SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__to
Commission File Number 1-14379
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CONVERGYS CORPORATION RETIREMENT AND SAVINGS PLAN
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CONVERGYS CORPORATION
201 East Fourth Street
Cincinnati, Ohio 45202
INDEX
Page
----
Report of Independent Auditors ............................................ 1
Financial Statements:
Statements of Assets Available for Benefits as of
December 31, 2001 and 2000 ............................................ 2
Statement of Changes in Assets Available for
Benefits for the Year Ended December 31, 2001 ......................... 3
Notes to Financial Statements ............................................. 4
Schedule:
Schedule H, line 4i - Schedule of Assets (Held at End of Year) ............ 10
REPORT OF INDEPENDENT AUDITORS
To the Convergys Corporation Employee Benefits Committee
We have audited the accompanying statement of assets available for benefits of
the Convergys Corporation Retirement and Savings Plan (the "Plan") as of
December 31, 2001 and 2000, and the related statement of changes in assets
available for benefits for the year ended December 31, 2001. These financial
statements are the responsibility of the Plan's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets available for benefits of the Plan at December
31, 2001 and 2000, and the changes in its assets available for benefits for the
year ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedule of assets
(held at end of year) as of December 31, 2001, is presented for purposes of
additional analysis and is not a required part of the financial statements but
is supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. The supplemental schedule is the responsibility of the
Plan's management. The supplemental schedule has been subjected to the auditing
procedures applied in our audits of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.
/s/ Ernst & Young LLP
Cincinnati, Ohio
June 21, 2002
1
Convergys Corporation Retirement and Savings Plan
Statements of Assets Available for Benefits
December 31
2001 2000
----------------------------------
Assets
Cash $ 2,352,738 $ 1,398,354
Investments, at fair value 336,334,264 389,591,516
Receivables:
Participant contributions 873,827 -
Employer contributions 423,599 -
----------------------------------
Total receivables 1,297,426 -
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Assets available for benefits $339,984,428 $390,989,870
==================================
See accompanying notes.
2
Convergys Corporation Retirement and Savings Plan
Statement of Changes in Assets Available for Benefits
Year ended December 31, 2001
Additions:
Participant contributions $ 23,001,180
Employer contributions 8,920,929
Dividend and other income 6,117,899
Transfers from other Company plans 494,136
-----------------
Total additions 38,534,144
Deductions:
Net depreciation in fair value of investments 72,281,666
Benefits paid to participants 17,118,826
Administrative expenses 139,094
-----------------
Total deductions 89,539,586
-----------------
Net decrease (51,005,442)
Assets available for benefits at beginning of year 390,989,870
-----------------
Assets available for benefits at end of year $ 339,984,428
=================
See accompanying notes.
3
Convergys Corporation Retirement and Savings Plan
Notes to Financial Statements
December 31, 2001
1. Description of Plan
The following description of the Convergys Corporation Retirement and Savings
Plan (the "Plan") provides only general information. Participants should refer
to the Plan document for a more complete description of the Plan's provisions.
General
The Plan is a defined contribution plan available to all eligible employees of
Convergys Corporation (CVG), Convergys Information Management Group Inc. (IMG),
and Convergys Customer Management Group Inc. (CMG), each individually a
"Participating Company", who have one year of service and are twenty-one years
of age or older. It is subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA).
Contributions
Each year, participants may contribute up to 16 percent of pretax annual
compensation, as defined in the Plan (certain highly compensated employees are
limited to a maximum of 4 percent contributions). Participants may also
contribute amounts representing distributions from other qualified defined
benefit or defined contribution plans. Participants direct the investment of
their contributions into various investment options offered by the Plan. At
December 31, 2001, the Plan offered various mutual funds and individual stocks
as investment options for participants. Participants may also create a
self-directed brokerage account and invest their contributions in these
accounts. Each Participating Company contributes an amount equal to the lesser
of (a) 4% of the Participant's covered compensation, as defined, with respect to
which salary deferral contributions were authorized or (b) 66 2/3% of the amount
of the salary deferral contributions made with respect to such covered
compensation. The matching Participating Company contributions are invested
directly in Convergys Corporation common stock. Contributions are subject to
certain limitations.
Participant Accounts
Each participant's account is credited with the participant's contribution and
allocations of (a) the Participating Company contributions, (b) Plan earnings,
and (c) administrative expenses. Allocations are based on participant earnings
or account balances, as defined. The benefit to which a participant is entitled
is the benefit that can be provided from the participant's vested account.
Vesting
Participants are vested immediately in their contributions plus actual earnings
thereon. Vesting in the Participating Company contribution portion of their
accounts is based on years of service. A participant is 100 percent vested after
three years of credited service.
4
Convergys Corporation Retirement and Savings Plan
Notes to Financial Statements (continued)
1. Description of Plan (continued)
Participant Loans
Participants may borrow from their accounts, a minimum of $500, up to a maximum
of $50,000 or 50 percent of their vested account balance, whichever is less. The
loans are secured by the balance in the participant's account and bear interest
at the prime lending rate at the time the loan is initiated. Loans generally
must be repaid within five years.
Payment of Benefits
Distribution of a participant's vested account balance is made in one lump sum
payment to the participant, or to their beneficiary, upon termination of
employment, permanent disability or death. Participant accounts that are vested
and in excess of $5,000 will not be distributed to the participant before they
attain age 70 1/2 without the written consent of the participant. Participants
may apply for hardship withdrawals, subject to approval by the Plan
Administrator. Contributions and earnings are taxable to the participants,
subject to certain exceptions, upon withdrawal from the Plan. Forfeited amounts
related to employees who were not fully vested at the time of termination serve
first as restorals and then to reduce employer contributions to the Plan.
Plan Amendment
On August 1, 2001, the investment options of the Plan were amended. The Fidelity
Mid-Cap Stock Fund was added as a Plan investment option for participants.
Effective October 1, 2001, the Baron Asset Fund was frozen to incoming
contributions.
2. Summary of Accounting Policies
Use of Estimates
The 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 reported amounts of assets and liabilities and
changes therein, and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
Investment Valuation and Income Recognition
The Plan's investments are stated at fair value. Quoted market prices are used
to value investments. Shares of mutual funds are valued at the net asset value
of shares held by the Plan at year-end. The participant loans are valued at
their outstanding principal balances, which approximate fair value.
Purchases and sales of securities are recorded on a trade-date basis. Dividends
are recorded on the ex-dividend date.
5
Convergys Corporation Retirement and Savings Plan
Notes to Financial Statements (continued)
3. Investments
During 2001, the Plan's investments (including gains and losses on investments
bought and sold, as well as held during the year) depreciated in fair value as
determined by quoted market prices as follows:
Net Realized and
Unrealized Depreciation
in Fair Value of
Investments
-----------------------------
Mutual funds $ 14,266,211
Common stock 58,015,455
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$ 72,281,666
=============================
The following presents investments that represent 5% or more of the Plan's net
assets at December 31 as follows:
2001 2000
Shares Assets Shares Assets
-------------------------------- ---------------------------
Common Stock:
Convergys Corporation * 3,500,993 $ 131,252,243 3,390,593 $ 153,637,930
Broadwing Inc. 2,351,706 22,341,211 2,561,165 58,427,853
Mutual Funds:
Fidelity Equity Income Fund 355,344 17,330,143 312,190 16,680,333
Fidelity Dividend Growth Fund 2,169,316 61,456,723 2,084,663 62,456,505
Fidelity Managed Income Portfolio 19,640,146 19,640,146 17,298,713 17,298,713
Spartan U.S. Equity Index Fund 419,389 17,043,977 380,116 17,793,216
* non-participant directed
Investments of the Fidelity Managed Income Portfolio consist in part of
guaranteed investment contracts that are reported at estimated fair value, which
approximates contract value (contributions made plus interest accrued at the
current rate, less withdrawals and fees). These investment contracts provide for
benefit responsible withdrawals by the Plan participants at contract value. The
average interest rate on the contracts was 6.40% for 2001 and 6.36% for 2000.
The average yield on the contracts was 5.93% for 2001 and 5.86% for 2000.
6
Convergys Corporation Retirement and Savings Plan
Notes to Financial Statements (continued)
4. Non-participant Directed Investments
Information about the assets and the significant components of the changes in
assets relating to the non-participant directed investments is as follows:
December 31,
2001 2000
------------------------------------------
Investments at fair value:
Convergys Common Stock $ 131,252,243 $ 153,637,930
==========================================
Year ended
December 31,
2001
----------------
Changes in Assets:
Participant contributions $ 2,866,696
Employer contributions 10,036,644
Loan repayments, net 1,232,924
Interest and dividends 348,389
Net depreciation (26,436,032)
Benefits paid to participants (7,033,331)
Administrative expenses (8,007)
Transfers from other Company plans 16,327
Fund transfers, net (3,409,297)
---------------
$ (22,385,687)
===============
5. Related Party Transactions
Certain Plan investments are shares of mutual funds managed by Fidelity
Investments, a sister company to Fidelity Management Trust Company. Fidelity
Management Trust Company is the trustee as defined by the Plan and, therefore,
these transactions qualify as party-in-interest transactions. Administrative
fees paid amount to $139,094 for the year ended December 31, 2001. Certain
professional and accounting fees incurred in connection with the operation of
the Plan are paid directly by CVG.
7
Convergys Corporation Retirement and Savings Plan
Notes to Financial Statements (continued)
6. Discrimination Tests
Contributions to the Plan for 2001 are subject to the limitations contained in
sections 401(k) and 401(m) of the Internal Revenue Code. CVG has stated that in
the event it is determined that such limitations have been exceeded, appropriate
corrective action will be taken prior to December 31, 2002 to maintain the
qualified status of the Plan. Because the type of corrective action has not yet
been determined, no amounts have been reflected in the financial statements as
contributions receivable or liabilities of the Plan.
Contributions to the Plan in the 2000 plan year exceeded the limits contained in
sections 401(k) and 401(m) of the Internal Revenue Code. Excess contributions
were returned to affected participants in order to maintain the Plan's qualified
status.
7. Income Tax Status
On May 14, 1996, the Internal Revenue Service issued a favorable determination
letter with respect to the qualification of the Plan under the Internal Revenue
Code.
On February 27, 2002, the Plan filed an application for an updated favorable
determination letter with the Internal Revenue Service with respect to the
qualification of the recent amendment and restatement of the Plan. The Plan
Administrator and the Plan's tax counsel believe that the Plan is currently
designed and being operated in compliance with the applicable requirements of
the Internal Revenue Code. Therefore, no provision for income taxes has been
included in the Plan's financial statements.
CVG has stated that it will make any amendments to the Plan that are required by
the IRS before a favorable determination letter may be issued.
8. Plan Termination
Although CVG has not expressed any intent to do so, CVG reserves the right under
the Plan to discontinue its contributions at any time and terminate the Plan
subject to the provisions of ERISA. In the event of Plan termination,
participants would become 100 percent vested in their Company contributions.
8
Convergys Corporation Retirement and Savings Plan
Notes to Financial Statements (continued)
9. Subsequent Event
In 2002 the Plan was amended and restated to comply with all changes in the law
and to incorporate all plan amendments since the last restatement. The Plan was
also amended, effective January 1, 2002, to eliminate the service requirement
for eligibility to make 401(k) contributions, to change the amount of the
matching contribution to 100% of the first 3% and 50% of the next 2% of
compensation contributed to the plan, to provide for immediate vesting of
company matching contributions, and to allow participants to immediately
transfer the investment of company matching contributions from the company stock
fund to any other investment option(s) offered under the Plan. During 2002, the
CMG Retirement Savings Plan was merged into the Plan resulting in the assets of
the CMG Retirement Savings Plan being transferred into the Plan.
Convergys Corporation Retirement and Savings Plan
Schedule H, line 4i - Schedule of Assets (Held at End of Year)
December 31, 2001
Number of Market
Name of Issuer and title of issue Shares Cost Value
--------------------------------- ------ ---- -----
Convergys Shares Fund + 3,500,993 $93,951,136** $ 131,252,243
Broadwing Inc. Shares Fund 2,351,706 *** 22,341,211
Participant Self-Directed Brokerage Accounts *** 8,826,088
PIMCO Total Return Fund 714,188 *** 7,470,404
Baron Asset Fund 233,978 *** 10,402,657
Fidelity Growth Company Fund+ 54,843 *** 2,918,768
Fidelity High Income Fund+ 33,317 *** 270,864
Fidelity Puritan Fund + 844,102 *** 14,915,277
Fidelity Equity Income Fund + 355,344 *** 17,330,143
Fidelity Cash Reserve Fund + 32,528 *** 32,528
Fidelity Diversified International Fund + 547,914 *** 10,454,206
Fidelity Managed Income Portfolio + 19,640,146 *** 19,640,146
Spartan U.S. Equity Index Fund + 419,389 *** 17,043,977
Fidelity Dividend Growth Fund + 2,169,316 *** 61,456,723
Fidelity Mid-Cap Stock Fund + 66,579 *** 1,502,697
MS Small Company Growth Portfolio B Fund 147,933 *** 1,384,654
Fidelity Freedom Income Fund+ 51,834 *** 566,550
Fidelity Freedom 2000 Fund+ 17,611 *** 202,875
Fidelity Freedom 2010 Fund+ 51,259 *** 646,377
Fidelity Freedom 2020 Fund+ 72,192 *** 908,180
Fidelity Freedom 2030 Fund+ 52,660 *** 661,413
Participant Loans * *** 8,459,021
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GRAND TOTAL $ 338,687,002
=============
* The interest rates on these loans range from 6.0% to 10.5% at December 31,
2001.
** Cost information provided for the Convergys Shares Fund is inclusive of both
participant directed and non-participant directed accounts.
*** This information is not required for participant directed accounts.
+ Party-in-interest to the Plan.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the members
of the Convergys Corporation Employee Benefits Committee have duly caused this
annual report to be signed on its behalf by the undersigned hereunto duly
authorized.
CONVERGYS CORPORATION RETIREMENT AND SAVINGS PLAN
By: /s/ Laura A. Ryan
-----------------
Laura A. Ryan
June 21, 2002