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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED).
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 is not contained herein, and will not be contained,
to the best of the registrants' 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. Yes No X
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Non-affiliates of CORT Business Services Corporation held 6,507,116
shares of Common Stock as of March 20, 1997. The fair market value of the stock
held by non-affiliates is $156,170,784 based on the sale price of the shares on
March 20, 1997.
As of March 20, 1997, 12,777,480 shares of Common Stock, par value
$.01, were outstanding.
Documents Incorporated by Reference:
Document Part of Form 10-K
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Annual Report to Stockholders for the fiscal year
ended December 31, 1996 Part II
Proxy Statement for the Annual Meeting of
Stockholders to be held May 14, 1997 Part III
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<PAGE>
PART I
ITEM 1. Business
Overview
CORT Business Services Corporation (the "Company" or "CORT") through its
wholly-owned subsidiary CORT Furniture Rental Corporation ("CFR") is the leading
national provider of rental furniture, accessories and related services in the
growing and fragmented "rent-to-rent" segment of the furniture rental industry.
The "rent-to-rent" segment serves both corporate and individual customers who
desire flexibility to meet their temporary and transitional needs. The Company
focuses on corporate customers by offering office and residential furniture and
related accessories through a direct sales force of approximately 650
salespeople and a network of 108 showrooms in 31 states and the District of
Columbia. The Company believes that approximately 80% of its rental revenue is
derived from its corporate customers, while the remainder is derived principally
from rentals to middle- and upper-income level individuals. Management believes
that the Company's focus on corporate and upper-income individual customers
allows it to maintain a high-quality lease portfolio, which contributes to
generally higher operating margins than those of its competitors. The Company
maintains the showroom quality condition of its merchandise available for rent
by selling its previously rented merchandise through a network of 69
company-operated clearance centers, thereby enabling the Company to regularly
update its inventory with new styles and new merchandise. Sales of furniture
through clearance centers, at prices which for the last five years have averaged
110% of the furniture's original cost, allow the Company to maximize the
residual value of its rental merchandise. Furniture sales through clearance
centers and other sales accounted for approximately 18% of the Company's total
1996 revenue.
As the industry leader and the only "rent-to-rent" furniture rental company with
a national presence, CORT is well-positioned to take advantage of growing demand
for furniture rental services. This demand is believed to be driven by continued
growth in management and professional employment, the increasing importance to
American business of flexibility and outsourcing and the impact of a more mobile
and transitory population. The Company is called upon to meet business-related
furniture rental service needs by a corporate customer base which includes
Fortune 500 companies, small businesses and professionals, and owners and
operators of apartment communities.
Management believes that annual revenues of the "rent-to-rent" furniture rental
industry are in excess of $700 million. A significant portion of these revenues
is generated by single-location and small regional rental businesses which
present attractive consolidation opportunities for the larger "rent-to-rent"
furniture rental companies such as CORT. Since the beginning of 1992, the
Company has acquired two of its significant competitors, General Furniture
Leasing Company ("General Furniture") and Evans Rents, entered two new markets,
New York City and Salt Lake City, through portfolio acquisitions, and has
completed and successfully integrated 13 small lease portfolio acquisitions.
Management believes that CORT is well-positioned to continue capitalizing on the
consolidation trend in the "rent-to- rent" furniture rental industry due to its
national presence, leading market share and financial capacity.
The Company's total revenue increased 21.7% on an annual basis, from $106.5
million in 1992 to $234.1 million in 1996, as a result of the acquisitions of
General Furniture and Evans Rents, small lease portfolio acquisitions and new
showroom openings, as well as growth in existing operations. Operating earnings
increased 27.2% on an annual basis from $13.5 million (excluding non-recurring
charges of $10.0 million) in 1992 to $35.4 million in 1996.
Business Strategy
Management believes that CORT's size, national presence, consistently high-level
customer service, product quality and broad product selection, depth of
management and efficient clearance centers have been key contributors to the
Company's success. The Company's objective is to build on these fundamentals and
increase further its revenue and operating earnings and expand its margins by
continuing to pursue its growth strategy. The key components of this strategy
are (i) making selective acquisitions; (ii) initiating operations in new markets
and adding showrooms in existing markets; (iii) expanding its corporate customer
base on the rental of high-margin office furniture products; and (iv) continuing
to invest in the development of various products and services.
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<PAGE>
Acquisitions
The primary focus of the Company's growth strategy has been and will continue to
be the selective acquisition of small lease portfolios and regional companies in
new and existing markets. Since the beginning of 1992, the Company has completed
15 small lease portfolio acquisitions. In a typical lease portfolio acquisition,
the Company acquires existing leases and rental furniture. Additionally, the
Company may also retain sales personnel with strong local customer
relationships. The Company generally does not acquire showrooms, distribution
facilities or clearance centers in existing markets. However, in new markets,
the Company may choose to retain such real estate. The Company also believes
that there are a select number of opportunities to acquire larger regional
companies in order to enter new markets and increase its market share in
existing markets. For example, the Company has acquired two larger regional
companies: General Furniture in September 1993, which had total revenues of
approximately $41.5 million for fiscal year 1992, and Evans Rents in April 1996,
which had total revenues of approximately $30.5 million for fiscal year 1995.
The acquisition of General Furniture provided CORT with immediate access to new
market areas and additional critical mass in CORT's existing markets. Evans
Rents provides CORT with additional critical mass in the greater Los Angeles and
San Francisco areas, increases the percentage of rental revenue derived from the
rental of higher-margin office furniture products and contributed additional
expertise in the supply of furniture for trade shows and conventions.
New Markets and Additional Showrooms
The Company continues to expand the number of showrooms within its existing
markets as well as initiate new operations, including showrooms, distribution
facilities and clearance centers, in strategically identified geographic
locations where it currently does not conduct business and where attractive
acquisition opportunities do not exist. By increasing the number of showrooms
associated with existing distribution facilities and clearance centers, the
Company is able to distribute its real estate, personnel and other fixed costs
over a larger revenue base. Since the beginning of 1995, CORT has begun
operations in four new metropolitan markets: Birmingham, AL; Little Rock, AR;
Portland, OR; and St. Louis, MO.
Expanded Corporate Customer Base
The Company seeks to increase its corporate customer base in order to capitalize
on the longer lease terms, higher average lease amounts and multiple lease
transactions associated with corporate customers. In addition, corporate
customers more frequently enter into higher-margin office furniture leases. The
Company intends to grow revenue by increasing its corporate customer base
through expanded emphasis on national accounts, further development of sales
personnel with business-to-business sales experience and continued advertising.
The Company intends to increase awareness among its sales force of the benefits
and breadth of its office product offerings through expanded training programs
and to focus the efforts of its sales force on these products by increased
incentive compensation for office product rentals.
Development of Products and Services
The Company continues to invest in the development of other products and
services. Products and services in various stages of development include the
rental of houseware amenity packages, interior design services and furniture for
model homes and the supply of furniture for trade shows and conventions.
Management believes that the gradual introduction of new products and services
allows the Company to experiment with such products and services at a relatively
low initial cost. See "Products--Other Products and Services."
The "Rent-to-Rent" Industry
The "rent-to-rent" segment of the furniture rental industry serves both
corporate and individual customers who generally have immediate, temporary needs
for office or residential merchandise but who typically do not seek to own such
merchandise. Office product customers range from large corporations who desire
flexibility to meet their temporary and transitional needs, to small businesses
and professionals who require office furnishings but seek to
- 2 -
<PAGE>
conserve capital. Residential product customers include corporations seeking to
provide furnishings for corporate employees who have been relocated or who are
on temporary assignment, apartment community managers seeking to provide
furnished apartments and individual residents seeking to rent merchandise for
their own homes and apartments.
Management believes the "rent-to-rent" furniture rental industry generates in
excess of $700 million of annual revenue. The demand for rental products is
believed to be driven by continued growth in management and professional
employment levels, the changing trends in American business towards flexibility
and outsourcing and the impact of a more mobile and transitory population. The
industry is highly competitive and consolidating with many participants
operating single locations and small regional businesses. See "Competition."
The "rent-to-rent" business is differentiated from the "rent-to-own" business
primarily by the terms of the rental arrangements and the type of customer
served. "Rent-to-rent" customers generally desire high quality furniture to meet
temporary needs, have established credit, and pay on a monthly basis. Typically,
these customers do not seek to acquire the property rented. In the typical
"rent-to-rent" transaction, the customer agrees to rent merchandise for three to
six months, subject to extension by the customer on a month-to-month basis. By
contrast, "rent-to-own" arrangements are generally made by customers without
established credit whose objective is to acquire ownership of the property.
"Rent-to-own" arrangements are typically entered into on a month-to-month basis
and require weekly rental payments.
Products
The Company rents a full line of furniture and accessories throughout the United
States for office and residential purposes. The Company classifies its furniture
leases based on the type of furniture leased and the expected use of the
furniture.
Office Products
In order to capitalize on the significant profit potential available from the
longer average rental periods and the higher average monthly rent for office
products, the Company's strategy is to emphasize office furniture rentals. The
Company offers a full range of office, conference room and reception area
furniture, including desks, chairs, tables, credenzas, panel systems and
accessories. In order to promote longer office lease terms, the Company leases
furniture to its corporate customers at rates that reflect a premium on leases
that are less than six months and a discount on leases of more than six months.
The Company's office furniture customers consist primarily of large companies
that desire flexibility to satisfy temporary and transitional needs and small or
start-up businesses that have immediate and changing furniture requirements but
seek to minimize capital outlay. The Company emphasizes its ability to outfit an
entire office with high quality furniture in two business days, as well as its
ability to provide consistent customer service and product quality nationwide.
Residential Products
The Company leases residential products to corporate customers who are
temporarily or permanently relocating employees, to apartment managers and
owners who are providing furnished apartments and to individual end users of the
furniture. The Company offers a broad range of household furniture, including
dining room, living room and bedroom pieces, as well as certain electronic
products.
A significant portion of the Company's residential furniture rentals are derived
from corporate relocations and temporary assignments, as new and transferred
employees of the Company's corporate customers enter into leases for residential
furniture. The Company's sales personnel maintain contacts with corporate
relocation departments. By presenting the possibility of obtaining
fully-furnished rental apartments as a lower cost alternative to hotel
accommodations, the Company offers its corporate rental customers a way to
reduce the costs of corporate relocations
- 3 -
<PAGE>
while developing residential business with new and transferred employees. The
Company's ability to service both corporate and individual needs creates a broad
corporate customer base accompanied by an increasing pool of employees utilizing
the Company's residential services.
Other Products and Services
CORT offers several other products and services in selected markets. The Company
offers houseware amenity packages (such as linens, towels, dishes, cookware and
other kitchen, bedroom and bath accessories) for rent to its furniture rental
customers. The Company had generally distributed houseware amenity packages
through third-party contractors either under subcontract arrangements or direct
referrals. The Company continues to expand the distribution of its own houseware
amenity packages to capture profits currently accruing to third-party
contractors and made a lease portfolio acquisition in 1996 of a housewares
rental business. In addition, CORT currently offers interior design services and
furnishings for model home builders in three major metropolitan areas.
The Company has been providing rental specialty furniture for short term use at
trade shows and conventions through its operations in New Orleans and the
California operations acquired with Evans Rents. In March 1997, the Company
completed its acquisition of three trade show services businesses that operate
in nine major markets. The combination of CORT's national network with the
experience of these organizations should provide the Company with a competitive
advantage in the trade show and convention services business.
Operations
Lease Terms
The Company typically leases furniture to individuals and corporate accounts for
three-, six- and twelve-month terms, which may be and often are extended by its
customers on a month-to-month basis. Management believes that, on average,
furniture remains on lease for approximately nine months at a time. Although
rental contracts may give the customer the option to purchase the merchandise
rented, only a small percentage of the Company's rental leases lead to customer
ownership.
The Company's strategy is to price rentals to recover the original cost of the
furniture over a ten-month rental "payout period." However, pricing and payout
periods often vary with the length of the leases. The Company frequently charges
a delivery fee and, in the absence of proof of insurance, a waiver fee. Within
general company guidelines, each district has discretion to set prices based
upon local market factors.
The Company may also require a security deposit from a customer which will be
returned at the end of the lease upon satisfactory compliance with the terms of
the lease. The Company requires applications from prospective rental customers
and performs credit investigations before approving such applications. In each
of the last five years, the Company's bad debt losses have been limited to 0.5%
of revenue or less.
Customer Services
CORT is dedicated to providing consistently high quality customer service
nationwide to its corporate and individual customers. Through its national
network, the Company more efficiently services its corporate clients by
providing a single point of contact for customers who have furniture needs in
multiple locations, offering consistent quality of products and services at all
CORT locations, and offering a broad spectrum of products to customers. Under
its Personal Service Guaranty, which management believes is the only written
service guarantee of its kind in the "rent- to-rent" industry, the Company
ensures customers of CORT Furniture Rental that they will be satisfied with the
furniture they rent or the Company will exchange it for similar furniture within
two business days free of charge. Additionally, the Company's employees assist
customers with space planning, interior design and apartment location services.
- 4 -
<PAGE>
Furniture Sales
For the last five years, the Company has derived 72% of its furniture sales
revenue from clearance centers sales. The remaining furniture sales revenue is
derived primarily from lease conversions and sales of new furniture. Sales of
rental furniture allow the Company to control inventory levels and maintain
showroom quality of rental inventory. On average, furniture is typically sold
through the clearance centers three years after its initial purchase by the
Company. For the last five years, sales of rental furniture through the
clearance centers have had an average recovery margin on the original cost of
furniture of approximately 110%, a price which is usually considerably lower
than the price of comparable new merchandise. Management believes that its
ability to recover the original cost of its furniture through its clearance
centers is a key contributor to the Company's profitability.
Cost Recovery Ratio Table
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1992 1993(1) 1994 1995 1996(2)
---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Clearance Center sales revenue...... $18,226 $22,490 $26,136 $26,021 $28,714
Original cost of furniture.......... 16,517 20,067 23,651 23,666 26,137
Cost recovery ratio................. 110.3% 112.1% 110.5% 110.0% 109.8%
<FN>
- --------
(1) Includes four months of combined data pursuant to the acquisition of
General Furniture.
(2) Includes Evans Rents subsequent to its acquisition on April 24, 1996;
however, Evans Rents did not operate Clearance Centers.
</FN>
</TABLE>
Cost of Sales Table
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1992 1993(1) 1994 1995 1996(2)
---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Cost of Clearance Center sales...... $10,452 $13,354 $15,371 $15,060 $16,447
Cost of other furniture sales....... 3,024 3,456 5,278 7,143 8,760
----- ----- ----- ----- -----
Total Cost of Sales................. $13,476 $16,810 $20,649 $22,203 $25,207
====== ====== ====== ====== ======
<FN>
- ------------
(1) Includes four months of combined data pursuant to the acquisition of
General Furniture.
(2) Includes Evans Rents subsequent to its acquisition on April 24, 1996;
however, Evans Rents did not operate Clearance Centers.
</FN>
</TABLE>
Sales, Marketing and Advertising
The Company employs a sales force of approximately 650 people, including
managers and supervisors, rental consultants, commercial account executives,
residential account executives, and clearance center personnel. In general,
rental consultants service walk-in showroom customers, clearance center sales
personnel are responsible for
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<PAGE>
walk-in clearance center customers and commercial and residential account
executives work to develop office and residential customers in their districts.
Utilizing the Company's national distribution network to emphasize its ability
to serve customers throughout the country, the Company employs ten national
account representatives who are responsible for customers with business in more
than one district.
CORT's sales representatives receive professional, business-to-business sales
training through the Company's CORT University program, which was developed as
part of the Company's continuing effort to increase rental revenue and improve
customer service. Management believes that the program's emphasis on a problem
solving, value-added approach to clients' needs enhances its relationships with
customers and provides CORT with a competitive advantage in marketing to
corporate customers.
The Company markets its services through brochures, newspapers, periodicals,
yellow pages, radio, television and direct response media and over the internet
(http://www.cort1.com). The Company designs its advertising program both to
promote the business and to increase awareness of the advantages of renting in
the residential and office furniture markets. The Company also supports its
clearance center sales through newspaper, radio and television advertising.
Purchasing and Distribution
The Company has a national product line chosen by its merchandising group. Each
district manager, in consultation with his or her regional merchandising
manager, selects from the national product line based on an analysis of customer
demand within such manager's specific market. Each district then places purchase
orders directly with the Company's vendors and shipment is arranged through the
Company's freight analyst directly to the district warehouse.
The Company acquires furniture from a large number of manufacturers and is not
dependent on any particular manufacturer as a source of supply. In 1996, no
furniture manufacturer accounted for more than 10% of the Company's furniture
purchases. Management believes that the Company is able to purchase furniture at
lower prices than its competitors due to the centralized selection of its
product line and large volume of purchases. The Company is generally able to
obtain prompt delivery of furniture from its suppliers and has not experienced
material interruptions in its business resulting from delays in acquiring
furniture.
Merchandise is delivered to rental customers by Company employees via owned or
leased trucks after a rental agreement has been signed. At the end of the lease
term, rental furniture is returned to the Company's warehouses where it is
inspected, cleaned and/or repaired in preparation for future rental or sale. If
it is determined that the furniture is appropriate for sale rather than future
rental, the furniture is then transferred to a clearance center. Company
warehouses are typically located next to a clearance center, thereby allowing
the Company to reduce shipping expenses and realize efficiency gains.
Competition
The "rent-to-rent" segment of the furniture rental industry is highly
competitive. Management believes that Aaron Rents, Globe Business Resources and
Brook Furniture Rental are the Company's most significant competitors. In
addition, there are numerous smaller regional and local "rent-to-rent" furniture
companies as well as retailers offering residential and office furniture.
Management believes that the principal competitive factors in the furniture
rental industry are product value, furniture condition, extent of furniture
selection, terms of rental agreement, speed of delivery, exchange privilege,
option to purchase, deposit requirements and customer service level.
With respect to sales of furniture through its clearance centers, the Company
competes with numerous used and new furniture retailers, some of which are
larger than the Company and have greater financial resources. Management
believes that price and value are the principal competitive factors in its
furniture sales.
- 6 -
<PAGE>
Employees
On December 31, 1996, the Company employed approximately 2,000 people, of whom
approximately 50 were employed at corporate headquarters. Approximately 650
people were employed as salespersons, 975 people were employed in the warehouse
and distribution portion of the business and the remainder in district and
regional administrative positions.
The Company's warehouse and delivery employees in Maryland (approximately 37
persons) are represented by an independent union under a contract which expires
in December 1999. Additionally, 16 of the Company's warehouse and delivery
employees in New York City are represented by the Local 840 of the International
Brotherhood of Teamsters under a contract which expires in June 1999.
The Company believes that its relationships with its employees are good.
Trademarks and Name Recognition
The Company engages in business under the CORT Furniture Rental and General
Furniture Leasing tradenames, each of which has been used in the furniture
rental business for over 20 years. The Company has established its reputation as
a provider of quality furniture and customer service using these names. The
Company feels that reputation and name recognition are important to customers.
Therefore, following an acquisition in a new market, the Company may use a
combination of the CORT and acquired business name to maintain customer
recognition, i.e. CORT/EVANS, CORT/afr, CORT/bel style.
Regulatory Matters
Compliance with federal, state and local laws and regulations governing
pollution and protection of the environment is not expected to have any material
effect upon the financial condition or results of operations of the Company.
ITEM 2. Properties
As of December 31, 1996, the Company carried out its rental, sales and warehouse
operations through 140 facilities, of which 22 were owned and 118 were leased.
The leased facilities have lease terms with expiration dates ranging from 1997
to 2010. Upon the expiration of its leases, the Company generally has been able
to either extend its leases or obtain suitable alternative facilities on
satisfactory terms. Management seeks to locate properties in new markets where
rental, clearance and warehouse operations can be combined in one facility. As
the Company expands in a particular district, the Company seeks to open
free-standing showrooms that can be serviced from pre-existing warehouses. The
Company's showrooms generally have 3,500 to 4,500 square feet of floor space.
The Company regularly reviews the presentation and appearance of its furniture
showrooms and clearance centers and periodically improves or refurbishes them to
enhance their attractiveness to customers.
The Company's decision to enter a new market is based upon its review of current
demographic information, short-and long-term population and business growth
projections and the level of existing competition. Once the decision is made to
enter a new market, management selects individual showroom locations by
reviewing demographic information, accessibility, visibility, customer traffic,
location of competitors and cost.
The metropolitan areas in which the Company operates, together with the number
of showrooms in each metropolitan area, are set forth in the table below:
District Locations Number of Showrooms
- ----------------------------------------------- --------------------
ALABAMA Birmingham 1
ARIZONA Phoenix 1
ARKANSAS Little Rock 1
- 7 -
<PAGE>
District Locations Number of Showrooms
- ------------------------------------------------ -------------------
CALIFORNIA Orange County 3
Los Angeles 6
Sacramento 1
San Diego 1
San Francisco 5
Santa Clara 2
COLORADO Denver 2
DISTRICT OF COLUMBIA (1) 6
FLORIDA Ft. Lauderdale 4
Jacksonville 2
Orlando 3
Pensacola 1
Tampa 4
GEORGIA Atlanta 6
ILLINOIS Chicago 3
INDIANA Indianapolis 1
KANSAS Kansas City 1
KENTUCKY Louisville 2
LOUISIANA Baton Rouge 2
New Orleans 1
MASSACHUSETTS Boston 3
MICHIGAN Detroit 3
MINNESOTA Minneapolis 4
MISSOURI St. Louis 1
NEW MEXICO Albuquerque 1
NEW YORK New York 1
NORTH CAROLINA Raleigh 2
Charlotte 1
OHIO Cincinnati 2
Columbus 1
OKLAHOMA Oklahoma City 1
Tulsa 1
OREGON Portland 1
PENNSYLVANIA Philadelphia(2) 4
TENNESSEE Memphis 1
Nashville 1
TEXAS Austin 2
Corpus Christi 1
Dallas 4
Houston 4
San Antonio 3
UTAH Salt Lake City 1
VIRGINIA Richmond 1
Virginia Beach 2
WASHINGTON Seattle 3
---
TOTAL 108
- -------
(1) Includes locations in Washington, D.C., Maryland and Virginia.
(2) Includes locations in Pennsylvania, New Jersey and Delaware.
- 8 -
<PAGE>
The Company distributes its furniture using a fleet of approximately 188 leased
and 33 company-owned delivery trucks. The trucks are usually rented for a period
of five to six years under operating leases and typically display CORT's
tradenames.
ITEM 3. Legal Proceedings
At December 31, 1996, the Company was involved in certain legal proceedings
arising in the normal course of its business. The Company believes the outcome
of these matters will not have a material adverse effect on the Company. The
Company has undergone an examination of its Federal income tax returns and
reached a settlement in early 1997. See Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources and Item 8 - Financial Statements and Supplementary Data.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 4a. Directors and Executive Officers of the Registrant
The names of the executive officers and directors of CORT and their respective
ages and positions with CORT are set forth in the following table. Directors are
elected at the annual meeting of stockholders to serve until the next annual
meeting and until their successors are elected and qualify.
Name Age Position
- ---- --- --------
Paul N. Arnold(3) 50 President, Chief Executive Officer & Director
Anthony J. Bellerdine 48 Group Vice President
Michael G. Connors 40 Vice President--Real Estate
Charles M. Egan(3) 60 Chairman & Director
Kenneth W. Hemm 42 Group Vice President
Steven D. Jobes 47 Vice President--Marketing, Merchandising,
Sales & National Accounts
Lloyd Lenson 46 Group Vice President
Frank Martini 48 Group Vice President
Victoria L. Stiles 42 Vice President--Human Resources & Corporate
Risk Management
Maureen C. Thune 31 Controller & Assistant Secretary
Frances Ann Ziemniak 46 Vice President--Finance, Chief Financial
Officer & Assistant Secretary
Keith E. Alessi(2) 42 Director
Bruce C. Bruckmann(1)(2) 43 Director
Michael A. Delaney(1) 42 Director
Gregory B. Maffei(2) 36 Director
James A. Urry(1) 43 Director
- ------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Directors Stock Option Committee
PAUL N. ARNOLD, President, Chief Executive Officer and Director. Mr. Arnold has
been with CORT and Mohasco Corporation, its former parent, for 28 years and has
held group management positions within CORT since 1976. He has held his current
position since July 1992.
ANTHONY J. BELLERDINE, Group Vice President. Mr. Bellerdine has been with CORT
since July 1991. He was appointed to Group Vice President in December 1994,
having served as Area Vice President and Senior District
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<PAGE>
Manager. Prior to joining CORT, Mr. Bellerdine was Senior Vice President of
Sales and Marketing of Stern Office Furniture for eight years.
MICHAEL G. CONNORS, Vice President--Real Estate. Mr. Connors joined CORT in
February 1986, after nearly eight years in Real Estate and Marketing with Mobil
Oil Corporation and has served in his current position since March 1991.
CHARLES M. EGAN, Chairman and Director. Mr. Egan has been with CORT since the
acquisition of General Furniture Leasing Company in September 1993. Mr. Egan
joined General Furniture Leasing Company in 1989 and became its President and
Chief Executive Officer in 1992. From 1985 to 1989, Mr. Egan was Executive Vice
President of Mohasco Corporation. Mr. Egan was President of CORT from 1980 to
1985.
KENNETH W. HEMM, Group Vice President. Mr. Hemm has been with CORT for 16 years.
He was appointed Group Vice President in June 1992, having served as Group
Manager since January 1991.
STEVEN D. JOBES, Vice President--Marketing, Merchandising, Sales and National
Accounts. Mr. Jobes has been with CORT for 25 years and served as Group Vice
President prior to assuming his current position in May 1993.
LLOYD LENSON, Group Vice President. Mr. Lenson has been with CORT for 18 years
serving in his current position since May 1993. He previously served as Group
Vice President and as Vice President--Marketing, Sales and Acquisitions.
FRANK MARTINI, Group Vice President. Mr. Martini has been with CORT for 20 years
serving in his current position since July 1994. He previously served as Area
General Manager and District General Manager.
VICTORIA L. STILES, Vice President--Human Resources and Corporate Risk
Management. Ms. Stiles joined CORT in November 1987, after nearly eight years in
Personnel for the Hecht Company a division of the May Company. She was appointed
to Vice President in July 1996, having served as Director of Human Resources and
Regional Manager of Human Resources.
MAUREEN C. THUNE, Controller and Assistant Secretary. Ms. Thune joined CORT in
August 1992 after five years with KPMG Peat Marwick LLP, having most recently
served as a Manager.
FRANCES ANN ZIEMNIAK, Vice President--Finance & Chief Financial Officer. Ms.
Ziemniak joined the Company in March 1995 after three years as an independent
consultant focusing on risk-management and retail acquisition analysis. Ms.
Ziemniak was previously Vice President, Finance and Chief Financial Officer for
Federated Merchandising, a division of Federated Department Stores, Inc. from
1987 to 1992 and Corporate Vice President, Financial Services for The GAP, Inc.
from 1982 to 1987. Before Ms. Ziemniak joined The GAP, Inc. in 1979, she was
employed by Arthur Young & Company.
KEITH E. ALESSI, Director. Mr. Alessi has been a Director of the Company since
October 1993. Mr. Alessi is Chairman, Chief Executive Officer and a Director of
Jackson Hewitt Inc. Mr. Alessi was Vice-Chairman and Chief Financial Officer of
Farm Fresh, Inc. from June 1994 through June 1996. He had previously served in
various executive capacities, including President, with Farm Fresh from 1988 to
1992. Mr. Alessi also is a Director of Farm Fresh, Inc. and Shoppers Food
Warehouse, Inc.
BRUCE C. BRUCKMANN, Director. Mr. Bruckmann has been a Director of the Company
since March 1993. Mr. Bruckmann is currently Managing Director of Bruckmann,
Rosser, Sherrill & Co., Inc. Mr. Bruckmann was a Vice President of Citicorp
Venture Capital Ltd., which is an affiliate of the Company, through 1993 and a
Managing Director from 1993 through 1994. He is also a Director of Mohawk
Industries, Inc., AmeriSource Health Corporation, Chromcraft-Revington, Inc.,
Jitney-Jungle Stores of America, Inc. and Anvil Knitwear, Inc.
- 10 -
<PAGE>
MICHAEL A. DELANEY, Director. Mr. Delaney has been a Director of the Company
since May 1995. Mr. Delaney has been a Vice President of Citicorp Venture
Capital Ltd., which is an affiliate of the Company, since 1989. From 1986
through 1989 he was Vice President of Citicorp Mergers and Acquisitions. Mr.
Delaney is also a Director of Aetna Industries, Inc., AmeriSource Health
Corporation, Ballentrae Corporation, CLARK Material Handling Corporation, Delco
Remy International, Inc., Enterprise Media Inc., GVC Holdings, JAC Holdings, IKS
Corporation, Palomar Technologies, Inc., SC Processing, Inc., MSX International
and Triumph Holdings, Inc.
GREGORY B. MAFFEI, Director. Mr. Maffei has been a Director of the Company since
November 1995. Mr. Maffei is Vice President, Corporate Development and Treasurer
of Microsoft Corporation. He joined Microsoft in April 1993 and has served as
Treasurer since 1994. Before joining Microsoft, he was self-employed from
September 1992 to March 1993, serving as a consultant for various companies
including Microsoft. From January 1991 to August 1992, he served as Executive
Vice President and Chief Financial Officer of Pay 'N Pak Stores, Inc. Prior
thereto, Mr. Maffei was a Vice President of Citicorp Venture Capital Ltd., which
is an affiliate of the Company. Mr. Maffei is also a Director of Mobile
Telecommunications Technologies Corporation and Citrix Systems, Inc.
JAMES A. URRY, Director. Mr. Urry has been a Director of the Company since March
1993. Mr. Urry has been with Citibank, N.A. since 1981 serving as a Vice
President since 1986. He has been a Vice President of Citicorp Venture Capital
Ltd., which is an affiliate of the Company, since 1989. He is also a Director of
AmeriSource Health Corporation, CLARK Material Handling Corporation, Hancor
Holding Corporation, IKS Corporation, Palomar Products Inc., Recreation Vehicle
Product Company and York International Corporation.
- 11 -
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required for this item is incorporated by reference to page 28
of the Company's 1996 Annual Report to Stockholders.
ITEM 6. Selected Financial Data
The information required for this item is incorporated by reference to page 10
of the Company's 1996 Annual Report to Stockholders.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required for this item is incorporated by reference to pages 11
through 14 of the Company's 1996 Annual Report to Stockholders.
ITEM 8. Financial Statements and Supplementary Data
The consolidated balance sheets of CORT Business Services Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996, and the report dated
February 14, 1997 of KPMG Peat Marwick LLP, independent public accountants, are
incorporated by reference to pages 15 through 27 of the Company's 1996 Annual
Report to Stockholders.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
No response to this Item is required.
- 12 -
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by Item 401(b) of Regulation S-K is included in Part I,
Item 4a. Directors and Executive Officers of the Registrant.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
The information required for this part of Item 10 is incorporated by reference
to page 22 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held May 14, 1997.
ITEM 11. Executive Compensation
The information required for this item is incorporated by reference to pages 18
through 21 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held May 14, 1997.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required for this item is incorporated by reference to page 14
of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held May 14, 1997.
ITEM 13. Certain Relationships and Related Transactions
The information required for this item is incorporated by reference to page 22
of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held May 14, 1997.
- 13 -
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) and (d) Financial Statements and Schedules (see Index on Page F-1)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of
the period covered by this report.
(c) Exhibits (see Index on Page E-1)
- 14 -
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
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.
CORT BUSINESS SERVICES CORPORATION
By: /s/ Frances Ann Ziemniak
-----------------------------------
Frances Ann Ziemniak
Vice President, Finance, Chief
Financial Officer and Assistant
Secretary (Principal financial
and principal accounting officer)
Date: March 31, 1997
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 dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Paul N. Arnold President, Chief Executive Officer (principal March 31, 1997
- -------------------------------- executive officer) and Director
Paul N. Arnold
/s/ Charles M. Egan Chairman and Director March 31, 1997
- --------------------------------
Charles M. Egan
/s/ Frances Ann Ziemniak Vice President, Finance, Chief Financial Officer March 31, 1997
- -------------------------------- and Assistant Secretary
Frances Ann Ziemniak
/s/ Keith E. Alessi Director March 31, 1997
- --------------------------------
Keith E. Alessi
/s/ Bruce C. Bruckmann Director March 31, 1997
- --------------------------------
Bruce C. Bruckmann
</TABLE>
- 15 -
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Michael A. Delaney Director March 31, 1997
- --------------------------------
Michael A. Delaney
/s/ Gregory B. Maffei Director March 31, 1997
- --------------------------------
Gregory B. Maffei
/s/ James A. Urry Director March 31, 1997
- --------------------------------
James A. Urry
</TABLE>
- 16 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements............................................... 13
Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant......... S-1
Schedule II - Valuation and Qualifying Accounts.................... S-3
F - 1
<PAGE>
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
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
E - 1
<PAGE>
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 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
10.3 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
10.4 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
10.5 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
10.6 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
10.7 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
10.8 CFR's Supplemental Executive Retirement Plan, dated October
28, 1992, as revised effective January 1, 1993, restated
through the Second Amendment
10.9 Agreement for Irrevocable Trust Under CORT Furniture Rental
Supplemental Executive Retirement Plan, dated June 1, 1996,
between CFR and Mentor Trust Company
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
E - 2
<PAGE>
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
11.1 Statement re computation of per share earnings
13.1 Portions of the Annual Report of the Company for the fiscal
year ended December 31, 1996 which are expressly incorporated
by reference herein
21.1 List of Subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedules
E - 3
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in thousands)
Condensed Balance Sheets:
As of December 31,
-----------------------
1995 1996
---- ----
Investment in CORT Furniture Rental ............. $75,421 $125,152
Other assets .................................... -- --
------- --------
Total assets ................................ 75,421 125,152
======= ========
Accrued expenses ................................ -- --
Long-term debt .................................. -- --
------- --------
Total liabilities ........................... -- --
Stockholders' equity ............................ 75,421 125,152
------- --------
Total liabilities and equity ................ $75,421 $125,152
======= ========
Condensed Statements of Operations:
Year Ended December 31,
-------------------------------
1994 1995 1996
---- ---- ----
Equity in earnings of CORT Furniture
Rental ................................. $5,130 $3,705 $15,936
Interest expense .......................... 2,637 2,716 --
------ ------ -------
Income before income taxes ............ 2,493 989 15,936
Income tax benefit ........................ 1,053 1,086 --
------ ------ -------
Net income ............................ $3,546 $2,075 $15,936
====== ====== =======
S - 1
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
(in thousands)
Condensed Statements of Cash Flows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net income ..................................................................... $ 3,546 2,075 $ 15,936
Adjustments to reconcile net income to cash flows from operating activities:
Equity in earnings of CORT Furniture Rental ................................ (5,130) (3,705) (15,936)
Discount on junior subordinated debentures ................................. 68 65 --
Interest converted to long-term debt ....................................... 1,664 2,636 --
Changes in assets and liabilities, net ..................................... (193) (1,689) --
------- -------- --------
Cash used in operating activities ..................................... (45) 618 --
------- -------- --------
Cash flows from investing activities:
Investment in CORT Furniture Rental ........................................ -- (36,458) (33,224)
------- -------- --------
Cash used in investing activities ..................................... -- (36,458) (33,224)
------- -------- --------
Cash flows from financing activities:
Issuance of common stock ................................................... 76 37,045 33,224
Net repayments of long-term debt ........................................... (31) -- --
Net proceeds from issuance of long-term debt ............................... -- 31 --
------- -------- --------
Cash provided by financing activities ................................. 45 37,076 33,224
------- -------- --------
Net increase in cash and cash equivalents ...................................... -- -- --
Cash and cash equivalents at beginning of period ............................... -- -- --
------- -------- --------
Cash and cash equivalents at end of period ..................................... $ -- $ -- $ --
======= ======== ========
Supplemental disclosures of cash flow information:
Noncash financing activities:
Tax benefit from exchange of debt for equity ............................... $ -- $ 741 $ --
Exchange of debt for equity ................................................ -- 20,147 --
Tax benefit from exercise of stock options ................................. -- -- 571
</TABLE>
Note to Condensed Financial Statements of Registrant:
Basis of Presentation
The accompanying condensed financial statements represent the accounts of CORT
Business Services Corporation on a stand-alone basis. Substantially all footnote
disclosures are omitted. Reference is made to the audited consolidated financial
statements and footnotes of CORT Business Services Corporation and subsidiaries
as of December 31, 1996 and 1995, and for each of the years in the three-year
period ended December 31, 1996, which appear in the Company's 1996 Annual Report
to stockholders.
S - 2
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Deductions
Additions ------------
-------------------- Write off of
Allowance for Beginning Charged to Uncollectible Ending
Doubtful Accounts Balance Expense Other(1) Accounts Balance
- ----------------- ------- ---------- -------- ------------- -------
December 31, 1994 802 675 -- (560) 917
December 31, 1995 917 582 -- (561) 938
December 31, 1996 938 1,234 334 (600) 1,906
- ----------
(1) Other additions represent the balance of Evans Rents' allowance for
doubtful accounts, which was recorded April 24, 1996 in conjunction
with the acquisition.
S - 3
<PAGE>
EXHIBIT 11.1
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average common shares outstanding:
Average shares outstanding during the period ......................... 4,149,105 4,581,003 11,416,193
Unexercised stock options and warrants using
the treasury stock method, other than cheap stock ................ 591,025 869,005 1,031,901
Cheap stock options and issuances(1) ................................. 218,434 218,434 --
Common shares issued in the exchange for common stock(2) ............. 2,090,591 2,090,591 --
--------- --------- ----------
Total weighted average common shares ............................. 7,049,155 7,759,033 12,448,094
========= ========= ==========
Net income applicable to common shares:
Income before extraordinary loss ..................................... $3,546,000 $6,218,000 $15,936,000
Increase in earnings, net of taxes, resulting from the
exchange for common stock(2) ..................................... 2,149,000 2,200,000 --
--------- --------- ----------
Income applicable to common shares before extraordinary loss ......... 5,695,000 8,418,000 15,936,000
Extraordinary loss, net of taxes ..................................... -- 4,143,000 --
--------- --------- ----------
Net income applicable to common shares ............................... $5,695,000 $4,275,000 $15,936,000
========= ========= ==========
Earnings per common share before extraordinary loss .................. $ 0.81 $ 1.08 $ 1.28
Extraordinary loss per common share .................................. -- 0.53 --
--------- --------- ---------
Earnings per common share ............................................ $ 0.81 $ 0.55 $ 1.28
========= ========= =========
<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 common share for 1994 and 1995,
the Company has assumed that the exchange occurred as of January 1, 1994 for
2,090,591 Shares of common stock.
</FN>
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
CORT Furniture Rental Corporation
Evans Rents
Evans Convention Services
Evans Relocation Services
Levitt Investment Company
The McGregor Corporation
McGregor Enterprises, Inc.
KLM, L.L.C.
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
CORT Business Services Corporation and Subsidiaries:
The audits referred to in our report dated February 14, 1997 included the
related financial statement schedules as of December 31, 1996 and 1995, and for
each of the years in the three-year period ended December 31, 1996, included
herein. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to incorporation by reference in the registration statements on Form
S-3 (No. 33-99008) and on Forms S-8 (Nos. 33-72724, 333-15611, 333-15613) or
CORT Business Services Corporation of our reports dated February 14, 1997,
relating to the consolidated balance sheets of CORT Business Services
Corporation and subsidiaries as of December 31, 1996 and 1995, and related
consolidated statements of operations stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996, and all
related schedules, which reports appear, or are incorporated by reference, in
the December 31, 1996 annual report on form 10-K of CORT Business Services
Corporation.
KPMG PEAT MARWICK LLP
WASHINGTON, DC
MARCH 28, 1997
EXHIBIT 10.8
CORT FURNITURE RENTAL
SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
As Revised Effective January 1, 1993
Restated through the Second Amendment
<PAGE>
CORT FURNITURE RENTAL
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
This is the CORT FURNITURE RENTAL SUPPLEMENTAL EXECUTIVE RETIREMENT
PLAN (the "Plan") for certain key management employees (the "Participants") of
Cort Furniture Rental Corporation ("Cort").
Background
The purpose of this Plan is to reward certain key management employees
of Cort for long periods of service and to provide an additional incentive to
those employees to continue to work for Cort until attainment of age 65 by
providing a meaningful supplement to the retirement benefits those employees
will receive from the Retirement Plan for Salaried and Sales Employees of
Mohasco Corporation (the "Mohasco Plan") and the Cort Furniture Rental
Investment Savings and Profit Sharing Retirement Plan (the "401(k) Plan"). This
Plan will provide both supplemental retirement benefits, and the incidental
death benefits for Participants.
ARTICLE I. DEFINITIONS
1.1. "Account" means for any Participant listed in Exhibit B the sum of
the following:
(a) the Participant's share of the gains or losses such Participant's
Account actually incurred in the grantor trust maintained for the Plan
under Internal Revenue Code Section 671 as of the most recent December 31,
determined annually;
(b) the Participant's share of the Annual Contribution to be credited
to the Participant's Account as of January 1 of each calendar year; and
(c) the Participant's share determined each January 1 of any
forfeitures from the prior year.
- 1 -
<PAGE>
A Participant's share of Annual Contributions and any forfeitures suffered by
any Participant listed in the same Part of Exhibit B as the Participant for such
calendar year is equal to a fraction where the numerator is equal to such
Participant's points and the denominator is equal to the total points for all
Participants included in the same Part of Exhibit B as the Participant for each
calendar year. A Participant will receive one point for every whole year of age
and two points for every Year of Service as of such January 1 except that if
such Participant is an Operating Group Vice President on such date then such
Participant shall receive one and one-half points for every whole year of age
and two points for every Year of Service as of such January 1. A Participant
shall not share in the Annual Contribution in any year following the year he
attains his Normal Retirement Date. In addition, a Participant who has
terminated employment shall not receive a share of the Annual Contribution and
forfeitures in any year following termination. The Trustees shall value the
Account at least annually. The Corporation may request the Trustees to value the
Account more frequently.
1.2. "Accrued Benefit" means for any Participant listed in Exhibit A
the targeted percentage (as indicated in Exhibit A) of the Participant's Final
Average Compensation as of the date of the Participant's retirement or
termination of employment multiplied by the ratio of the Participant's actual
Years of Service as of the applicable event to the Participant's Years of
Service projected to such Participant's Normal Retirement Date.
1.3. "Annual Contribution" means for the Participants listed in Part I
of Exhibit B an amount contributed by Cort annually equal to $15,000 multiplied
by the number of Participants listed in Part I of Exhibit B who have not yet
attained the Normal Retirement Date and who are employees of Cort as of January
1 of such year as well as any other amount that may be authorized by the Board
of Directors for such year and for the Participants listed in Part II of Exhibit
B an amount contributed by Cort annually equal to $20,000 multiplied by the
number of Participants listed in Part II of Exhibit B who have not yet attained
the Normal Retirement Date and who are employees of Cort as of January 1 of such
year
- 2 -
<PAGE>
as well as any other amount that may be authorized by the Board of Directors for
such year. Effective September 1, 1994, no additional Annual Contributions shall
be made on behalf of any Participant listed under Part II of Exhibit B without
specific authorization by the Board of Directors.
1.4. "Cause" means the Corporation's right to terminate a Participant's
employment with the Corporation upon the willful engaging by the Participant in
gross misconduct materially or demonstrably injurious to the Corporation or upon
the Participant's willful refusal to substantially perform the duties reasonably
assigned to him. For purposes of this definition, no act, or failure to act,
shall be considered "willful" unless done, or failed to be done, by the
Participant not in good faith and without reasonable belief that such action or
omission was in the best interest of the Corporation.
1.5. "Compensation" includes (a) salary, (b) bonuses, (c) any pre-tax
income deferrals made pursuant to the 401(k) Plan, the Mohasco Plan or any
cafeteria plan, as defined in Internal Revenue Code Section 125, established by
Cort, and (d) for the tax year ending December 31, 1989, compensation received
by an employee or contributed at the employee's election to any 401(k) plan
maintained by Mohasco Corporation prior to the sale of Cort.
1.6 "Corporation" means Cort Furniture Rental Corporation.
1.7 "Final Average Compensation" means the average of the Participant's
Compensation over those 36 consecutive months out of the last 60 months of the
Participant's employment that produce the highest average.
1.8. "Participants" means those employees of Cort whose
responsibilities and actions have a substantial impact on the success of Cort as
a whole, that are part of a select group of management and highly compensated
employees, and who are selected by the Board of Directors of Cort ("Boards) to
participate in the Plan. The individuals listed on Exhibit A and Exhibit B,
attached hereto, have been selected as Participants in the Plan.
1.9. "Plan" means the Cort Furniture Rental Supplemental Executive
Retirement Plan.
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<PAGE>
1.10. "Plan Administrator" means the person or committee persons
appointed by Cort who shall have the responsibility, discretion and authority
to, among other things:
(a) interpret, construe and implement the provisions of the Plan;
(b) decide all questions concerning the Plan and the amount of
benefits to which any Participant is entitled under the Plan;
(c) adopt such regulations, rules, procedures and forms consistent
with the Plan that are deemed necessary or desirable for the administration
of the Plan, and
(d) employ individuals and firms to provide legal and actuarial advice
and counsel, as necessary, to assure that the provision of the Plan are
properly interpreted and administered.
The Plan Administrator shall be the President and Chief Executive
Officer, Vice President of Human Resources and Risk Management and Chief
Financial Officer..
1.11 "Vested Account" means Account as defined in Paragraph 1.1
multiplied by a factor not to exceed 1.0. For a Participant listed in Part I of
Exhibit B the Account is multiplied by .5 if the Participant's Years of Service
as of the date of determination are less than 25 and such Participant has not
attained age 65 and 1.0 if the Participant has either attained age 65 or earned
25 or more Years of Service. For a Participant listed under Part II of Exhibit B
the Account is multiplied by 1.0 without regard to the Participant's Years of
Service or Average Final Compensation.
For any Participant who was a Participant on December 31, 1995 any
amount determined under the preceding Paragraph shall not be less than the
amount of such Participant's Account balance as of December 31, 1995 as adjusted
for any net losses due to investment performance in the grantor trust maintained
for the Plan.
1.12. "Years of Service" means the Years of Service used to determine
vesting service for vesting purposes under the 401(k) Plan.
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<PAGE>
ARTICLE II. NORMAL RETIREMENT
2.1. Normal Retirement Date. The Normal Retirement Date for a
Participant who has not retired early pursuant to Article IV shall be the first
day of the month coincident with or next following the date he attains age 65.
2.2. Normal Retirement Benefit for Participants Listed in Exhibit A.
The retirement benefit payable monthly beginning at the Normal Retirement Date
of a Participant listed on Exhibit A shall be one-twelfth (1/12) of the
Participant's Accrued Benefit, reduced by:
(a) the annuity value of the total amount of contributions and
accumulated earnings thereon, if any, made on behalf of such Participant by
Cort pursuant to Section 3.04 of the 401(k) Plan that are allocated to that
Participant's Account under such Plan. That annuity value is to be
determined as of the date that the Participant's retirement benefit
payments under the Plan are scheduled to commence, and shall be determined
by Cort by use of the actuarial assumptions most recently issued by the
Pension Benefit Guaranty Corporation ("PBGC"), and
(b) the annuity benefit, on a single life basis only, if any, which is
or would be payable to a Participant who has been a member of the
Retirement Plan for Salaried and Sales Employees of Mohasco Corporation as
if he had retired from the Mohasco Plan as of the date that his retirement
benefit payments under the Plan are scheduled to commence.
2.3 Normal Retirement Benefit for Participants Listed in Exhibit B. The
Vested Account balance of a Participant listed in Exhibit B as of the last day
of the month in which he attains age 65 except that for a Participant listed in
Part I of Exhibit B, such amount when converted to an annual life annuity shall
not exceed whatever amount is necessary to provide for an annual life annuity
for his life only, calculated using the actuarial assumptions specified in
Paragraph 2.2(a), equal to 35% of Final Average Compensation for any Participant
who is an Operating Group Vice President at such time or 25% of Final Average
Compensation for any Participant who is a Staff Vice President at such time.
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<PAGE>
For any Participant who was a Participant on December 31, 1995 any
amount determined under the preceding Paragraph shall not be less than the
amount of such Participant's Account balance as of December 31, 1995 as adjusted
for any net losses due to investment performance in the grantor trust maintained
for the Plan.
ARTICLE III. LATE RETIREMENT
3.1. Late Retirement Date. The Late Retirement Date for a Participant
who continues in the employ of Cort beyond his Normal Retirement Date shall be
the first of the month next following the date the Participant's employment with
Cort has terminated.
3.2. Late Retirement Benefit for Participants Listed in Exhibit A. The
retirement benefit payable monthly beginning at the Late Retirement Date of a
Participant listed in Exhibit A shall be determined in accordance with Section
2.2 as if the Participant had retired as of his Normal Retirement Date.
3.3. Late Retirement Benefit for Participants Listed in Exhibit B. The
Vested Account balance of a Participant listed in Exhibit B as of the last day
of the month in which his employment with Cort has terminated except that for a
Participant listed in Part I of Exhibit B, such amount when converted to an
annual life annuity shall not exceed whatever amount is necessary to provide for
an annual life annuity, determined as if the Participant were age 65, for his
life only, calculated using the actuarial assumptions specified in Paragraph
2.2(a), equal to 35% of Final Average Compensation for any Participant who is an
Operating Group Vice President at such time or 25% of Final Average Compensation
for any Participant who is a Staff Vice President at such time.
For any Participant who was a Participant on December 31, 1995 any
amount determined under the preceding Paragraph shall not be less than the
amount of such Participant's Account balance as of December 31, 1995 as adjusted
for any net losses due to investment performance in the grantor trust
- 6 -
<PAGE>
maintained for the Plan.
ARTICLE IV. EARLY RETIREMENT
4.1. Early Retirement Date. The Early Retirement Date of a Participant
who has attained age 60 shall be the first day of the month next following the
date the Participant's employment with Cort is terminated. No Early Retirement
Date prior to the date the Participant would attain age 60 may be established
without the consent of the Board.
4.2. Early Retirement Benefit for Participants Listed in Exhibit A. The
retirement benefit payable monthly at the Early Retirement Date of a Participant
listed on Exhibit A shall be the Accrued Benefit of such Participant determined
as of the Participant's Early Retirement Date after the reduction described in
clauses (a) and (b) of Paragraph 2.2; provided, however, if the Participant is
under age 65 at the date that payment of retirement benefits commence, the Early
Retirement Benefit shall be reduced by one fourth of one percent (.25%) for each
complete month between the date that payment of retirement benefits commence and
the date the Participant would attain age 65 up to a maximum reduction of
fifteen percent (15%).
4.3. Early Retirement Benefit for Participants Listed in Exhibit B. The
benefit of a Participant listed in Exhibit B who has attained his Early
Retirement Date shall be determined in accordance with subparagraph 6.2.3.
ARTICLE V. TERMINATION OF EMPLOYMENT AND DEATH IN ACTIVE SERVICE
5.1. Eligibility for Retirement Benefit. A Participant whose employment
with Cort terminates for any reason other than Termination for Cause under
Article VIII after completing five (5) Years of Service shall be entitled to
receive a retirement benefit.
5.1.1. The benefit of a Participant listed in Exhibit A shall be
equal to his then Accrued
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<PAGE>
Benefit less the reduction described in clauses (a) and (b) of
Paragraph 2.2 under the Plan payable, at the Participant's election,
at his Normal or Early Retirement Date, if he is then living. If such
a Participant elects a benefit payable at this Early Retirement Date,
the benefit will be reduced as provided in Paragraph 4.2.
5.1.2. The benefit of a Participant listed in Exhibit B shall be
equal to the benefit determined under Paragraph 2.3 as of the last day
of the month that is eighteen (18) months from the date his
termination of employment occurred.
5.2. Eligibility for Death Benefit. In the case of a Participant who
has five (5) Years of Service and dies before benefits commence, the Beneficiary
of such Participant shall be entitled to receive a benefit.
5.2.1. Such benefit for a Participant listed in Exhibit A shall
be equal to the amount of benefit payable to a spouse under
subparagraph 6.1.2. determined at the date of the death of the
Participant and be payable at what would have been the Normal
Retirement Date of the Participant. If the Participant died on or
after age 60, the Beneficiary may elect to begin receiving benefits
immediately or if the Participant had not yet attained age 60 at the
time of his death the Beneficiary may elect to begin .. receiving
benefits at any time following the date the Participant would have
reached age 60 but in either event the amount of the benefit payable
monthly will be reduced by one fourth of one percent (.25%) for each
complete month between the date the payment of benefits commence and
the date the Participant would have attained age 65 up to a maximum
reduction of fifteen percent (15%).
5.2.2 The benefit of a Participant listed in Exhibit B shall be
equal to the benefit determined under Paragraph 2.3 as of the last day
of the month in which his death occurred except that for purposes of
calculating his Vested Account balance under Paragraph 1.1 the factor
shall equal 1.0.
5.3. Termination Without Cause or Substantial Reduction.
Notwithstanding anything under Section 5.1 to the contrary, a Participant whose
employment with Cort is terminated without Cause or
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<PAGE>
who has a substantial reduction in duties and responsibilities or in
Compensation, will be entitled to receive a retirement benefit.
5.3.1. Such benefit for a Participant listed in Exhibit A shall
be equal to his then Accrued Benefit under the Plan payable at his
Normal or Early Retirement Date, if he is then living, whether or not
he meets the five (5) Years of Service eligibility requirement of
Paragraph 5.1. If such a Participant elects a benefit payable at his
Early Retirement Date, the benefit will be reduced as provided in
Section 4.2.
5.3.2. Such benefit for a Participant listed in Exhibit B shall
be equal to the benefit determined under Paragraph 2.3 as of the last
day of the month in which the applicable event occurs, whether or not
he meets the five (5) Years of Service eligibility requirement of
Paragraph 5.1 except that for purposes of calculating his Vested
Account balance under Paragraph 1.11 the factor shall equal 1.0. The
benefit is payable as soon as practicable thereafter.
5.4. Severance Payment. In addition to the payment of his Accrued
Benefit or Account balance pursuant to Section 5.3, such Participant shall be
entitled to an immediate lump sum payment as follows: (i) a Participant who was
a Cort employee on or before January 1, 1989 shall receive an amount equal to
the amount of Compensation he receives during the final twelve (12) months prior
to the date of his termination or substantial reduction, (2) a Participant who
became a Cort employee after January 1, 1989 shall receive an amount equal to
the amount of Compensation he receives during the final six (6) months prior to
the date of his termination or substantial reduction, except that in the case of
the CEO such amount shall equal twice the otherwise applicable amount of such
Compensation, and any Participant's payment shall be reduced by the amount of
any Cort paid severance payments to which such Participant is entitled under any
employment agreement or any severance benefit plan or program sponsored by Cort
or otherwise.
5.5 Eligibility for Long Term Disability. A Participant who has five
(5) Years of Service
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<PAGE>
and becomes eligible for benefits under the Cort Furniture Rental Long Term
Disability Plan and actually and regularly receives benefits under the Cort
Furniture Rental Long Term Disability Plan until such Participant would have
otherwise been eligible to receive benefits under Paragraph 5.1 of this Plan
shall be entitled to receive a benefit. The benefit is then payable under
Paragraph 5.1, or Paragraph 5.2, as applicable.
5.5.1 Such benefit for a Participant listed in Exhibit A shall be
equal to the amount of benefit as determined under Subparagraph 5.1.1
except that the Final Average Compensation of such Participant shall
be determined as of the last day of the month immediately preceding
the first month such Participant became eligible to receive benefits
under the Cort Furniture Rental Long Term Disability Plan and he will
continue to be credited with Years of Service as long as he is
eligible for and actually and regularly receiving benefits under the
Cort Furniture Rental Long Term Disability Plan regardless of whether
such Years of Service would have been credited to him under the Cort
Furniture Rental Investment Savings and Profit Sharing Retirement
Plan.
5.5.2 The benefit of a Participant listed in Exhibit B shall be
equal to the benefit determined under Paragraph 2.3 as of the last day
of the month immediately preceding the first month in which such
Participant becomes eligible for benefits under the Cort Furniture
Rental Long Term Disability Plan except that for purposes of
calculating his Vested Account balance under Paragraph 1.11 the
factor shall equal 1.0 and the Vested Account of such Participant will
continue to share in the gains or losses such Participant's Vested
Account actually incurred in the grantor trust maintained for the Plan
under Internal Revenue Code Section 671 as of the last day of the
month immediately preceding any subsequent payment.
ARTICLE VI. FORM OF BENEFIT PAYMENTS.
6.1. Form of Benefit Payments for Participants listed in Exhibit A.
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<PAGE>
6.1.1. Normal Form. The normal form of benefit for Participants
listed in Exhibit A under this Plan will be an annuity for the
Participant's life with no further benefits payable following the
Participant's death.
6.1.2. Alternate Forms. A Participant listed in Exhibit A will be
able to elect a form of retirement benefit from among the following
methods of payment:
(a) A reduced annuity for the Participant's life with the
provision that if the Participant dies before receiving 180
payments, payments in the same amount as those being received by
the Participant will continue to be made to the Participant's
Designated Beneficiary(ies) as determined according to Article IX
until the total number of payments to the Participant and the
Designated Beneficiary(ies) is 180; or
(b) A reduced annuity for the life of the Participant with
the provision that an amount equal to 50% of the amount payable
to the Participant will be paid to the Participant's surviving
spouse, if any, for so long as that spouse survives the
Participant.
The actuarial methods and assumptions used to convert the normal form of benefit
into either of the alternative forms of benefit payment will be based upon the
UP-1984 Table assuming an interest rate of seven percent (7%) per year.
6.2 Form of Benefit Payments for Participants Listed in Exhibit B.
6.2.1. Termination at Normal Retirement Date. A Participant who
terminates employment during the month immediately preceding his
Normal Retirement Date will receive his Normal Retirement Benefit in a
lump sum as soon as practicable following his termination of
employment.
6.2.2. Termination at Late Retirement Date. A Participant who
terminates employment following his Normal Retirement Date shall
receive his Late Retirement Benefit in a lump sum as soon as
practicable following his termination of employment.
6.2.3. Termination at Early Retirement Date and Before Normal
Retirement Date. The
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<PAGE>
benefit of a Participant who has attained his Early Retirement Date
but not his Normal Retirement Date shall first be determined under
Paragraph 2.3 and then 6% of such amount shall be distributed to him
as soon as practicable following his Early Retirement Date. The
remaining balance in the Vested Account will continue to share in the
gains or losses such Participant's Vested Account actually incurred in
the grantor trust maintained for the Plan under Internal Revenue Code
Section 671 as of the last day of the month immediately preceding any
subsequent payment. Twelve (12) months following his Early Retirement
Date he shall again receive a payment equal to 6% of such amount. The
balance shall be paid to him in a lump sum eighteen (18) months from
his termination of employment.
6.2.4. Termination Before Early Retirement Date. A Participant
whose employment terminates under Paragraph 5.1 will receive a lump
sum payment as soon as practicable following the month that is 18
months from the date in which termination occurred.
ARTICLE VII. NON-COMPETITION
7.1. Period of Non-Competition. By receiving benefits under this Plan,
the Participant agrees to refrain for a period of eighteen (18) months from the
date his employment with Cort terminates, unless he is terminated without Cause
or has a substantial reduction in duties and responsibilities or Compensation,
from engaging as a principal, employee, partner or stockholder in any business
engaged in by Cort, excluding stock ownership not exceeding five percent (5%) of
the issued and outstanding capital stock of any corporation engages in such
activity.
ARTICLE VIII. FORFEITURE OF BENEFITS
8.1. Termination for Cause. The Accrued Benefit or Account balance
under the Plan shall be forfeited in the event of prohibited conduct on the part
of the Participant, as defined in any employment agreement in effect between
Cort and the Participant at the time of the alleged violation.
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<PAGE>
The Participant will be provided with notice of an alleged violation and with an
opportunity to correct any alleged prohibited conduct prior to any forfeiture.
8.2. Competition. A Participant who violated the Non-Competition
provision of Article VII after terminating his employment with Cort, shall
forfeit all remaining rights to any benefits under the Plan.
ARTICLE IX. DESIGNATED BENEFICIARY(IES)
9.1. Procedure for Designation of Beneficiary. Each Participant shall
designate in writing to the Plan Administrator a Beneficiary(ies) who may be the
Participant's spouse or children, including adopted children to receive any
Death Benefit payable under Article VI. Any Beneficiary designation may be
revoked or modified at any time by such Participant. Notwithstanding Article VI,
no death benefit shall be payable with respect to a Participant who is not
survived by a validly designated Beneficiary(ies), nor shall any death benefit
be payable following the death of the last of the Participant's designated
Beneficiaries.
ARTICLE X. FUNDING
10.1 Irrevocable Grantor Trust. Cort has established an irrevocable
grantor trust within the meaning of Section 671 of the Internal Revenue Code of
1986, as amended, entitled "Agreement for Irrevocable Trust Under Cort Furniture
Rental Supplemental Executive Retirement Plan" ("Trust") to assist in payment of
its obligations under this Plan. That Trust will receive such periodic infusions
of capital as may be determined by Cort based on the actuarial equivalent
computed lump-sum value of the Accrued Benefit, as defined in Paragraph 1.2. In
addition, each year the Trust will receive an Annual Contribution as defined in
Paragraph 1.3. The assets in the Trust shall remain part of the general assets
of Cort, and no person, including a Participant, claiming benefits under this
Plan will have any right,
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<PAGE>
title, or interest in such Trust. The creation of the Trust does not cause the
Plan to be other than "unfunded" four purposes of Title I of the Employee
Retirement Income Security Act of 1974.
ARTICLE XI. PARTICIPANT AS GENERAL CREDITOR
11.1. Benefits Unsecured. The rights of any Participant to benefits
under the Plan or Trust prior to actual receipt of such benefits shall be
limited to those of a general unsecured creditor of Cort.
ARTICLE XII. MISCELLANEOUS
12.1 Withholding of Taxes. The rights of a Participant to payments
under this Plan shall be subject to Cort's obligations to withhold from such
payments any income or owner tax on such payments.
12.2. Alienation or Assignment of Benefits. The benefits payable under
this Plan shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, charge or seizure. Any attempted
alienation or assignment of benefits hereunder shall be void and of no force or
effect.
12.3. No Implied Rights. Nothing in this Plan shall be deemed to:
(a) give to any employee of Cort, including a Participant in
this Plan, the right to be retained in the employ of Cort or to
interfere with the right of Cort to dismiss any employee of Cort
at any time, or
(b) give to any Participant or beneficiary any right to any
payment or benefits except as specifically provided for in the
Plan.
12.4 Amendment and Termination. The Plan may be amended or terminated
by the Board at any time. No amendment or termination shall serve to reduce the
benefits accrued pursuant to Article VI above by any Participant up to the date
of such action.
12.5 Governing Law. This Plan shall be construed in accordance with and
governed by
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Virginia law.
12.6 Construction. Wherever applicable, the masculine pronoun shall
mean or include the feminine pronoun, and words used in the singular shall
include the plural, and vice versa.
12.7. Effective Date. This Plan as revised shall take effect as of
January 1, 1996.
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<PAGE>
EXHIBIT A
Targeted Percentage
Date of of Final Average
Name of Participant Participation Compensation
- ------------------- ------------- ------------
1. Robert O'Malley 12/4/89 55
2. Paul N. Arnold 12/4/89 55
3. Allen B. Shuttleworth 12/4/89 50
4. Steven D. Jobes 12/4/89 50
5. Lloyd Lenson 12/4/89 50
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<PAGE>
EXHIBIT B
Part I
Date of
Name of Participant Participation Job Classification
- ------------------- ------------- ------------------
a. Edward J. Beer 1/1/93 Staff Vice President
b. Warren Hemm 1/1/93 Operating Group Vice President
c. Frank Martini 1/1/95 Operating Group Vice President
d. Anthony Bellerdine 1/1/95 Operating Group Vice President
e. Frances Ziemniak 1/1/96 Operating Group Vice President
f. Michael Connors 1/1/96 Staff Vice President
Part II
Date of
Name of Participant Participation Job Classification
- ------------------- ------------- ------------------
a. Charles M. Egan 12/21/93 Not Applicable
- 17 -
EXHIBIT 10.9
IRREVOCABLE TRUST
under
Cort Furniture Rental Supplemental Executive Retirement Plan
Dated October 28, 1992
Date of this Agreement:
June 1, 1996
<PAGE>
TABLE OF CONTENTS
ARTICLE I - General Provisions
1.01 Irrevocable .......................................................... 2
1.02 Effective Date ....................................................... 2
1.03 Definitions .......................................................... 2
1.04 General Scope of Trustee's Duties .................................... 2
ARTICLE II - Establishment and Acceptance of Trust
2.01 Establishment of Trust ............................................... 3
2.02 Acceptance of Trust .................................................. 3
2.03 Contributions to the Plan ............................................ 3
2.04 Prior Trustees ....................................................... 3
2.05 Segregation of Plan Assets ........................................... 3
ARTICLE III - Allocation of Authority
3.01 Plan and Trust Administration ........................................ 4
3.02 Identity of Plan Administrator ....................................... 4
3.03 Communications ....................................................... 5
3.04 Certifications, Instructions, etc .................................... 5
3.05 Retention of Advisers ................................................ 6
3.06 Other Services by the Trustee ........................................ 6
ARTICLE IV - Payments from the Trust Fund
4.01 Directions by Plan Administrator ..................................... 7
4.02 Segregation of Assets for Payments ................................... 8
4.03 Disputes ............................................................. 8
ARTICLE V- Investment of the Trust Fund
5.01 Investment Discretion in General ..................................... 9
5.02 Investment Powers .................................................... 9
5.03 Location of Indicia of Ownership ..................................... 10
5.04 Employer Securities and Real Property ................................ 10
5.05 Bank Securities, Deposits, and Collective Trust Funds ................ 11
5.06 Insurance Contracts .................................................. 11
<PAGE>
5.07 Cash ................................................................ 11
5.08 Diversification of Investments ...................................... 11
5.09 Trustee's Liability ................................................. 11
ARTICLE VI - Plan Funding Policy and Direction of Investments
6.01 Plan Funding Policy ................................................. 12
6.02 Named Fiduciaries ................................................... 12
6.03 Investment Managers ................................................. 12
ARTICLE VII - Trustee Powers
7.01 Trustee Powers ...................................................... 14
ARTICLE VIII - Compensation. Expenses and Taxes
8.01 Compensation ........................................................ 17
8.02 Expenses ............................................................ 17
8.03 Taxes ............................................................... 17
8.04 Charge Upon the Trust Fund .......................................... 17
ARTICLE IX- Records and Accountings
9.01 Record Keeping ...................................................... 18
9.02 Annual and Final Accountings ........................................ 18
9.03 Judicial Accountings ................................................ 19
9.04 Other Accountings ................................................... 19
9.05 Federal Filings ..................................................... 19
9.06 Valuation of the Trust Fund ......................................... 19
ARTICLE X - Resignation or Removal of Trustees
10.01 In General .......................................................... 20
10.02 Successor Trustee ................................................... 20
10.03.Transfer of Assets .................................................. 20
<PAGE>
ARTICLE XI - Amendment and Termination
11.01 Amendment of Agreement of Trust ................................... 21
11.02 Termination of Plan and Trust ..................................... 21
11.03 Distribution of Assets Upon Termination ........................... 21
11.04 Retention of Certain Assets ....................................... 21
ARTICLE XII - Dissolution. Merger etc.
12.01 The Trustee ....................................................... 22
12.02 The Employer ...................................................... 22
12.03 The Plan .......................................................... 22
ARTICLE XIII - Miscellaneous Provisions
13.01 Applicable Law .................................................... 23
13.02 Spendthrift Clause ................................................ 23
13.03 Necessary Parties to Judicial Proceedings ......................... 23
13.04 Bond .............................................................. 23
13.05 Indemnification ................................................... 23
13.06 Irrevocability .................................................... 24
13.07 Counterpart ....................................................... 24
<PAGE>
IRREVOCABLE TRUST
under
Cort Furniture Rental Supplemental Executive Retirement Plan
THIS AGREEMENT is made this 1st day of June, 1996, between Cort
Furniture Rental Corporation (the "Employer"), and Mentor Trust Company,
Virginia (the "Trustee"),
WITNESSETH
WHEREAS, the Employer has established the Cort Furniture Rental
Supplemental Executive Retirement Plan (the "Plan"), dated October 28, 1992; and
WHEREAS, the Employer wishes to establish with the Trustee a successor
trust (the "Trust") to hold, invest, and administer the amounts held in and to
be contributed to the Plan, in order to replace Crestar Bank, N.A., the previous
trustee;
NOW, THEREFORE, the Employer and the Trustee, each intending to be
legally bound, agree as follows:
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ARTICLE I
General Provisions
1.01 Irrevocable Trust. The Trust established and maintained according
to this Agreement of Trust is intended to qualify as an irrevocable grantor
trust within the meaning of Section 671 of the Internal Revenue Code of 1986, as
amended, the assets of which remain part of the general assets of the Employer.
The creation of the Trust does not cause the Plan to be other than "unfunded"
for purposes of Title I of the Employee Retirement Income Security Act of 1974
("ERISA").
1.02 Effective Date. The effective date of this Agreement of Trust is
June 1, 1996.
1.03 Definitions. The terms used herein shall have the meanings given
to them by ERISA or the official text of the Plan, unless the context clearly
indicates a different meaning.
1.04 General Scope of Trustee's Duties.
(a) The duties of the Trustee with respect to the Plan shall be solely
as provided in this Agreement of Trust. The Trustee shall not be a party to
the Plan. The Trustee shall discharge its duties under this Agreement of
Trust in accordance with all applicable laws.
(b) If any assets of the Plan are held by any insurance company or
trustee other than the Trustee, the Trustee shall have the duties specified
in this Agreement of Trust with respect only to those assets of the Plan
which are held hereunder, and, except to the extent otherwise required by
applicable law, shall have no liability for any loss to the Plan arising
from any act or omission by any such insurance company or other trustee.
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ARTICLE II
Establishment and Acceptance of Trust
2.01 Establishment of Trust. The Employer hereby establishes with the
Trustee a trust consisting of such sums of money, and such property acceptable
to the Trustee, as shall from time to time hereafter be paid or delivered to the
Trustee under the Plan, and only with respect to such sums of money or other
acceptable property. All such money and property, all investments and
reinvestments made therewith and proceeds thereof, and all earnings and profits
therein, less any losses thereon, and less the payments which at the time of
reference shall have been made by the Trustee as authorized herein are referred
to as the "Trust Fund." The Trust Fund shall be all of the assets held from time
to time within the account of the Trust Fund. No assets in excess of those
attributable to the Plan shall be used to pay benefits or expenses under the
Plan. The Trustee shall hold, invest, and deal with the Trust Fund in accordance
with this Agreement of Trust.
2.02 Acceptance of Trust. The Trustee hereby accepts the Trust
established hereunder.
2.03 Contributions to the Plan. The Trustee shall not be responsible
for calculating or collecting any contributions due under the Plan, and shall be
accountable solely for contributions actually received by it. The Trustee shall
not be responsible for the accuracy of any amount received or for determining
whether or not the amount is in accordance with the requirements of the Plan.
The Employer will be solely responsible for determining the contributions to be
made under the Plan, the accuracy thereof, for delivering the same to the
Trustee, and for complying with any law applicable to contributions to the Plan.
2.04 Prior Trustees. The Trustee is not responsible for pursuing Plan
assets held by any prior trustee or any trustee with respect to other assets of
the Plan, and shall be responsible only for property received by it. The Trustee
will have no duty to inquire into actions taken under the Plan by any prior
trustee, or by any trustee with respect to other assets of the Plan.
2.05 Segregation of Plan Assets.
(a) Although assets of the Plan are held in Trust hereunder, the
assets remain the sole property of the Employer, subject to the Employer's
control; the Employer acknowledges that the assets of the Plan remain
subject to the claims of Employer's creditors.
(b) The assets of the Plan shall be returned to the Employer or
distributed to participants in the Plan, according to the Employer's
instructions. All instructions given by the Employer to the Trustee with
respect to the Trust Funds held hereunder shall be in accordance with the
terms of the Plan documents.
(e) Upon termination of the Plan, any residual Plan assets which
remain in the Trust Fund after making distributions to participants
according to the Employer's instructions, shall be returned to the
Employer.
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ARTICLE III
Allocation of Authority
3.01 Plan and Trust Administration. Except as otherwise provided in
3.06, the Trustee shall not be responsible for administration or interpretation
of the Plan, but shall be responsible solely for the directed investment and
safekeeping of the Trust Fund.
3.02 Identity of Plan Administrator.
(a) The Employer shall from time to time notify the Trustee in writing
of the identity of the person or persons, or of the members of the
committee or committees, that are acting as the "Administrator" of the
Plan. Unless and until notified to the contrary, the Trustee shall assume
that the Employer is acting as Plan Administrator of the Plan. All
references in this agreement to the Plan Administrator mean the Employer
unless and until the Employer appoints a different Plan Administrator and
so notifies the Trustee. If the Employer, acting as Plan Administrator,
retains the services of one or more contract record-keeping firms (Agent
Firms) for the purpose of maintaining Plan participant account records,
filing required reports or returns with the Internal Revenue Services, the
Department of Labor or other governmental agencies or for other, similar,
duties, such Agent Firms will be identified by the Employer to the Trustee
and the Trustee may accept information and instructions from Agent Firms as
if received from the Plan Administrator. The Employer agrees to indemnify
and hold Trustee harmless from any loss resulting from reliance by Trustee
on information or instructions delivered to Trustee by an Agent Firm,
unless and until Trustee has been informed by Employer that the services of
such Agent Firm have been terminated by Employer.
(b) The Trustee is authorized and directed to accept and deliver
information and accept instructions for Plan distributions from the Plan
Administrator or from one or more Agent Firms.
(c) Except as otherwise provided in 3.02 and 3.03, any power held by
the Employer under this Agreement of Trust shall be exercised through
resolutions adopted by the board of directors of the Employer.
(d) Any power held by the Employer under this Agreement of Trust which
is delegated by the Employer to any other person or committee shall be
exercised by such person or committee. The Employer shall from time to time
notify the Trustee in writing of the identity of such person, or of the
members of such committee, and the scope of the responsibility and power so
delegated.
(f) Unless it receives notice to the contrary from the Employer, the
Trustee shall be fully protected in assuming that any appointment or
delegation described in this section remains in effect unchanged. At the
Trustee's request, the Employer shall provide evidence satisfactory to the
Trustee that any such appointment or delegation has been properly made in
accordance with
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the terms of the Plan and any applicable laws. At the Trustee's request,
the Employer shall provide specimen signatures of any persons described in
this section.
3.03 Communications.
(a) Any direction, certification, or notice (hereinafter referred to
as "communications") from the Employer, or from any person or committee
involved in the administration of the Plan, to the Trustee shall be made or
confirmed in writing in a manner acceptable to the Trustee. Communications
from a committee shall be signed by a majority of its members, except that
if the Trustee is notified in writing by a majority of the members of the
committee that future communications may be signed by a lesser number of
members, and given the number or names of members of the committee who may
sign future communications, the Trustee may rely on communications signed
by such lesser number of members as being authorized by and reflecting the
action of the committee.
(b) Communications to the Trustee shall be addressed to the Trustee's
principal office at 901 East Byrd Street, Richmond, Virginia 23219.
Communications to the Employer or to any person or committee involved in
the administration of the Plan shall be sent to the principal office of the
Employer, or to such other address as may be specified in a written
instrument delivered to the Trustee. No communication shall be binding
until received. Communications sent by facsimile machine will be followed
up by regular communication sent to the above address.
(c) The Trustee shall be fully protected in acting upon any
communication, instrument or other paper believed by it to be genuine and
to be signed or presented by the proper person or persons, and the Trustee
shall be under no duty to make any investigation or inquiry as to any
statements contained in any such communication but may accept the same as
conclusive evidence of the truth and accuracy of the statements therein
contained.
3.04 Certification, Instructions, etc.
(a) The Employer shall provide to the Trustee, at the Trustee's
request, such certification and/or other evidence of fact as the Trustee
may deem desirable in order to permit the Trustee to perform its duties,
exercise its powers. The Trustee shall be fully protected in relying upon
such certifications and other evidence.
(b) If at any time the Trustee is in doubt concerning the course it
should follow under this Agreement of Trust (except as to any decision
which is expressly entrusted to the Trustee's discretion hereunder), it may
request instructions from the Employers or the Plan Administrator, and may
refrain from taking the questioned action until it receives such
instructions. The Trustee shall be fully protected in acting or not acting
in reliance upon such instructions.
(c) The Employer shall keep the Trustee supplied with current and
correct copies of all Plan documents and instruments.
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(d) The Trustee shall be under no duty to question any communication
of the Employer or Plan Administrator. The Trustee shall not be responsible
for any financial losses incident to, or any other liabilities resulting
from, errors, mistakes, or omissions contained in such communications.
3.05 Retention of Advisers. The Trustee may consult with legal counsel
and other professional advisers (who may but need not be its own counsel or
adviser, or counsel or adviser to the Employer, the Plan or to any Plan
participant or beneficiary) with respect to the meaning and construction of this
Agreement of Trust or its powers, duties, and conduct hereunder. The Trustee
shall be fully protected in acting pursuant to, or relying upon, the advice of
such legal counsel or advisers. Pursuant to 8.02, the Trustee may in the
retention of such advisers, receive reimbursement for expenses incurred from the
Trust Fund.
3.06 Other Services by the Trustee. The Employer, or the Plan
Administrator (if other than the Employer) may at any time, with the consent of
the Trustee, employ the Trustee in its corporate (not its fiduciary) capacity as
agent to perform "ancillary services" or services necessary for the
establishment or operation of the Plan. Any such agency relationship shall be
established by a separate written agreement, and the existence of such
arrangement, and actions performed by the Trustee under such arrangement, shall
not affect its responsibilities or liabilities as Trustee under this Agreement
of Trust. Any such services shall be provided at such reasonable rate of
compensation, as may be agreed upon between the Employer and the Trustee.
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ARTICLE IV
Payments from the Trust Fund
4.01 Directions by Plan Administrator.
(a) The Trustee shall make payments out of the Trust Fund in such form
as the Plan Administrator may from time to time direct in writing for the
payment of Plan benefits, the purchase of annuity contracts, or the payment
of expenses of administering the Trust Fund or the Plan. Any such direction
shall specify that the payment is made for one or more of the purposes
listed herein, but need not describe the specific application to be made of
the payment. The Trustee shall not pay any Plan benefits without such
directions, even though it may be informed from other sources (including,
without limitation, a Plan participant or beneficiary) that benefits are
payable under the Plan. The Trustee shall have no responsibility to
determine when, to whom, or in what amount benefits are payable under the
Plan. The Plan Administrator may give directions as to payments and
distributions from the plan directly to agent firms, in which case, the
entry concerning such payment or distribution transaction on the account
statement of the agent firm will constitute notice by the Plan
Administrator to the Trustee.
(b) Any such direction shall constitute a certification by the Plan
Administrator that the direction is consistent with the terms of the Plan,
and any applicable laws, and the Trustee shall be fully protected in
relying upon any such certification, unless the Trustee knows or should
know that it is improper.
(c) All amounts to be distributed to participants under the plan shall
be paid by the Trustee to the Plan Administrator. The Plan Administrator
shall be responsible for calculating withholding taxes to be deducting from
distributions to participants, making the deposit of withholding taxes,
payment of the net amount of each distribution (after deducting withholding
taxes) to participants and filing all tax and other returns and reports,
required in connection with distributions from the plan.
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4.02 Segregation of Assets for Payments. At the direction of the Plan
Administrator, the Trustee shall segregate any designated portion of the Trust
Fund for the purpose of making distributions under the Plan, and shall
separately invest such portion in accordance with the instructions of the Plan
participant entitled to the distribution.
4.03 Disputes. If a dispute arises as to any payment or delivery, such
payment or delivery shall be suspended until the dispute is finally resolved by
a court of competent jurisdiction, or finally settled in writing by all of the
parties concerned. The Trustee reserves the right to bring interpleader or other
appropriate actions in courts of competent jurisdiction to determine how
distributions of certain assets shall be made.
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ARTICLE V
Investment of the Trust Fund
5.01 Investment Discretion in General.
(a) The Trustee shall invest and reinvest the Trust Fund, without
distinction between principal and income, exactly according to the
directions given to it by the Employer. The Employer may direct the Trustee
to invest the Trust Fund in mutual funds or in a portfolio of securities,
under the management of an investment manager appointed by the Employer
pursuant to 6.03 of this Agreement.
(b) The Trustee shall not be obligated to restrict Trust Fund
investments to property of a character authorized for investment by
trustees under the law of any state, district or territory.
5.02 Investment Powers. In addition to any power granted to trustees
under any statutes or other law, including (but not limited to) ss.26-45.1 of
the Code of Virginia (which statutes and other laws, to the extent they grant
investment powers applicable to trusts of the same or similar nature to this
Trust, are incorporated herein by reference), in following the investment
directions of an investment manager that may be appointed pursuant to 6.03 of
this Agreement, the Trustee's investment powers shall include, but shall not be
limited to, investment in the following:
(a) common and preferred stocks of domestic or foreign issuers,
including warrants, rights, and preferred stocks convertible into common
stock, and covered call option contracts, regardless of where or how
traded, subject however to the restrictions set forth in 5.04 and 5.05(a).
(b) corporate bonds and debentures (whether or not convertible into
common stock) of domestic or foreign issuers, subject however to the
restrictions set forth in 5.04 and 5.05(a).
(c) bonds and other obligations of the United States of America or of
any foreign nation, and any agencies thereof, and any bonds and other
obligations which are directly or indirectly guaranteed by the United
States or any foreign nation, or any agency thereof;
(d) obligations of the states, municipalities and any agencies
thereof;
(e) interests or participations in real estate investment trusts;
(f) leaseholds of any duration;
(g) mineral and other natural resources, including, but not limited
to, oil, gas, timber and coal, and any participation therein in any form,
including but not limited to, royalties, ownership, drilling, and
exploration;
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(h) open-end and closed-end investment companies, regardless of the
purposes for which such fund or funds were created and whether or not such
investment companies are managed by affiliates of the Trustee;
(i) any partnership, limited or general, joint venture, and other
forms of joint enterprise created for any lawful purpose;
(j) savings accounts, master savings accounts, certificates of
deposit, and other types of deposits with any financial or quasi-financial
institution, domestic or foreign, subject however to the restrictions set
forth in 5.05(b);
(k) any short-term or cash-equivalent common or collective trust fund,
and any pooled commercial paper master note, subject however to the
restrictions set forth in 5.05(c); and
(1) any common or collective trust, exempt under section 501(a) of the
Code, which is now or hereafter maintained by a bank or trust company
exclusively for the collective investment of assets of trust funds,
including, in accordance with 5.05(c), any such common or collective trust
maintained by the Trustee. To the extent of the Trust Fund's interest in
any such common or collective trust, the terms of the agreement or
declaration of trust establishing such common or collective trust shall be
a part of this Agreement of Trust as if set forth in full herein, and any
assets transferred to any such common or collective trust shall be held,
invested, and administered in accordance with such agreement or declaration
of trust, which shall be controlling notwithstanding any contrary provision
of this Agreement of Trust. Without limitation of the foregoing, the time
and manner of withdrawals from any common or collective trust shall be
established in the discretion of the trustee of such trust, and the
responsibility for diversification of investments held under such common or
collective trust shall be as provided for in such agreement or declaration
of trust. For the purposes of valuing any interest under the Plan, the
value of the Trust Fund's interest in such common or collective trust shall
be the fair market value of the common or collective trust-fund units held
by the Trust Fund, determined in accordance with generally recognized
valuation procedures. The power to invest under this subsection shall be
subject to the restrictions set forth in 5.05(c).
5.03 Location of Indicia of Ownership. The Trustee shall not maintain
the indicia of ownership of any asset of the Trust Fund outside the jurisdiction
of the District Courts of the United States.
5.04 Employer Securities and Real Property.
(a) No portion of the Trust Fund shall be invested in any "employer
securities" or "employer real property" (as such terms are defined under
ERISA).
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5.05 Bank Securities, Deposits, and Collective Trust Funds.
(a) Subject to 5.05 (b), and (c), no portion of the Trust Fund shall
be invested in securities issued by Mentor Trust Company or any affiliate
thereof.
(b) The Trustee shall not borrow from the Mentor Trust Company,
Virginia, except for temporary advancements or on a cash or overdraft
basis.
(c) The Trustee is authorized to invest any portion of the Trust Fund
in interests in any common or collective trust fund maintained by the
Trustee, if so directed by the Employer.
5.06 Insurance Contracts. No portion of the Trust Fund shall be
invested in any individual or group insurance policy or contract.
5.07 Cash. At the direction of the Plan Administrator or Investment
Manager, if any is appointed pursuant to 6.03 of this Agreement, the Trustee
shall keep a portion of the Trust Fund in cash or cash equivalents in order to
meet the short-term liquidity needs of the Plan. The Trustee shall not be liable
for any interest on any cash or cash equivalents so maintained.
5.08 Diversification of Investments. The Plan Administrator or
Investment Manager, if any is appointed pursuant to 6.03 of this Agreement,
shall be responsible for diversifying all the investments of the Trust Fund so
as to minimize the risk of large losses, unless under the circumstances it would
be clearly prudent not to do so. The Trustee's responsibility in this regard is
to limited to following exactly the directions given to it, pursuant to 5.01 (a)
of this Agreement.
5.09 Trustee's Liability.
(a) The Trustee shall not be liable for the acts or omissions of the
Plan Administrator or Investment Manager, if any is appointed pursuant to
6.03 of this Agreement. The Trustee shall have no responsibility or
liability for any loss of income or of capital, nor for any unusual expense
which the Trustee may incur, relating to any investment, or to the sale or
exchange of any asset. The Trustee shall not act as an investment adviser
to the Plan and shall not have any duty to question the directions
regarding the purchase, retention, or sale of any asset given to the
Trustee pursuant to 5.01 (a) of this Agreement. The Trustee shall not be
liable to anyone for any loss sustained by the Trust Fund, for any
inadequacy of the Trust Fund to meet or discharge any Plan payments or
liabilities, or for any act or omission in the administration of this
Agreement of Trust, except to the extent that this results from action or
inaction on the part of the Trustee which is judicially determined to be a
breach of its fiduciary duties, the terms of this Agreement or of
applicable law. The Trustee shall not be liable for any claims for benefits
under the Plan, and all of such claims shall be limited to the Trust Fund.
(b) The Trustee shall not be liable for any breach of fiduciary
responsibility by any other fiduciary with respect to the Plan.
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ARTICLE VI
Plan Funding Policy and Direction of Investments
6.01 Plan Funding Policy.
(a) The Plan Administrator shall provide a procedure for establishing
and carrying out a funding policy and method consistent with the Plan's
objectives.
6.02 Named Fiduciaries.
(a) If the Trustee is subject to the direction of an Investment
Manager pursuant to 6.03 of this Agreement, whether or not such Investment
Manager is a Named Fiduciary, the Trustee shall follow the directions of
such Investment Manager which the Trustee determines to be proper and made
in accordance with the terms of the Plan.
(b) The Trustee shall not be liable on account of having acquired,
retained or sold any investment or reinvestment made in accordance with a
direction of an Investment Manager appointed pursuant to 6.03 of this
Agreement unless it shall have been judicially determined that any loss
resulting from such acquisition, retention or sale was due to the willful
misconduct of the Trustee or its failure to act in good faith in accordance
with the provisions of this Agreement.
6.03 Investment Managers.
(a) If an Investment Manager is appointed by the Employer pursuant to
this Agreement and the Plan, to manage all or a specified portion of the
assets the Trust Fund, the Plan Administrator shall notify the Trustee of
the effective date of the appointment, and shall certify to the Trustee
that such appointment complies with the Plan, and that all powers of the
Employer or the Plan Administrator under this Agreement of Trust which are
to be exercised by such Investment Manager have been duly delegated to such
Investment Manager. The Plan Administrator shall furnish the Trustee with a
duly executed copy of the written agreement between the Plan Administrator
and the Investment Manager specifying the Trust assets to be managed and
the Investment Manager's duties and responsibilities with respect to such
assets. The Investment Manager shall also certify to the Trustee its
acceptance of its appointment, shall acknowledge that it is a fiduciary
under the Plan, shall certify the identity of the person or persons
authorized to give instructions or directions on its behalf, and shall
provide specimen signatures of such persons. The Trustee shall be fully
protected in relying on any written communication purporting to be signed
by such persons on behalf of the Investment Manager as being the act of the
Investment Manager. The Trustee may continue to rely upon any
certification, agreement, or undertaking under this subsection until
otherwise notified in writing by the Plan Administrator, the Employer or
the Investment Manager.
(b) If the Investment Manager resigns or is removed, the Plan
Administrator or the Employer shall immediately notify the Trustee. The
Trustee shall be fully protected in assuming
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that the appointment of an Investment Manager remains in effect until it
receives such notice to the contrary from the Plan Administrator or the
Employer.
(c) During the period of the Investment Manager's authority, the
Trustee shall accept instructions for the investment and reinvestment of
the managed account solely in accordance with the written directions of the
Investment Manager, and the Trustee shall act solely as custodian of such
assets in the Trust Fund. The period of the Investment Manager's authority
shall commence on the effective date of its appointment as stated by the
Plan Administrator or the Employer, or (if later) upon the Trustee's
receipt of all certifications and notifications required under 6.03(a), and
shall end on the date the Trustee is notified of such Investment Manager's
resignation or removal, or such later date as may be specified in such
notice. When the period of the Investment Manager's authority ends, the
Trustee shall invest and reinvest the assets of the account, theretofore
managed by such Investment Manager, only as directed by the Employer or
Plan Administrator.
(d) During the period of the Investment Manager's authority, the
Trustee shall be under no liability for loss of any kind which may result
by reason of any action taken by it in accordance with any direction of
such Investment Manager, by reason of its failure to exercise any power
because of the failure of such Investment Manager to give directions, or by
reason of any act or omission of the Investment Manager. If the Trustee
does not receive directions from the Investment Manager with respect to any
part of the Trust Fund designated to the Investment Manager, the Trustee
shall hold such amounts in cash or cash equivalents. The Trustee shall have
no duty to determine or inquire into whether or not directions from the
Investment Manager are proper and lawful under the Plan, no duty to review
any investment to be acquired, held, or disposed of pursuant to such
directions, no duty to make investment recommendations, and no duty to
invest or otherwise manage any asset in the appropriate portion of the
Trust Fund. Any duty of supervision or review of the acts or omissions of
an Investment Manager shall be the exclusive responsibility of the Plan
Administrator. The Trustee shall be fully protected by the Employer in
acting or not acting pursuant to any direction from the Investment Manager,
or in failing to act in the absence of any such direction.
(e) An Investment Manager that is an Investment Advisor registered as
such under the Investment Advisors Act of 1940 and is affiliated with the
Trustee through ownership by a common parent may be chosen by the Employer
or Plan Administrator pursuant to 6.03 of this Agreement.
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ARTICLE V11
Trustee Powers
7.01 Trustee Powers.
(a) At the direction of the Employer, Plan Administrator or Investment
Advisor, and except to the extent inconsistent with applicable law or with
provisions of the Plan and Trust, the Trustee shall have the following
powers regarding the Trust and Trust Fund:
(1) To sell at public or private sale, exchange, convey,
transfer, lease or otherwise dispose of, and to grant options with
respect to all or any part of any property at any time held in the
Trust Fund, for such considerations, in cash or in credit, and upon
such terms and conditions, as it shall deem advisable; provided that
any put or call options held in the Trust Fund shall be traded on and
purchased through a national securities exchange registered under the
Securities Exchange Act of 1933, as amended, or, if not traded on a
national securities exchange, guaranteed by a member firm of the New
York Stock Exchange.
(2) To compromise or settle any claim in respect of any debt or
other obligation due to it as Trustee hereunder, to institute and
prosecute any and all legal proceedings (including foreclosure
proceedings) on behalf of the Plan, and to take any other action for
the purpose of enforcing any such claim, and to change the rate of
interest or extend the maturity date of any such debt or obligation.
(3) To compromise or settle any claim with respect to any debt or
other obligation due to third persons from it as Trustee hereunder; to
defend any and all legal proceedings in respect of any such claim; and
to change the rate of interest on, extend the maturity date of, or
otherwise modify the terms of any such debt or obligation.
(4) To join in and become a party to, or to oppose any
reorganization (including any consolidation, merger or other capital
changes) of any corporate securities which may at any time be held in
the Trust Fund, or any plan or agreement for the protection of the
interests of the holders of any such securities; to participate in any
such protective plan or agreement or any such reorganization to the
same extent and as fully as though it were the absolute and sole owner
of such securities; to deposit with any plan administrator or
depository pursuant to any such protective plan or agreement or any
such reorganization any securities held in the Trust Fund; to make
payments from the Trust Fund of and charges or assessments imposed by
the terms of any such protective plan or agreement upon any such
reorganization; and to receive and continue to hold in the Trust Fund
any property allotted to the Trust Fund by reason of the Trustee's
participation therein.
(5) To vote, in person or by general or limited proxy, on any
securities at any time held in the participant's separate account
within the Trust Fund, at any meeting of security
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holders, with respect to any business that may come before the
meeting; so that the participant may execute general or limited
proxies to one or more nominees; so that the participant may consent
to, approve and authorize any corporate act or proceeding, including
any merger on consolidation, lease, mortgage or sale of corporate
property, or dissolution or liquidation, whether or not proposed at
any such meeting; so that each participant may execute such
instruments as may be necessary or appropriate therefore; and so that
each participant may generally exercise the powers of an owner with
respect to stocks, bonds, securities, or other property
(6) To exercise any conversion or subscription rights appurtenant
to any securities at any time held in such participant's separate
account within the Trust Fund or to sell any such rights.
(7) To execute, acknowledge and deliver any and all deeds,
leases, assignments and other instruments that it may deem necessary
or proper in the exercise of any of its powers under this Agreement.
(8) To cause any property at any time held in the Trust Fund to
be registered in the name of a nominee of the Trustee or of an agent
firm, without disclosure of the Trust, or to hold in bearer form any
securities at any time held in the Trust Fund so that they will pass
by delivery, but any such registration or holding by the Trustee or by
an agent firm shall not release the Trustee from its responsibility
for the safe custody and disposition of the Trust Fund, in accordance
with the terms and provisions of this agreement.
(9) To borrow from time to time money from persons or others (but
not from a party in interest) for the purposes of the Trust created
hereby on such terms and conditions as the Trustee may deem advisable.
(10) To employ suitable agents and counsel, and to pay their
reasonable expenses and compensation.
(11) To hold part or all of the Trust Fund uninvested at any
affiliated firm or any agent firm.
(12) To invest and reinvest in open-end and closed-end mutual
funds to such extent as is prudent under the circumstances.
(13) To do all acts, whether or not expressly authorized herein,
which it may deem necessary and proper for the protection of the
property held hereunder, and to carry out the purposes of the Plan.
If there is more than one Trustee designated and acting as such under
this Trust, all actions by the Trustee must be adopted by a majority of the
Trustees.
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(b) In addition and not by way of limitation, the Trustee shall have
any and all powers concerning the investment, retention, and sale of
property held in the Trust Fund as if it were absolute owner of the
property, and no restrictions with regard to the property so held shall be
implied, warranted, or sustained by reason of this Agreement of Trust,
provided, however, the Trustee shall exercise such power only in accordance
with the instructions it receives from the Employer.
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ARTICLE VIII
Compensation, Expenses, and Taxes
8.01 Compensation. The Trustee shall be entitled to receive
compensation for its services as Trustee at the annual rate of 0.15% of the
total value of the assets of the Plan, payable quarterly in arrears based on the
total value of the Trust Fund on the first day of each quarter. For any year
during which the Trustee serves as Trustee for less than the full year of the
plan, the compensation paid to the Trustee pursuant to this paragraph shall be
pro-rated per diem.
8.02 Expenses. The Trustee shall be entitled to reimbursement for all
reasonable expenses properly and actually incurred by it in the performance of
its duties hereunder, including (but not limited to) legal and accounting
expenses, expenses incurred as a result of disbursements and payments made by
the Trustee, reasonable compensation for services rendered to the Trustee by
agents, counsel, and other third parties, and expenses incident to the rendering
of such services. The expenses of the Trustee and the compensation of the
persons rendering such services shall be paid by the Trust Fund, unless
otherwise paid for by the Employer.
8.03 Taxes.
(a) The Trustee shall pay out of the Trust Fund all taxes (including
interest and penalties) of any and all kinds levied or assessed under
existing or future laws against the Trust Fund.
(b) The Trustee shall notify the Plan Administrator of any proposed or
final tax levies or assessments against the Trust Fund concerning which it
receives notice. Unless directed to the contrary by the Plan Administrator
within thirty (30) days after such notification, the Trustee shall pay any
such taxes. If the Plan Administrator so requests in writing within said
period, the Trustee shall contest the validity of such taxes in any manner
deemed appropriate by the Plan Administrator. The Employer may itself
contest the validity of any such taxes, in which case the Plan
Administrator shall so notify the Trustee, and the Trustee shall have no
responsibility or liability respecting such contest. If either party to
this Agreement of Trust contests any such levy or assessments, the other
party shall provide such information and cooperation as the party
conducting the contest shall reasonably request.
8.04 Charge Upon the Trust Fund. All compensation, expenses and taxes
specified in this Article, to the extent that they are not paid or reimbursed by
the Employer, shall constitute a charge upon the Trust Fund, and may be
withdrawn by the Trustee from the Trust Fund. The Trustee may liquidate assets
as it may deem necessary to make such payment. If the amount cannot be withdrawn
from the Trust Fund, it shall be paid by the Employer.
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ARTICLE IX
Records and Accountings
9.01 Record Keeping.
(a) The Trustee shall keep accurate and detailed accounts of all
investments, receipts and disbursements and other transactions hereunder,
and all accounts, books, and records relating thereto shall be open at all
reasonable times to inspection and audit by any person designated by the
Employer or the Plan Administrator. Maintaining copies of account
statements created by any brokerage firm, including an affiliate the
Trustee, with which the Trustee deposits the assets of the Trust Fund,
shall fulfill the Trustee's obligations in this regard. The Trustee need
not keep records of the interests in the Trust Fund of individual
participants and beneficiaries, unless it undertakes in a separate written
agreement with the Employer under 3.06 to keep such records.
(b) All records and accounts maintained by the Trustee with respect to
the Trust Fund shall be preserved for such period as may be required under
any applicable law. Upon the expiration of such period, the Trustee may
destroy such records and accounts, after notifying the Plan Administrator
in writing of its intention to do so and transferring to the Plan
Administrator any of such records and accounts which the Plan Administrator
timely requests. The Trustee shall have the right to preserve all records
and accounts in original form, or on microfilm, magnetic tape, optical disk
or other similar form.
9.02 Annual and Final Accountings.
(a) Within ninety (90) days after the close of each fiscal year of the
Trust Fund, or after the close of such other period as may be agreed upon
between the Trustee and the Plan Administrator, and within ninety (90) days
(or such other period as may be agreed upon) after the effective date of
the removal or resignation of the Trustee, the Trustee shall file with the
Plan Administrator a certified written report setting forth all
contributions, earnings from investments, gains on assets, other receipts,
benefit payments, administrative expenses and other expenses of the Trust
Fund, disbursements, the net income or loss of the Trust Fund, the net
assets at the beginning and end of each accounting period and the net
earnings of the Trust Fund during such period. The Employer, acting as Plan
Administrator, shall be responsible to have all such accounting reports
prepared for the Trustee by the Plan Administrator or by any other
administrator retained by the Employer for such purpose.
(b) Within ninety (90) days after the filing of any such account, the
Trustee shall make available to the Plan Administrator or its designated
agent such additional information, support data, and work papers as the
Plan Administrator may reasonably request in order to determine the
correctness of the Trustee's account and the propriety of the actions of
the Trustee therein reported.
-18-
<PAGE>
(c) Within ninety (90) days after the filing of such account, the Plan
Administrator or its designated agent shall examine such account. If the
Plan Administrator or its designated agent shall discover anything in such
account which leads it to suspect that such account may be incorrect, or
that any action by the Trustee therein reported may have been mistaken or
otherwise improper, the Plan Administrator shall notify the Trustee
thereof. The Trustee's duties with respect to correction of any accounting
report shall be limited to checking the mathematical accuracy of the report
and cooperating with the Employer and the Plan Administrator in seeking
corrections to be made by the Plan Administrator. To the extent permitted
by applicable law, the Trustee shall be forever released and discharged
from all liability and accountability to the Employer, the participants,
the beneficiaries and all other persons with respect to the propriety of
its acts and transactions shown or reflected in such account, except with
respect to any acts or transactions as to which the Plan Administrator
shall file written objections within such ninety (90) day period. If the
Plan Administrator files such objections, and if it is later satisfied that
its objections should be withdrawn, or if the account is adjusted to its
satisfaction, the Plan Administrator shall indicate its approval of the
account in a written statement filed with the Trustee, and the Trustee
shall be forever released and discharged in the same manner as if no
objections had ever been filed.
9.03 Judicial Accountings. Nothing contained in this Agreement of Trust
or in the Plan shall deny the Trustee the right to obtain a judicial settlement
of its accounts at any time.
9.04 Other Accountings. The Employer and the Plan Administrator shall
not be entitled to any accounting by the Trustee other than as provided under
9.02 or as required by law. No participant, beneficiary, or other person other
than the Employer or the Plan Administrator shall be entitled to any accounting
by the Trustee, except as may be required by law.
9.05 Federal and State Filings. The Trustee shall be fully protected in
assuming that the Plan Administrator has timely made any required federal and
state filings.
9.06 Valuation of the Trust Fund. The fair market value of the Trust
Fund shall be determined at least annually, and at such other times as the Plan
Administrator may determine to be necessary in order to administer the Plan.
Each such valuations shall be prepared by the Trustee.
-19-
<PAGE>
ARTICLE X
Resignation or Removal of Trustees
10.01 In General. The Trustee may be removed with or without cause by
the Employer upon five days written notice to that effect delivered to the
Trustee. The Trustee may resign as Trustee hereunder upon thirty days written
notice to that effect delivered to the Employer.
10.02 Successor Trustee. If the Trustee shall resign or be removed, the
Employer shall appoint a successor Trustee, whose duties shall commence as of
the effective date of such removal or resignation. The Plan Administrator or the
Employer shall require the successor Trustee to deliver to the Trustee a written
instrument accepting such appointment. Upon the commencement of its duties, the
successor Trustee shall be vested with the same powers and duties as those
conferred upon the Trustee under this Agreement of Trust. If the Employer fails
to appoint a successor Trustee after appropriate notice, the Trustee may name
the Plan Administrator as Trustee and forward the assets to such successor.
10.03 Transfer of Assets.
(a) As soon as reasonably practicable after the settlement of its
account, or at such earlier time as shall be agreed upon by the parties to
this Agreement, and the successor Trustee, the Trustee shall assign,
transfer, and deliver to the successor Trustee all of the property then
held by it in the Trust Fund, except such amount as the Trustee may reserve
in order to cover its compensation, its expenses in connection with its
administration of the Trust Fund and the settlement of its account, and
payment of any taxes assessed or levied against the Trust Fund for the
period preceding the effective date of its removal or resignation. The
Trustee shall pay over to the successor Trustee any balance of any such
reserve that shall remain after payment of such compensation, expenses, and
taxes. The delivery of assets of the Trust Fund shall not be deemed a
waiver by the Trustee of any lien or claim it may have on the Trust Fund
under 8.04 or otherwise.
(b) If the Trustee holds any property which it deems to be unsuitable
for delivery to the successor Trustee, it shall retain such property. As to
such retained property alone, it shall be co-trustee with the successor
Trustee its duties and obligations being limited solely to any such
retained property.
-20-
<PAGE>
ARTICLE XI
Amendment and Termination
11.01 Amendment of Agreement of Trust. This Agreement of Trust may be
amended at any time and from time to time by a written instrument executed by
the Trustee and the Employer. Provided, however, no amendment shall have the
effect of placing the assets of the Plan beyond the claims of creditors of the
Employer, of revoking this Trust or diminishing the rights of participants to
the benefits in the plan documents, or of granting to any participant or his
beneficiary any right of voluntary or involuntary assignment. The instrument of
amendment shall specify its effective date.
11.02 Termination of Plan and Trust. The Employer reserves the right at
any time and from time to time to terminate the Plan and this trust in whole or
in part by resolution of the board of directors of the Employer. At least ninety
(90) days prior to the proposed effective date of the intended termination, the
Employer shall notify the Trustee in writing of such intended termination.
11.03 Distribution of Assets Upon Termination.
(a) If the Plan is terminated in its entirety, the Trustee shall hold
and/or dispose of the Trust Fund in accordance with the written
instructions of the Employer, under the provisions of the plan documents,
subject to the Trustee's right to receive a written or judicial settlement
of its account. The Trustee may, however, reserve such amount as it deems
advisable to cover its compensation, its expenses in connection with its
administration of the Trust Fund and the settlement of its account, and the
payment of any unpaid taxes assessed or levied against the Trust Fund.
(b) The Trustee shall be fully protected in making distributions in
reliance upon any directions made by the Employer under this section,
unless the Trustee knows such directions to be improper.
(c) If no direction is provided by the Employer as to the holding
and/or distribution of the Trust Fund upon termination of the Plan, the
Trustee shall make such distributions as are specified by the Plan. If the
Plan is silent as to such distributions, or in the opinion of the Trustee
inconsistent with then-applicable law, the Trustee shall distribute the
Trust Fund to Plan participants and beneficiaries in an equitable manner,
for which purpose the Trustee reserves the right to seek a determination
from a court of competent jurisdiction as to the proper method of
distributing the Trust Fund upon termination of the Plan and the trust.
11.04 Retention of Certain Assets The Trustee reserves the right to
retain such property as is not, in the sole discretion of the Trustee, suitable
for distribution at the time of termination of the Plan and this trust. The
Trustee shall hold such property as custodian for those persons or other
entities entitled to such property, until such time as the Trustee is able to
make distribution. The Trustee's duties and obligations with respect to any
property so held shall be purely custodial in nature, and the Trustee shall only
be obligated to see to the safekeeping of such property prior to its
distribution.
-21-
<PAGE>
ARTICLE XII
Dissolution, Merger, etc.
12.01 The Trustee. In the event that the Trustee merges or consolidates
with another corporation or sells or transfers all or substantially all of its
assets and business to another corporation, or is in any manner reorganized or
reincorporated, then the resulting or acquiring corporation shall thereupon
become the Trustee hereunder without the execution of any instrument and without
the need for any action by the Plan Administrator, any participant or
beneficiary, or any other person having or claiming to have an interest in the
Trust Fund or the Plan.
12.02 The Employer. In the event that the Employer merges or
consolidates with another corporation or sells or transfers all or substantially
all of its assets and business to another corporation, or is in any manner
reorganized or reincorporated, then the resulting or acquiring corporation shall
thereupon become subject to the terms, conditions and obligations of this
Agreement and the plan documents.
12.03 The Plan.
(a) At the Plan Administrator's or Employer's direction, the Trustee
shall accept the transfer to the Trust Fund of assets acceptable to it from
any trustee or insurance company maintaining any other investment medium of
the Plan.
(b) At the Plan Administrator's or Employer' direction, the Trustee
shall transfer such part of the assets of the Trust Fund as the Plan
Administrator or Employer may specify to any trustee or insurance company
maintaining any other investment medium of the Plan.
(c) Any direction of the Plan Administrator or the Employer described
in this section shall constitute a certification that the transfer so
directed is in conformity with the provisions of the Plan, and this
Agreement of Trust. The Trustee shall be fully protected in relying upon
any such certification, and shall not be responsible for determining the
effect of any such transfer upon the interests of participants and
beneficiaries of any Plan.
-22-
<PAGE>
ARTICLE XIII
Miscellaneous Provisions
13.01 Applicable Law. This Agreement of Trust shall be administered,
construed, and enforced, to the extent possible, according to the laws of the
Commonwealth of Virginia. In the case of any conflict between the Plan and this
Agreement of Trust, the provisions of this Agreement of Trust shall govern.
13.02 Spendthrift Clause. No right or claim in or to the Trust Fund or
any assets thereof shall be assignable or subject to garnishment, attachment,
execution, levy, or alienation of any land. Any attempt to transfer, assign,
pledge, or otherwise alienate the same shall be void and shall not be recognized
by the Trustee, except to such extent as may be legally required. No Plan
participant or beneficiary or any other person shall have any interest in or
right to any portion of the Trust Fund, except as expressly provided under the
Plan and this Agreement of Trust.
13.03 Necessary Parties to Judicial Proceedings. To the extent
permitted by law, only the Trustee and the Employer shall be necessary parties
in any application to the courts for an interpretation of this Agreement of
Trust or for an accounting by the Trustee, and no Plan participant or
beneficiary or other person having an interest in the Trust Fund shall be
entitled to any notice or service of process. Any final judgment entered in any
such action or proceeding shall, to the extent permitted by law, be conclusive
upon all persons claiming under this Agreement of Trust. If the Trustee so
elects, however, it may bring in any other person or entity as a party to any
such proceeding.
13.04 Bond. The Trustee shall not be required to give any bond or other
security for the faithful performance of its duties under this Agreement of
Trust, except such as may be required by mandatory provisions of law which
cannot be waived.
13.05 Indemnification. In any case where this Agreement of Trust
provides that the Trustee shall be fully protected in relying upon, or acting or
refraining from acting in accordance with, a particular communication, and where
the Trustee so relies, acts, or refrains from acting on the basis of a
communication which it believes in good faith to be within the scope of
authority of the person or committee from which it purports to have originated,
then the Employer shall indemnify the Trustee and hold it harmless from any and
all claims, loss, damages, expenses (including reasonable attorneys' fees and
disbursements), and liability (including any reasonable amounts paid in
settlement with or without the Employer's approval) arising from or incurred as
a result of such reliance, action, or inaction. Any obligation to provide
indemnification under this Agreement shall be expressly conditioned upon the
Trustee providing written notice to the Employer of any pending or threatened
action within thirty days after the Trustee obtains knowledge of such action and
offering the Employer the right to control the defense of any such action.
13.06 Irrevocability. Subject to the provisions of the Plan, the Trust
is declared to be irrevocable.
-23-
<PAGE>
13.07 Counterparts. This Agreement of Trust may be executed in any
number of counterparts, each of which shall be deemed an original, and may be
sufficiently evidenced by any one counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement of
Trust to be executed by their respective officers hereunto duly authorized, and
their corporate seals to be hereunto affixed and attested, on the date first
written above.
ATTEST: Cort Furniture Rental Corporation
/s/ B. Frost By: /s/ Edward J. Baer
- -------------------- ---------------------------
ATTEST: Mentor Trust Company, Virginia
/s/ M. A. By: /s/ Charles M. Aulino
- -------------------- ----------------------------
-24-
<PAGE>
STATE OF VIRGINIA :
: SS.
CITY/COUNTY OF FAIRFAX :
On this 28th day of May 1996, before me personally came Edward J. Baer,
to me known, who being by me duly sworn, did depose and say that he resides in
the State of Virginia, that he is an officer of Cort Furniture Rental
Corporation, the corporation described in and which executed the foregoing
instrument; that he knows the seal of said corporation, that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.
Sandra L. Kosch
-----------------------------
Notary Public
[SEAL]
My commission expires: December 31, 1996
-25-
<PAGE>
COMMONWEALTH OF VIRGINIA :
: SS.
CITY OF RICHMOND :
On this 21st day of May, 1996, before me personally came Charles M.
Aulino, to me known, who being by me duly sworn, did depose and say that he
resides in the Commonwealth of Virginia, that he is an officer of Mentor Trust
Company, Virginia, the corporation described in and which executed the foregoing
instrument; that he knows the seal of said corporation, that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.
/s/ Mindy Ann Komski
--------------------------
Notary Public
[SEAL]
My commission expires: June 30, 1997.
-26-
EXHIBIT 13.1
CORT Business Services
Annual Report 1996
Capitalizing on Change
<PAGE>
Financial Review
Selected Consolidated Financial Data ..................................... 10
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......................... 11
Consolidated Balance Sheets .............................................. 15
Consolidated Statements of Operations .................................... 16
Consolidated Statements of Stockholders' Equity .......................... 17
Consolidated Statements of Cash Flows .................................... 18
Notes to Consolidated Financial Statements ............................... 19
Independent Auditors' Report ............................................. 27
Market for Common Stock of the Registrant and
Related Stockholders' Matters .......................................... 28
<PAGE>
10
CORT Business Services Corporation and subsidiaries
<TABLE>
<CAPTION>
Selected Consolidated Financial Data(1)
Predecessor CORT Business Services
------------------------ --------------------------------------------------------------
Three Nine
months months Year ended December 31,
Year ended ended ended -----------------------------------------------
December 31, March 31, December 31, Combined
------------------------ -----------------------
1992 1993 1993 (2) 1993 (2) 1994 1995 1996 (3)
--------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Furniture rental revenue ........... $ 83,351 $21,497 $ 79,002 $100,499 $130,026 $141,988 $191,560
Furniture sales revenue ............ 23,109 6,228 21,846 28,074 34,534 37,321 42,589
--------------------- ------------------------------------------------------------
Total revenue .................... 106,460 27,725 100,848 128,573 164,560 179,309 234,149
Furniture rental gross profit ...... 68,555 17,451 63,318 80,769 104,255 114,038 154,602
Furniture sales gross profit ....... 9,633 2,548 8,716 11,264 13,885 15,118 17,382
--------------------- ------------------------------------------------------------
Total gross profit ............... 78,188 19,999 72,034 92,033 118,140 129,156 171,984
Selling, general and
administrative expenses ......... 74,671 16,779 58,990 75,769 95,526 102,435 136,536
--------------------- ------------------------------------------------------------
Operating earnings (4) ............. 3,517 3,220 13,044 16,264 22,614 26,721 35,448
Interest expense (5) ............... 10,979 879 8,941 9,820 16,246 15,917 8,251
Income (loss) before
extraordinary loss ............... (6,862) 1,976 2,313 4,289 3,546 6,218 15,936
Net income (loss) .................. (6,862) 1,976 2,313 4,289 3,546 2,075 15,936
Earnings per common share
before extraordinary loss (6) .... 0.81 1.08 1.28
Pro forma income before
extraordinary loss (7) ........... 9,067 11,529
Pro forma earnings per
common share (8) ................. 0.78 0.99
As of December 31, 1992 1993 1994 1995 1996
- ------------------ -------- -----------------------------------------------
Total assets ....................... $154,262 $169,777 $178,275 $173,722 $247,199
Total debt ......................... 147,948 120,269 123,645 53,800 65,600
Stockholders' equity (deficit) ..... (17,268) 3,341 6,963 75,421 125,152
<FN>
(1) The table above sets forth the selected consolidated financial data of the
Company since its formation and acquisition of CORT Furniture Rental
Corporation ("CFR" or "Predecessor") on March 31, 1993, and the selected
financial data of CFR prior to the acquisition by the Company. The
consolidated financial data of the Company as of and for the nine months
ended December 31, 1993 and as of and for the years ended December 31,
1994, 1995 and 1996 have been derived from the consolidated financial
statements of the Company. The financial data of CFR as of and for the year
ended December 31, 1992, and for the three months ended March 31, 1993 have
been derived from the financial statements of CFR. The combined financial
data for the year ended December 31, 1993 represent CFR information for the
three months ended March 31, 1993 combined with information for the Company
for the nine months ended December 31, 1993. The selected historical
consolidated financial data should be read in conjunction with the
Company's consolidated financial statements and notes thereto included
elsewhere in this Annual Report.
(2) Income statement data for the nine months ended and combined year ended
December 31, 1993 include the results of operations of General Furniture
Leasing Company ("General Furniture") for the four months ended December
31, 1993. The September 1, 1993 acquisition of General Furniture was
accounted for as a purchase business combination. Revenue of General
Furniture for the four months ended December 31, 1993 was $13,438,000.
(3) Income statement data for the year ended December 31, 1996 include the
results of operations of Evans Rents from the date of acquisition, April
24, 1996. The acquisition of Evans Rents was accounted for as a purchase
business combination. Revenue of Evans Rents for the period of April 25,
1996 through December 31, 1996 was approximately $22,500,000.
(4) Operating earnings for 1992 include $1,149,000 of severance and relocation
costs resulting from the changes in the senior management team and
$8,877,000 relating to the discontinuation of the development of a computer
system. Management of the Company believes that these charges are
non-recurring in nature. Adjusted for these non-recurring expenses,
operating earnings would have been $13,543,000 for the year ended December
31, 1992.
(5) Interest expense in 1992 and for the three months ended March 31, 1993
reflects the impact of a restructuring of CFR on June 30, 1992. Interest
expense for the six months ended December 31, 1992 and the three months
ended March 31, 1993 was recognized at an effective rate of 1.8% as a
result of applying the accounting principles of a troubled debt
restructuring.
(6) Earnings per common share before extraordinary loss is computed by dividing
income before extraordinary loss by the weighted average number of shares
of common stock and common stock equivalents outstanding during the year.
In connection with the Companys initial public offering of common stock,
the Company exchanged all subordinated debentures for 2,728,167 shares of
common stock. For purposes of the computations of earnings per common share
for 1994 and 1995, the Company has assumed that the exchange occurred as of
January 1, 1994 for 2,090,591 shares of common stock.
(7) Pro forma income before extraordinary loss is adjusted for interest expense
associated with the $50 million of senior notes and the subordinated
debentures assumed to be retired on January 1, 1994.
(8) Pro forma earnings per common share is computed by dividing pro forma
income before extraordinary loss by 11,608,000 shares, the actual number of
shares of common stock and common stock equivalents as of December 31, 1995
on a fully diluted basis.
</FN>
</TABLE>
<PAGE>
11
CORT Business Services Corporation and subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following information should be read together with the consolidated
financial statements and notes thereto appearing elsewhere herein (dollars in
thousands, except per share data).
Results of Operations
CORT Business Services Corporation was formed on March 29, 1993 and
contemporaneously acquired all of the stock of CORT Furniture Rental Corporation
("CFR") in a business combination accounted for using the purchase method. The
Company is a holding company with no assets other than its investment in CFR.
The following analysis compares the results of operations of the Company for the
years ended December 31, 1996, 1995 and 1994. The following table sets forth,
for the period indicated, certain income statement data as a percentage of total
revenue, unless otherwise indicated.
Year ended December 31,
------------------------
1994 1995 1996
------------------------
Rental revenue ................................ 79.0% 79.2% 81.8%
Sales revenue ................................. 21.0 20.8 18.2
------------------------
Total revenue ............................... 100.0 100.0 100.0
Cost of rental(1) ............................. 19.8 19.7 19.3
Cost of sales(1) .............................. 59.8 59.5 59.2
Gross margin .................................. 71.8 72.0 73.4
Selling, general and administrative expenses .. 58.0 57.1 58.3
------------------------
Operating earnings ............................ 13.7 14.9 15.1
Interest ...................................... 9.9 8.9 3.5
Income taxes .................................. 1.7 2.6 4.8
------------------------
Income before extraordinary loss .............. 2.2% 3.4% 6.8%
Net income .................................... 2.2% 1.2% 6.8%
(1) Cost of rental is calculated as a percentage of rental revenue. Cost of
sales is calculated as a percentage of sales revenue.
Components of Operating Earnings
Revenue. Substantially all of the Company's revenue is derived from base rent
and fees from its outstanding furniture leases and from the sale of rental
furniture. Rental revenue is recognized in the month in which it is due.
Furniture sales revenue is recognized in the month of furniture delivery.
Cost of Furniture Rental. The primary component of cost of furniture rental is
depreciation of rental furniture which is a noncash charge included in the
statements of cash flows as a component of cash provided by operating
activities. The Company depreciates most of its rental furniture on a
declining-balance method over five years, with an estimated salvage value of 40%
of original cost. The remainder of rental furniture is generally depreciated on
a straight line basis over six years with an estimated salvage value of 25%. The
Company also records the net book value of other disposals, primarily inventory
shrinkage, as a component of the cost of furniture rental revenue.
Cost of Furniture Sales. When furniture is sold, the depreciated book value of
such furniture is recorded as cost of furniture sales and is also included in
the statements of cash flows as a component of cash provided by operating
activities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include employee, delivery, advertising, occupancy,
utilities and other operating expenses, nonrental depreciation, and amortization
of goodwill.
Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995
Revenue. Total revenue increased 30.6% to $234,149 in 1996 from $179,309 in
1995. Furniture rental revenue for the year was $191,560, a 34.9% increase from
$141,988 in 1995. Rental revenue growth before the impact of the acquisitions of
Evans Rents and certain assets and liabilities of AFRA Enterprises, Inc. and
Apartment Furniture Rental Associates ("AFR"), estimated by excluding all of the
Company's California and New York operations, was approximately $21,535 or 17.0%
which reflects growth in the number of leases as well as revenue per lease.
Furniture sales increased 14.1% to $42,589 in 1996 from $37,321 in 1995.
Excluding the impact of an unusually large corporate sale in the first quarter
of 1995, furniture sales would have shown an increase of 18.6%. This increase in
furniture sales is an effort of the Company to maintain a quality line-up of
rental furniture.
Gross Profit. Gross profit margin on total revenue increased to 73.4% for the
year ended December 31, 1996 from 72.0% for the year ended December 31, 1995.
The gross profit margin on furniture rental revenue increased to 80.7% in 1996
from 80.3% in 1995. Gross profit margin on furniture sales revenue increased to
40.8% in 1996 from 40.5% in 1995.
<PAGE>
12
CORT Business Services Corporation and subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $136,536 or 58.3% of total revenue in 1996 as
compared to $102,435 or 57.1% of total revenue in 1995. However, excluding $425
of certain charges associated with duplicate showroom closings related to the
acquisition of Evans Rents, selling, general and administrative expenses would
have been 58.1% of total revenue in 1996. The percentage increase is primarily
due to the impact of start-up operations in new markets.
Operating Earnings. As a result of the changes in revenue, gross margin and
selling, general and administrative expenses discussed above, operating earnings
increased to $35,448, or 15.1% of total revenue in 1996 from $26,721, or 14.9%
of total revenue in 1995. Excluding the second quarter charges related to the
acquisition of Evans Rents operating earnings would have been 15.3% of total
revenue in 1996.
Interest Expense, Net. Interest expense decreased to $8,251 in 1996 from $15,917
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 last quarter of 1995,
net of borrowings under the Revolving Credit Facility.
Furniture Purchases. Furniture purchases totaled $79,306 in 1996, an increase of
46.4% from the $54,153 purchased in 1995. Approximately $12,200 of purchases is
attributable to the acquisitions of Evans Rents and AFR, small portfolio
acquisitions, and start-up operations in new markets. The remaining increase
supports the growth in furniture rental revenue and replenishes furniture which
has been sold or disposed.
Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994
Impact of Initial Public Offering and Early Debt Retirement. Due to the
proximity of the Company's initial public offering and related debt retirement
transactions to December 31, 1995, Management believes that pro forma income
before extraordinary loss and related per share data provide a more meaningful
comparison than historical results. Therefore, pro forma income before
extraordinary loss has been adjusted to reflect the impact of the initial public
offering and related debt retirement transactions as if they occurred at the
beginning of 1994. Pro forma income excludes approximately $4 million, net of
tax, associated with the early retirement of debt and also excludes interest
associated with the subordinated debentures and $50,000 of the Senior Notes. Pro
forma earnings per common share before extraordinary loss have been calculated
using 11,608,000 shares, the actual number of common and common stock
equivalents outstanding as of December 31, 1995 on a fully diluted basis. Given
the above adjustments, pro forma income before extraordinary loss for the year
ended December 31, 1995 was $11,529, or $0.99 per share compared to $9,067, or
$0.78 per share.
Revenue. Total revenue increased 9.0% to $179,309 in 1995 from $164,560 in 1994.
Furniture rental revenue for the year was $141,988, an increase of 9.2% from
$130,026 in 1994. This increase reflects an average increase of 9.6% in base
rent as well as an average of 3.1% growth in the number of leases. Furniture
sales increased 8.1% in 1995 to $37,321 from $34,534 in 1994. Excluding the
impact of an unusually large corporate sale in the first quarter of 1995,
furniture sales would have shown an increase of 5.2%.
Gross Profit. Gross profit margin on total revenue increased to 72.0% for the
year ended December 31, 1995 from 71.8% for the year ended December 31, 1994.
The gross profit margin on furniture rental revenue increased to 80.3% in 1995
from 80.2% in 1994. Gross profit margin on furniture sales revenue increased to
40.5% in 1995 from 40.2% in 1994.
Selling, General and Administrative Expenses totaled $102,435 or 57.1% of total
revenue in 1995 as compared to $95,526 or 58.0% of total revenue in 1994. This
percentage decrease is primarily attributed to revenue increasing faster than
occupancy expenses.
Operating Earnings. As a result of the changes in revenue, gross margin and
selling, general and administrative expenses discussed above, operating earnings
increased to $26,721, or 14.9% of total revenue in 1995 from $22,614, or 13.7%
of total revenue in 1994.
Interest Expense, Net. Interest expense decreased to $15,917 in 1995 from
$16,246 in 1994. The decrease is related to the early retirement of $50,000 in
aggregate principal amount of Senior Notes, as well as the exchange of
subordinated debentures for Common Stock, both of which occurred in the last
quarter of 1995.
<PAGE>
13
Extraordinary Loss. As a result of the early retirement of the Senior Notes and
the termination of the old revolving credit facility, the Company recognized a
loss of $4,143, net of taxes, which has been reflected in the Company's
consolidated statement of operations as an extraordinary loss for the year ended
December 31, 1995. The extraordinary loss includes $4,600 of premiums on the
Senior Notes retirement, the write off of $1,907 of deferred financing fees and
$398 of other associated costs.
Furniture Purchases. Furniture purchases totaled $54,153 in 1995, an increase of
25.3% over total purchases of $43,233 in 1994. Of this increase, $1,072 or 2.5%
represents furniture acquired in connection with small portfolio acquisitions.
The remaining increase supports the increase in furniture rental revenue and
replenishes furniture which has been sold or disposed of while still reducing
idle inventory.
Liquidity and Capital Resources
The Company's primary capital requirements are for purchases of rental furniture
(including new furniture purchases and lease portfolio acquisitions) and debt
service. The Company 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. Furniture purchases were
$43,233, $54,153 and $79,306 in 1994, 1995 and 1996, respectively. As the
Company's growth strategies continue to be implemented, furniture purchases are
expected to increase accordingly.
The Company's other capital requirements consist of purchases of property, plant
and equipment, including warehouse and showroom improvements, office equipment,
trucks and 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 $2,780, $4,108 and $5,652 in
1994, 1995 and 1996, respectively.
During 1994, 1995 and 1996, net cash provided by operations was $52,019, $55,563
and $77,567, respectively. During 1994, 1995 and 1996, net cash used in
investing activities was $46,645, $54,237, and $122,120, respectively,
consisting primarily of purchases of rental furniture and in 1996, the
acquisitions of Evans Rents and AFR. During 1994, 1995 and 1996, net cash
provided (used) by financing activities was ($329), ($14,108) and $44,297,
respectively. In 1995, $36,995 was provided by the initial public offering, net
of expenses, which was used along with other cash resources to pay off $50,000
of the Senior Notes. In 1996, $32,672 was provided by the public offering of
common stock, net of expenses, which was used to repay indebtedness under the
Revolving Credit Facility primarily due to the acquisition of Evans Rents.
CFR entered into a new Revolving Credit Facility concurrently with the
consummation of the Company's initial public offering in November 1995. The
Revolving Credit Facility provides a $70,000 line of credit (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. The Revolving Credit Facility expires on November 22,
1998. Borrowings under the Revolving Credit Facility bear interest at a
fluctuating rate based on, at the Company's option, either the lead lender's
base rate or the London Interbank Offer Rate (LIBOR). The average interest rate
paid by CFR during 1996 on the Revolving Credit Facility was 7.3%. A commitment
fee calculated based upon the unused portion of the Revolving Credit Facility is
payable quarterly in arrears. The Company had $53,441 available under the
Revolving Credit Facility at December 31, 1996.
The net proceeds from the initial public offering of the Company, together with
available cash and borrowings of $4,800 under the Revolving Credit Facility were
used to retire $50,000 in aggregate principal amount of the Senior Notes in
1995. The Company is required to make annual interest payments on the remaining
$50,000 in aggregate principal amount of the Senior Notes outstanding totalling
$6,000 annually, payable on March 1 and September 1, in arrears. The Company
will not be required to make principal repayments on the Senior Notes until
maturity.
The Revolving Credit Facility and indenture governing the Senior Notes restricts
the ability of CFR to make advances and pay dividends to the Company.
The Company believes that future cash flows from operations, together with the
borrowings available under the Revolving Credit Facility will provide the
Company with sufficient liquidity and financial resources to finance its growth
and satisfy its working capital requirements through the term of the Revolving
Credit Facility. The Company may not be able to generate sufficient cash flows
from operations to pay the entire principal amount of the remaining $50,000 of
Senior Notes when due in September 2000. In such event, the Company intends to
refinance such amount primarily through additional equity offerings or
alternative forms of debt
<PAGE>
14
CORT Business Services Corporation and subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
financing. However, there can be no assurance that the Company will be able to
obtain financing on acceptable terms.
The Internal Revenue Service ("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 recovery and certain capitalized financing fees.
The Company has reached a settlement with the IRS on the proposed adjustments.
The settlement did not result in any additional financial statement tax
expenses, as the Company's reserves were adequate to cover such expenses, and
did not require the Company to alter its methods of depreciation or cost
recovery period. The total amount of the settlement is approximately $1 million,
including interest through December 31, 1996, of which the Company made an
initial deposit of approximately $925 in February, 1996.
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
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 $31 million for such periods (including interest through December
31, 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 consolidated financial statements, if any.
Inflation and General Economic Conditions
Historically, the Company has been able to offset increases in furniture prices
with increases in rental rates. Management believes that increases in new
furniture prices have averaged less than the overall inflation rate over the
last five years. In periods of high inflation, the Company has historically
achieved higher margins on its clearance center sales. A sustained recession
with little or no new job growth may have a material adverse affect on the
Company's future opportunities for sustained growth.
<PAGE>
15
CORT Business Services Corporation and subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
-------------------
1995 1996
-------------------
Assets
Cash and cash equivalents ................................ $ 379 $ 123
Accounts receivable, less allowance for doubtful accounts
of $938 and $1,906 in 1995 and 1996, respectively ...... 6,019 11,011
Prepaid expenses ......................................... 3,973 4,224
Rental furniture, net (note 2) ........................... 103,741 147,161
Property, plant and equipment, net (note 5) .............. 31,044 35,667
Other receivables and assets, net (note 7) ............... 3,814 3,815
Goodwill, net of accumulated amortization of $1,717
and $2,678 in 1995 and 1996, respectively (note 13) .... 24,752 45,198
-------------------
$173,722 $247,199
===================
Liabilities and Stockholders' Equity
Accounts payable ......................................... $ 3,597 $ 4,157
Rental security deposits ................................. 5,761 7,184
Accrued expenses (note 11) ............................... 19,096 27,491
Deferred rental revenue .................................. 5,425 7,174
Long-term debt (note 7) .................................. 53,800 65,600
Deferred income taxes (note 6) ........................... 10,622 10,441
-------------------
98,301 122,047
-------------------
Commitments and contingencies (notes 6, 8 and 10)
Stockholders' equity (notes 1, 3, 4, 7, 9, and 12):
Common stock, voting, $.01 par value, 15,500,000 shares
authorized, 10,415,367 and 12,674,381 shares issued
and outstanding ...................................... 104 127
Common stock, Class B, nonvoting, $.01 par value,
15,500,000 shares authorized, and none issued
and outstanding ...................................... -- --
Additional paid-in capital ............................. 67,383 101,155
Accumulated earnings ................................... 7,934 23,870
-------------------
Total stockholders' equity ......................... 75,421 125,152
-------------------
$173,722 $247,199
===================
See accompanying notes to consolidated financial statements.
<PAGE>
16
CORT Business Services Corporation and subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1994 1995 1996
------------------------------
<S> <C> <C> <C>
Revenue:
Furniture rental ........................................... $130,026 $141,988 $191,560
Furniture sales ............................................ 34,534 37,321 42,589
------------------------------
Total revenue ............................................ 164,560 179,309 234,149
------------------------------
Operating costs and expenses:
Cost of furniture rental ................................... 25,771 27,950 36,958
Cost of furniture sales .................................... 20,649 22,203 25,207
Employee, delivery and advertising expenses ................ 66,256 72,379 95,204
Occupancy, utilities and nonrental depreciation ............ 16,370 16,724 22,722
Amortization of goodwill ................................... 682 662 961
Other operating expenses ................................... 12,218 12,670 17,649
------------------------------
Total costs and expenses ................................. 141,946 152,588 198,701
------------------------------
Operating earnings ....................................... 22,614 26,721 35,448
Interest expense, net ........................................ 16,246 15,917 8,251
------------------------------
Income before income taxes and extraordinary loss ........ 6,368 10,804 27,197
Income tax expense (note 6) .................................. 2,822 4,586 11,261
------------------------------
Income before extraordinary loss ......................... 3,546 6,218 15,936
Extraordinary loss on early retirement of debt, net of
income tax benefit of $2,762 (notes 6 and 7) ............... -- 4,143 --
------------------------------
Net income ............................................... $ 3,546 $ 2,075 $ 15,936
==============================
Earnings per common share before extraordinary loss .......... $ .81 $ 1.08 $ 1.28
Extraordinary loss per common share .......................... -- .53 --
------------------------------
Earnings per common share .................................... $ .81 $ .55 $ 1.28
==============================
Weighted average number of common shares used in computation.. 7,049 7,759 12,448
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
17
CORT Business Services Corporation and subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Total
Common Additional Accumulated stockholders'
Stock paid-in capital earnings equity
------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 ............ $ 40 $ 988 $ 2,313 $ 3,341
Stock cancellation .................. (1) 1 -- --
Issuance of common stock from
exercise of stock options ......... 3 73 -- 76
Net income .......................... -- -- 3,546 3,546
------------------------------------------------------
Balance, December 31, 1994 ............ 42 1,062 5,859 6,963
Issuance of common stock from
public offering, net of expenses .. 34 36,961 -- 36,995
Issuance of common stock from
exercise of stock options ......... -- 32 -- 32
Issuance of common stock
from exercise of warrants ......... 1 17 -- 18
Issuance of common stock in debt
to equity exchange ................ 27 29,311 -- 29,338
Net income .......................... -- -- 2,075 2,075
------------------------------------------------------
Balance, December 31, 1995 ............ 104 67,383 7,934 75,421
Issuance of common stock from
public offering, net of expenses .. 19 32,653 -- 32,672
Issuance of common stock from
exercise of stock options ......... 1 487 -- 488
Issuance of common stock
from exercise of warrants ......... 3 61 -- 64
Income tax benefit from stock
options exercised ................. -- 571 -- 571
Net income .......................... -- -- 15,936 15,936
------------------------------------------------------
Balance, December 31, 1996 ............ $127 $101,155 $23,870 $125,152
======================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
18
CORT Business Services Corporation and subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1994 1995 1996
---------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ....................................................................... $ 3,546 $ 2,075 $ 15,936
Proceeds of disposals of rental furniture in excess of gross profit .............. 20,631 21,455 24,118
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary loss on early retirement of debt ................................. -- 4,143 --
Depreciation and amortization:
Rental furniture ............................................................. 18,281 19,551 26,887
Other ........................................................................ 2,358 2,601 3,804
Goodwill ..................................................................... 682 662 961
Deferred financing fees ...................................................... 755 729 698
Discount on junior subordinated debentures ................................... 68 65 --
Rental furniture inventory shrinkage ........................................... 1,237 1,838 2,261
Deferred income taxes .......................................................... 1,054 2,811 2,990
Pay-in-kind interest converted to long term debt ............................... 2,277 3,598 --
Changes in assets and liabilities:
Accounts receivable .......................................................... 106 (547) (2,820)
Prepaid expenses ............................................................. (122) (998) (58)
Other receivables and assets ................................................. (736) (1,190) (1,544)
Accounts payable, accrued expenses and rental security deposits, net ......... 1,455 (1,768) 2,585
Deferred rental revenue ...................................................... 427 538 1,749
---------------------------------
Net cash provided by operating activities .................................. 52,019 55,563 77,567
---------------------------------
Cash flows from investing activities:
Purchases of rental furniture .................................................... (43,233) (54,153) (79,306)
Purchases of property, plant and equipment ....................................... (2,812) (4,521) (6,238)
Sale of property, plant and equipment ............................................ 32 413 586
Purchase of Evans Rents .......................................................... -- -- (27,778)
Purchase of AFR .................................................................. -- -- (9,384)
Purchase of short-term investments ............................................... (632) (1,024) --
Sale of short-term investments ................................................... -- 5,048 --
---------------------------------
Net cash used in investing activities ...................................... (46,645) (54,237) (122,120)
---------------------------------
Cash flows from financing activities:
Repayments of long-term debt ..................................................... (795) (50,287) (573)
Payments to retire debt .......................................................... -- (4,998) --
Payment of deferred financing fees ............................................... -- -- (154)
Proceeds from issuance of long-term debt ......................................... 749 332 --
Borrowings on the line of credit ................................................. -- 4,800 88,076
Repayments on the line of credit ................................................. -- (1,000) (76,276)
Payments on capital lease obligation ............................................. (359) -- --
Issuance of common stock ......................................................... 76 37,045 33,224
---------------------------------
Net cash provided (used) by financing activities ........................... (329) (14,108) 44,297
---------------------------------
Net increase (decrease) in cash and cash equivalents ....................... 5,045 (12,782) (256)
Cash and cash equivalents at beginning of year ..................................... 8,116 13,161 379
---------------------------------
Cash and cash equivalents at end of year ........................................... $ 13,161 $ 379 $ 123
=================================
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ......................................................................... $ 12,178 $ 13,408 $ 7,487
Income taxes ..................................................................... 2,213 2,161 8,089
=================================
Noncash financing activities:
Tax benefit from exercise of stock options ....................................... $ -- $ -- $ 571
Tax benefit from exchange of debt for equity ..................................... -- 741 --
Exchange of debt for equity (note 7) ............................................. -- 28,597 --
=================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
19
CORT Business Services Corporation and subsidiaries
Notes to Consolidated Financial Statements
(1) Formation and Description of the Company
CORT Business Services Corporation, formerly New Cort Holdings Corporation (the
"Company"), was formed on March 29, 1993 and contemporaneously acquired all of
the stock of CORT Furniture Rental Corporation ("CFR"). The Company is a holding
company with no independent operations and no material assets other than its
ownership of all the outstanding capital stock of CFR. The Company is largely
dependent on the receipt of dividends or distributions from CFR to fund its
obligations. CFR is a provider of rental furniture, accessories and related
services to both corporate and individual customers. In addition, CFR sells
previously rented furniture.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Presentation
The consolidated financial statements as of December 31, 1995 and 1996, and for
the years ended December 31, 1994, 1995 and 1996, include the accounts of CORT
Business Services Corporation and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated.
(b) Accounting Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reported periods. Actual results could differ from these estimates.
(c) Rental Furniture
Rental furniture includes residential and office furniture which is rented to
customers or is available for rental and/or sale and is recorded at the lower of
depreciated cost or market value. Rental furniture is depreciated on a
declining-balance or straight-line method over 3 to 6 years, with an estimated
salvage value of 25 to 40 percent of original cost. Accumulated depreciation on
rental furniture was $45,199,000 and $53,582,000 at December 31, 1995 and 1996,
respectively. Reserves for purchase options and shrinkage on rental furniture
were $1,793,000 and $2,768,000 at December 31, 1995 and 1996, respectively.
Furniture no longer meeting rental standards is held for sale.
Furniture rentals are recognized as revenue in the month they are due. Rental
payments received prior to the month due are recorded as deferred rental
revenue. Cost of furniture rental includes depreciation expense, inventory
losses, repairs and maintenance, net book value of furniture sold under lease
purchase options and costs of accessories.
Certain of CFR's leases include purchase options whereby the customer can
receive title to the furniture upon satisfaction of certain conditions.
Generally, these leases are short-term and must be extended by the customer in
order for the purchase option to apply. CFR provides reserves to reduce the net
book value of furniture under such leases based on the length of time the
furniture has been out on lease and the likelihood of the exercise of the
options.
The Company considers the proceeds from the sale of rental furniture as an
element of cash flow from operations. Accordingly, the proceeds received in
excess of the gross profit recognized on sales of rental furniture are added to
net income in deriving cash flow from operations in the accompanying
consolidated statements of cash flows.
(d) Property, Plant and Equipment
Property, plant and equipment is recorded at cost, or fair value if acquired
through a purchase business combination. Depreciationis computed using the
straight-line method over the estimated useful lives of the assets as follows:
buildings 50 years; major roof renovations 10 years; furniture, fixtures,
machinery and equipment from 5 to 10 years; and leasehold improvements over the
term of the related leases.
(e) Goodwill
The excess of purchase cost over the fair value of net assets acquired
(goodwill) is amortized using the straight-line method over 40 years. The
Company evaluates the recoverability ofits goodwill annually. In making such
evaluation, the Company compares certain financial indicators such as expected
undiscounted future revenues and net cash flows to the carrying amount of
goodwill. Impairment losses, if any, are measured as the excess of the carrying
amount of goodwill over estimated fair market value.
(f) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and investments having a
maturity of three months or less on the date of purchase. Cash and cash
equivalents at December 31, 1995 and 1996 consisted primarily of overnight
repurchase funds.
(g) Rental Security Deposits
The Company may require a non-interest bearing security deposit of one months
rent based on the Companys evaluation of the credit worthiness of the customer.
The security deposit is returned at the end of the lease provided that all lease
terms have been satisfied.
<PAGE>
20
CORT Business Services Corporation and subsidiaries
Notes to Consolidated Financial Statements
(h) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require companies to record stock-based
employee compensation plans at fair value. The Company has elected to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
employee stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the exercise price an
employee must pay to acquire the stock.
(i) Income Taxes
Income taxes are reported under the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that includes the
enactment date.
(j) Deferred Financing Fees
Costs incurred with the issuance of long-term debt have been capitalized and are
being amortized over the term of the related debt using a method which
approximates the effective interest method.
(k) Earnings Per Common Share
Earnings per common share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents are comprised entirely of
stock options and warrants. The Company has no other potentially dilutive
securities. Fully-diluted earnings per common share is presented only to the
extent that it results in dilution in excess of 3% of primary earnings per
common share.
Common stock issued and common stock options granted during the 12-month period
preceding the date of the Companys initial public offering (see note 4) have
been included in the calculation of weighted average common shares outstanding
for all of 1994 and 1995 using the treasury stock method based on the
initial public offering price.
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 percommon share for 1994 and 1995, the Company has assumed that the
exchange occurred as of January 1, 1994 for 2,090,591 shares of Common Stock.
(3) Reverse Stock Split
On November 9, 1995, the Company effected a 1 for 7.5 reverse split of Common
Stock whereby each 7.5 shares of existing Common Stock were exchanged for one
share of Common Stock. All share and per share data appearing in the
consolidated financial statements and notes thereto have been retroactively
adjusted for this reverse split.
(4) Public Offerings of Common Stock
In November 1995, the Company sold, through an underwritten initial public
offering, 3,402,260 common shares at $12.00 per share. The net proceeds of
approximately $36,995,000, net of associated underwriting discounts and other
expenses of the offering, were used to retire a portion of the Senior Notes(see
note 7).
In July 1996, the Company sold, through an underwritten public offering,
1,865,100 common shares at $18.75 per share. The net proceeds of approximately
$32,672,000, net of associated underwriting discounts and other expenses of the
offering, were used to repay indebtedness under the Revolving Credit Facility
primarily due to the acquisition of Evans Rents (see note 13).
<PAGE>
(5) Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
December 31, December 31,
----------------------------
1995 1996
----------------------------
Land and land improvements ......... $ 6,996 $ 7,003
Buildings and improvements ......... 15,151 15,169
Machinery, equipment and computer .. 4,896 9,142
Leasehold improvements ............. 7,647 11,515
Furniture and fixtures ............. 1,421 1,590
Other .............................. 1,252 1,371
----------------------------
37,363 45,790
Accumulated depreciation
and amortization ................. 6,319 10,123
----------------------------
$31,044 $35,667
============================
<PAGE>
21
CORT Business Services Corporation and subsidiaries
Notes to Consolidated Financial Statements
(6) Income Taxes
Components of the expense for income taxes are summarized as follows (in
thousands):
Year ended Year ended Year ended
December 31, December 31, December 31,
1994 1995 1996
-------------------------------------
Current:
Federal .......................... $1,367 $ 1,257 $ 6,117
State and local .................. 263 494 1,489
-------------------------------------
1,630 1,751 7,606
-------------------------------------
Deferred:
Federal .......................... 1,013 2,410 3,107
State and local .................. 179 425 548
-------------------------------------
1,192 2,835 3,655
-------------------------------------
Total expense before
extraordinary loss ............ $2,822 $ 4,586 $11,261
Income tax benefit from
extraordinary loss on early
retirement of debt ............... -- (2,762) --
-------------------------------------
Total income tax expense ................. $2,822 $ 1,824 $11,261
=====================================
The difference between the actual expense for taxes and taxes computed at the
Federal income tax rate of 34 percent in 1994 and 1995, and 35 percent in 1996
is summarized as follows(in thousands):
Year ended Year ended Year ended
December 31, December 31, December 31,
1994 1995 1996
----------------------------------------
Tax expense computed
at Federal rate ................. $2,165 $3,673 $ 9,519
State and local taxes, net
of Federal benefit .............. 292 607 1,324
Effects of goodwill
amortization .................... 232 225 336
Other, net ........................... 133 81 82
-------------------------------------
Total expense before
extraordinary loss ............ $2,822 $4,586 $11,261
=====================================
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
December 31, December 31,
1995 1996
--------------------------
Deferred tax assets:
Accounts receivable, principally
due to allowance for
doubtful accounts .............................. $ 375 $ 762
Compensated absences, principally
due to accrual for financial
reporting purposes ............................. 530 748
Deferred financing fees ......................... 638 495
Deferred rental revenue ......................... 2,209 2,999
Reserve for unfavorable operating
lease and duplicate facilities ................. 2,377 3,592
Net operating loss carryforwards ................ 1,511 600
AMT credit carryforward ......................... 4,093 3,388
Other ........................................... 2,105 2,503
----------------------
Total gross deferred tax assets ............... 13,838 15,087
----------------------
Deferred tax liabilities:
Rental furniture, principally due
to differences in depreciation ................. 20,547 20,179
Property, plant and equipment,
principally due to differences
in depreciation ................................ 3,913 5,306
Other ........................................... -- 43
----------------------
Total gross deferred tax
liabilities .................................. 24,460 25,528
----------------------
Net deferred tax liability .................... $10,622 $10,441
======================
At December 31, 1996, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $1,500,000 which are available to
offset only a subsidiary's future Federal taxable income, if any, through 2007.
The net operating loss carryforwards are subject to an annual limitation of
$955,000 pursuant to Internal Revenue Code Section 382. In addition, the Company
has alternative minimum tax credit carryforwards of approximately $3,388,000
which are available to reduce future Federal regular income taxes, if any, over
an indefinite period.
The Internal Revenue Service ("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 recovery and certain capitalized financing fees.
The Company has reached a settlement with the IRS on the proposed adjustments.
The settlement did not result in any additional financial statement tax
expenses, as the Company's reserves were adequate to cover such expenses, and
did not require the Company to alter its methods of depreciation or cost
recovery period. The total amount
<PAGE>
22
CORT Business Services Corporation and subsidiaries
Notes to Consolidated Financial Statements
of the settlement is approximately $1 million, including interest through
December 31, 1996, of which the Company made aninitial deposit of approximately
$925,000 in February, 1996.
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
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 $31 million for such periods (including interest through December
31, 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 Companys consolidated financial statements, if any.
(7) Long-Term Debt
The outstanding long-term debt was as follows (in thousands):
December 31, December 31,
1995 1996
------------------------------
Revolving Credit Facility, secured...... $3,800 $15,600
Senior Notes, 12%, unsecured............ 50,000 50,000
-------------------------
$53,800 $65,600
=========================
<PAGE>
CFR had a revolving credit facility with a bank for $15 million, which was
terminated on November 22, 1995. CFR entered into a new Revolving Credit
Facility with a group of banks concurrently with the consummation of the initial
public offering of the Company. The Revolving Credit Facility, for which the
Company is guarantor, provides a $70 million line of credit (amended in May 1996
from $50 million), subject to certain borrowing base restrictions, to meet
acquisition and expansion needs as well as seasonal working capital and general
corporate requirements. The Revolving Credit Facility expires on November 22,
1998. Borrowings under the Revolving Credit Facility bear interest at a
fluctuating rate based on, at the Companys option, either the lead lenders base
rate or the London Interbank Offer Rate (LIBOR). The average interest rate paid
by CFR during 1996 on the Revolving Credit Facility was 7.3%. A commitment fee
calculated based upon the unused portion of the Revolving Credit Facility is
payable quarterly in arrears. The Revolving Credit Facility is collateralized by
substantially all of CFR's assets.
The Senior Notes bear interest at 12 percent with interest payable semi-annually
on March 1 and September 1. The Senior Notes are unsecured and are due September
1, 2000. The Company may not redeem the Senior Notes prior to September 1, 1998
except in certain circumstances. Early redemptions must be made at a premium.
With the proceeds of the initial public offering, borrowings under the Revolving
Credit Facility and cash on hand, $20 million in aggregate principal amount of
Senior Notes were retired at a repurchase price of 108% of the principal amount,
plus accrued and unpaid interest thereon, and $30 million in aggregate principal
amount of Senior Notes were retired at a redemption price of 110% of the
principal amount plus accrued and unpaid interest thereon.
The Revolving Credit Facility and indenture governing the Senior Notes restrict
the ability of CFR to make advances and pay dividends to the Company.
As a result of the early retirement of the Senior Notes in 1995, the Company
recognized a loss of $4,143,000, net of taxes, which has been reflected in the
Company's consolidated statement of operations as an extraordinary loss for the
year ended December 31, 1995. The extraordinary loss includes $4,600,000 of
redemption premiums on the Senior Notes retirement, the write-off of
approximately $1,907,000 of deferred financing fees and approximately $398,000
of other associated costs.
Contemporaneously with the initial public offering, CFR's 14% Senior
Subordinated Pay-In-Kind Notes, the Company's 14.5% Subordinated Debentures and
the Company's 15% Junior Subordinated Debentures (collectively the "Debt
Securities"), due to
<PAGE>
23
controlling and certain other stockholders of the Company, were exchanged for an
aggregate of 2,728,167 shares of Common Stock, which represented all principal,
accrued interest and unamortized discount of the Debt Securities. During the
years ended December 31, 1994 and 1995, the aggregate interest expense incurred
on the Debt Securities was approximately $3,518,000 and $3,598,000,
respectively, all of which was settled through the issuance of additional
debentures.
The estimated fair value of the Company's consolidated long-term debt based on
the quoted market price and other available information was approximately
$57,300,000 and $71,100,000 at December 31, 1995 and 1996, respectively.
Other assets include debt issuance costs, net of accumulated amortization, of
$2,534,000 and $1,990,000 at December 31, 1995 and 1996, respectively.
(8) Employee Benefit Plans
The Company maintains an investment and profit-sharing defined contribution
retirement plan. All the Company's employees are eligible to participate after
one year of service. The Company makes a 50 percent matching contribution on the
first four percent of employee contributions to the plan. The Company may, at
its discretion, make additional contributions based on the Company's
performance. The aggregate plan contributions were approximately $650,000,
$940,000, and $1,080,000 for the years ended December 31, 1994, 1995, and 1996,
respectively.
The Company maintains a Supplemental Executive Retirement Plan (SERP) for
certain key present and former management executives. The SERP consists of both
a defined benefit and a defined contribution plan. The annual costs of the plan
were approximately $139,000, $148,000, and $119,000 for the years ended December
31, 1994, 1995, and 1996, respectively. The accrued, unfunded liability under
the plan as of December 31, 1996 was not significant.
(9) Stock Options
At December 31, 1996, the Company has three stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, as all options have
been granted at exercise prices equal to the fair market value as of the date of
grant, no compensation cost has been recognized under these plans in the
accompanying consolidated financial statements. Had compensation cost for the
<PAGE>
Company's three stock-based compensation plans been determined consistent with
FASB Statement No. 123, the Company's net income and earnings per common share
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):
Year ended Year ended
December 31, December 31,
1995 1996
------------------------------
Net income As Reported $2,075 $15,936
Pro Forma $1,697 $15,327
Earnings per common share As Reported $0.55 $1.28
Pro Forma $0.22 $1.23
The effects of compensation cost as determined under FASB Statement No. 123 on
net income in 1995 and 1996 may not be representative of the effects on pro
forma net income for future periods.
Stock Option and Stock Purchase Plan
Under the terms of the Stock Option and Stock Purchase Plan (the "1994 Plan"),
certain key employees were granted, at the discretion of the Board of Directors,
the right to purchase varying amounts of Debt Securities and options to purchase
Common Stock. Concurrent with the adoption of the 1994 Plan, all members of
management who previously held Common Stock of the Company gave up their rights
to such stock.
At the date of grant, each employee had the option to purchase immediately in
cash all granted amounts of the Debt Securities, or defer purchase of these
securities, plus interest, over a five-year vesting period. In either case,
assuming all obligations to purchase the Debt Securities were fulfilled, the
exercise price of the options to purchase Common Stock was fixed and the options
are exercisable over a ten-year period.
Contemporaneously with the initial public offering, all Debt Securities were
exchanged for Common Stock (see note 7). There is no further obligation to
purchase Debt Securities under the 1994 Plan.
The fair value of options granted on February 1, 1995 is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: dividend yield of 0.0%, expected volatility of
30%, risk-free interest rate of 7.63%, and expected life of six years.
1995 Stock-Based Incentive Compensation Plan
The 1995 Stock-Based Incentive Compensation Plan (the "1995 Plan") was adopted
by the Board of Directors and approved by the Company's stockholders. The 1995
Plan became effective on October 31, 1995. The 1995 Plan provides for the
granting of a maximum of 577,427 stock options to key employees of the Company.
No awards can be made under the 1995 Plan after
<PAGE>
24
CORT Business Services Corporation and subsidiaries
Notes to Consolidated Financial Statements
October 31, 1997. The shares granted under the 1995 Plan may be in the form of
deferred stock, restricted stock, incentive stock options, non-qualified stock
options or stock appreciation rights. All awards made in 1995 and 1996 were in
the form of non-qualified stock options. The exercise price of an option under
the 1995 Plan is equal to the fair market value of common stock on the date the
option is granted. An option under the 1995 Plan vests over a three-year period
and the expiration period may not exceed ten years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1995 and 1996, respectively: 0.0% dividend yield
for both years; expected volatility of 30% for both years; risk-free interest
rates of 5.65% and 6.29%, and expected lives of four years and five years.
1995 Directors Stock Option Plan
The 1995 Directors Stock Option Plan (the "Director Plan") was adopted by the
Board of Directors and approved by the Company's stockholders. The Director Plan
became effective on October 18, 1995. The Director Plan provides for the
granting of a maximum of 50,000 stock options to non-employee directors of the
Company. The Director Plan provides for automatic grants of options to purchase
shares of Common Stock on November 16, 1995 and 1996. The option exercise price
per share is equal to the fair market value of common stock on the date the
option is granted. All options granted will be vested on November 16, 1998. The
expiration period may not exceed ten years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1995 and 1996, respectively: 0.0% dividend yield
for both years; expected volatility of 30% for both years; risk-free interest
rates of 5.89% and 6.43%; and expected lives of seven years for both years.
<PAGE>
Stock Option Activity Summary
The following table summarizes the Company's option plans:
<TABLE>
<CAPTION>
1994 Plan 1995 Plan Director Plan
-----------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1, 1994 ..................................... -- -- -- -- -- --
Granted ............................................. 784,640 $0.25875 -- -- -- --
Exercised ........................................... (295,135) 0.25875 -- -- -- --
Forfeited ........................................... (53,669) 0.25875 -- -- -- --
----------------------------------------------------------------
Outstanding at
December 31, 1994 ................................... 435,838 $0.25875 -- -- -- --
Granted ............................................. 245,794 1.09800 439,800 $12.00 21,000 $12.00
Exercised ........................................... (37,977) 0.85770 -- -- -- --
Forfeited ........................................... (16,099) 0.81827 -- -- -- --
----------------------------------------------------------------
Outstanding at
December 31, 1995 ................................... 627,556 $0.57274 439,800 $12.00 21,000 $12.00
Granted ............................................. -- -- 131,300 19.87 10,000 22.75
Exercised ........................................... (52,558) 0.33230 (39,501) 12.00 -- --
Forfeited............................................ -- -- -- -- -- --
----------------------------------------------------------------
Outstanding at
December 31, 1996 ................................... 574,998 $0.59472 531,599 $13.94 31,000 $15.47
Options exercisable at:
December 31, 1994 ................................... 70,188 -- --
December 31, 1995 ................................... 627,556 -- --
December 31, 1996 ................................... 574,998 120,280 7,003
Weighted-average fair value at date of grant of options
granted during the year ended:
December 31, 1995 ................................... $ 0.57 $ 3.90 $ 5.43
December 31, 1996 ................................... -- 7.58 10.59
</TABLE>
<PAGE>
25
The following table summarizes information about the Company's stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------- ---------------------------------------
Weighted-Average
Range of Remaining Contractual Weighted-Average Weighted-Average
Exercise Prices Number Outstanding Life (years) Exercise Price Number Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.2587 - 1.0980 574,998 7.44 $0.59 574,998 $0.59
12.0000 421,299 8.88 12.00 127,283 12.00
18.0000 - 22.7500 141,300 9.69 20.07 -- --
--------- -------
1,137,597 702,281
========= =======
</TABLE>
10) Rental Commitments
The Company leases certain warehouse and showroom facilities and equipment.
Future minimum lease payments at December 31, 1996 under all noncancelable
operating leases are as follows (in thousands):
1997 .............................................. 13,999
1998 .............................................. 12,099
1999 .............................................. 10,952
2000 .............................................. 9,228
2001 .............................................. 7,583
Thereafter......................................... 18,997
------
Total minimum lease payments.................... 72,858
Less sublease rentals.............................. 643
------
Net minimum operating lease payments............ $72,215
=======
Rental expense was approximately $9,291,000, $9,177,000 and $12,145,000 for the
years ended December 31, 1994, 1995 and 1996, respectively, (including
approximately $1,795,000, $1,826,000 and $2,460,000 for short-term vehicle
leases).
<PAGE>
(11) Accrued Expenses
Accrued expenses are comprised of (in thousands):
December 31, December 31,
1995 1996
-----------------------------
Accrued salaries, wages and incentives ...... $ 4,159 $ 6,301
Accrued interest ............................ 2,026 2,078
Accrued vacation ............................ 1,325 1,871
Reserves for unfavorable operating lease
and duplicate facilities .................. 5,942 8,981
Accrued property, sales and use taxes ....... 1,529 1,971
Other accrued expenses ...................... 4,115 6,289
-----------------------------
$19,096 $27,491
=============================
(12) Warrants to Purchase Common Stock
At December 31, 1995 and 1996, 2,762,200 and 908,410 warrants to purchase an
aggregate of 450,238 and 148,070 shares of Common Stock, respectively, were
outstanding. For the years ended December 31, 1995 and 1996, 537,800 and
1,853,790 warrants were exercised for an aggregate of 87,657 and 302,164 shares
of the Common Stock, respectively. Each warrant is exercisable at a price of
$.0345. The warrants are subject to certain anti-dilution provisions relating to
future issuances of the Common Stock.
(13) Acquisitions
Evans Rents
On April 24, 1996, the Company acquired Evans Rents, a provider of rental
furniture in California, for approximately $27,778,000, 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 Revolving Credit Facility.
The fair value allocated to the identifiable assets and liabilities of Evans
Rents was determined by independent appraisal. 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 were not replaced.
Based on the allocation of the purchase price over the net assets acquired,
goodwill of approximately $14,220,000 was recorded. Such goodwill is being
amortized on a straight-line basis
<PAGE>
26
CORT Business Services Corporation and subsidiaries
Notes to Consolidated Financial Statements
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 .................................................... 14,220
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)
------
$ 27,778
========
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.
Year ended Year ended
December 31, December 31,
1995 1996
----------------------------
(in thousands, except
per share amounts)
Total revenue........................... $209,814 $244,069
Net income.............................. 7,176 16,432
Earnings per share...................... $1.20 $1.32
Weighted average number of shares
used in computation................... 7,759 12,448
<PAGE>
AFR
On August 5, 1996, the Company acquired certain assets of AFR, a provider of
rental furniture in the New York City metropolitan area, for $9,384,000,
including costs of acquisition, in a transaction accounted for as a purchase
business combination. Based on the allocation of the purchase price over the net
assets acquired, goodwill of approximately $6,016,000 was recorded. Such
goodwill is being amortized on a straight-line basis over 40 years.
(14) Quarterly Financial Data (Unaudited)
Three months ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
----------------------------------------------------
(in thousands except per share data)
Furniture rental
revenue .............. $38,555 $46,882 $53,707 $52,416
Furniture sales
revenue .............. 10,214 11,226 10,900 10,249
Operating earnings ..... 7,172 8,205 10,030 10,041
Income before
income taxes ......... 5,391 5,941 7,838 8,027
Net income ............. 3,160 3,483 4,591 4,702
Earnings per
common share ......... $ .27 $ .30 $ .35 $ .35
Three months ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
----------------------------------------------------
(in thousands except per share data)
Furniture rental
revenue ............... $33,815 $35,239 $36,354 $ 36,580
Furniture sales
revenue ............... 10,316 9,288 9,137 8,580
Operating earnings ...... 6,252 6,425 6,893 7,151
Income before
income taxes
and extraordinary
loss .................. 2,107 2,226 2,675 3,796
Extraordinary loss,
net of tax ............ -- -- -- 4,143
Net income (loss) ....... 1,195 1,273 1,539 (1,932)
Earnings per common
share before
extraordinary loss .... $ .25 $ .26 $ .30 $ .29
Earnings (loss) per
common share .......... $ .25 $ .26 $ .30 $ (.17)
<PAGE>
27
CORT Business Services Corporation and Subsidiaries
Independent Auditors Report
The Stockholders and Board of Directors
CORT Business Services Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of CORT Business
Services Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CORT Business
Services Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
February 14, 1997
<PAGE>
28
CORT Business Services Corporation and subsidiaries
Market for Common Stock of the
Registrant and Related Stockholders' Matters
Common Stock
The Company's Common Stock, par value $.01 per share (the Common Stock),
commenced trading on the Nasdaq Stock Market on November 17, 1995 under the
symbol "CORT". Prior to that date there was no established public trading market
for the Common Stock. The Company delisted the Common Stock from the Nasdaq
Stock Market on December 20, 1995 and the Common Stock commenced trading on the
New York Stock Exchange under the symbol "CBS" on December 21, 1995. The
following table sets forth, for the period indicated, the high and low sales
prices of the Company's Common Stock as reported on each exchange.
1995 Period High Low
- -----------------------------------------------------------------
Nasdaq November 17-
December 20 $17 3/4 $13 1/4
New York
Stock Exchange December 21-
December 31 16 1/2 15 7/8
1996
New York
Stock Exchange 1st Quarter 19 1/2 15 3/4
2nd Quarter 19 1/2 17
3rd Quarter 20 3/4 18 1/4
4th Quarter 22 7/8 19 3/4
Dividend Policy
The Company has not paid any cash dividends on its Common Stock to date. The
payment of dividends, if any, in the future is within the discretion of the
Board of the Directors and will depend on the Company's earnings, its capital
requirements and financial condition. It is the present intention of the Board
of Directors to retain all earnings, if any, for use in the Company's business
operations and accordingly, the Board of Directors does not expect to declare or
pay any dividends in the foreseeable future. In addition, as a holding company,
the Company's ability to pay dividends is dependent on the receipt of dividends
or advances from its wholly owned subsidiary, CFR. The Revolving Credit Facility
and indenture governing the Senior Notes restricts the ability of CFR to make
advances and pay dividends to the Company.
Holders
As of March 13, 1997, the Company had approximately 267 holders of record of its
Common Stock. The Company believes there are in excess of 1,000 beneficial
owners of its Common Stock.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 123
<SECURITIES> 0
<RECEIVABLES> 12,917
<ALLOWANCES> 1,906
<INVENTORY> 147,161
<CURRENT-ASSETS> 0
<PP&E> 45,790
<DEPRECIATION> 10,123
<TOTAL-ASSETS> 247,199
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 127
<OTHER-SE> 125,025
<TOTAL-LIABILITY-AND-EQUITY> 247,199
<SALES> 42,589
<TOTAL-REVENUES> 234,149
<CGS> 25,207
<TOTAL-COSTS> 62,165
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 640
<INTEREST-EXPENSE> 8,251
<INCOME-PRETAX> 27,197
<INCOME-TAX> 11,261
<INCOME-CONTINUING> 15,936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,936
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
</TABLE>
