================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 1-14146
CORT BUSINESS SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-1662135
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4401 Fair Lakes Court, Fairfax, VA 22033
(Address of principal executive offices) (Zip Code)
(703) 968-8500
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding as of
Class November 13, 1996
----- -----------------
Class A, $.01 par value 12,630,880
Class B, $.01 par value - 0 -
================================================================================
<PAGE>
CORT BUSINESS SERVICES CORPORATION
INDEX TO FORM 10-Q
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets............................. 1
Condensed Consolidated Statements of Operations................... 2
Condensed Consolidated Statements of Cash Flows................... 3
Notes to Unaudited Condensed Consolidated Financial Statements.... 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 7
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 11
SIGNATURE............................................................... 12
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents......................... $ 379 $ 1,474
Accounts receivable, net.......................... 6,019 9,884
Prepaid expenses.................................. 3,973 3,725
Rental furniture, net............................. 103,741 147,535
Property, plant and equipment, net................ 31,044 35,932
Other receivables and assets, net................. 3,814 3,070
Goodwill, net..................................... 24,752 44,164
-------- --------
Total assets................................. $173,722 $245,784
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable............................. $ 3,597 $ 7,584
Accrued expenses............................. 19,096 27,307
Deferred revenue and security deposits....... 11,186 14,093
Revolving credit facility, secured........... 3,800 20,300
Senior notes, 12%............................ 50,000 50,000
Deferred income taxes........................ 10,622 7,097
-------- --------
Total liabilities........................ 98,301 126,381
Stockholders' equity.............................. 75,421 119,403
-------- --------
Total liabilities and stockholders' equity... $173,722 $245,784
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
- 1 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Furniture rental.............. $36,354 $53,707 $105,408 $139,144
Furniture sales............... 9,137 10,900 28,741 32,340
------- ------- -------- --------
Total revenue............. 45,491 64,607 134,149 171,484
Operating costs and expenses:
Cost of furniture rental...... 7,161 10,175 20,591 26,803
Cost of furniture sales....... 5,487 6,537 17,099 19,115
Selling, general and
administrative expenses... 25,950 37,865 76,889 100,159
------- ------- -------- --------
Total costs and expenses.. 38,598 54,577 114,579 146,077
------- ------- -------- --------
Operating earnings........ 6,893 10,030 19,570 25,407
Interest expense................... 4,218 2,192 12,562 6,237
------- ------- -------- --------
Income before income taxes.... 2,675 7,838 7,008 19,170
Income taxes....................... 1,136 3,247 3,001 7,936
------- ------- -------- --------
Net income.................... $ 1,539 $ 4,591 $ 4,007 $ 11,234
======= ======= ======== ========
Earnings per share................. $0.30 $0.35 $0.80 $0.93
Weighted average number of
shares used in computation...... 7,242 12,976 7,241 12,075
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
- 2 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 4,007 $ 11,234
Proceeds of disposals of rental furniture in
excess of gross profit................................. 17,006 18,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Rental furniture depreciation ....................... 14,262 19,290
Other depreciation................................... 1,901 2,698
Goodwill amortization................................ 496 668
Amortization of debt issuance costs.................. 567 518
Discount on junior subordinated debentures........... 53 --
Current period interest converted to debt............. 2,620 --
Rental furniture inventory shrinkage.................. 765 1,728
Changes in operating accounts, net.................... (3,281) 5,533
-------- ---------
Net cash provided by operating activities............ 38,396 59,949
-------- ---------
Cash flows from investing activities:
Purchases of rental furniture............................ (43,511) (65,712)
Purchases of property, plant and equipment............... (3,105) (5,272)
Sales of property, plant and equipment................... 425 461
Purchase of Evans Rents.................................. -- (27,737)
Purchase of assets of Apartment Furniture Rental......... -- (9,269)
Purchase of short-term investments....................... (1,024) --
-------- ---------
Net cash used by investing activities................ (47,215) (107,529)
-------- ---------
Cash flows from financing activities:
Issuance of common stock................................. 33 32,748
Repayments on revolving credit facility.................. -- (59,353)
Borrowings on revolving credit facility.................. -- 75,853
Repayments of long term debt............................. (287) (573)
Proceeds from issuance of long term debt................. 332 --
-------- ---------
Net cash provided by financing activities............ 78 48,675
-------- ---------
Net increase (decrease) in cash and cash equivalents. (8,741) 1,095
Cash and cash equivalents at beginning of period.......... 13,161 379
-------- ---------
Cash and cash equivalents at end of period................ $ 4,420 $ 1,474
======== =========
Supplemental disclosures of cash flow information:
Debentures issued in lieu of cash interest............... $ 3,862 --
Interest paid............................................ 12,047 $ 7,084
Income taxes paid........................................ 2,133 5,643
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
- 3 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(1) Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of
only normal recurring accruals, necessary for a fair presentation of the
consolidated financial position of CORT Business Services Corporation
("CORT" or the "Company") and Subsidiaries as of September 30, 1996, and
the results of their operations for the three and nine months ended
September 30, 1996 and 1995, and cash flows for the nine months ended
September 30, 1996 and 1995. The results of operations for the nine months
ended September 30, 1996 are not necessarily indicative of the results that
may be expected for the full year. These condensed consolidated financial
statements are unaudited, and do not include all related footnote
disclosures.
The interim unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements
included in the Company's 1995 Annual Report on Form 10-K.
(2) Credit Facility
---------------
On May 24, 1996, the Company amended the revolving credit facility ("Credit
Facility") to increase its borrowing capacity from $50 million to $70
million, subject to certain borrowing base restrictions. No other
substantial changes were made to the Credit Facility pursuant to this
amendment.
(3) Acquisition of Evans Rents
--------------------------
On April 24, 1996 the Company acquired Evans Rents, a provider of rental
furniture in California, for approximately $27,737,000, including costs of
acquisition, in a transaction accounted for as a purchase business
combination. As such, the fair value of Evans Rents' assets and liabilities
were recognized as of April 24, 1996, and the Company's results of
operations include Evans Rents' operations subsequent to that date. The
Company financed the acquisition of Evans Rents with borrowings under the
Credit Facility.
The purchase price has been allocated to assets and liabilities based on
preliminary estimates of fair value as of the date of acquisition. The
final allocation of the purchase price will be determined when appraisals
and other studies are completed. As part of the purchase price allocation,
the Company recorded a reserve for estimated costs to be incurred in the
consolidation of duplicate Evans Rents' facilities and termination of
employment of certain members of Evans Rents' management who will not be
replaced. Based on the allocation of the purchase price over the net assets
acquired, goodwill of approximately $14,179,000 was recorded. Such goodwill
is being amortized on a straight-line basis over 40 years. The purchase
price has been allocated as follows (in thousands):
Cash $ 25
Accounts receivable 1,967
Prepaid expenses and other assets 182
Rental property 15,066
Property, plant and equipment 1,932
Deferred income taxes 2,600
Goodwill 14,179
Accounts payable and accrued expenses (2,235)
Notes payable (573)
Deferred revenue (1,543)
Other liabilities, including reserves for
duplicate facilities and employee severance (3,863)
-------
$27,737
=======
- 4 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEPTEMBER 30, 1996
The following unaudited pro forma condensed consolidated financial
information presents the combined results of operations of the Company and
Evans Rents as if the acquisition had occurred as of January 1, 1995. This
information gives effect to certain adjustments including amortization of
goodwill, elimination of certain compensation expense, interest expense on
borrowings and related income tax effects. The pro forma consolidated
financial information does not necessarily reflect the results of
operations that would have occurred had the Company and Evans Rents
constituted a single entity during the periods.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1995 1996 1995 1996
---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenue.................. $53,256 $64,607 $157,235 $181,404
Net income..................... 1,839 4,591 4,986 11,730
Earnings per share............. $ 0.34 $ 0.35 $ 0.94 $ 0.97
Weighted average number of
shares used in computation.. 7,242 12,976 7,241 12,075
</TABLE>
(4) Public Offering of Common Stock
-------------------------------
In July 1996, the Company sold, through an underwritten public offering,
1,865,100 common shares at $18.75 per share. The proceeds of approximately
$32,675,000, net of associated underwriting discounts and other expenses of
the offering, were used to repay indebtedness under the Credit Facility
primarily from the acquisition of Evans Rents.
(5) Income Taxes
------------
The Internal Revenue Service ("IRS") has examined the Federal income tax
returns of CORT Furniture Rental Corporation ("CFR") for the years 1989
through June 30, 1992 and has proposed certain adjustments to CFR's taxable
income, relating primarily to methods of depreciation, period of cost
recovery and certain capitalized financing fees. If successfully asserted
by the IRS, the proposed adjustments would result in approximately $22
million of additional tax liability, including accrued interest through
September 30, 1996. The Company, however, has agreed in principle with the
IRS appeals officer handling the administrative appeal of the examination
as to a settlement of the proposed adjustments. The settlement agreed to in
principle will not result in any additional financial statement tax
expenses, as the Company's reserves included in deferred income taxes are
adequate to cover such expenses, and will not require the Company to alter
its methods of depreciation or cost recovery period. The Company will be
required to make a payment to the IRS and certain state jurisdictions for
income and franchise tax purposes. The total amount of the proposed
settlement is approximately $3 million, including interest through
September 30, 1996, of which the Company made an initial deposit of
approximately $925,000 in February 1996. This agreement is only an
agreement in principle, however, and is subject to final IRS approval and
thus could change. The tentative settlement will become effective only upon
approval by the proper IRS personnel and execution of definitive settlement
documentation. Upon final IRS approval, the Company will make the remaining
required payment.
The IRS has also proposed the disallowance of certain deductions taken by
Fairwood Corporation for a consolidated tax group of which CFR was
previously a member (the "Former Group") through the year ended December
31, 1988 and subsequent years. The IRS challenge includes the assertion
that certain interest
- 5 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SEPTEMBER 30, 1996
deductions taken by the Former Group should be recharacterized as
non-deductible dividend distributions and that deductions for certain
expenses related to the acquisition of Mohasco Corporation (now
Consolidated Furniture Corporation ("Consolidated")), CFR's former
shareholder, be disallowed. Under IRS regulations, the Company and each
other member of the Former Group is severally liable for the full amount of
any Federal income tax liability of the Former Group while CFR was a member
of the Former Group, which could be as much as approximately $30 million
for such periods (including interest through September 30, 1996). Under the
agreement of sale for CFR, Consolidated agreed to indemnify the Company in
full for any consolidated tax liability of the Former Group for the years
during which CFR was a member of the Former Group. In addition, the Company
may have rights of contribution against other members of the Former Group
if the Company were required to pay more than its equitable share of any
consolidated tax liability. Fairwood Corporation has indicated to the
Company that it has tentatively reached an agreement in principle with the
IRS Appeals Officer handling the case regarding a settlement of the
principal issues in the case. A final settlement on that basis would be
substantially less than the liability that would result from the proposed
adjustments. The terms of such a tentative settlement are subject to
further review by the IRS and by the Joint Committee on Taxation, and no
assurance can be given that any settlement will be reached with the IRS.
Due to the preliminary nature of the proposed agreement, the Company is not
in a position to determine the probable outcome and its impact on the
Company's financial statements, if any.
- 6 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar figures in thousands)
Results of Operations
- ---------------------
Three months ended September 30, 1996 as compared to three months ended
September 30, 1995
Revenue
Total revenue increased 42.0% to $64,607 for the three months ended September
30, 1996 from $45,491 for the three months ended September 30, 1995. Furniture
rental revenue for the three months ended September 30, 1996 was $53,707, a
47.7% increase from $36,354 for the corresponding period in 1995. Rental revenue
growth before the impact of the acquisitions of Evans Rents and certain assets
and liabilities of Apartment Furniture Rental ("AFR"), estimated by excluding
the Company's California and New York operations, was approximately $6,942 or
21.5% which reflects growth in the number of leases as well as revenue per
lease. This increase includes the effect of the 1996 Summer Olympics in the
Atlanta operations. Furniture sales increased 19.3% to $10,900 in the three
months ended September 30, 1996 from $9,137 in the quarter ended September 30,
1995. Before the impact of acquisitions as described above, furniture sales
increased $1,437 or 17.9%.
Operating Costs and Expenses
Cost of furniture rental has decreased from 19.7% of furniture rental revenue in
1995 to 18.9% of furniture rental revenue in 1996. This decrease is the result
of the reduction of rental cost components other than depreciation as a percent
of rental revenue, net of an increase in cost of rent from the start-up
operations. Cost of furniture sales decreased from 60.1% of furniture sales
revenue in 1995 to 60.0% of furniture sales revenue in 1996.
Selling, general and administrative expenses totaled $37,865 or 58.6% of total
revenue for the quarter ended September 30, 1996 as compared to $25,950 or 57.0%
of total revenue for the quarter ended September 30, 1995. This increase is
associated with start-up operations and the expansion of distribution centers
for the Company's housewares business.
Operating Earnings
As a result of the changes in revenue, operating costs and expenses discussed
above, operating earnings were $10,030 or 15.5% of total revenue in the third
quarter of 1996 compared to $6,893 or 15.2% of total revenue in the third
quarter of 1995.
Interest Expense
Interest expense for the quarter decreased to $2,192 in 1996 from $4,218 in
1995. The decrease is primarily the result of the early retirement of $50,000 in
Senior Notes and the exchange of the Company's and CFR's subordinated debentures
for common stock, both of which occurred in the fourth quarter of 1995, net of
borrowings under the Credit Facility.
- 7 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(dollar figures in thousands)
Nine months ended September 30, 1996 as compared to nine months ended September
30, 1995
Revenue
Total revenue increased 27.8% to $171,484 for the nine months ended September
30, 1996 from $134,149 for the nine months ended September 30, 1995. Furniture
rental revenue for the nine months ended September 30, 1996 was $139,144, a
32.0% increase from $105,408 for the corresponding period in 1995. Rental
revenue growth before the impact of the acquisitions of Evans Rents and AFR,
estimated by excluding the Company's California and New York operations, was
approximately $15,767 or 16.8% which reflects growth in the number of leases as
well as revenue per lease. Furniture sales increased 12.5% to $32,340 in the
nine months ended September 30, 1996 from $28,741 in the nine months ended
September 30, 1995. Excluding the impact of an unusually large corporate sale in
the first quarter of 1995, furniture sales would have shown an increase of
18.4%.
Operating Costs and Expenses
Cost of furniture rental has decreased from 19.5% of furniture rental revenue in
1995 to 19.3% of furniture rental revenue in 1996. Cost of furniture sales
decreased from 59.5% of furniture sales revenue in 1995 to 59.1% in 1996. The
cost of furniture sales for 1995 included the large corporate sale at a reduced
margin.
Selling, general and administrative expenses totaled $100,159 or 58.4% of total
revenue for the nine months ended September 30, 1996 as compared to $76,889 or
57.3% of total revenue for the nine months ended September 30, 1995. However,
excluding $425 of certain charges associated with duplicate showrooms related to
the acquisition of Evans Rents, selling, general and administrative expenses
would have been 58.2% of total revenue. The percentage increase is primarily due
to the impact of start-up operations.
Operating Earnings
As a result of the changes in revenue, operating costs and expenses discussed
above, operating earnings were $25,407 or 14.8% of total revenue for the nine
months ended September 30, 1996 compared to $19,570 or 14.6% of total revenue
for the nine months ended September 30, 1995. Excluding the second quarter
charges related to the acquisition of Evans Rents, operating earnings would have
been 15.1% of total revenue for the nine months ended September 30, 1996.
Interest Expense
Interest expense for the nine months ended September 30, 1996 decreased to
$6,237 from $12,562 in 1995. The decrease is primarily the result of the early
retirement of $50,000 in Senior Notes and the exchange of the Company's and
CFR's subordinated debentures for common stock, both of which occurred in the
fourth quarter of 1995, net of borrowings under the Credit Facility.
- 8 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(dollar figures in thousands)
Furniture Purchases
Furniture purchases totaled $65,712 in the nine months ended September 30, 1996,
an increase of 51.0% from the $43,511 purchased in the nine months ended
September 30, 1995. Approximately $8,900 of purchases is attributable to the
acquisitions of Evans Rents and AFR as well as start-up operations in the four
new markets. The remaining increase supports the growth in furniture rental
revenue and replenishes furniture which has been sold or disposed.
Liquidity and Capital Resources
- -------------------------------
The Company is a holding company with no independent operations and no material
assets other than its ownership of CFR. The Company is dependent on the receipt
of dividends or distributions from CFR to fund any obligations. The Credit
Facility and indenture governing the Senior Notes restrict the ability of CFR to
make advances and pay dividends to the Company.
CORT's primary capital requirements are purchases of rental furniture (including
new furniture purchases and lease portfolio acquisitions) and debt service. CORT
purchases furniture throughout each year to replace furniture which has been
sold and to maintain adequate levels of rental furniture to meet existing and
new customer needs. As the Company's growth strategies continue to be
implemented, furniture purchases are expected to increase.
The Company's other capital requirements consist of purchases of property, plant
and equipment, including warehouse and showroom improvements, office equipment,
computer hardware and standard programming enhancements necessary for
installation of the new management information system in additional districts.
Net purchases of property, plant and equipment were $2,680 and $4,811 for the
nine months ended September 30, 1995 and 1996, respectively.
During the nine months ended September 30, 1995 and 1996 net cash provided by
operations was $38,396 and $59,949, respectively. During the nine months ended
September 30, 1995 and 1996 net cash used in investing activities was $47,215
and $107,529, respectively. In 1996, approximately $27,737 and $9,269 was used
for the acquisitions of Evans Rents and AFR, respectively. The remaining cash
used in investing activities consists primarily of purchases of rental
furniture. During the nine months ended September 30, 1995 and 1996 net cash
provided in financing activities was $78 and $48,675, respectively. In 1996,
$32,675 was provided by the public offering of common stock, net of expenses,
which was used to repay indebtedness under the Credit Facility primarily from
the acquisition of Evans Rents.
CORT is required to make semi-annual cash interest payments, in arrears on March
1 and September 1, of $3,000 ($6,000 annually) on the Senior Notes. The Company
will not be required to make principal repayments on the Senior Notes until
maturity.
CFR has available a revolving credit facility of $70,000 (amended in May 1996
from $50,000), subject to certain borrowing base restrictions, to meet
acquisition and expansion needs as well as seasonal working capital and general
corporate requirements. CFR had borrowings of approximately $20,300 under the
Credit Facility at September 30, 1996.
The IRS has examined the Federal income tax returns of CFR for the years 1989
through June 30, 1992 and has proposed certain adjustments to CFR's taxable
income, relating primarily to methods of depreciation, period of cost
- 9 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(dollar figures in thousands)
recovery and certain capitalized financing fees. If successfully asserted by the
IRS, the proposed adjustments would result in approximately $22,000 of
additional tax liability, including accrued interest through September 30, 1996.
The Company, however, has agreed in principle with the IRS appeals officer
handling the administrative appeal of the examination on a settlement of the
proposed adjustments. The settlement agreed to in principle will not result in
any additional financial statement tax expenses, as the Company's reserves
included in deferred income taxes are adequate to cover such expenses, and will
not require the Company to alter its methods of depreciation or cost recovery
period. The Company will be required to make a payment to the IRS and certain
state jurisdictions for income and franchise tax purposes. The total amount of
the proposed settlement is approximately $3,000 (including interest through
September 30, 1996) of which the Company made an initial deposit of
approximately $925 in February 1996. This agreement is only an agreement in
principle, and thus could change. The tentative settlement will become effective
only upon approval by the proper IRS personnel and execution of definitive
settlement documentation. Upon final IRS approval, the Company will make the
remaining required payment from either cash on hand or borrowings under the
Credit Facility.
The IRS has also proposed the disallowance of certain deductions taken by
Fairwood Corporation for the Former Group through the year ended December 31,
1988 and subsequent years. The IRS challenge includes the assertion that certain
interest deductions taken by the Former Group should be recharacterized as
non-deductible dividend distributions and that deductions for certain expenses
related to the acquisition of Mohasco Corporation (now Consolidated Furniture
Corporation), CFR's former shareholder, be disallowed. Under IRS regulations,
each of the Company and the other members of the Former Group is severally
liable for the full amount of any Federal income tax liability of the Former
Group while CFR was a member of the Former Group, which could be as much as
approximately $30,000 for such periods (including interest through September 30,
1996). Under the agreement of sale for CFR, Consolidated agreed to indemnify the
Company in full for any consolidated tax liability of the Former Group for the
years during which CFR was a member of the Former Group. In addition, the
Company may have rights of contribution against other members of the Former
Group if the Company were required to pay more than its equitable share of any
consolidated tax liability. Fairwood Corporation has indicated that it has
tentatively reached an agreement in principle with the IRS Appeals Officer
handling the case regarding a settlement of the principal issues in the case. A
final settlement on that basis would be substantially less than the liability
that would result from the proposed adjustments. The terms of such a tentative
settlement are subject to further review by the IRS and by the Joint Committee
on Taxation, and no assurance can be given that any settlement will be reached
with the IRS. Further, no assurance can be given that, if Consolidated becomes
liable for Federal income tax as a result of the examination, and if the IRS
were to collect any resulting tax directly from CFR, that CFR would be able to
recover all or part of the deficiency from Consolidated under its indemnity or
from other members of the Former Group under the rights of contribution. No
reserves are included in the Company's consolidated financial statements with
respect to potential tax liabilities of the Former Group. There can be no
assurance, however, that the Company's ultimate liability with respect to
periods during which CFR was a member of the Former Group will not result in a
material impact on the Company's financial condition or results of operations.
- 10 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (see Index on page E-1)
(b) Reports on Form 8-K:
The Company filed one (1) report on Form 8-K dated July 15, 1996
to report earnings for the quarter ended June 30, 1996.
- 11 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements 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.
CORT BUSINESS SERVICES CORPORATION
(Registrant)
Date: November 14, 1996 By: /s/ Frances Ann Ziemniak
-------------------------- ----------------------------------
Frances Ann Ziemniak
Vice President, Finance & CFO
(Principal financial and principal
accounting officer)
- 12 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description Page
- --------------------------------------------------------------------------------
2.1 Stock Purchase Agreement, dated June 22, 1993, by and among
the Company, Interfinancial, Inc., General Furniture Leasing
Company and Fortis, Inc.; incorporated by reference to Exhibit
2.1 to CFR's Registration Statement on Form S-1, No. 33-65094,
filed on June 25, 1993
2.2 First Amendment to Stock Purchase Agreement, dated as of
August 31, 1993, by and among the Company, Fortis, Inc.,
Interfinancial, Inc. and General Furniture Leasing Company;
incorporated by reference to Exhibit 2.2 to CFR's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30,
1993
2.3 Assignment and Assumption Agreement, dated as of August 31,
1993, between CFR and the Company; incorporated by reference
to Exhibit 2.3 to CFR's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1993
2.4 Acquisition Agreement, dated March 15, 1996, by and among the
Company, CE Merger Sub Inc. and Evans Rents; incorporated by
reference to Exhibit 2.4 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995
3.1 Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to Amendment No. 3 to
the Company's Registration Statement on Form S-1, No. 33-97568
filed on November 13, 1995
3.2 By-laws of the Company; incorporated by reference to Exhibit
3.2 to Amendment No. 3 to the Company's Registration Statement
on Form S-1, No. 33-97568 filed on November 13, 1995
4.1 Form of Indenture between CFR and United States Trust Company
of New York, as Trustee, with respect to CFR's 12% Senior
Notes due 2000; incorporated by reference to Exhibit 4.1 to
Amendment No. 3 to the Company's Registration Statement on
Form S-1, No. 33-65094, filed on August 20, 1993
4.2 First Supplemental Indenture between CFR and United States
Trust Company of New York, as Trustee, dated August 25, 1995;
incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1, No. 33-97568 filed on
September 29, 1995
4.3 Second Supplemental Indenture between CFR and United States
Trust Company of New York, as Trustee, dated September 29,
1995; incorporated by reference to Exhibit 4.9 to Amendment
No. 1 to the Company's Registration Statement on Form S-1, No.
33-97568 filed on October 23, 1995
4.4 Warrant Agreement, dated September 1, 1993, between the
Company and United States Trust Company of New York, as
Warrant Agent; incorporated by reference to Exhibit 4.7 to the
Company's Registration Statement on Form S-1, No. 33-97568
filed on September 29, 1995
E - 1
<PAGE>
4.5 Amendment No. 1 to Warrant Agreement, dated February 1, 1994,
between the Company and United States Trust Company of New
York, as Warrant Agent; incorporated by reference to Exhibit
4.8 to the Company's Registration Statement on Form S-1, No.
33-97568 filed on September 29, 1995
10.1 Credit Agreement dated as of November 21, 1995 by and among
CFR, the Company, the lenders identified therein, and
NationsBank, N.A., as agent; incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995
10.2 Stock Option, Securities Purchase and Stockholders Agreement,
dated as of January 18, 1994, by and among the Company, CFR,
Citicorp Venture Capital Ltd. and certain investors named
therein; incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-8, No. 33-72724,
filed on December 9, 1993
10.3 Amendment 1 to New Cort Holdings Corporation and Subsidiaries
Employee Stock Option and Stock Purchase Plan as adopted by
the Board of Directors of the Company on December 21, 1993;
incorporated by reference to Exhibit 10.11 to CFR's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993
10.4 New Cort Holdings Corporation and Subsidiaries Employee Stock
Option and Stock Purchase Plan (1995 Plan Distribution) as
adopted by the Board of Directors of the Company on December
16, 1994; incorporated by reference to Exhibit 10.13 to CFR's
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1995
10.5 Form of First Amendment to Stockholders Agreement, dated as of
November 13, 1995, by and among the Company, Citicorp Venture
Capital Ltd., and certain investors named therein;
incorporated by reference to Exhibit 10.5 to Amendment No. 3
to the Company's Registration Statement on Form S-1, No.
33-97568 filed on November 13, 1995
10.6 Registration Rights Agreement for Common Stock, dated as of
January 18, 1994, by and among the Company, Citicorp Venture
Capital Ltd. and certain investors named therein; incorporated
by reference to Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1994
10.7 CFR's Supplemental Executive Retirement Plan, dated October
28, 1992, as amended through December 21, 1993; incorporated
by reference to Exhibit 10.12 to the CFR's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993
10.8 Agreement for Irrevocable Trust Under Cort Furniture Rental
Supplemental Executive Retirement Plan, dated August 20, 1990,
between CFR and Crestar Bank, N.A.; incorporated by reference
to Exhibit 10.13 to CFR's Registration Statement on Form S-1,
No. 33-65094, filed on June 25, 1993
10.9 Amendment Number One to the Agreement for Irrevocable Trust
Under CORT Furniture Rental Supplemental Executive Retirement
Plan, dated October 27, 1992, between CFR and Crestar Bank,
N.A.; incorporated by reference to Exhibit 10.14 to CFR's
Registration Statement on Form S-1, No. 33-65094, filed on
June 25, 1993
E - 2
<PAGE>
10.10 Letter Agreement, dated July 24, 1992, between CFR and Paul N.
Arnold; incorporated by reference to Exhibit 10.16 to CFR's
Registration Statement on Form S-1, No. 33-65094, filed on
June 25, 1993
10.11 Letter Agreement, dated August 18, 1993, between CFR and Paul
N. Arnold; incorporated by reference to Exhibit 10.26 to
Amendment No. 5 to the Company's Registration Statement on
Form S-1, No. 33-65094, filed on August 25, 1993
10.12 Employment Agreement, dated September 1, 1994, between CFR and
Charles M. Egan; incorporated by reference to Exhibit 10.10 to
CFR's Annual Report on Form 10-K for the year ended December
31, 1994
10.13 New Cort Holdings Corporation 1995 Stock-Based Incentive
Compensation Plan, as adopted by the Board of Directors on
July 25, 1995; incorporated by reference to Exhibit 10.16 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1, No. 33-97568 filed on October 23, 1995
10.14 Equity Share Agreement, between CFR and Lloyd and Eileen S.
Lenson, dated April 20, 1994; incorporated by reference to
Exhibit 10.17 to the Company's Registration Statement on Form
S-1, No. 33-97568 filed on September 29, 1995
10.15 Form of Senior Notes Purchase Agreement between CFR and
certain holders of CFR's 12% Senior Notes Due 2000, dated
September 28, 1995; incorporated by reference to Exhibit 10.18
to Amendment No. 2 to the Company's Registration Statement on
Form S-1, No. 33-97568 filed on November 1, 1995
10.16 Private Exchange Commitment Letter by and among the Company,
Citicorp Venture Capital Ltd. and certain investors, dated
September 28, 1995; incorporated by reference to Exhibit 10.19
to Amendment No. 1 to the Company's Registration Statement on
Form S-1, No. 33-97568 filed on October 23, 1995
10.17 CORT Business Services Corporation 1995 Directors Stock Option
Plan, as adopted by the Board of Directors on October 18,
1995; incorporated by reference to Exhibit 10.20 to Amendment
No. 3 to the Company's Registration Statement on Form S-1, No.
33-97568 filed on November 13, 1995
10.18 First Amendment to Credit Agreement dated as of May 24, 1996
by and among CFR, the Company, the lenders identified therein,
and NationsBank, N.A., as agent; incorporated by reference to
Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996
11.1 Statement re: computation of per share earnings
27 Financial Data Schedule
E - 3
Exhibit 11.1
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Average shares outstanding during the period 4,170,181 12,038,038 4,168,986 11,001,928
Unexercised stock options and warrants using
the treasury stock method, other than Cheap Stock 763,241 938,444 763,241 1,072,805
Cheap stock options and issuances (1) 218,434 -- 218,434 --
Shares issued in the Exchange for Common Stock (2) 2,090,591 -- 2,090,591 --
---------- ---------- ---------- -----------
Total weighted average shares 7,242,447 12,976,482 7,241,252 12,074,733
========== ========== ========== ===========
Net income applicable to shares:
Net income $1,539,000 $4,591,000 $4,007,000 $11,234,000
Increase in earnings, net of taxes, resulting from the
Exchange for Common Stock (2) 625,000 -- 1,817,000 --
---------- ---------- ---------- -----------
Net income applicable to shares 2,164,000 4,591,000 5,824,000 11,234,000
========== ========== ========== ===========
Earnings per share $ 0.30 $ 0.35 $ 0.80 $ 0.93
========== ========== ========== ===========
<FN>
(1) Pursuant to Staff Accounting Bulletin Topic 4:D, stock options granted and
stock issued within one year of the initial public offering have been
included in the calculation of weighted average common shares outstanding
using the treasury stock method based on an assumed initial public offering
price of $12.00 and have been treated as outstanding for all reported
periods.
(2) In connection with the Company's initial public offering of Common Stock,
the Company exchanged CFR's 14% Senior Subordinated Pay-In-Kind Notes, the
Company's 14.5% Subordinated Debentures, the Company's 15% Junior
Subordinated Debentures, including the unamortized discount, and accrued
interest on all such debentures for 2,728,167 shares of Common Stock. For
purposes of the computations of earnings per share for 1995, the Company has
assumed that the exchange occurred as of January 1, 1994 for 2,090,591
shares of Common Stock.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Art. 5 FDS for Third Quarter 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,474
<SECURITIES> 0
<RECEIVABLES> 11,476
<ALLOWANCES> 1,592
<INVENTORY> 147,535
<CURRENT-ASSETS> 0
<PP&E> 57,005
<DEPRECIATION> 21,073
<TOTAL-ASSETS> 245,784
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 126
<OTHER-SE> 119,277
<TOTAL-LIABILITY-AND-EQUITY> 245,784
<SALES> 32,340
<TOTAL-REVENUES> 171,484
<CGS> 19,115
<TOTAL-COSTS> 45,918
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 640
<INTEREST-EXPENSE> 6,237
<INCOME-PRETAX> 19,170
<INCOME-TAX> 7,936
<INCOME-CONTINUING> 11,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,234
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
</TABLE>
