only other
condition is that in the unlikely event you leave our employment in the first two years of your
employment, Convergys reserves the right to reclaim the entire amount of the signing on bonus.
As the position is based in Cambourne we would look to you to relocate to within reasonable
commuting distance of Cambourne such that you are able to commute to Cambourne on a daily basis.
To assist you with such relocation we are happy to contribute up to £15,000 towards your relocation
expenses, which must be used within 12 months of your start date. Any tax liability for these
relocation expenses will be borne by the company. We are reasonably flexible on how this assistance
is spent, provided it can be demonstrated (by receipts) that the money is being used for relocationincurred expenses, including temporary housing costs. The only other condition is that in the unlikely
event you leave our employment in the first year of employment, Convergys reserves the right to
reclaim the entire allowance.
You will be granted, subject to the approval of the Compensation and Benefits Committee of the
Board of Directors of Convergys Corporation, stock options to purchase 25,000 Convergys
Corporation common shares in conjunction with the acceptance of this position. You will be eligible
to be considered for additional grants of stock options for Convergys Corporation common shares
beginning January 1, 2004, expressly subject to the approval of the Compensation and Benefits
Committee of the Board of Directors of Convergys Corporation. All option grants are subject to the
terms and conditions of the grant and the terms of the incentive plan pursuant to which they are
issued.
Also, you will be granted, subject to the approval of the Compensation and Benefits Committee of
the Board of Directors of Convergys Corporation, 20,000 restricted shares of Convergys stock in
conjunction with the acceptance of this position. The restricted shares are subject to the terms and
conditions of the 1998 Long Term Incentive Plan. You will be required to sign a Restricted Stock
Award Agreement.
As an employee of Convergys EMEA Ltd, you will be entitled to Private Medical Cover, Permanent
Health Insurance and Life Insurance. Private medical cover is inclusive of yourself and your family
and Life Insurance is equivalent to four times your basic salary.
In addition to your basic salary, you will be entitled to a contribution to the Company’s Group
Personal Pension Plan, which will be 8% of your salary to one of three preferred pension providers.
Our offer is subject to confirmation of a satisfactory state of health. Assessment of this is achieved by
completion of the enclosed medical questionnaire, which is assessed by an independent Occupational
Health service. The results of this questionnaire will be communicated to you in due course. Also
enclosed is a ‘Personal Information Form’, which is used for our records. I would be grateful if you
could complete and return both forms as soon as possible (by confidential fax to 01223 705268).
Full terms and conditions are set out in the enclosed service agreement document. In order to confirm
your acceptance we would be pleased if you would sign both copies of the contract, and both copies
of this letter, retaining one copy of each for your information and returning one copy to Issy
Houghton, VP Human Resources at the address above.
This offer of employment is valid until 20 August 2003 from receipt of this letter. Please let Issy
Houghton know your decision within this time, either by contacting her on 01223 705058 or by
emailing her at [email protected].
If you have any questions regarding the offer then please do not hesitate to call.
We look forward to hearing from you.
Yours sincerely
/s/ Stephen Robertson
Stephen Robertson
IMG President, International
Signed as a deed and delivered by the Executive.
/s/ Jean-Herve Jenn
in the presence of:
Nancy Garrison Jenn
Signature: /s/ Nancy Garrison Jenn
Occupation: Consultant
DATED 13 August 2003
(1) CONVERGYS EMEA LTD
and
(2) Jean-Hervé Jenn
SERVICE AGREEMENT
1
THIS AGREEMENT is made on 13 August 2003
BETWEEN:
(1)
Convergys EMEA Limited (Company No 2412849) whose registered office is at Cambourne Business Park, Cambourne, Cambridge,
CB3 6DN (“the Company”), and
(2)
Jean-Hervé JENN (“the Executive”).
IT IS AGREED as follows:
1.
DEFINITIONS AND INTERPRETATION
1.1
In this Agreement unless the context otherwise requires the following expressions have the following meanings:
the “ Board ” means the Board of Directors for the time being of the Company, any authorized director or any committee of
directors for the time being;
“ Confidential Information ” means trade secrets and all financial, technical, organizational, operational, commercial,
product, services, intellectual property, employee, supplier, customer, management, marketing and other information or data
of whatever kind including, without limitation, any and all information and data of whatever kind relating to commercial
strategies and plans for expansion (whether or not any such information or data is recorded in documentary form or on
computer disk or tape or any other media) relating to the business or affairs of the Company or any Group Company or which
is treated by the Company or any Group Company as confidential or in respect of which the Company or any Group Company
owes an obligation of confidentiality to any third party which the Executive shall have acquired or shall acquire at any time
during his employment by the Company (whether before or after this Agreement comes into effect) but which does not form
part of the Executive’s stock in trade and which is not readily ascertainable to persons not connected with the Company or any
Group Company either at all or without a significant expenditure of labour, skill or money;
the “ Employment ” means the Executive’s employment pursuant to this Agreement;
the “ ERA ” means the Employment Rights Act 1996;
the “ Group ” means the Company and with the Group Companies;
2
“ Group Company ” means any Company which is for the time being a subsidiary or holding company of the Company and
any subsidiary of any such holding company and for the purposes of this Agreement the terms “ subsidiary ” and “ holding
company ” shall have the meanings ascribed to them by sections 736 and 736A Companies Act of 1985. “Group Companies”
shall be understood accordingly.
2.
3.
1.2
References to clauses and schedules are unless otherwise stated to clauses of and schedules to this Agreement.
1.3
The headings to the clauses are for convenience only and shall not affect the construction or interpretation of this Agreement.
1.4
Words importing the masculine gender shall include the feminine gender.
Appointment
2.1
The Company appoints the Executive and the Executives agrees to act as President, EMEA, of the Company (or in such other
capacity as the Company may from time to time reasonably direct) on the terms of this Agreement.
2.2
The Company may appoint any other persons to act jointly with the Executive in any position to which the Executive may be
assigned from time to time.
2.3
The Executive will report to the IMG President, International, of the Company or such other officer of Convergys
Corporation, the Company or any Group Company as may be designated by the Chief Executive Officer of Convergys
Corporations.
2.4
At the request of the Company the Employment may be transferred to a Group Company with the substitution of that Group
Company for the Company as the employer under this Agreement and otherwise on the terms and conditions set out in this
Agreement, without such transfer involving any termination of this Agreement or the Employment.
Duration of the Employment
3.1
3.2
This Agreement shall come into effect and the Employment shall commence from September 1 st 2003 and, subject to the
provisions of this Agreement, shall continue unless and until terminated by either party giving to the other not less than:
3.1.1
3 months’ prior notice where notice is given within 1 year of the date specified in clause 3.5 below; and
3.1.2
6 months’ prior notice at any time thereafter.
Notwithstanding clause 3.1, the Employment shall terminate when the Executive reaches the normal retiring age applicable to
employees of the Company, which is currently 65.
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4.
3.3
The Company reserves the right to terminate the Employment without notice or on notice less than that required by clause 3.1
provided that if it does so it will pay to the Executive a sum equal to but no more than the basic annual salary under clause
6.1, car allowance under clause 7 and pension contributions under clause 11.1 in respect of that part of the period of notice in
clause 3.1 which the Company has not given to the Executive less any appropriate tax and other statutory deductions. In this
situation the company will make reasonable efforts, where practical, to enable the Executive to receive continuity of insurance
cover, at his own expense.
3.4
At any time during a period of notice of termination served in accordance with clause 3 (whether given by the Company or
the Executive), the Company shall be under no obligation to assign any duties to the Executive and shall be entitled to exclude
the Executive from its premises, provided that this shall not affect the Executive’s entitlement to receive his normal salary and
other contractual benefits.
3.5
For the purposes of the ERA the Executive’s period of continuous employment began on September 1 st 2003.
3.6
The Executive represents and warrants that he is not bound by or subject to any court order, agreement, arrangement or
undertaking that in any way restricts or prohibits him from entering into this Agreement or from performing his duties under
it.
Scope of the Employment
4.1
During the Employment the Executive shall:
4.1.1
devote the whole of his time, attention and skill to the business and affairs of the Company both during normal
business hours (9.00 am to 5.30pm, Monday to Friday) and during such additional hours as are necessary for the
proper performance of his duties or as the Board may reasonably require from time to time;
4.1.2
faithfully and diligently perform such duties and exercise such powers consistent with his position as may from time
to time be assigned to or vested in him by the Board;
4.1.3
obey the reasonable and lawful directions of the Board;
4.1.4
comply with all the Company’s and relevant Group Company rules, regulations, policies and procedures from time to
time in force; and
4.1.5
keep the Board at all times promptly and fully informed (in writing if so requested) of his conduct of the business of
the Company and any Group Company and provide such explanations in connection with it as the Board may require.
4
5.
6.
4.2
The Executive shall if and so long as the Company requires and without any further remuneration carry out his duties on
behalf of any Group Company and act as an executive or officer of any Group Company.
4.3
Notwithstanding clause 4.1, the Executive shall be entitled to devote such time and attention as may be appropriate to acting
as occasional consultant or non-executive board member to other business activities provided that:
4.3.1
these activities do not in any way materially impair the discharge of his duties under this agreement;
4.3.2
the business of these activities does not in any way compete with or conflict with that of the Company; and
4.3.3
prior written permission has been sought and obtained from the Board for each such business activity, such
permission not to be unreasonably withheld.
Place of Work
5.1
The Executive’s place of work will initially be Cambourne Business Park, Cambourne, Cambridge, CB3 6DN. The Company
may request the Executive to work at any place (whether inside or outside the United Kingdom). Long term assignments will
be by agreement, which shall not be unreasonably withheld.
5.2
The Company may request the Executive to move house to an appropriate location for the better performance of his duties. In
the event that he does so move the Company will reimburse to him all expenses incurred by him in such a move as it
considers reasonable and in accordance with its relocation policy from time to time.
Remuneration
6.1
The Company shall pay to the Executive a salary at the rate of £165,000 per annum or such other sum as may from time to
time be agreed less such deductions for tax and National Insurance as are required by law, payable by equal monthly
instalments in arrears within the last three working days of the end of each month by credit transfer to his bank account. The
Executive’s salary shall be reviewed annually in accordance with the Convergys Pay Plan Schedule but shall not necessarily
be increased.
6.2
The Executive shall also be entitled to receive by way of further remuneration a bonus on a basis agreed with the Company
and subject always to the terms of the Company’s bonus plan as notified to him from time to time. The annual bonus amount
for 2003 will be £110,000, and this figure will be pro-rated and guaranteed for the year 2003 payable by equal monthly
instalments in arrears within the last three working days of the end of the month by credit transfer to his bank account. From
January 1 st 2004 eligibility for the Incentive Plan will not be guaranteed, and will fall under the terms as advised in the
separate Convergys IMG International Incentive Plan for 2004 for the IMG President EMEA, although the target
5
incentive amount for this year will remain at £110,000 and will be paid according to terms as advised in the separate
Convergys IMG International Incentive Plan for 2004 for the IMG President EMEA. The annual bonus target for future years
may be adjusted by the Company. In respect of the year in which his employment terminates, the Executive shall be entitled
to a proportion of the bonus which the Company reasonably determines he would have earned had he been employed for the
whole of the bonus year in question, such proportion being equal to the proportion of the bonus year which has expired at the
date of termination, and payment to be made when it would have fallen due had the Employment not terminated provided that
the Executive shall not be entitled to any such payment if the Employment is terminated in accordance with clause 15.
7.
6.3
Subject to the approval of the Compensation and Benefits Committee of the board of directors of Convergys Corporation the
Executive may be awarded options to purchase shares in Convergys at a time and price to be determined by the Compensation
and Benefits Committee and subject to the rules of the applicable share option scheme. Such options for Convergys shares
may be awarded annually at the discretion of the Compensation and Benefits Committee.
6.4
The remuneration specified in this clause 6 shall be inclusive of any fees to which the Executive may be entitled as an
executive or director of the Company or any Group Company.”
Car
7.1
8.
Expenses
8.1
9.
The Executive will also be entitled to a car allowance of £12,000 per annum (less the required deductions for tax and National
Insurance) payable monthly in arrears. The level of the car allowance will be reviewed each year, but shall not be reduced.
The Company shall reimburse the Executive in respect of all expenses reasonably incurred by him in the proper performance
of his duties, subject to his providing such receipts or other evidence as the Company may require.
Holidays
9.1
The Executive shall be entitled, in addition to all Bank and Public holidays normally observed in England, 25 working days’
paid holiday in each holiday year (being the period from 1 st January to 31 st December). The Executive may only take his
holiday at such times as are agreed with the Executive’s manager.
9.2
In the respective holiday years in which the Employment commences or terminates, the Executive’s entitlement to holiday
shall accrue on a pro rata basis for each complete calendar month of service during the relevant year.
9.3
If, on the termination of the Employment, the Executive has exceeded his accrued holiday entitlement, the excess may be
deducted from any sums
6
due to him. If the Executive has any unused holiday entitlement, the Company may either require the Executive to take such
unused holiday during any notice period of make payment in lieu of it.
9.4
10.
If the Executive has not taken all of his paid leave at the end of a year then he may carry over to the following year up to 10
days paid holiday. Further holiday entitlement may only be carried over by prior agreement of the Board.
Sickness benefits
10.1
Subject to clause 15.2 the Company shall continue to pay in any one calendar year the Executive’s full basic salary during
sick leave for a period of twenty six weeks
Beyond this period, subject to acceptance under the Company’s Permanent Health Insurance Scheme, payments are made
under the terms of that scheme. It may be a requirement of the Company’s Permanent Health Insurance Scheme that the
Executive shall from time to time if required:
10.1.1
supply medical certificates covering any period of sickness or incapacity; and
10.1.2
undergo, at the Company’s expense, a medical examination by a doctor appointed by the Company’s insurer.
10.2
Payment in respect of any other or further period of absence shall be at the Company’s discretion. Any payment to the
Executive pursuant to clause 10.1 shall be subject to set off by the Company in respect of any Statutory Sick Pay and any
Social Security Sickness Benefit or other benefits to which the Executive may be entitled.
10.3
All periods of sickness must be reported on the first working day, or as soon as possible thereafter, to the Executive’s
manager, and must be verified on return using the Company’s self-certification form, and, for absences of more than seven
days, must be accompanied by a medical certificate.
10.4
If the Executive’s absence shall be occasioned by the actionable negligence of a third party, in respect of which damages are
recoverable, then the Executive shall:
10.5
10.4.1
notify the Company immediately of all the relevant circumstances and of any claim, compromise, settlement, order or
judgement made or awarded in connection with it; and
10.4.2
if the Company so requires, refund to the Company any amount received by him from any such third party provided
that the refund shall be no more than the amount which he had recovered in respect of remuneration.
If the Executive is absent by reason of sickness or accident for a period of six or more consecutive months, the Executive’s
car allowance shall
7
terminate after the first twelve months of such absence. If the Executive is absent by reason of sickness or accident for a
period of six months or more in any calendar year, the Executive shall be entitled to a proportion of the bonus which the
Company reasonably determines he would have earned had he been actively employed for the whole of the calendar year in
question, such proportion being equal to the proportion of the calendar year, if any, during which he was actively employed.
11.
12.
Pension, death benefit and Insurance
11.1
The Company will contribute 8% of the Executive’s salary as set out in clause 6.1 to a Personal Pension Plan with a personal
pension plan provider approved or selected by the Company.
11.2
The Executive shall be entitled to participate in any private medical insurance, life insurance and permanent health insurance
schemes maintained by the Company for similarly situated employees of the Company.
Restrictions during the Employment
12.1
During the Employment the Executive shall not engage in any activity or investment which the Board reasonably considers
may be or become harmful to or competitive with the interests of the Company or of any Group Company or which might
reasonably be considered to interfere with performance of the Executive’s duties under this Agreement.
12.2
Clause 12.1 shall not apply;
12.3
13.
12.2.1
to the Executive holding (directly or through nominees) investments listed on any recognized public stock exchange
as long as he does not hold more than 5 per cent of the issued shares or other securities of any class of any one
company; or
12.2.2
to any act undertaken by the Executive with the prior written consent of the Board; or
12.2.3
to any interest permitted by clause 4.3.
The Executive shall comply with every rule of law, the Rules and Regulations of any appropriate stock exchange (whether of
the United Kingdom or the United States of America or elsewhere) and every regulation of the Company or any Group
Company for the time being in force in relation to dealings in shares or other securities of the Company or any Group
Company.
Confidential information and company documents
13.1
The Executive shall neither during the Employment (except in the proper performance of his duties) nor at any time after the
termination of the Employment whether by himself his servants or agents or otherwise:
13.1.1
divulge or communicate Confidential Information to any person, business entity or other organisation;
8
13.1.2
use Confidential Information for his own purposes or for any purposes other than those of the Company or any Group
Company; or
13.1.3
through any failure to exercise due care and diligence, permit or cause any unauthorised disclosure of any
Confidential Information.
These restrictions shall cease to apply to any information which shall become available to the public generally otherwise than
through any default of the Executive.
13.2
14.
All books, notes, memoranda, records, lists of customers and suppliers and employees, correspondence, documents, computer
and other discs and tapes, date listings, codes, designs and drawings and other documents and material whatsoever (whether
made or created by the Executive or otherwise and whether made or created prior the date of this Agreement or otherwise)
relating to the business of the Company or any Group Company (and any copies of the same):
13.2.1
shall be and remain the property of the Company or the relevant Group Company; and
13.2.2
shall be handed over by the Executive to the Company or to the relevant Group Company on demand and in any
event on the termination of the Employment
Inventions and other intellectual property
14.1
The parties acknowledge that the Executive may have made and may make inventions or other intellectual property in the
course of his duties to the Company (whether before or after this Agreement comes into effect) and agree that in this respect
the Executive has a special responsibility to further the interests of the Company and the Group Companies.
14.2
Any invention, improvement, design, developed, process, information, copyright work, trade mark or trade name or get-up
developed, made, created or discovered by the Executive during the continuance of his employment by the Company (whether
capable of being patented or registered or not and whether or not made or discovered in the course of his employment with the
Company and whether made or discovered before or after this Agreement comes into effect ) in conjunction with or in any
way affecting or relating to the business of the Company or of any Group Company or capable of being used or adapted for
use in them or in connection with them shall be disclosed immediately to the Company and shall belong to and be the absolute
property of the Company or such Group Company as the Company may direct.
9
14.3
14.4
15.
If and when required so to do by the Company the Executive shall at the expense of the Company or such Group Company as
the Company may direct:
14.3.1
apply or join with the Company or such Group Company in applying for letters patent or other protection or
registration in the United Kingdom and in any other part of the world for any such invention, improvement, design,
process, information, work, trade mark, trade name or get-up; and
14.3.2
execute and do all instruments and things necessary for vesting such letters patent or other protection or registration
when obtained and all right, title and interest to and in them absolutely and as sole beneficial owner in the Company
or such other person as the Company may specify.
The Executive irrevocably and unconditionally waives all rights under chapter IV of Part I of the Copyright Designs and
Patents Act 1988 (“ Moral Rights ”) in connection with his authorship of any existing or further copyright work, in whatever
part of the world such rights may be enforceable including, without limitation;
14.4.1
the right conferred by section 77 of that Act to be identified as author of any such work; and
14.4.2
the right conferred by section 80 of that Act not to have any such work subjected to derogatory treatment.
14.5
The Executive irrevocably appoints the Company to be his Attorney in his name and on his behalf to execute and do any such
instrument or thing and generally to use his name for the purpose of giving to the Company the full benefit of this clause. In
favour of any third party a certificate in writing signed by any Director or by the Secretary of the Company that any
instrument or act falls within the authority conferred by this clause shall be conclusive evidence that such is the case.
14.6
Nothing in this clause shall be construed as restricting the rights of the Executive or the Company under sections 39 to 43
Patents Acts 1977.
Termination
15.1
Notwithstanding any other provisions of this Agreement in any of the following circumstances the Company may terminate
the Employment immediately by serving written notice on the Executive to that effect. In such event the Executive shall not
be entitled to payment in lieu of notice nor to any further payment from the Company except such sums as shall have accrued
due to the date of termination of the Employment. The circumstances are if the Executive:
15.1.1
commits any serious breach of this Agreement or is guilty of any gross misconduct or any wilful neglect in the
discharge of his duties;
10
15.1.2
repeats or continues (after warning) any breach of this Agreement;
15.1.3
is guilty of any fraud, dishonestly or conduct tending to bring himself, the Company, or any Group Company into
disrepute;
15.1.4
shall commit any act of bankruptcy or shall take advantage of any statute for the time being in force offering relief
for insolvent debtors;
15.1.5
shall be or become of unsound mind or be or become a patient for any purpose of any enactment relating to mental
health; provided that the company shall not terminate the Executive’s employment in these circumstances if to do so
would deprive him of any benefit which he would otherwise receive under a permanent health insurance scheme
maintained by the company;
15.1.6
is convicted of any criminal offence (other than minor offences under the Road Traffic Acts or the Road Safety Acts
for which a fine or non-custodial penalty is imposed) which might reasonably be thought to affect adversely the
performance of his duties;
15.1.7
is disqualified from holding office in the Company or in any other company because of wrongful trading under the
Insolvency Act 1986 or any other reason;
15.2
The Company shall be entitled to suspend the Executive on full pay and benefits for so long as it may think fit if it appears to
the Company that it is entitled to terminate the Employment pursuant to clause 15.1 or if, by reason of a need to investigate
the Executive’s conduct or alleged conduct, the Company considers it necessary to do so.
15.3
On the termination of the Employment or upon either the Company or the Executive having served notice of such termination,
the Executive shall:
15.3.1
at the request of the Company resign from office as a Director or executive of the Company and all offices held by
him in any Group Company, provided however that such resignation shall be without prejudice to any claims which
the Executive may have against the Company or any Group Company arising out of the termination of the
Employment; and
15.3.2
Immediately deliver to the Company all materials within the scope of clause 13.2 and all keys, credit cards, motorcars, car keys and other property of or relating to the business of the Company or of any Group Company which may
be in his possession or under his power or control; and
15.3.3
the Executive irrevocably authorises the Company to appoint any person in his name and on his behalf to sign any
documents and do any things necessary or requisite to give effect to his obligations under this clause 15.3.
11
16.
Restrictive Covenants
16.1
The Executive agrees that he will not (without the prior consent of the Company) directly or indirectly for a period of 12
months (less any period during which the Executive is on garden leave) after the termination of his employment, either on his
own behalf or with through for or on behalf of any other person, firm, company or organisation:
16.1.1
solicit or endeavour to solicit (in connection with any business of a type carried on by the Company at the date of
termination of his employment) the business or custom of any customer of the Company nor solicit or endeavour to
solicit (in connection with any business of a type carried on by any Group Company at the date of termination of his
employment) the business or custom of any customer of such Group Company where the customer of the Company
or the Group Company is one with whom he had material contact during a period of 12 months prior to either the
termination of his employment or, if earlier, the date on which the Company exercised its rights under clause 3.4;
16.1.2
deal or endeavour to deal (in connection with any business of a type carried on by the Company at the date of
termination of his employment) with any customer of the Company nor deal or endeavour to deal (in connection with
any business of a type carried on by any Group Company at the date of termination of his employment) with any
customer of such Group Company where the customer of the Company or the Group Company is one with whom he
had material contact during the period of 12 months prior to either the termination of his employment or, if earlier,
the date on which the Company exercised its rights under clause 3.4;
16.1.3
entice away from or endeavour to entice away from the Company or any Group Company any person employed by
the Company or any Group Company as a director, or in a senior or technical capacity at the date of termination of
his employment and with whom the Executive had material contact as a result of his employment by the Company
during the period of 12 months prior to either the termination of his employment or, if earlier, the date on which the
Company exercised its rights under clause 3.4;
16.1.4
Be engaged concerned or interested in any capacity whatsoever either on his own behalf or with through for or on
behalf of any other person firm company or organisation in any business which competes within the Area with any
business carried on by the Company or by any Group Company at the date of termination of his employment in
which he was involved to a material extent during the period of 12 months prior to either termination of his
employment or, if earlier, the date on which the Company exercised its rights under clause 3.4.
12
17.
18.
16.2
During the Employment and for the duration of the restrictions set out in this clause 16, before accepting any offer of
employment or any other engagement other than with the Company or any Group Company, the Executive will provide to the
person, firm, company or organisation making such offer a complete signed copy of this Agreement.
16.3
16.3 In this clause 16, “Area” means the United Kingdom or the United States or France or Germany or Spain or Sweden or
Ireland or the Czech Republic or Switzerland or Austria or Italy or Portugal or the Netherlands or Norway or Poland or
Turkey or Singapore.
16.4
At no time after the termination of his employment shall the Executive directly or indirectly represent himself as being
interested in or employed by or in any way connection with the Company or any Group Company, other than as a former
employee of the Company.
16.5
The Executive agrees that, having regard to all circumstances, the restrictions contained in this clause are reasonable and
necessary for the protection of the Company’s and the Group Companies’ legitimate business interests and that they do not
bear harshly upon the Executive and the Executive agrees that each restriction shall be read and construed independently of
the other restrictions so that if any one or more are found to be void or unenforceable the remaining restrictions shall not be
affected. Furthermore, if any such restriction or undertaking shall be found to be void or voidable but would be valid and
enforceable if some part or parts of the restriction or undertaking were deleted, such restriction or undertaking shall apply
with such modification as may be necessary to make it valid and enforceable.”
Disciplinary and grievance procedures
17.1
The Executive is subject to the Company’s standard disciplinary procedure. A copy of the Company’s Disciplinary procedure
can be obtained from the Personnel Administrator. The Company’s Disciplinary Procedure does not form part of the
Executive’s contract of employment.
17.2
If the Executive wishes to obtain redress of any grievance relating to the Employment or is dissatisfied with any reprimand,
suspension or other disciplinary step taken by the Company, he shall apply in writing to the Chairman of the Board, setting
out the nature and details of any such grievance or dissatisfaction.
17.3
There are no special disciplinary rules which apply to the Executive and any disciplinary matters affecting him will be dealt
with by the Board.
Notices
18.1
Any notice or other document to be given under this Agreement shall be in writing and may be given personally to the
Executive or to the Secretary of the Company (as the case may be) or may be sent by first class post or
13
other fast postal service or by facsimile transmission to, in the case of the Company, its registered office for the time being
and in the case of the Executive either to his address shown on the fact of the Agreement or to his last known place of
residence.
18.2
19.
Former contracts of employment
19.1
20.
21.
Any such notice shall (unless the contrary is proved) be deemed served when in the ordinary course of the means of
transmission it would be first received by the addressee in normal business hours. In proving such service it shall be sufficient
to prove, where appropriate, that the notice was addressed properly and posted, or that the facsimile transmission was
despatched and confirmed by fax log sent to the correct number.
This Agreement shall be in substitution for any previous contracts, whether by way of letters of appointment, agreements or
arrangements, whether written, oral or implied, relating to the employment of the Executive, which shall be deemed to have
been terminated by mutual consent as from the date of this Agreement and the Executive acknowledges that he has no
outstanding claims of any kind against the Company or any Group Company in respect of any such contract.
Choice of law and submission to jurisdiction
20.1
This Agreement shall be governed by and interpreted in accordance with English Law.
20.2
The parties submit to the jurisdiction of the English Courts but this Agreement may be enforced in any court of competent
jurisdiction.
General
21.1
The Executive acknowledges that the provisions of clauses 12, 13, 14 and 16 constitute separate undertakings given for the
benefit of each Group Company and may be enforced by any of them.
21.2
The expiration or termination of this Agreement shall not prejudice any claim which either party may have against the other in
respect of any pre-existing breach of or contravention or non-compliance with any provision of this Agreement nor shall it
prejudice the coming into force or the continuance in force of any provision of this Agreement which is expressly or by
implication intended to or has the effect of coming into or continuing in force on or after such expiration or termination.
21.3
This Agreement constitutes the written statement of the terms of employment of the Executive provided in compliance with
Part 1 of the ERA.
Signed as a deed and delivered by Convergys EMEA Ltd acting by one Director and the Secretary or by two Directors.
/s/ [Illegible]
/s/ Stephen Robertson
14
Signed as a deed and delivered by by Executive.
/s/ Jean-Herve Jenn
in the presence of:
Nancy Garrison Jenn
Signature:
/s/ Nancy Garrison Jenn
Occupation: Consultant
15
Exhibit 10.8 to 2007 10-K
CONVERGYS CORPORATION
1998 LONG TERM INCENTIVE PLAN, AS AMENDED
1. Purpose .
The primary purpose of the Convergys Corporation 1998 Long Term Incentive Plan, as amended (the “Plan”) is to further the long term
growth of Convergys Corporation (the “Company”) by offering competitive incentive compensation related to long term performance goals to
those employees of the Company and its affiliates who will be largely responsible for planning and directing such growth. The Plan is also
intended as a means of reinforcing the commonality of interest between the Company’s shareholders and the employees who are participating in
the Plan and as an aid in attracting and retaining employees of outstanding abilities and specialized skills. The Plan became effective on July 20,
1998, the date on which it was approved by the shareholders of the Company (the “Effective Date”).
2. Administration .
2.1 The Plan shall be administered by the Compensation and Benefits Committee (the “Committee”) of the Company’s Board of Directors
(the “Board”). The Committee shall consist of at least three members of the Board (a) who are neither officers nor employees of the Company
and (b) who are “outside directors” within the meaning of section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended (the “Code”).
2.2 Subject to the limitations of the Plan, the Committee shall have complete authority (a) to select from the employees and Non-Employee
Advisors (as defined in Section 10B) of the Company and its affiliates those individuals who shall participate in the Plan, (b) to make awards in
such forms and amounts as it shall determine and to cancel, suspend or amend awards, (c) to impose such limitations, restrictions and conditions
upon awards as it shall deem appropriate, (d) to interpret the Plan and to adopt, amend and rescind administrative guidelines and other rules and
regulations relating to the Plan and (e) to make all other determinations and to take all other actions necessary or advisable for the proper
administration of the Plan; provided, however, that notwithstanding the foregoing, except as otherwise permitted under Section 14, the
Committee shall not, without the further approval of the shareholders of the Company, authorize the amendment of any outstanding option to
reduce its exercise price or cancel an option and replace it with an option having a lower exercise price. Determinations of fair market value
under the Plan shall be made in accordance with the methods and procedures established by the Committee. The Committee’s determinations on
matters within its authority shall be conclusive and binding on the Company and all other parties.
2.3 The Committee may delegate to one or more Senior Managers or to one or more committees of Senior Managers the right to make
awards to employees who are not officers or directors of the Company and to Non-Employee Advisors.
2.4 In order to facilitate the making of any grant or combination of grants under this Plan, the Committee may provide for such special
terms for awards to participants
1
who are foreign nationals or who are employed by the Company or any subsidiary outside of the United States of America as the Committee
may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Moreover, the Committee may approve
such supplements to or amendments, restatements or alternative versions of this Plan as it may consider necessary or appropriate for such
purposes, without thereby affecting the terms of this Plan as in effect for any other purpose, and the Corporate Secretary or other appropriate
officer of the Company may certify any such document as having been approved and adopted in the same manner as this Plan. No such special
terms, supplements, amendments or restatements, however, shall include any provisions that are inconsistent with the terms of this Plan as then
in effect unless this Plan could have been amended to eliminate such inconsistency without further approval by the shareholders of the Company.
3. Types of Awards.
Awards under the Plan may be in any one or more of the following: (a) stock options, including incentive stock options (“ISOs”), (b) stock
appreciation rights (“SARs”), in tandem with stock options or free-standing, (c) restricted stock, (d) restricted stock units, (e) performance shares
and performance units conditioned upon meeting performance criteria and (f) other awards based in whole or in part by reference to or otherwise
based on Company Common Shares, without par value (“Common Shares”). In connection with any award or any deferred award, payments
may also be made representing dividends or interest or other equivalent. No awards shall be made under the Plan after ten years from the
Effective Date.
4. Shares Subject to Plan.
Subject to adjustment as provided in Section 14 below, 38,000,000 of the Company’s Common Shares may be issued or transferred (1) upon the
exercise of options or SARs, (2) as restricted shares (whether or not deferred pursuant to Section 12) and released from substantial risks of
forfeiture, (3) in payment of restricted stock units or performance units or performance shares that have been earned, or (4) in payment of
dividend equivalents paid with respect to awards made under the Plan. Common Shares available in any year which are not used for awards
under the Plan shall be available for award in subsequent years. Notwithstanding the foregoing, subject to adjustment as provided in Section 14
below, (a) the total number of Common Shares actually issued by the Company upon the exercise of ISOs shall not exceed 15,000,000, (b) the
total number of Common Shares that may be subject to awards granted under the Plan, in the form of stock options, SARs, performance shares,
restricted stock specifying objective performance criteria or other stock awards specifying objective performance criteria to any one individual,
during any calendar year, shall not exceed separately or in the aggregate, 500,000 and (c) the total amount of cash (or fair market value of
property) payable pursuant to performance units granted to any one individual during any calendar year shall not exceed $3,500,000.
2
In the future, if another company is acquired, any Common Shares covered by or issued as result of the assumption or substitution of
outstanding grants of the acquired company shall not be deemed issued under the Plan and shall not be subtracted from the Common Shares
available for grant under the Plan. The Common Shares issued or transferred under the Plan may consist in whole or in part of authorized and
unissued shares or treasury shares. If any Common Shares subject to any award are forfeited, terminated, cancelled or settled in cash or
otherwise terminated with or without issuance or transfer of Common Shares, the Common Shares subject to such award shall again be available
for grant pursuant to the Plan. Common Shares withheld in payment of any exercise price or taxes relating to an award shall be deemed to
constitute Common Shares not issued or transferred to the participant and shall be deemed to again be available for awards under the Plan. This
Section shall apply to the number of Common Shares reserved and available for ISOs only to the extent consistent with applicable provisions of
the Code and Treasury regulations related to ISOs.
5. Stock Options .
Except as provided in Sections 10A and 10B, all stock options granted under the Plan shall be subject to the following terms and
conditions:
5.1 The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as the Committee
may prescribe, grant to any employee of the Company or affiliate of the Company options to purchase Common Shares, which options may be
options that comply with the requirements for incentive stock options set forth in section 422 of the Code (“ISOs”) or options which do not
comply with such requirements (“NSOs”) or both. The grant of an option shall be evidenced by an Evidence of Award containing such terms and
conditions as the Committee may from time to time prescribe (“Stock Option Agreement”). For purposes of the Plan, “Evidence of Award”
means an agreement, certificate, resolution or other type or form of writing or other evidence, including electronic evidence, approved by the
Committee which sets forth the terms and conditions of the award.
5.2 The purchase price per Common Share of options granted under the Plan shall be determined by the Committee; provided that the
purchase price per Common Share of any ISO shall not be less 100% of the fair market value of a Common Share on the date the ISO is granted.
5.3 Unless otherwise prescribed by the Committee in the Stock Option Agreement, each option granted under the Plan shall be for a period
of ten years, shall be exercisable in whole or in part after the commencement of the second year of its specified term and may thereafter be
exercised in whole or in part before it terminates under the provisions of the Stock Option Agreement. The Committee shall establish procedures
governing the exercise of options and shall require that notice of exercise be given and that the option price be paid in full in cash at the time of
exercise. The Committee may permit an optionee, in lieu of part or all of the cash payment, to make payment in Common Shares
3
or other property valued at fair market value on the date of exercise, as partial or full payment of the option price. As soon as practicable after
receipt of each notice and full payment, the Company shall deliver to the optionee a certificate or certificates representing the acquired Common
Shares, unless, in accordance with rules prescribed by the Committee, the optionee has elected to defer receipt of the Common Shares.
5.4 Any ISO granted under the Plan shall be exercisable upon the date or dates specified in the Stock Option Agreement, but not earlier
than one year after the date of grant of the ISO and not later than 10 years after the date of grant of the ISO, provided that the aggregate fair
market value, determined as of the date of grant, of Common Shares for which ISOs are exercisable for the first time during any calendar year as
to any individual shall not exceed the maximum limitations in section 422 of the Code. Notwithstanding any other provisions of the Plan to the
contrary, no individual will be eligible for or granted an ISO if, at the time the option is granted, that individual owns (directly or indirectly,
within the meaning of section 424(d) of the Code) stock of the Company possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of any of its subsidiaries.
6. Stock Appreciation Rights .
6.1 A SAR may be granted free-standing or in tandem with new options or after the grant of a related option which is not an ISO. The SAR
shall represent the right to receive payment of a sum not to exceed the amount, if any, by which the fair market value of the Common Shares on
the date of exercise of the SAR (or, if the Committee shall so determine in the case of any SAR not related to an ISO, any time during a specified
period before the exercise date) exceeds the grant price of the SAR.
6.2 The grant price and other terms of the SAR shall be determined by the Committee.
6.3 Payment of the amount to which an individual is entitled upon the exercise of a SAR shall be made in cash, Common Shares or other
property or in a combination thereof, as the Committee shall determine. To the extent that payment is made in Common Shares or other property,
the Common Shares or other property shall be valued at fair market value on the date of exercise of the SAR.
6.4 Unless otherwise determined by the Committee, any related option shall no longer be exercisable to the extent the SAR has been
exercised and the exercise of an option shall cancel the related SAR to the extent of such exercise.
7A. Restricted Stock .
Common Shares awarded as restricted stock may not be disposed of by the recipient until certain restrictions established by the Committee
lapse. Recipients of restricted stock are not required to provide consideration other than the rendering of services or the payment of any
minimum amount required by law, unless the Committee otherwise
4
elects. The recipient shall have, with respect to Common Shares awarded as restricted stock, all of the rights of a shareholder of the Company,
including the right to vote the Common Shares, and the right to receive any cash dividends, unless the Committee shall otherwise determine.
Upon termination of employment during the restricted period, all restricted stock shall be forfeited, subject to such exceptions, if any, as are
authorized by the Committee, as to termination of employment, retirement, disability, death or special circumstances. Restricted stock grants
may specify objective performance criteria (in accordance with Section 8 below) the achievement of which is a condition to termination or early
termination of the restrictions applicable to some or all of such shares. Each such grant may specify in respect of such objective performance
criteria a minimum acceptable level of achievement and may set forth a formula for determining the number of restricted shares on which
restrictions will terminate if performance is at or above the minimum level, but falls short of full achievement of the specified criteria.
7B. Restricted Stock Units.
The Committee may award to any participant restricted stock units. Each such grant shall represent the right of the recipient to receive a
number of Common Shares in the future, but subject to the fulfillment of such conditions as the Committee may specify. Recipients of restricted
stock units are not required to provide consideration other than the rendering of service, unless the Committee otherwise elects. Each award of
restricted stock units shall be evidenced by an Evidence of Award containing such terms and conditions as the Committee may determine. An
award of restricted stock units may specify objective performance criteria (in accordance with Section 8 below), the achievement of which is a
condition to the Company’s obligation to deliver Common Shares thereunder. Each such grant may specify in respect of such objective
performance criteria a minimum acceptable level of achievement and may set forth a formula for determining the number of Common Shares
deliverable under the award if performance is at or above the minimum level, but falls short of full achievement of the specified criteria.
8. Performance Shares and Units .
8.1 The Committee may award to any participant performance shares or performance units (“Performance Award”). Each performance
share shall represent, as the Committee shall determine, one Common Share or other security. Each performance unit shall represent the right of
the recipient to receive an amount equal to the value determined in the manner established by the Committee at the time of the award. Recipients
of Performance Awards are not required to provide consideration other than the rendering of service, unless the Committee otherwise elects.
8.2 Each Performance Award under the Plan shall be evidenced by an Evidence of Award containing such terms and conditions as the
Committee may determine.
8.3 Each Performance Award shall specify objective performance criteria which, if achieved, will result in payment or early payment of the
award, and each award may
5
specify in respect of such specified objective performance criteria a minimum acceptable level of achievement and shall set forth a formula for
determining the number of performance shares or performance units that will be earned if performance is at or above the minimum level, but
falls short of full achievement of the specified objective performance criteria. Each award shall specify that, before the performance share or
performance units shall be earned and paid, the Committee must determine that the objective performance criteria have been satisfied. Objective
performance criteria may be described in terms of Company-wide objectives or objectives that are related to the performance of the individual
participant or a subsidiary, business unit, division, department, region or function within the Company or subsidiary. The objective performance
criteria may be made relative to the performance of other corporations. The objective performance criteria shall be based on specified levels of or
growth in one or more of the following criteria: earnings per share; stock price; total shareholder return; return on investment; return on capital;
revenues; earnings from operations; earnings before or after interest and taxes; net income; cash flow; debt to capital ratio; economic value
added; return on equity; return on assets; earnings before or after interest, depreciation, amortization or extraordinary or special items; free cash
flow; cash flow return on investment (discounted or otherwise); net cash provided by operation; cash flow in excess of cost of capital; operating
margin; and profit.
If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the
manner in which it conducts its business, or other events or circumstances (including those events and circumstances described in Section 14 of
this Plan) render the objective performance criteria unsuitable, the Committee may in its discretion modify such criteria or the related minimum
acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable, except in the case where such action
would result in the loss of the otherwise available exemption of the award under Section 162(m) of the Code.
The performance period for each award within which the objective performance criteria are to be achieved shall be of such duration as the
Committee shall establish at the time of award (“Performance Period”). There may be more than one award in existence at any one time, and
Performance Periods may differ.
8.4 The Committee may provide that amounts equivalent to dividends paid shall be payable with respect to each Performance Share
awarded, and that amounts equivalent to interest at such rates as the Committee may determine shall be payable with respect to amounts
equivalent to dividends previously credited to the participant. The Committee may provide that amounts equivalent to interest at such rates as the
Committee may determine shall be payable with respect to performance units.
8.5 Payments of performance shares and any related dividends, amounts equivalent to dividends and amounts equivalent to interest may be
made in a lump sum or in installments, in cash, property or in a combination thereof, as the Committee may determine. Payment of performance
units and any related amounts equivalent to interest may be made in a lump sum or in installments, in cash, property or in a combination thereof,
as the Committee may determine.
6
9. Other Stock Unit Awards .
9.1 The Committee is authorized to grant to employees of the Company and its affiliates, either alone or in addition to other awards granted
under the Plan, awards of Common Shares or other securities of the Company or any subsidiary of the Company and other awards that are
valued in whole or in part by reference to, or are otherwise based on, Common Shares or other securities of the Company or any subsidiary of
the Company (“other stock unit awards”). Other stock unit awards may be paid in cash, Common Shares, other property or in a combination
thereof, as the Committee shall determine.
9.2 The Committee shall determine the employees to whom other stock unit awards are to be made, the times at which such awards are to
be made, the number of shares to be granted pursuant to such awards and all other conditions of such awards. The provisions of other stock unit
awards need not be the same with respect to each recipient. The recipient shall not be permitted to sell, assign, transfer, pledge, or otherwise
encumber the Common Shares or other securities prior to the later of the date on which the Common Shares or other securities are issued, or the
date on which any applicable restrictions or performance or deferral periods lapse. Common Shares (including securities convertible into
Common Shares) and other securities granted pursuant to other stock unit awards may be issued for no cash consideration or for such minimum
consideration as may be required by applicable law. Common Shares (including securities convertible into Common Shares) and other securities
purchased pursuant to purchase rights granted pursuant to other stock unit awards may be purchased for such consideration as the Committee
shall determine, which price shall not be less than the fair market value of such Common Shares or other securities on the date of grant, unless
the Committee otherwise elects.
10A. Grants to Non-Employee Directors .
10A.1 For purposes of the Plan, “Non-Employee Director” means a member of the Board who is not an employee of the Company or an
affiliate of the Company. In addition to awards to employees and Non-Employee Advisors, awards (other than ISOs) also may be made to NonEmployee Directors under the Plan. Except as otherwise provided in this Section 10A, any award to a Non-Employee Director shall be subject to
all of the terms and conditions of the Plan.
10A.2 The Board, in its sole discretion, may make awards to Non-Employee Directors. In exercising such authority, the Board shall have
all of the power otherwise reserved to the Committee under the Plan, including, but not limited to, the sole and complete authority (a) to select
the Non-Employee Directors who shall be eligible to receive awards, (b) to select the types and amounts of awards which may be made and
(c) to impose such limitations, restrictions and conditions upon awards as the Board shall deem appropriate.
7
10B. Grants to Non-Employee Advisors .
10B.1 For purposes of the Plan, “Non-Employee Advisor” means an individual selected by the Company or one or more of its affiliates to
participate in one or more foreign advisory boards who is neither an employee of the Company or an affiliate of the Company nor a NonEmployee Director. In addition to awards to employees and Non-Employee Directors, awards (other than ISOs) also may be made to NonEmployee Advisors under the Plan. Except as otherwise provided in this Section 10B, any award to a Non-Employee Advisor shall be subject to
all of the terms and conditions of the Plan.
10B.2 The Committee, in its sole discretion, may make awards to Non-Employee Advisors. In exercising such authority, the Committee
shall have complete authority (a) to select the Non-Employee Advisors who shall be eligible to receive awards, (b) to select the types and
amounts of awards which may be made and (c) to impose such limitations, restrictions and conditions upon awards as the Committee shall deem
appropriate.
11. Nonassignability of Awards .
Unless permitted by the Committee, no award granted under the Plan shall be assigned, transferred, pledged or otherwise encumbered by
the recipient, otherwise than (a) by will, (b) by designation of a beneficiary after death or (c) by the laws of descent and distribution. Each award
shall be exercisable during the recipient’s lifetime only by the recipient or, if permissible under applicable law, by the recipient’s guardian or
legal representative or, in the case of a transfer permitted by the Committee, by the recipient of the transferred amount.
12. Deferrals of Awards .
The Committee may permit recipients of awards to defer the distribution of all or part of any award in accordance with such terms and
conditions as the Committee shall establish.
13. Provisions Upon Change of Control .
In the event of a Change in Control occurring on or after the Effective Date, the provisions of this Section 13 will supersede any conflicting
provisions of the Plan.
13.1 In the event of a Change in Control, (a) all outstanding stock options and SARs under Sections 5 and 6 of the Plan shall become
exercisable in full, (b) the restrictions otherwise applicable to any Common Shares awarded as restricted stock under Section 7A of the Plan shall
lapse, (c) all Common Shares that are the subject of restricted stock units granted under Section 7B shall be issued, and (d) the performance
8
criteria relating to outstanding performance shares, performance units and other awards under Sections 8 and 9 of the Plan shall be deemed to
have been satisfied in full and such awards shall be paid in full within five business days of such Change in Control, provided that for those
performance awards issued after February 19 2007, performance goals will not be deemed satisfied in full and such awards shall be paid based
upon actual results as of the date of the Change in Control; further, unless the Committee shall revoke such an entitlement prior to a Change in
Control, any optionee who is deemed by the Committee to be a statutory officer (“insider”) for purposes of Section 16 of the Securities
Exchange Act of 1934, as amended (the “1934 Act”), shall be entitled to receive in lieu of exercise of any stock option, to the extent that it is
then exercisable, a cash payment in an amount equal to the difference between the aggregate price of such option, or portion thereof, and (a) in
the event of a tender offer or similar event, the final offer price per share paid for Common Shares times the number of Common Shares covered
by the option or portion thereof, or (b) the aggregate value of the Common Shares covered by the stock option.
In the event of a tender offer in which fewer than all Common Shares which are validly tendered in compliance with such offer are
purchased or exchanged, then only that portion of the Common Shares covered by a stock option as results from multiplying such Common
Shares by a fraction, the numerator of which is the number of Common Shares acquired pursuant to the offer and the denominator of which is
the number of Common Shares tendered in compliance with such offer, shall be used to determine the payment thereupon. To the extent that all
or any portion of a stock option shall be affected by this provision, all or such portion of the stock option shall be terminated.
13.2 For purposes of this Section 13, a “Change in Control” of the Company means and shall be deemed to occur if:
(a) a tender shall be made and consummated for the ownership of 30% or more of the outstanding voting securities of the Company;
(b) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than
75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of the Company, other than affiliates (within the meaning of the 1934 Act) of any party to such merger or consolidation, as
the same shall have existed immediately prior to such merger or consolidation;
(c) the Company shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary;
(d) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3) of the 1934 Act, shall acquire 20% or more of the
outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record), or a person, within the meaning of
Section 3(a)(9) or Section 13(d)(3) of the 1934 Act, controls in any manner the election of a majority of the directors of the Company; or
9
(e) within any period of two consecutive years commencing on or after the Effective Date of the Plan, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election of each
director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds
of the directors then in office who were directors at the beginning of the period. For purposes hereof, ownership of voting securities shall
take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) pursuant to the 1934 Act.
13.3 In the event of a Change in Control, the provisions of this Section 13 may not be amended on or subsequent to the Change in Control
in any manner whatsoever which would be adverse to any recipient of an award under the Plan without the consent of such recipient who would
be so affected; provided, however, the Board may make minor or administrative changes to this Section 13 or changes to conform to applicable
legal requirements.
14. Adjustments .
14.1 In the event of any change affecting the Common Shares by reason of any stock dividend or split, recapitalization, merger,
consolidation, spin-off, combination or exchange of shares or other corporate change, or any distributions to common shareholders other than
cash dividends, the Committee shall make such substitution or adjustment in the aggregate number or class of shares which may be distributed
under the Plan and in the number, class and option price or other price of shares subject to the outstanding awards granted under the Plan as it
deems to be appropriate in order to maintain the purpose of the original grant.
14.2 Subject to restrictions and limitations otherwise provided under the Plan, the Committee shall be authorized to make adjustments in
performance award criteria or in the terms and conditions of other awards in recognition of unusual or non-recurring events affecting the
Company or its financial statements or changes in applicable laws, regulations or accounting principles. The Committee may correct any defect,
supply any omission or reconcile any inconsistency in the Plan or any award in the manner and to the extent it shall deem desirable to carry it
into effect.
15. Amendments and Terminations .
Notwithstanding any other provisions hereof to the contrary, the Board may assume responsibilities otherwise assigned to the Committee
and may amend, alter or discontinue the Plan or any portion thereof at any time, provided that no such action shall impair the rights of any
recipient of an award under the Plan without such recipient’s consent and provided that no amendment shall be made without shareholder
approval which (a) increases the total number of Common Shares reserved for issuance pursuant to the Plan or the total number of Common
Shares which may be issued upon the exercise of ISOs or the total number of Common Shares which may be issued to any one individual (b)
10
changes the classes of persons eligible to receive awards under the Plan or (c) is required to be approved by the shareholders of the Company in
order to comply with applicable law or the rules of the principal national securities exchange upon which the Common Shares are traded.
16. Withholding .
To the extent required by applicable federal, state, local or foreign law, the recipient of an award under the Plan shall make arrangements
satisfactory to the Company for the satisfaction of any withholding obligations that arise in connection with the award and the Company shall
have the right to withhold from any cash award the amount necessary, or retain from any award in the form of Common Shares a sufficient
number of Common Shares, to satisfy the applicable withholding tax obligation. Unless otherwise provided in the applicable award agreement, a
participant may satisfy any tax withholding obligation by any of the following means or any combination thereof: (a) by a cash payment to the
Company, (b) by delivering to the Company Common Shares owned by the participant or (c) by authorizing the Company to retain a portion of
the Common Shares otherwise issuable to the participant pursuant to the exercise or vesting of the award.
17. CBI Stock Plan .
17.1 For purposes of this Section 17, “CBI” means Cincinnati Bell Inc., “CBI Option” means an option to purchase CBI common shares
granted under a CBI Stock Plan, “CBI Restricted Stock” means an award of CBI common shares as restricted stock under a CBI Stock Plan,
“CBI Stock Plan” means, collectively, the Cincinnati Bell Inc. 1988 Long Term Incentive Plan, the Cincinnati Bell Inc. 1989 Stock Option Plan,
the Cincinnati Bell Inc. 1997 Long Term Incentive Plan, the Cincinnati Bell Inc.1988 Stock Option Plan for Non-Employee Directors and the
Cincinnati Bell Inc. 1997 Stock Option Plan for Non-Employee Directors and “Distribution” means the date as of which CBI distributes to its
shareholders all of the Common Shares owned by CBI.
17.2 At the time of the Distribution, each holder of a CBI Option shall receive an additional stock option under this Plan (“Company
Option”) to purchase a number of Common Shares equal to the number of CBI common shares subject to the CBI Option. Each Company
Option shall have the same terms and conditions (including vesting) as the CBI Option with respect to which it is granted, except that
termination of employment shall mean, (a) in the case of a CBI employee or director, termination of employment with CBI and (b) in the case of
a Company employee or director, termination of employment with the Company. The exercise price per share of each CBI Option (the “CBI
Exercise Price”) shall be reduced, and the exercise price per share of the associated Company Option (the “Company Exercise Price”) shall be
set so that (a) the sum of the CBI Exercise Price (after the reduction provided herein) and the Company Exercise Price is equal to the CBI
Exercise Price (before the reduction provided herein) and (ii) the ratio of the CBI Exercise Price (after the reduction provided herein) to the
Company Exercise Price is equal to the ratio of the average of the high and low per-share prices of CBI common shares on the New York Stock
Exchange (“NYSE”) on January 4,
11
1999 to the average of the high and low per-share prices of Common Shares on the NYSE on January 4, 1999. Notwithstanding the foregoing, in
the event that the number of Common Shares to be distributed to each CBI shareholder at the time of the Distribution with respect to each CBI
common share owned by the shareholder on the record date for the Distribution is greater or less than one, the number of Common Shares
represented by each Company Option and the Company Exercise Price shall be adjusted to reflect such difference.
17.3 At the time of the Distribution, the Common Shares to be distributed with respect to each CBI common share which constitutes CBI
Restricted Stock shall be deemed to have been issued under this Plan and shall be subject to the same terms, conditions and restrictions
(including vesting) which apply to the CBI Restricted Stock with respect to which the distribution is being made, except that termination of
employment shall mean, (a) in the case of a CBI employee, termination of employment with CBI and (b) in the case of a Company employee,
termination of employment with the Company.
18. Governing Law.
The Plan and each Evidence of Award shall be governed by the laws of the State of Ohio, excluding any conflicts or choice of law rule or
principle that might otherwise refer construction or interpretation of the Plan to the substantive law of another jurisdiction.
12
Exhibit 10.9 to 2007 10-K
CONVERGYS CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN
(As amended effective October 29, 2001, except as otherwise provided)
TABLE OF CONTENTS
SECTION 1
NAME AND PURPOSE OF PLAN
1
SECTION 2
GENERAL DEFINITIONS; GENDER AND NUMBER
1
SECTION 3
DEFERRALS; COMPANY MATCH
2
SECTION 4
MAINTENANCE AND VALUATION OF ACCOUNTS
5
SECTION 5
DISTRIBUTION
7
SECTION 6
ADMINISTRATION OF THE PLAN
10
SECTION 7
FUNDING OBLIGATION
11
SECTION 8
AMENDMENT AND TERMINATION
11
SECTION 9
NON-ALIENATION OF BENEFITS
12
SECTION 10
MISCELLANEOUS
12
CONVERGYS CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN
SECTION 1
NAME AND PURPOSE OF PLAN
1.1 NAME. The plan set forth herein shall be known as the Convergys Corporation Executive Deferred Compensation Plan (the “Plan”).
1.2 PURPOSE. The purpose of the Plan is to provide deferred compensation for a select group of officers and highly compensated
employees of Convergys Corporation (“Convergys”) and its affiliates.
1.3 EFFECTIVE DATE. The Plan shall be effective on January 1, 1999 (the “Effective Date”).
1.4 PREDECESSOR PLANS. The Plan is intended to amend and supersede the MATRIXX Marketing Inc. Executive Deferred
Compensation Plan (the “MATRIXX Plan”) as of the Effective Date. The Plan also is intended to assume and discharge all of the obligations of
Cincinnati Bell Inc. (“CBI”) and its affiliates under CBI’s Executive Deferred Compensation Plan (the “CBI Plan”) with respect to those
employees of Convergys and its affiliates who were participating in the CBI Plan immediately prior to the Effective Date.
SECTION 2
GENERAL DEFINITIONS; GENDER AND NUMBER
2.1 GENERAL DEFINITIONS. For purposes of the Plan, the following terms shall have the meanings hereinafter set forth unless the
context otherwise requires:
2.1.1 “Accounts” means, collectively, all outstanding Cash Deferral Accounts, Restricted Stock Accounts and Company Matching
Accounts maintained for a Key Employee.
2.1.2 “Beneficiary” means the person or entity designated by a Key Employee, on forms furnished and in the manner prescribed by
the Committee, to receive any benefit payable under the Plan after the Key Employee’s death. If a Key Employee fails to designate a beneficiary
or if, for any reason, such designation is not effective, his “Beneficiary” shall be his surviving spouse or, if none, his estate.
1
2.1.3 “Convergys Shares” means common shares of Convergys Corporation.
2.1.4 “Convergys Entity” means Convergys and each corporation which is a member of a controlled group of corporations (within
the meaning of section 414(b) of the Code, as modified by section 415(h) of the Code) which includes Convergys.
2.1.5 “Code” means the Internal Revenue Code of 1986 as such Code now exists or is hereafter amended.
2.1.6 “Committee” means Convergys Employee Benefits Committee.
2.1.7 “Employee” means any person who is an employee of a Convergys Entity.
2.1.8 “Key Employee” means, with respect to any calendar year, an Employee who has been designated by the Committee as a “Key
Employee” for such calendar year.
2.2 GENDER AND NUMBER. For purposes of the Plan, words used in any gender shall include all other genders, words used in the
singular form shall include the plural form, and words used in the plural form shall include the singular form, as the context may require.
SECTION 3
DEFERRALS; COMPANY MATCH
3.1 ELECTION OF DEFERRALS.
3.1.1 Subject to such rules as the Committee may prescribe, a Key Employee may elect prior to January 1 of such calendar year (or
such earlier date as may be prescribed by the Committee) to defer up to 75% of his Basic Salary for any calendar year in accordance with
procedures established by the Committee. Notwithstanding the foregoing, if an Employee first becomes a Key Employee after the first day of a
calendar year, such Key Employee may elect within 30 days of the date on which he first becomes a Key Employee to defer a permissible
percentage of his Basic Salary for the remainder of the calendar year in accordance with procedures prescribed by the Committee. Any election
under the preceding sentence shall be effective as of the first payroll period beginning after the date the election is filed. For purposes of the
Plan, “Basic Salary” means the basic salary, pay in lieu of paid time off, short term disability pay, sales incentive payments and bonuses,
overtime pay, hiring bonuses and retention bonuses payable to a Key Employee by a Convergys Entity, but not including spot bonuses, patent
bonuses, referral bonuses, severance pay, relocation pay, imputed income, long term incentive payments and other special forms of pay.
2
3.1.2 Subject to such rules as the Committee may prescribe, a Key Employee may elect prior to January 1 of such calendar year (or
such earlier date as may be prescribed by the Committee) to defer up to 100% (subject to applicable withholding) or a specific dollar amount
(not less than $1,000) of any Annual Cash Incentive Award otherwise payable during the calendar year pursuant to procedures established by the
Committee. For purposes of the Plan, “Annual Cash Incentive Award” means the annual incentive award or bonus payable in cash to a Key
Employee by a Convergys Entity.
3.1.3 Subject to such rules as the Committee may prescribe, a Key Employee who has received a Restricted Stock Award may elect
to surrender any of the restricted Convergys Shares as of any date permitted by the Committee (not later than six months prior to the date on
which the restrictions otherwise applicable to such shares would lapse). For purposes of the Plan, “Restricted Stock Award” means an award of
Convergys Shares under the Convergys 1998 Long Term Incentive Plan (the “1998 LTIP”) which is in the form of restricted stock.
3.2 CHANGING DEFERRALS. Subject to such rules as the Committee may prescribe, a Key Employee who has elected to defer a portion
of his Basic Salary or Annual Cash Incentive Awards may change the amount of his deferral from one permissible amount to another, effective
as of any January 1, provided such change is made prior to such January 1 (or such earlier date as may be prescribed by the Committee).
3.3 SUSPENDING DEFERRALS.
3.3.1 Subject to such rules as the Committee may prescribe, a Key Employee who has elected to defer a portion of his Basic Salary
may suspend such election, as of the first day of any payroll period, provided such election is made prior to the first day of such payroll period.
A Key Employee who has suspended his election for deferrals in accordance with this Section 3.3.1 may again elect to defer a portion of his
Basic Salary, effective as of any January 1 following the six month period beginning on the effective date of the suspension, provided such
election is made prior to such January 1 (or such earlier date as may be prescribed by the Committee).
3.3.2 A Key Employee’s election to defer a portion of an Annual Cash Incentive Award or to surrender any portion of a Restricted
Stock Award may not be revoked during the calendar year.
3.4 COMPANY MATCH.
3.4.1 Effective January 1, 2002, as of each day on which Basic Salary or Annual Cash Incentive Award deferrals are credited, under
Section 4.1, to the Cash
3
Deferral Account of a Key Employee (“Deferral Date”), there shall also be credited to such Key Employee’s Company Matching Account under
Section 4.3, an amount equal to the lesser of (a) the result obtained (not less than zero) by subtracting the Maximum 401(m) Match from 4% of
the Key Employee’s Total Compensation or (b) 100% of the first 3% of Basic Salary and Annual Cash Incentive Awards deferred by the Key
Employee and 50% of the next 2% of Basic Salary and Annual Cash Incentive Awards deferred by the Key Employee on the Deferral Date. For
purposes of the preceding sentence, “Total Compensation” means the total Basic Salary and Annual Cash Incentive Awards paid to the Key
Employee on a Deferral Date or which would have been paid to the Key Employee on the Deferral Date if he had not participated in a 401(k)
plan or cafeteria plan and “Maximum 401(m) Match” means the maximum Convergys Entity match which would have been made for the Key
Employee on the Deferral Date under the Convergys Corporation Retirement and Savings Plan (the “RSP”) if the Key Employee had elected to
contribute 5% of his non-deferred compensation to the RSP on a pre-tax basis (not in excess of the applicable dollar limitation). For purposes of
this Section 3.4.1 only, the terms “Basic Salary” and “Annual Cash Incentive Award” shall not include an award payable under the 1998 LTIP or
any other long term incentive plan or any type of compensation (other than compensation in excess of the applicable dollar limitation) which is
excluded from the definition of the term “Covered Compensation” under the RSP. Notwithstanding any other provision of the Plan to the
contrary, with respect to a Key Employee hired on or after January 1, 2002, no amounts shall be credited under this Section 3.4.1 with respect to
Basic Salary or Annual Cash Incentive Award deferrals credited to the Key Employee’s Cash Deferral Account prior to the date on which he has
complete one year of Eligibility Service (as defined in the RSP).
3.4.2 As of any day on which the value of a Restricted Stock Award which a Key Employee has elected to surrender is credited,
under Section 4.2, to the Restricted Stock Account of such Key Employee, there shall also be credited to such Key Employee’s Company
Matching Account under Section 4.3, an amount equal to 4% of the value of the Restricted Stock Award credited to his Restricted Stock
Account.
3.5 DEFERRALS OF SAVINGS PLAN DISTRIBUTIONS.
3.5.1 Subject to such rules as the Committee may prescribe, a Key Employee who has received a Required 401(k) Distribution may
elect to defer from his Basic Salary a dollar amount not greater than the dollar amount of the Required 401(k) Distribution. Such deferral shall be
made with respect to the Basic Salary paid (1) after the Required 401(k) Distribution has been paid, (2) prior to the date the services to which
such Basic Salary relates have been performed and (3) during the year in which the Required 401(k) Distribution is paid. Such deferrals shall be
credited to the Key Employee’s Cash Deferral Account. For purposes of this Section 3.5, “Required 401(k) Distribution” means a distribution of
employee contributions and earnings from the RSP made to satisfy the limitations contained in section 401(k) of the Code.
4
3.5.2 Subject to such rules as the Committee may prescribe, a Key Employee who has received a Required 401(m) Distribution may
elect to defer from his Basic Salary a dollar amount not greater than the dollar amount of the Required 401(m) Distribution. Such deferral shall
be made with respect to the Basic Salary paid (1) after the Required 401(m) Distribution has been paid, (2) prior to the date the services to which
such Basic Salary relates have been performed and (3) during the year in which the Required 401(k) Distribution is paid. Such deferral shall be
credited to the Key Employee’s Cash Deferral Account. For purposes of this Section 3.5, “Required 401(m) Distribution” means a distribution of
company matching contributions and earnings from the RSP made to satisfy the limitations under section 401(m) of the Code.
3.5.3 In the case of a Key Employee who has received a Required 401(k) Distribution and who has incurred a Required 401(m)
Forfeiture by reason of such Required 401(k) Required Distribution, if a deferral of the Required 401(k) Distribution amount is made under
Section 3.5.1, there also shall be credited to such Key Employee’s Company Matching Account, an amount equal to the amount of the Required
401(m) Forfeiture associated with that Required 401(k) Distribution. For purposes of this Section 3.5, “Required 401(m) Forfeiture” means a
forfeiture of company matching contributions and earnings under the RSP by reason of a Required 401(k) Distribution.
SECTION 4
MAINTENANCE AND VALUATION OF ACCOUNTS
4.1 CASH DEFERRAL ACCOUNTS. There shall be established for each Key Employee who has elected to defer a portion of his Basic
Salary or Annual Cash Incentive Award under Section 3.1.1, 3.1.2, 3.5.1 or 3.5.2 a separate Account, called a Cash Deferral Account, which
shall reflect the amounts deferred by the Key Employee and the assumed investment thereof. Subject to such rules as the Committee may
prescribe, any amount deferred by a Key Employee under Section 3.1.1, 3.1.2, 3.5.1 or 3.5.2 shall be credited to the Key Employee’s Cash
Deferral Account as of the day on which such deferred amount would have otherwise been paid to the Key Employee and shall be assumed to
have been invested as designated by the Key Employee among the investments available under the Plan.
4.2 RESTRICTED STOCK ACCOUNTS. There shall be established for each Key Employee who has elected to surrender all or a portion
of a Restricted Stock Award under Section 3.1.3 a separate Account, called a Restricted Stock Account, which shall reflect the value of the
Convergys Shares surrendered by the Key Employee under Section 3.1.3 and the assumed investment thereof. Subject to such rules as the
Committee may prescribe, an amount equal to the value of the Convergys Shares surrendered by the Key Employee under Section 3.1.3 shall be
credited to the Key Employee’s Restricted Stock Account as of the day on which the Convergys Shares are surrendered to Convergys. Amounts
credited to the Key Employee’s Restricted Stock Account on or after October
5
29, 2001 shall be assumed to be invested in Convergys Shares at all times. Amounts credited to the Key Employee’s Restricted Stock Account
prior to October 29, 2001 shall be assumed to have been invested exclusively in Convergys Shares until six months after the Applicable Lapse
Date for the surrendered Convergys Shares. Thereafter, such amounts shall be assumed to have been invested as designated by the Key
Employee among the investments available under the Plan. For purposes of the Plan, “Applicable Lapse Date” means, with respect to any
Restricted Stock Award, the date on which the restrictions would have lapsed if the restricted Convergys Shares had not been surrendered.
4.3 COMPANY MATCHING ACCOUNTS. There shall be established for each Key Employee who is entitled to a match under
Section 3.4.1, 3.4.2 or 3.5.3 a separate Account called a Company Matching Account, which shall reflect the match to be credited on behalf of
the Key Employee under Section 3.4.1, 3.4.2 and 3.5.3 and the assumed investment thereof. The amount of the match shall be credited to the
Key Employee’s Company Matching Account as of the day on which the deferred Basic Salary or Annual Cash Incentive Award to which the
match relates would have otherwise been paid to the Key Employee or, in the case of a match credited pursuant to Section 3.4.2, as of the date on
which the Key Employee elected to surrender the Restricted Stock Award pursuant to Section 3.1.3. Amounts credited to the Key Employee’s
Company Matching Account shall be assumed to have been invested as designated by the Key Employee, pursuant to rules prescribed by the
Committee, among the investments available under the Plan.
4.4 VALUATION. As soon as practical following the end of each calendar year, and as of such other date as the Committee may prescribe,
each Key Employee or, in the event of his death, his Beneficiary, shall be furnished a statement as of December 31 showing the balance of the
Key Employee’s Accounts, the total credits to such Accounts during the preceding calendar year, and, if amounts credited to any such Accounts
are assumed to have been invested in securities, a description of such securities including the number of shares assumed to have been purchased
by the amounts credited to such Accounts.
4.5 PREDECESSOR PLAN ACCOUNTS. In the case of a Key Employee who had one or more accounts under the MATRIXX Plan or the
CBI Plan (the “Predecessor Plans”) immediately prior to the Effective Date, the balance credited to each such Account shall be transferred to the
corresponding Account (Cash Deferral, Restricted Stock or Company Matching) in this Plan as of the Effective Date. From and after such
transfer, the Key Employee shall cease to have any further rights under any Predecessor Plan. To the extent that a Predecessor Plan Account was
assumed to have been invested in common shares of CBI (“CBI Shares”) immediately prior to the Effective Date, the Key Employee’s Accounts
in this Plan shall be credited with one Convergys Share and one CBI Share (adjusted in value to reflect the Convergys Shares distributed to
CBI’s shareholders on the Effective Date) for each CBI Share credited to his Predecessor Plan Accounts immediately prior to the Effective Date
and in the case of CBI Shares credited to a Restricted Stock Account under this Plan, references to “Convergys Shares” in Sections 4.2 and 5.2.4
shall include such CBI Shares.
6
4.6 CONVERGYS SHARES. To the extent Key Employee’s Accounts are assumed to have been invested in Convergys Shares:
4.6.1. Whenever any cash dividends are paid with respect to Convergys Shares, additional amounts shall be credited to the Key
Employee’s Accounts as of the dividend payment date. The additional amount to be credited to each account shall be determined by multiplying
the per share cash dividend paid with respect to the Convergys Shares on the dividend payment date by the number of assumed Convergys
Shares credited to the Key Employee’s Accounts on the day preceding the dividend payment date. Such additional amount credited to the Key
Employee’s Account shall be assumed to have been invested in additional Convergys Shares on the day on which such dividends are paid.
4.6.2. If there is any change in Convergys Shares through the declaration of a stock dividend or a stock split or through a
recapitalization resulting in a stock split, or a combination or a change in shares, the number of shares assumed to have been purchased for each
Account shall be appropriately adjusted.
4.6.3 Whenever Convergys Shares are to be valued for purposes of the Plan, the value of each such share shall be the closing price of
the shares as reported on the New York Stock Exchange on the business day preceding the date as of which the valuation is performed or, if no
sales were made on that date, on the next preceding day on which sales were made.
SECTION 5
DISTRIBUTION
5.1 GENERAL. Except as otherwise provided in Section 5.5, no amount shall be paid with respect to a Key Employee’s Accounts while he
remains an Employee. Unless the Committee otherwise provides, all payments with respect to a Key Employee’s Accounts shall be made by the
Convergys Entity which otherwise would have paid the Basic Salary, Annual Cash Incentive Award or Restricted Stock Award deferred by the
Key Employee.
5.2 TERMINATION OF EMPLOYMENT. A Key Employee may elect to receive the amounts credited to his Accounts in up to ten annual
installment payments or 120 monthly installment payments, commencing not earlier than the first business day of the month following the date
he ceases to be an Employee and not later than the first business day of March of the calendar year following the calendar year in which he
ceases
7
to be an Employee. If a Key Employee fails to make such election, the amounts credited to the Key Employee’s Account shall be paid to the Key
Employee in two annual installments with the first installment being made on the first business day of March of the calendar year following the
calendar year in which the Key Employee ceases to be an Employee.
5.2.1. The amount of each annual installment payable under this Section 5.2 (or, in the case of monthly installments, the sum of the
12 installments paid during each 12 month period) shall be, at the election of the Key Employee, either (1) a specific dollar amount specified by
the Key Employee (not less than $50,000), or (2) a fraction of the amounts credited to the Key Employee’s Accounts as of the installment
payment date, the numerator of which is 1 and the denominator of which is equal to the total number of installments remaining to be paid
(including the installment to be paid on the subject installment payment date). If a Key Employee elects (2) above and the amount of any annual
installment (or, in the case of monthly installments, the sum of the 12 installments paid during each 12 month period) is less than $50,000, it
shall be increased to $50,000, as the case may be; provided that if the remaining amount credited to the Accounts on any annual installment date
is less than $50,000, the payment shall be the amount necessary to reduce the amount credited to the Account to $0.
5.2.2. Any election under this Section 5.2 must be made within the time prescribed by the Committee but in no event later than six
months prior to the effective date of the Key Employee’s termination. Distributions made under this Section 5.2 shall be subject to the rules and
procedures prescribed by the Committee. The Committee, in its discretion and subject to such rules as it may prescribe, may allow a Key
Employee to elect another form of payment not otherwise described in this Section 5.2.
5.2.3. In its discretion, the Committee may condition the right to receive payments with respect to a portion or all of a Key
Employee’s Company Matching Account on the Key Employee’s completing a minimum period of service prior to the date on which he ceases
to be an Employee. To the extent that a Key Employee has not satisfied any applicable service requirements prior to the date on which he ceases
to be an Employee (other than by reason of his death), he shall not be entitled to receive payment with respect to his Company Matching
Account.
5.2.4. In the case of a Restricted Stock Account and that portion of the Company Matching Account attributable to match credited
pursuant to Section 3.4.2, such amounts credited to such Accounts shall be subject to forfeiture at the same time and to the same extent that the
Convergys Shares surrendered would have been if such Convergys Shares had not been surrendered. The provisions of this Section 5.2.4 shall
not apply to amounts credited to the Restricted Stock Account under Section 4.6.1 or 4.6.2.
5.3 DEATH. Except as provided in Section 5.2.4, if a Key Employee ceases to be an Employee by reason of his death, or if a Key
Employee dies after ceasing to be
8
an Employee but before the amounts credited to his Accounts have been paid, the amounts credited to the Key Employee’s Accounts shall be
paid to the Key Employee’s Beneficiary in one lump sum as of the first business day of the third calendar quarter following the calendar quarter
in which the Key Employee’s death occurs; provided, however, that if the Key Employee has elected to have his Accounts distributed in
installments and if he dies after distribution has commenced, the remaining installments shall be paid to the Beneficiary as they become due.
5.4 DISTRIBUTIONS DURING EMPLOYMENT. Subject to such rules and restrictions as the Committee may prescribe, a Key
Employee may elect to receive a distribution of up to the entire balance in his Cash Deferral Account or Restricted Stock Account (to the extent
that the Restricted Stock Account is not subject to forfeiture). Any such election must be made both prior to the first day of the calendar year in
which the distribution is to be made and at least six months prior to the effective date of the distribution. A Key Employee who elects to receive
a distribution under this Section 5.4 shall not be permitted to make deferrals under Section 3.1 during the year in which the distribution occurs.
Notwithstanding any other provision of the Plan to the contrary, if a Key Employee’s compensation is subject to the limitations described in
Code Section 162(m), the Compensation Committee may limit the amount a Key Employee may elect to receive (under the terms of this
Section 5.4) from that portion of his Restricted Stock Account attributable to amounts credited to such account on or after October 29, 2001.
5.5 FORM OF PAYMENT. Payments of that portion of a Key Employee’s Restricted Stock Account that is attributable to amounts
credited to such account on or after October 29, 2001 shall be paid in the form of Convergys Shares. All other payments under the Plan shall be
made in cash.
5.6 CHANGE IN CONTROL. In the event of a Change in Control on or after January 1, 2001, the provisions of this Section 5.6 will
supersede any conflicting provisions of the Plan.
5.6.1 In the event of a Change in Control, the full present value of all amounts credited to Key Employee’s Accounts under the Plan
as of the Change in Control, whether or not vested, shall be fully funded to the Convergys Corporation Grantor Trust (the “Trust”), in cash or
other property acceptable to the trustee, within five business days of such Change in Control.
5.6.2 For the purposes of this Section 5.6, a “Change in Control” shall be deemed to have occurred if, (i) a tender offer shall be made
and consummated for the ownership of 30% or more of the outstanding voting securities of Convergys; (ii) Convergys shall be merged or
consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former shareholders of Convergys, other than affiliates (within the
meaning of the Securities Exchange Act of 1934 as in effect on the Effective Date (the “1934 Act”)) of any party to
9
such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation; (iii) Convergys shall sell
substantially all of its assets to another corporation which is not a wholly owned subsidiary; (iv) a person, within the meaning of Section 3(a)(9)
or of Section 13(d)(3) of the 1934 Act, shall acquire 20% or more of the outstanding voting securities of Convergys (whether directly, indirectly,
beneficially or of record), or a person, within the meaning of Section 3(a)(9) or Section 13(d)(3) of the 1934 Act, controls in any manner the
election of a majority of the directors of Convergys; (v) or within any period of two consecutive years commencing on or after the Effective
Date, individuals who at the beginning of such period constitute Convergys’ Board of Directors cease for any reason to constitute at least a
majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by
directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. For purposes hereof,
ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)
(i) of the 1934 Act.
5.6.3 In the event of a Change in Control, the provisions of Section 5.6 may not be deleted or amended on or subsequent to the
Change of Control in any manner whatsoever which would be adverse to one or more Key Employees without the consent of each such Key
Employee who would be so affected; provided, however, the Convergys Compensation and Benefits Committee may make minor or
administrative changes to Section 5.6 or changes to conform to applicable legal requirements. This Section 5.6.3 shall not limit the Convergys
Compensation and Benefits Committee from making any amendment to or deleting all or any portion of Section 5.6 prior to a Change in Control.
SECTION 6
ADMINISTRATION OF THE PLAN
6.1 GENERAL. The general administration of the Plan and the responsibility for carrying out its provisions shall be placed in the
Committee.
6.2 EXPENSES. Expenses of administering the Plan shall be shared by each Convergys Entity in such proportions as may be determined
by the Committee.
6.3 COMPENSATION OF COMMITTEE. The members of the Committee shall not receive compensation for their services as such, and,
except as required by law, no bond or other security need be required of them in such capacity in any jurisdiction.
6.4 RULES OF PLAN. Subject to the limitations of the Plan, the Committee may, from time to time, establish rules for the administration
of the Plan and the transaction of its business. The Committee may correct errors, however arising, and as far as possible, adjust any benefit
payments accordingly. The determination of the Committee as to the interpretation of the provisions of the Plan or any disputed question shall be
conclusive upon all interested parties.
10
6.5 AGENTS AND EMPLOYEES. The Committee may authorize one or more agents to execute or deliver any instrument. The
Committee may appoint or employ such agents, counsel (including counsel of any Company), auditors (including auditors of any Company),
physicians, clerical help and actuaries as in the Committee’s judgment may seem reasonable or necessary for the proper administration of the
Plan.
6.6 INDEMNIFICATION. Each Convergys Entity shall indemnify each member of the Committee for all expenses and liabilities
(including reasonable attorney’s fees) arising out of the administration of the Plan. The foregoing right of indemnification shall be in addition to
any other rights to which the members of the Committee may be entitled as a matter of law.
SECTION 7
FUNDING OBLIGATION
Except as provided in Section 5.6, no Convergys Entity shall have any obligation to fund, either by the purchase of Convergys Shares or
the investment in any account or by any other means, its obligation to Key Employees hereunder. If, however, a Convergys Entity does elect to
allocate assets to provide for any such obligation, the assets allocated for such purpose shall be assets of the Convergys Entity subject to claims
against the Convergys Entity, including claims of the Convergys Entity’s creditors, to the same extent as are other corporate assets, and the Key
Employee shall have no right or claim against the assets so allocated, other than as general creditors of the Convergys Entity.
SECTION 8
AMENDMENT AND TERMINATION
The Convergys Compensation and Benefits Committee may, without the consent of any Key Employee or Beneficiary, amend or terminate
the Plan at any time; provided that no amendment shall be made or act of termination taken which divests any Key Employee of the right to
receive payments under the plan with respect to amount heretofore credited to the Key Employee’s Accounts.
11
SECTION 9
NON-ALIENATION OF BENEFITS
No Key Employee or Beneficiary shall alienate, commute, anticipate, assign, pledge, encumber or dispose of the right to receive the
payments required to be made by any Convergys Entity hereunder, which payments and the right to receive them are expressly declared to be
nonassignable and nontransferable. In the event of any attempt to assign or transfer any such payment or the right to receive them, no Convergys
Entity shall have any further obligation to make any payments otherwise required of it hereunder.
SECTION 10
MISCELLANEOUS
10.1 DELEGATION. The Committee may delegate to any Convergys Entity, person or committee certain of its rights and duties
hereunder. Any such delegation shall be valid and binding on all persons and the person or committee to whom or which authority is delegated
shall have full power to act in all matters so delegated until the authority expires by its terms or is revoked by the Committee, as the case may be.
10.2 APPLICABLE LAW. The Plan shall be governed by applicable federal law and, to the extent not preempted by applicable federal
law, the laws of the State of Ohio.
10.3 SEPARABILITY OF PROVISIONS. If any provision of the Plan is held invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions had not been included.
10.4 HEADINGS. Headings used throughout the Plan are for convenience only and shall not be given legal significance.
10.5 COUNTERPARTS. The Plan may be executed in any number of counterparts, each of which shall be deemed an original. All
counterparts shall constitute one and the same instrument, which shall be sufficiently evidenced by any one thereof.
CONVERGYS CORPORATION
COMPENSATION AND BENEFITS
COMMITTEE
By:
12
Exhibit 12 to 2007 10-K
CONVERGYS CORPORATION
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends
(Amounts in millions)
Earnings:
Income before income taxes, extraordinary
charges and cumulative effect of change
in accounting principle
Adjustment for undistributed
(income)/losses of partnerships
Interest expense
Portion of rental expense deemed interest
Total earnings
Fixed Charges:
Interest expense
Portion of rental expense deemed interest
Total fixed charges
Preferred dividends:
Preferred dividends
Combined fixed charges and preferred
dividends
Ratio of Earnings to Fixed Charges
Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends
For the Twelve
For the Twelve
For the Twelve
For the Twelve
For the Twelve
Months Ended
Months Ended
Months Ended
Months Ended
Months Ended
Dec. 31, 2007
Dec. 31, 2006
Dec. 31, 2005
Dec. 31, 2004
Dec. 31, 2003
$
245.6
$
(5.5)
17.5
28.8
286.4
$
$
17.5
28.8
46.3
$
244.6
$
(6.0)
22.8
28.7
290.1
$
$
—
$
46.3
6.19
6.19
22.8
28.7
51.5
$
213.4
$
(8.9)
21.2
33.0
258.7
$
$
—
$
51.5
5.63
5.63
21.2
33.0
54.2
$
173.4
$
(1.7)
10.3
31.0
213.0
$
$
—
$
54.2
4.77
4.77
10.3
31.0
41.3
$
271.6
$
13.8
6.9
37.3
329.6
$
$
—
$
41.3
5.16
5.16
6.9
37.3
44.2
—
$
44.2
7.46
7.46
Exhibit 14 to 2007 10-K
FINANCIAL CODE OF ETHICS
The Company has a Code of Business Conduct applicable to all Directors and employees of the Company. The Chief Executive Officer
(“CEO”), the President, the Chief Operating Officer (“COO”) and all senior financial officers, including the Chief Financial Officer (“CFO”)
and principal accounting officer, are bound by the provisions set forth therein relating to ethical conduct, conflicts of interest and compliance
with law. In addition to the Code of Business Conduct, the CEO and senior financial officers are subject to the following additional specific
policies (the “Financial Code of Ethics”):
The CEO, the President, the COO and senior financial officers are responsible for full, fair, accurate, timely and understandable
disclosure in the periodic reports required to be filed by the Company with the Securities and Exchange Commission or the New York
Stock Exchange, as well as certain other public communications made by the Company. Accordingly, it is the responsibility of the CEO,
President, COO and each senior financial officer to bring promptly to the attention of the Chief Compliance Officer (“CCO”) or the
Company’s Certification Subcommittee any material information of which he or she may become aware that affects the disclosures made
by the Company in its public filings or otherwise assists the CCO or the Certification Subcommittee in fulfilling their responsibilities as
specified in the Compliance Committee charter or the Certification Subcommittee charter.
The CEO, the President, the COO and each senior financial officer shall promptly bring to the attention of the CCO, or the
Certification Subcommittee and the Audit Committee any information he or she may have concerning (a) significant deficiencies in the
design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report
financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
Company’s financial reporting, disclosures or internal controls.
The CEO, the President, the COO and each senior financial officer shall promptly bring to the attention of the General Counsel, the
CCO or the CEO and to the Audit Committee any information he or she may have concerning any violation of this Code and the
Company’s Code of Business Conduct, including any conflicts of interest between personal and professional relationships involving any
management or other employees who have a significant role in the Company’s financial reporting, disclosures or internal controls.
The CEO, the President, the COO, the CCO and each senior financial officer shall endeavor to comply, and to cause the Company to
comply, with all applicable governmental laws, rules and regulations. The CEO, the President, the COO and each senior financial officer
shall promptly bring to the attention of the General Counsel, the CCO or the CEO and to the Audit Committee any information he or she
may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and
the operation of its business by the Company or any agent thereof, or of a violation of the Code of Business Conduct or of these additional
requirements.
The CEO, the President, the COO and each senior financial officer shall adhere to this Financial Code of Ethics and shall promptly
report any violations of this Code in accordance with Company policies and procedures. Any violation of this Financial Code of Ethics
may result in disciplinary action, up to and including termination.
The Code of Business Conduct and Financial Code of Ethics are available on the Company website at
www.convergys.com/corporategovernance.html.
Exhibit 21 to 2007 10-K
Direct and Indirect Subsidiaries of Convergys Corporation
Jurisdiction
Convergys Corporation
- Convergys Information Management Group Inc.
- Convergys EMEA Limited
- - Convergys IMG Ltd
- - Telesens KSCL SA
- - Convergys Egypt LLC
- Convergys IMG International Services Inc.
- Convergys IMG do Brasil Ltda
- Convergys Singapore Pte. Ltd.
- - Convergys Employee Care Singapore Pte. Ltd.
- - - Convergys Employee Care (Thailand) Co. Ltd.
- - - Convergys Employee Care Malaysia Sdn Bhd
- - Convergys Benefits Pte. Ltd.
- - - Convergys I- Benefits HK Limited
- - - Convergys Benefits (M) Sdn. Bhd.
- - - - Smiles Solutions Sdn Bhd (Malaysia)
- - Convergys Cyprus Limited
- - - Nodisko Trading Limited
- - - - Rosas Limited
- - - - Nodisko Outsourcing Company Private Limite
- Convergys Services Japan K.K.
- Convergys Cellular Systems Company
- Convergys France SAS
- Convergys Germany GmbH
- Convergys Hong Kong Limited
- Convergys Hungary Services LLC
- Convergys IMG Australia Pty Ltd
- Convergys IMG International Inc.
- Convergys IMG Spain, S.L.
- Convergys Information Management (India) Private Limited
- Convergys Information Management Services Limited
- Convergys Lanka (Private) Limited
- Convergys Mexico S. de R. L. de C. V.
- Convergys Solucoes Informaticas, Unipessoal, LTDA
- Convergys Thailand Co., Ltd.
- Convergys CIS (LLC)
- PT Convergys Indonesia
Ohio
Ohio
United Kingdom
United Kingdom
France
Egypt
Ohio
Brasil
Singapore
Singapore
Thailand
Malaysia
Singapore
Hong Kong
Malaysia
Malaysia
Cyprus
Cyprus
Cyprus
India
Japan
Ohio
France
Germany
Hong Kong
Hungary
Australia
Ohio
Spain
India
Korea
Sir Lanka
Mexico
Portugal
Thailand
Russia
Indonesia
- Convergys Customer Management Group Inc.
- Convergys Costa Rica SRL
- Convergys Employee Care Argentina S.R.L.
- Convergys Employee Care Colombia Limitada
- Convergys Employee Care Puerto Rico, LLC
- Convergys Employee Care Taiwan Limited
- Convergys India Services Private Limited
- Convergys Philippines Services Corporation
- Encore Receivable Management, Inc.
- - Encore Receivable Management Canada Inc.
Ohio
Costa Rica
Argentina
Colombia
Puerto Rico
Taiwan
India
Philippines
Kansas
Nova Scotia, Canada
- Finali Corporation
- - Netsage Corporation
- Convergys Learning Solutions Inc.
- - Arista Knowledge Systems, Inc.
- - DigitalThink (India) Pvt. Ltd.
- - DigitalThink UK Ltd.
- - Horn Interactive Inc.
- - - Tidewater Software, Inc.
- - Image Dynamic Inc.
- Convergys Customer Management International Inc.
- - Convergys CMG UK Limited
- - Convergys Customer Management AG
- - Convergys Customer Management Belgium SA
- - Convergys Customer Management Italy SRL
- - Convergys Customer Management Netherlands B.V.
- - Convergys Services Denmark ApS
- - Convergys Customer Management Group Canada Holding Inc.
- - - Convergys Customer Management Limited Partner ULC
- - - Convergys New Brunswick, Inc.
- - - - Convergys CMG Canada Limited Partnership
- - - Convergys Customer Management Delaware LLC
- - - Convergys CMG Utah Inc.
Delaware
Delaware
Delaware
Delaware
India
United Kingdom
Ohio
Ontario, Canada
Ohio
Ohio
United Kingdom
Switzerland
Belgium
Italy
Netherlands
Denmark
Delaware
Nova Scotia, Canada
New Brunswick, Canada
Manitoba, Canada
Delaware
Utah
- Convergys Broadband Asia Pte Ltd
- Convergys Broadband Japan K.K.
- Convergys Broadband Taiwan Limited
Singapore
Japan
Taiwan
- Convergys Israel Investments, Ltd.
- Convergys Solutions Ltd.
- Convergys Solutions Australia Pty Ltd.
- - SATTEC Solutions Pty Ltd.
Israel
Israel
Australia
Australia
- Asset Ohio Fourth Street LLC
- Convergys Government Solutions LLC
- Convergys Information Technology Services (Dalian) Co., Ltd.
- Convergys Software Service (Beijing) Ltd.
Ohio
Ohio
Dalian, China
Peoples Republic of China
•
All subsidiaries wholly owned except Convergys Broadband Asia Pte Ltd. And its subsidiaries which are owned 75%
•
All subsidiaries conduct business under their legal name.
Exhibit 23 to 2007 10-K
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in this Annual Report (Form 10-K) of Convergys Corporation of our report dated
February 27, 2008, with respect to the consolidated financial statements of Convergys Corporation, included in the 2007 Annual
Report to Shareholders of Convergys Corporation.
Our audits also included the financial statement schedule of Convergys Corporation. This schedule is the responsibility of
Convergys’ management. Our responsibility is to express an opinion based on our audits. In our opinion, as to which the date is
February 27, 2008, the financial statement schedule referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set forth therein.
We consent to the incorporation by reference in the following Registration Statements:
• Form S-8 No. 333-66992 pertaining to the Geneva Technology Limited Unapproved Share Option Scheme 1998,
• Form S-8 No. 333-69633 pertaining to the Convergys Corporation Employee Stock Purchase Plan,
• Form S-8 No. 333-86137 pertaining to the Convergys Corporation Canadian Employee Share Purchase Plan,
• Form S-8 No. 333-96727 pertaining to the Convergys Corporation 1998 Long Term Incentive Plan,
• Form S-8 No. 333-96729 pertaining to the Convergys Corporation Deferred Compensation and LTIP Award Deferral Plan for
Non-Employee Directors,
• Form S-8 No. 333-96733 pertaining to the Convergys Corporation Retirement and Savings Plan, and
• Form S-3 No. 333-101899 pertaining to Convergys Corporation’s registration of $250 million of debt securities and related
prospectus for the registration of debt securities, common shares, preferred shares and warrants to purchase (i) debt securities,
(ii) common shares, or (iii) preferred shares;
of our reports dated February 27, 2008, with respect to the consolidated financial statements and schedule of Convergys
Corporation and the effectiveness of internal control over financial reporting of Convergys Corporation, included in this Annual
Report (Form 10-K) for the year ended December 31, 2007.
/s/ Ernst & Young, LLP
Ernst & Young, LLP
Cincinnati, Ohio
February 27, 2008
Exhibit 24 to 2007 10-K
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation (hereinafter referred to as the “Company”), proposes
shortly to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended,
and the Rules and Regulations thereunder, an annual report on Form 10-K for the year ended December 31, 2007; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Philip A. Odeen, Earl C. Shanks and Karen R.
Bowman, and each of them singly, her attorneys for her and in her name, place and stead, and in her office and capacity in the
Company, to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendments or supplements
thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing
whatsoever requisite and necessary to be done in and about the premises as fully to all intents and purposes as she might or could do if
personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand this 19th day of February, 2008.
/s/ Zoë Baird
Zoë Baird
Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation (hereinafter referred to as the “Company”), proposes
shortly to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended,
and the Rules and Regulations thereunder, an annual report on Form 10-K for the year ended December 31, 2007; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Philip A. Odeen, Earl C. Shanks and Karen R.
Bowman, and each of them singly, his attorneys for him and in his name, place and stead, and in his office and capacity in the Company,
to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendments or supplements thereto, hereby
giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and purposes as he might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th day of February, 2008.
/s/ John F. Barrett
John F. Barrett
Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation (hereinafter referred to as the “Company”), proposes
shortly to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended,
and the Rules and Regulations thereunder, an annual report on Form 10-K for the year ended December 31, 2007; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Philip A. Odeen, Earl C. Shanks and Karen R.
Bowman, and each of them singly, his attorneys for him and in his name, place and stead, and in his office and capacity in the Company,
to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendments or supplements thereto, hereby
giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and purposes as he might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th day of February, 2008.
/s/ David B. Dillon
David B. Dillon
Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation (hereinafter referred to as the “Company”), proposes
shortly to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended,
and the Rules and Regulations thereunder, an annual report on Form 10-K for the year ended December 31, 2007; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Philip A. Odeen, Earl C. Shanks and Karen R.
Bowman, and each of them singly, his attorneys for him and in his name, place and stead, and in his office and capacity in the Company,
to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendments or supplements thereto, hereby
giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and purposes as he might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15 th day of February, 2008.
/s/ Joseph E. Gibbs
Joseph E. Gibbs
Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation (hereinafter referred to as the “Company”), proposes
shortly to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended,
and the Rules and Regulations thereunder, an annual report on Form 10-K for the year ended December 31, 2007; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Philip A. Odeen, Earl C. Shanks and Karen R.
Bowman, and each of them singly, his attorneys for him and in his name, place and stead, and in his office and capacity in the Company,
to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendments or supplements thereto, hereby
giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and purposes as he might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th day of February, 2008.
/s/ Steven C. Mason
Steven C. Mason
Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation (hereinafter referred to as the “Company”), proposes
shortly to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended,
and the Rules and Regulations thereunder, an annual report on Form 10-K for the year ended December 31, 2007; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Earl C. Shanks and Karen R. Bowman, and each of
them singly, his attorneys for him and in his name, place and stead, and in his office and capacity in the Company, to execute and file
such annual report on Form 10-K, and thereafter to execute and file any amendments or supplements thereto, hereby giving and
granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and necessary
to be done in and about the premises as fully to all intents and purposes as he might or could do if personally present at the doing
thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th day of February, 2008.
/s/ Thomas L. Monahan III
Thomas L. Monahan III
Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation (hereinafter referred to as the “Company”), proposes
shortly to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended,
and the Rules and Regulations thereunder, an annual report on Form 10-K for the year ended December 31, 2007; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Earl C. Shanks and Karen R. Bowman, and each of
them singly, his attorneys for him and in his name, place and stead, and in his office and capacity in the Company, to execute and file
such annual report on Form 10-K, and thereafter to execute and file any amendments or supplements thereto, hereby giving and
granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and necessary
to be done in and about the premises as fully to all intents and purposes as he might or could do if personally present at the doing
thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th day of February, 2008.
/s/ Philip A. Odeen
Philip A. Odeen
Director
Non-Executive Chairman
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation (hereinafter referred to as the “Company”), proposes
shortly to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended,
and the Rules and Regulations thereunder, an annual report on Form 10-K for the year ended December 31, 2007; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Philip A. Odeen, Earl C. Shanks and Karen R.
Bowman, and each of them singly, his attorneys for him and in his name, place and stead, and in his office and capacity in the Company,
to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendments or supplements thereto, hereby
giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and purposes as he might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18 th day of February, 2008.
/s/ Sidney A. Ribeau
Sidney A. Ribeau
Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation (hereinafter referred to as the “Company”), proposes
shortly to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended,
and the Rules and Regulations thereunder, an annual report on Form 10-K for the year ended December 31, 2007; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Philip A. Odeen, Earl C. Shanks and Karen R.
Bowman, and each of them singly, his attorneys for him and in his name, place and stead, and in his office and capacity in the Company,
to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendments or supplements thereto, hereby
giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and purposes as he might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th day of February, 2008.
/s/ Richard F. Wallman
Richard F. Wallman
Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, CONVERGYS CORPORATION, an Ohio corporation (hereinafter referred to as the “Company”), proposes
shortly to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended,
and the Rules and Regulations thereunder, an annual report on Form 10-K for the year ended December 31, 2007; and
WHEREAS, the undersigned is a director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Philip A. Odeen, Earl C. Shanks and Karen R.
Bowman, and each of them singly, his attorneys for him and in his name, place and stead, and in his office and capacity in the Company,
to execute and file such annual report on Form 10-K, and thereafter to execute and file any amendments or supplements thereto, hereby
giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and purposes as he might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 22nd day of February, 2008.
/s/ David R. Whitwam
David R. Whitwam
Director
Exhibit 31.1 to 2007 10-K
Certification
I, Dave F. Dougherty, certify that:
1.
I have reviewed this annual report on Form 10-K of Convergys Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: February 28, 2008
/s/ David F. Dougherty
David F. Dougherty
Chief Executive Officer
Exhibit 31.2 to 2007 10-K
Certification
I, Earl C. Shanks, certify that:
1.
I have reviewed this annual report on Form 10-K of Convergys Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: February 28, 2008
/s/ Earl C. Shanks
Earl C. Shanks
Chief Financial Officer
Exhibit 32.1 to 2007 10-K
CERTIFICATION OF PERIODIC FINANCIAL REPORT BY CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Form 10-K for the year ended December 31, 2007 of Convergys Corporation (the “Company”), as filed with the
Securities and Exchange Commission on February 28, 2008 (the “Report”), I, David F. Dougherty, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company as of and for the periods covered in the Report.
/s/ David F. Dougherty
David F. Dougherty
Chief Executive Officer
February 28, 2008
A signed original of this written statement required by Section 906 has been provided to Convergys Corporation and will be retained by
Convergys Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K and shall not be
considered filed as part of the Form 10-K.
Exhibit 32.2 to 2007 10-K
CERTIFICATION OF PERIODIC FINANCIAL REPORT BY CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Form 10-K for the year ended December 31, 2007 of Convergys Corporation (the “Company”), as filed with the
Securities and Exchange Commission on February 28, 2008 (the “Report”), I, Earl C. Shanks, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company as of and for the periods covered in the Report.
/s/ Earl C. Shanks
Earl C. Shanks
Chief Financial Officer
February 28, 2008
A signed original of this written statement required by Section 906 has been provided to Convergys Corporation and will be retained by
Convergys Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K and shall not be
considered filed as part of the Form 10-K.