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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
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-14146
CORT BUSINESS SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-1662135
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4401 Fair Lakes Court, Fairfax, VA 22033
(Address of principal executive offices) (Zip Code)
(703) 968-8500
(Registrant's telephone number, including area code)
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 [X] No [ ]
Non-affiliates of CORT Business Services Corporation held 6,904,501 shares
of Common Stock as of March 29, 1999. The fair market value of the stock held by
non-affiliates is $159,666,586 based on the sale price of the shares on March
29, 1999.
As of March 29, 1999, 8,744,174 shares of Common Stock, par value $.01,
were outstanding.
As of March 29, 1999, 4,350,411 shares of Class B 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 Part II
ended December 31, 1998
Proxy Statement for the Annual Meeting of Part III
Stockholders to be held May 11, 1999
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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 900
salespeople and a network of 119 showrooms in 32 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. The Company
maintains the showroom quality condition of its merchandise available for rent
by selling its previously rented merchandise through a network of 83
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
108% 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 17% of the Company's total
1998 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 furniture rental
needs of a corporate customer base which includes Fortune 500 companies, small
businesses and professionals, and owners and operators of apartment communities.
According to industry estimates, a significant portion of the "rent-to-rent"
furniture rental revenues is derived from 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 1993, the Company has acquired two larger regional competitors,
General Furniture Leasing and Evans Rents, and has completed and successfully
integrated 19 lease portfolio acquisitions. Management believes that CORT is
well-positioned to continue capitalizing on the industry's consolidation trend
due to its national presence, leading market share and financial capacity.
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 and clearance centers in existing markets; (iii) expanding
its corporate customer base and (iv) continuing to invest in the development of
various products and services.
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 1993, the Company has completed
18 small lease portfolio acquisitions which include entrance into the New York
City, Salt Lake City, Pittsburgh and Cleveland markets. In addition, the Company
completed the purchase of the rental furniture business of Instant Interiors
Corporation. This acquisition expands CORT's reach into the Midwest,
particularly in Michigan, Illinois, Indiana, and Ohio, and provides a
centralized distribution format that is cost effective in serving large
geographic areas containing many smaller cities. In a typical lease portfolio
acquisition, the Company acquires existing leases and rental furniture.
Additionally, the Company retains sales personnel with strong local customer
relationships. The Company generally does not acquire showrooms, distribution
facilities or
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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 Leasing 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 Leasing provided CORT with immediate access to
new market areas and additional critical mass in CORT's existing markets. Evans
Rents provided CORT with additional critical mass in the greater Los Angeles and
San Francisco areas, increased 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.
The Company entered the trade show furnishings business through acquisition of
three businesses in 1997. These businesses have been integrated to create CORT's
trade show furnishings segment and will establish CORT as one of the major
players in this segment of the furniture rental industry. To further expand this
segment, the Company purchased certain assets of the trade show furnishings
business of Aaron Rents, Inc. in October 1998. The trade show furnishings
business serves the major trade show contractors and corporate exhibitors
nationwide and provides specialty rental furniture for use at conventions and
trade shows. Major locations served include: Atlanta, Chicago, Dallas, Las
Vegas, Los Angeles, New Orleans, Orlando, New York City, San Francisco, and
Washington, D.C.
New Markets and Additional Facilities
The Company continues to expand the number of showrooms and clearance centers
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 and clearance centers associated with existing distribution
facilities, 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 seven new metropolitan markets: Birmingham, AL;
Huntsville, AL; Little Rock, AR; Portland, OR; St. Louis, MO; Las Vegas, NV and
El Paso, TX.
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.
In addition, the Company has introduced the high quality brand of office systems
furniture by Herman Miller. The Company continues 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 housewares amenity packages, the supply of furniture for trade shows
and conventions, and a website that provides information for relocating
customers. 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.
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 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
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provide furnished apartments and individual residents seeking to rent
furnishings for their own homes and apartments.
Management believes the demand for rental products is 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 "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.
Operating Segments
The Company has identified the following operating segments based on the
distinct products/services from which each derives revenue:
Furniture Rental - rental of residential and office furniture and accessories
to individual and corporate customers.
Furniture Sales - sale of new or previously rented residential and office
furniture to the general public.
Trade Show - short term rental of display and workplace furnishings for
Operations trade shows, conventions, and special events to
corporate customers and trade show associations.
Housewares - rental of kitchen, bedroom and bathroom accessories to the
Operations Furniture Rental segment.
Furniture rental and furniture sales segments represent the aggregation of
individual districts, all of which have similar economic characteristics and
distribution methods. Trade Show Operations and Housewares Operations are
aggregated with furniture rental and furniture sales for reporting purposes.
The Company reports separately, in its Consolidated Statements of Operations,
the revenue and associated cost of revenue of its reportable segments. Operating
segments are measured on the basis of gross margin; operating expenses, goodwill
amortization, interest expense, tax expense, and extraordinary items are not
allocated to the individual segments.
Assets and liabilities are not specifically allocated between Furniture Rental
and Furniture Sales. All rental furniture is available for rental or sale.
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
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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 contact with corporate
relocation departments and present the possibility of obtaining fully-furnished
rental apartments as a lower cost alternative to hotel accommodations. Thus, the
Company offers its corporate rental customers a way to reduce the costs of
corporate relocations 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 realized by third-party
contractors.
The Company provides rental specialty furniture for short term use at trade
shows and conventions through its trade show furnishings operation. The Company
had operations in New Orleans and California. The trade show services business
expanded through the acquisition of three trade show businesses in March 1997
and one trade show business in October 1998. 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.
The Company established Relocation Central, a website that provides information
about major cities such as apartment finders, school systems, movers and local
recreation for relocating individuals. Relocation Central provides the Company
with an additional marketing tool while also providing valuable information to
potential customers.
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 customer security deposit 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
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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 0.7% 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, 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.
Furniture Sales
For the last five years, the Company has derived 71% 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 108%, at 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.
Sales, Marketing and Advertising
The Company employs a sales force of approximately 900 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 walk-in clearance center customers and commercial
and residential account executives work to develop office and residential
customers in their markets. Utilizing the Company's national distribution
network to emphasize its ability to serve customers throughout the country, the
Company employs fourteen 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 and http://www.relocationcentral.com). The Company designs
its marketing program both to promote the business and to increase awareness of
the advantages of renting in the residential and office furniture markets.
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 1998, 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
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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 significant
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.
Employees
On December 31, 1998, the Company employed approximately 2,700 people, of whom
approximately 106 were employed at corporate headquarters. Approximately 900
people were employed as salespersons, 1,500 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 49
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 primarily under the CORT Furniture Rental
tradename, 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 this name. 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 for a period of
time.
Regulatory Matters
Compliance with Federal, state and local laws and regulations governing
pollution and protection of the environ-ment is not expected to have any
material effect upon the financial condition or results of operations of the
Company.
Subsequent Event
On March 25, 1999 the Company entered into an Agreement and Plan of Merger among
the Company, CBF Holding LLC, a Delaware limited liability company, and CBF
Mergerco Inc., a Delaware corporation. Pursuant to the Merger
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Agreement, an investor group that includes Bruckmann, Rosser, Sherrill & Co.,
Inc. ("BRS") and members of the Company's management team will acquire the
Company for consideration of $24.00 per share in cash and $2.50 per share in
liquidation value of a new series of preferred stock. Citicorp Venture Capital,
Ltd. ("CVC") will retain a portion of its investment and thereby provide equity
financing to the resulting corporation.
The merger agreement requires approval by the holders of a majority of the
Company's voting stock and, in addition, approval by the holders of a majority
of the outstanding voting stock who are not affiliated with BRS, CVC or other
members of the investor group. The merger is also subject to other conditions,
including receipt of necessary financing, a limitation on the number of
dissenting shareholders and certain regulatory approvals. The merger agreement
will terminate if the investor group has not obtained customary commitment and
highly confident letters to provide the required debt financing within thirty
days after the date of the merger agreement. There can be no assurance that the
merger will be completed, or that the merger will be completed as contemplated.
ITEM 2. Properties
As of December 31, 1998, the Company carried out its rental, sales and warehouse
operations through 277 facilities, of which 20 were owned and 257 were leased.
The leased facilities have lease terms with expiration dates ranging from 1999
to 2014. 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 and clearance centers that can be serviced from
pre-existing warehouses. The Company's showrooms generally have 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:
<TABLE>
<CAPTION>
District Locations Number of Showrooms
- ----------------------------------------- -------------------
<S> <C> <C>
ALABAMA Birmingham 1
Huntsville 1
ARIZONA Phoenix 2
ARKANSAS Little Rock 1
CALIFORNIA Orange County 2
Los Angeles 6
Sacramento 1
San Diego 1
San Francisco 5
Santa Clara 2
COLORADO Denver 2
DISTRICT OF COLUMBIA (1) 7
FLORIDA Ft. Lauderdale 2
Jacksonville 1
Miami 2
Orlando 3
Pensacola 1
Tampa 2
GEORGIA Atlanta 6
ILLINOIS Chicago 4
INDIANA Indianapolis 3
KANSAS Kansas City 1
KENTUCKY Louisville 2
LOUISIANA Baton Rouge 2
New Orleans 1
MASSACHUSETTS Boston 3
MICHIGAN Ann Arbor 1
Detroit 4
Grand Rapids 1
</TABLE>
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<TABLE>
<CAPTION>
District Locations Number of Showrooms
- ----------------------------------------- -------------------
<S> <C> <C>
Kalamazoo 1
Lansing 1
MINNESOTA Minneapolis 2
MISSOURI St. Louis 1
NEVADA Las Vegas 1
NEW JERSEY Kearny 3
NEW MEXICO Albuquerque 1
NEW YORK New York 1
NORTH CAROLINA Raleigh 2
Charlotte 2
OHIO Cincinnati 2
Cleveland 2
Columbus 1
OKLAHOMA Oklahoma City 1
Tulsa 1
OREGON Portland 1
PENNSYLVANIA Philadelphia(2) 4
Pittsburgh 1
TENNESSEE Memphis 1
Nashville 1
TEXAS Austin 1
Corpus Christi 1
Dallas 4
El Paso 1
Houston 4
San Antonio 2
UTAH Salt Lake City 1
VIRGINIA Richmond 1
Virginia Beach 1
WASHINGTON Seattle 3
---
TOTAL 119
</TABLE>
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(1) Includes locations in Washington, D.C., Maryland and Virginia.
(2) Includes locations in Pennsylvania, New Jersey and Delaware.
The Company distributes its furniture using a fleet of approximately 352 leased
and 47 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, 1998, 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.
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.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Paul N. Arnold (3) 52 President, Chief Executive Officer & Director
Robert Baker 44 Group Vice President--CORT Instant
Anthony J. Bellerdine 50 Senior Group Vice President
</TABLE>
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<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael G. Connors 42 Vice President--Real Estate
Charles M. Egan (3) 62 Chairman & Director
Kenneth W. Hemm 44 Executive Vice President & Chief Operating Officer - Division II
Steven D. Jobes 49 Executive Vice President & Chief Marketing Officer
Lloyd Lenson 48 Executive Vice President & Chief Operating Officer - Division I
Victoria L. Stiles 44 Vice President--Human Resources & Corporate Risk Management
William Swets 44 Vice President--Business Development
Maureen C. Thune 33 Vice President--Controller & Assistant Secretary
Frances Ann Ziemniak 48 Executive Vice President, Chief Financial Officer & Secretary
Keith E. Alessi (2) 44 Director
Bruce C. Bruckmann (1)(2) 45 Director
Michael A. Delaney(1) 44 Director
Gregory B. Maffei(2) 38 Director
James A. Urry (1) 45 Director
</TABLE>
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(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 30 years and has
held group management positions within CORT since 1976. He has held his current
position since July 1992. He is also a Director of Town Sports International,
Inc.
ANTHONY J. BELLERDINE, Senior 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 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, Executive Vice President & Chief Operating Officer--Division
II. Mr. Hemm has been with CORT for 17 years. He was appointed Group Vice
President in June 1992, having served as Group Manager since January 1991.
STEVEN D. JOBES, Executive Vice President & Chief Marketing Officer. Mr. Jobes
has been with CORT for 26 years and served as Group Vice President prior to
assuming his current position in May 1993.
LLOYD LENSON, Executive Vice President & Chief Operating Officer--Division II.
Mr. Lenson has been with CORT for 19 years serving in his current position since
May 1993. He previously served as Group Vice President and as Vice
President--Marketing, Sales and Acquisitions.
ROBERT BAKER, Group Vice President--CORT/Instant. Mr. Baker joined the Company
in August 1998 with the acquisition of certain assets of Instant Interiors
Corporation. Mr. Baker was the Chairman of Instant Interiors Corporation from
1978 until the acquisition.
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.
-9-
<PAGE>
WILLIAM SWETS, Vice President--Business Development. Mr. Swets joined the
Company in August 1998 with the acquisition of certain assets of Instant
Interiors Corporation. Mr. Swets was the founder and president of Instant
Interiors Corporation from 1978 until the acquisition.
MAUREEN C. THUNE, Vice President--Corporate 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, Executive Vice President, Chief Financial Officer and
Secretary. 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 Ernst & Young LLP.
KEITH E. ALESSI, Director. Mr. Alessi is currently President, Chief Executive
Officer and Chairman of the Board of Directors of Telespectrum Worldwide, Inc.
Mr. Alessi was President and Chief Executive Officer of Jackson Hewitt Inc. from
June 1996 through March 1998. He was Vice Chairman and Chief Financial Officer
of Farm Fresh, Inc. (which filed voluntary bankruptcy as part of a sale of the
company in January 1998 and emerged from bankruptcy in February 1998) 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
was Chairman and Chief Executive Officer of Virginia Supermarkets, Inc., from
1992 to 1994. He is also a Director of Town Sports International, Inc.
BRUCE C. BRUCKMANN, Director. 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
AmeriSource Health Corporation, Anvil Knitwear, Inc., Chromcraft-Revington,
Inc., Jitney-Jungle Stores of America, Inc., MEDIQ, Incorporated, Mohawk
Industries, Inc., Penhall International, Inc. and Town Sports International,
Inc.
MICHAEL A. DELANEY, Director. Mr. Delaney is currently a Managing Director of
Citicorp Venture Capital Ltd., which is an affiliate of the Company. From 1989
through 1997, he was a Vice President of Citicorp Venture Capital Ltd. and from
1986 through 1989 he was Vice President of Citicorp Mergers and Acquisitions.
Mr. Delaney is also a Director of Allied Digital Technologies Corporation, Aetna
Industries, Inc., AmeriSource Health Corporation, CLARK Material Handling
Corporation, Delco Remy International, Inc., Enterprise Media Inc., FabriSteel,
Inc., Great Lakes Dredge & Dock Corporation, GVC Holdings, IKS Corporation, JAC
Holdings, MSX International, Inc., Palomar Technologies, Inc., SC Processing,
Inc., and Triumph Group, Inc.
GREGORY B. MAFFEI, Director. Mr. Maffei is the Chief Financial Officer of
Microsoft Corporation. He joined Microsoft in April 1993, served as Treasurer
from 1994 to 1996 and Vice President, Corporate Development from 1996 to 1997,
and was promoted to Chief Financial Officer in July 1997. Mr. Maffei is also a
Director of Ragen MacKenzie Group Inc., Skytel Communications, Inc. and
Starbucks Corporation.
JAMES A. URRY, Director. 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 Airxcel, Inc., AmeriSource Health Corporation, Brunner Mond
Holdings, CLARK Material Handling Corporation, Hancor Holding Corporation, IKS
Corporation, Palomar Products Inc., and York International Corporation.
-10-
<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 1998 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 1998 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 1998 Annual Report to Stockholders.
In addition to historic information, this Annual Report on Form 10-K includes
certain forward-looking statements as such term is defined in Section 27A of the
Securities Act and Section 21E of the Exchange Act. These forward- looking
statements involve certain risks and uncertainties, including but limited to
acquisitions, additional financing requirements, development of new products and
services, the effect of competitive products and pricing and the effect of
general economic conditions, that could cause actual results to differ
materially from those in such forward-looking statements.
ITEM 8. Financial Statements and Supplementary Data
The consolidated balance sheets of CORT Business Services Corporation and
subsidiary as of December 31, 1998 and 1997, 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, 1998 are incorporated by
reference to pages 15 through 27 of the Company's 1998 Annual Report to
Stockholders.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
No response to this Item is required.
-11-
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by Item 401 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
Information appearing under "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's Notice of Annual Meeting of Shareholders
and Proxy Statement for the 1999 annual meeting of stockholders (the "1998 Proxy
Statement") is incorporated herein by reference. The Company will file the 1998
Proxy Statement with the Commission pursuant to Regulation 14A within 120 days
after the close of the fiscal year.
ITEM 11. Executive Compensation
The information required for this item is incorporated by reference to the
Company's 1998 Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required for this item is incorporated by reference to the
Company's 1998 Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required for this item is incorporated by reference to the
Company's 1998 Proxy Statement.
-12-
<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)
-13-
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
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
(Principal financial officer)
By: /s/ Maureen C. Thune
-----------------------------------
Maureen C. Thune
(Principal accounting officer)
Date: March 31, 1999
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, 1998
- ------------------------- executive officer) and Director
Paul N. Arnold
/s/ Charles M. Egan Chairman and Director March 31, 1998
- -------------------------
Charles M. Egan
/s/ Frances Ann Ziemniak Executive Vice President, Chief Financial March 31, 1998
- ------------------------- Officer and Secretary
Frances Ann Ziemniak
/s/ Keith E. Alessi Director March 31, 1998
- -------------------------
Keith E. Alessi
/s/ Bruce C. Bruckmann Director March 31, 1998
- -------------------------
Bruce C. Bruckmann
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Michael A. Delaney Director March 31, 1998
- -------------------------
Michael A. Delaney
/s/ Gregory B. Maffei Director March 31, 1998
- -------------------------
Gregory B. Maffei
/s/ James A. Urry Director March 31, 1998
- --------------------------
James A. Urry
</TABLE>
-15-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements............................................... 13
Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant......... S-1
Schedule II - Valuation and Qualifying Accounts.................... S-3
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------ ----------- ----
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of March 25, 1999,
among the Company, CBF Holding LLC and CBF Mergerco, Inc.;
incorporated by reference to Exhibit 2.1 the Company's Form
8-K, filed on March 29, 1999.
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 Amendment to Restated Certificate of Incorporation;
incorporated by reference to Appendix A to the Company's
Definitive Proxy Statement on Schedule 14A, filed as of March
31, 1997
3.3 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
10.1 Credit Agreement dated as of February 13, 1998 by and among
CFR, the Company, the lenders identified therein, and
NationsBank, N.A., as agent; incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997
10.2 Stock Option, Securities Purchase and Stockholders Agreement,
dated as of January 18, 1994, by and among the Company, CFR,
Citicorp Venture Capital Ltd. and certain investors named
therein; incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-8, No. 33-72724,
filed on December 9, 1993
10.3 Amendment 1 to New Cort Holdings Corporation and Subsidiary
Employee Stock Option and Stock Purchase Plan as adopted by
the Board of Directors of the Company on December 21, 1993;
incorporated by reference to Exhibit 10.11 to CFR's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993
10.4 New Cort Holdings Corporation and Subsidiary Employee Stock
Option and Stock Purchase Plan (1995 Plan Distribution) as
adopted by the Board of Directors of the Company on December
16, 1994; incorporated by reference to Exhibit 10.13 to CFR's
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1995
10.5 Form of First Amendment to Stockholders Agreement, dated as of
November 13, 1995, by and among the Company, Citicorp Venture
Capital Ltd., and certain investors named therein;
incorporated by reference to Exhibit 10.5 to Amendment No. 3
to the Company's Registration Statement on Form S-1, No.
33-97568 filed on November 13, 1995
10.6 Registration Rights Agreement for Common Stock, dated as of
January 18, 1994, by and among the Company, Citicorp Venture
Capital Ltd. and certain investors named therein; incorporated
by reference to Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1994
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------ ----------- ----
<S> <C> <C>
10.7 CFR's Supplemental Executive Retirement Plan, dated October
28, 1992, as revised effective January 1, 1993, restated
through the Second Amendment; incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996
10.8 Agreement for Irrevocable Trust Under CORT Furniture Rental
Supplemental Executive Retirement Plan, dated June 1, 1996,
between CFR and Mentor Trust Company; incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996
10.9 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
10.10 Letter Agreement, dated August 18, 1993, between CFR and Paul
N. Arnold; incorporated by reference to Exhibit 10.26 to
Amendment No. 5 to the Company's Registration Statement on
Form S-1, No. 33-65094, filed on August 25, 1993
10.11 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
10.12 Amended and Restated CORT Business Services Corporation 1995
Directors Stock Option Plan adopted by the Board of Directors
October 18, 1995 and amended and restated on May 14, 1997;
incorporated by reference to Exhibit 10.13 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1997
10.13 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
10.16 Amended and Restated CORT Business Services Corporation 1995
Stock Based Incentive Compensation Plan as adopted by the
Board of Directors on July 25, 1995 and amended and restated
on May 14, 1997; incorporated by reference to Exhibit 10.17 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997
10.17 CORT Business Services Corporation 1997 Directors Stock Option
Plan, as adopted by the stockholders of the Company at the
Annual Meeting of Stockholders on May 14, 1997; incorporated
by reference to Appendix C to the Company's Definitive Proxy
Statement on Schedule 14A, filed as of March 31, 1997
11.1 Statement re computation of per share earnings; incorporated
by reference to page 5 of the Company's Form 10-Q for the
fiscal quarter ended September 30, 1998
13.1 Portions of the Annual Report of the Company for the fiscal
year ended December 31, 1998 which are expressly incorporated
by reference herein
21.1 List of Subsidiaries
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------ ----------- ----
<S> <C> <C>
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedules
</TABLE>
E-3
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in thousands)
Condensed Balance Sheets:
<TABLE>
<CAPTION>
As of December 31,
-----------------------
1997 1998
---- ----
<S> <C> <C>
Investment in CORT Furniture Rental .............. $149,332 $175,662
Other assets ..................................... -- --
-------- --------
Total assets ................................. 149,332 175,662
======== ========
Accrued expenses ................................. -- --
Long-term debt ................................... -- --
-------- --------
Total liabilities ............................ -- --
Stockholders' equity ............................. 149,332 175,662
-------- --------
Total liabilities and equity ................. $149,332 $175,662
======== ========
</TABLE>
Condensed Statements of Operations:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Equity in earnings of CORT Furniture
Rental .................................. $15,936 $22,326 $23,395
Interest expense ........................... -- -- --
------- ------- -------
Income before income taxes ............. 15,936 22,326 23,395
Income tax benefit ......................... -- -- --
------- ------- -------
Net income ............................. $15,936 $22,326 $23,395
======= ======= =======
</TABLE>
S-1
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
(in thousands)
Condensed Statements of Cash Flows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income ....................................... $ 15,936 $ 22,326 $ 23,395
Adjustments to reconcile net income to cash flows
from operating activities:
Equity in earnings of CORT Furniture Rental .. (15,936) (22,326) (23,395)
Discount on junior subordinated debentures ... -- -- --
Interest converted to long-term debt ......... -- -- --
Changes in assets and liabilities, net ....... -- -- --
-------- -------- --------
Cash used in operating activities ....... -- -- --
-------- -------- --------
Cash flows from investing activities:
Investment in CORT Furniture Rental .......... (33,224) (677) (826)
-------- -------- --------
Cash used in investing activities ....... (33,224) (677) (826)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock ..................... 33,224 677 826
Net proceeds from issuance of long-term debt . -- -- --
-------- -------- --------
Cash provided by financing activities ... 33,224 677 826
-------- -------- --------
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:
Tax benefit from exercise of stock options ... 571 1,177 2,109
</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 subsidiary as
of December 31, 1998 and 1997, and for each of the years in the three-year
period ended December 31, 1998, which appear in the Company's 1998 Annual Report
to stockholders.
S-2
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Deductions
Additions ----------
------------------------- Write off of
Allowance for Beginning Charged to Uncollectible Ending
Doubtful Accounts Balance Expense Other(1) Accounts Balance
- ----------------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
December 31, 1996 938 1,234 334 (600) 1,906
December 31, 1997 1,906 2,107 -- (1,122) 2,891
December 31, 1998 2,891 1,710 -- (1,422) 3,179
</TABLE>
- -------------
(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
[CORT LOGO]
1998 Annual Report
Furnishing
Solutions
for the
Professional
World
<PAGE>
CORT Today
CORT Business Services Corporation is the
largest, and only national, provider of high-
quality office and residential rental furniture
and related accessories. The Company provides
corporations, small businesses and individuals
with temporary office, residential and trade
show furniture and furnishings. CORT's national
network, embracing 32 states and the District
of Columbia, includes 119 rental showrooms,
83 furniture clearance centers and 75 distribution
centers. The Company's operational brand names
include: CORT Furniture Rental, CORT/Instant
Furniture Rental, General Furniture Leasing,
CORT Furniture Rental Clearance Center,
CORT Housewares, CORT Trade Show
Furnishings and Relocation Central.
Furnishing Solutions for
the Professional World
o Office Furniture Rental
o Residental Furniture Rental
o Retail Sales
o Internet 7 Relocation Services
o Housewares Rental
o Trade Show Furnishings
o Customitzed Product
o National Accounts Program
<PAGE>
Financial Highlights
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1997 1998
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Furniture rental revenue ................ $191,560 $237,212 $265,871
Furniture sales revenue ................. 42,589 50,006 53,093
Total revenue ......................... 234,149 287,218 318,964
Gross profit ............................ 171,984 211,327 238,747
Operating earnings ...................... 35,448 46,308 52,647
Income before extraordinary loss ........ 15,936 22,326 25,903
Per diluted share ..................... 1.31 1.67 1.92
As of December 31,
- ------------------
Total assets ............................ $247,199 $277,841 $332,896
Total debt .............................. 65,600 63,132 90,800
Stockholders' equity .................... 125,152 149,332 175,662
</TABLE>
Total Rental Gross Operating
Revenue Revenue Profit Earnings
(in millions) (in millions) (in millions) (in millions)
chart chart chart chart
1
<PAGE>
To Our Investors:
Once again, I am pleased to begin my report on a note of achievement and
optimism.
As a new century approaches, CORT's financial, organizational and
managerial resources make it very well positioned for continued growth. Our
strengths include a proven and consistent strategic plan, a dominant position in
a dynamic market, and an experienced management team committed to enhancing
value for all investors.
In addition, we continue to make significant infrastructure investments
that will serve us well in the future. One notable step is the funding of
high-potential incubator businesses that complement our core rental operations.
Another is our Internet presence, which consists of relocationcentral.com, a web
site that provides local market information for transferring business people,
and CORT1.com, an increasingly important sales, marketing and service channel
for on-line information about CORT products and services.
CORT is truly furnishing solutions for growth in the professional world as
few other companies can.
CORT was one of the first participants in the rent-to-rent furniture
industry. Other early entrants have not progressed much further than renting
furniture and furnishings for the apartments of individual customers. But CORT
saw an opportunity to support the growth of the American business
infrastructure--from home-based offices to Main Street businesses to regional
companies to global corporations, along with the away-from-home residences of
corporate employees. Today, as the largest company and most active consolidator
in a highly fragmented industry, CORT's early vision is paying off.
[reverse insert]
"CORT saw an
opportunity to
support the
growth of the
American business
infrasturcture."
A Year Of Steady Progress
Revenues for the year ended December 31, 1998 rose 11.1% to $319.0 million,
a new record, from $287.2 million in 1997. Operating income of $52.6 million
increased 13.7% from $46.3 million the year before. Income before an
extraordinary loss rose to $25.9 million, or $1.92 per diluted share, from $22.3
million, or $1.67 per diluted share, a year ago. CORT's operating margin of
16.5% rose from 16.1% in 1997. This productivity yardstick is one of the best in
the rent-to-rent furniture industry.
In September, CORT redeemed the remaining $49.9 million principal of its
12% senior notes at 107% of the principal amount of each note. Accordingly, the
Company recognized an extraordinary loss of $2.5 million: primarily the premium
paid to noteholders, net of the associated tax benefits. Early retirement of the
senior notes replaces high cost debt with lower cost debt and strengthens our
financial position for the future.
The sole discordant note in an otherwise robust and productive year was a
slowing of our traditional rate of growth in core rental revenues, which exclude
acquisitions and trade show operations. To address this situation, we plan to
aggressively pursue market share in key segments and introduce new sales
enhancement programs. In addition, we realigned our management structure to
place our senior managers closer to business opportunities in local markets.
These measures should lead to a higher rate of revenue growth and energize the
Company for long-term quality performance.
2
<PAGE>
In addition to these initiatives, CORT will continue its expansion program.
External growth reinforces our position as the only national company in our
industry, builds brand equity and embellishes our reputation for superior
customer service. Expansion, through a combination of internal investments and
acquisitions, is central to our strategy for sustained, above-average growth.
Acquisitions Continue
Since the beginning of 1998, we acquired four furniture rental companies
with total annualized revenues of approximately $30 million. We also purchased a
trade show furnishings business, taking us deeper into an important market
sector.
The acquired rental businesses--IS Furniture Rental Corp., Furniture
Rentors of America, Inc., Instant Interiors Corporation and Alco Furniture
Rental Co.--give us additional presence in the important Northeast Corridor and
the growing Midwest.
In addition to expanding our geographic reach, the Instant Interiors
acquisition also provides a centralized distribution format that is
cost-effective in serving large geographic areas containing many smaller cities.
This template will be valuable as we expand outward from major business centers.
The ability to offer customers a national presence is a vital part of our
business plan. Corporate customers, who account for approximately 80% of our
rental revenue, require a degree of reach, responsiveness and product breadth
only CORT can provide. Customers also prefer a single point of contact available
through a national accounts program like ours.
This ability to meet big-company needs has attracted customers like
Andersen Consulting, EDS, Exxon Corporation, The Great-West Life Assurance
Company, PepsiCo Inc., Sprint and Universal Studios. Concurrently, CORT serves
middle market, small and start-up companies, and meets an array of residential
needs. This is the professional world of today, and CORT is furnishing it.
The New Millennium
We are very confident about the strength of our core businesses, and we
have the ability to take advantage of new opportunities. All the elements needed
for progress--forward momentum, investments in our infrastructure, a tested
strategic plan and a focused and motivated employee team--are in place. With the
support of our customers, directors, employees and managers, we approach the
future with confidence.
/s/ Paul N. Arnold
- -------------------------------------------
Paul N. Arnold
President and Chief Executive Officer
3
<PAGE>
Furnishing Support for Business Growth
The growth-oriented business arena of today and tomorrow is a world of
people on the move: To consulting assignments, training sessions, outsource
projects, relocation sites. From corporate headquarters to divisions,
subsidiaries, sales offices, manufacturing sites, distribution centers, research
facilities.
Each move sets up needs for fully furnished work and living environments.
Only CORT can provide so broad a range of office and residential furniture and
furnishings to meet customers' duration, location, quantity and budget needs.
Beginning early in this decade, the world shrank, time compressed and
borders dissolved. In response, corporations abandoned traditional notions of
how the workplace should be structured. Corporations found that mobility and
flexibility, properly harnessed, could be potent tools in the search for new
markets, increased productivity, higher profitability and faster growth. This
led to re-engineering, downsizing and outsourcing. It led, in sum, to a world of
changing values.
Fortunately, CORT's culture embraces flexibility and adaptability. We
operate with a sense that the needs of our customers will be different tomorrow.
This challenge is one we are continuously prepared to meet.
A View Of The New World
Business people are adaptable and comfortable with change: Temporary
employees, hired for a week, stay for a year. Project teams "parachute in" to
solve problems and put out fires. Consultants remain continuously on site to
implement solutions and troubleshoot systems. Employees "telecommute" from
furnished home offices and work out of satellite office "hotels."
Business tools are revolutionizing communications, data management and
information exchange--the new foundations of industry. Cell phones the size of a
playing card reach anywhere in the world; handheld computer devices send and
receive faxes and e-mail; laptop computers more powerful than mainframes access
multiple databases and workgroups and turn any airport, automobile or hotel room
into a virtual office.
Home offices become functional, efficient and technologically advanced:
Working in comfortable, familiar surroundings, entrepreneurs find an environment
that supports their creativity and helps them bring imaginative new ideas to
life.
These changes have enormous implications for the rental of CORT products
and services.
[reverse insert with picture]
"CORT is the com-
pany best able to
meet a customer's
preferences in
office furniture
and furnishings for
living quarters."
For example, approximately 12 million new white-collar jobs were created
between 1984 and 1994, and the Bureau of Labor Statistics predicts a comparable
number of new jobs by 2005. Similarly, when CORT was founded in 1972,
outsourcing, as a concept, barely existed. Today, many jobs are filled by
contract workers rather than corporate employees. Outsourcing has become an
important driver of our business and exemplifies the changes sweeping through
our customer base.
4
<PAGE>
At CORT, one rental order
has incredible potential:
Office
[picture]
National Accounts
[picture]
Trade Shows
[picture]
Internet
[picture]
5
<PAGE>
Offering More Services
to Out Custoemrs:
Home
[picture]
Retail
[picture]
Housewares
[picture]
Relocation
[picture]
6
<PAGE>
Meeting the Needs of Customers
CORT's customers include corporations, businesses of all sizes, individuals and
apartment communities that meet relocation needs. Large or small, customers
expect high quality and reasonable cost in the office and residential furniture
and furnishings they rent, and value, service and responsiveness from the
resource they use. CORT best meets those needs, standards and expectations.
Corporations now prefer to rent furniture for many of the same reasons they
lease automobiles, business aircraft, office machines, capital equipment and
other items: Conservation of capital, costs tailored to every budget, flexible
lease lengths, extensive product choices, one-stop shopping, rapid order
fulfillment and, increasingly, the convenience of electronically accessed
information.
Ours is truly a business built on understanding and responding to the
customer.
In The Office Market, Flexibility
Is The Key
CORT rents a full line of branded, top-quality furniture that meets
temporary needs, whether short- or long-term, in any type or size business.
Our customers include start-up companies, businesses that are expanding or
transferring personnel from one site to another, and organizations establishing
temporary offices to accommodate contract employees, special project teams, task
forces, consultant groups, visiting auditors, outside inspection teams, summer
interns and training classes.
Movement in the workplace is a result of white-collar job creation,
corporate re-engineering and outsourcing. These factors and a growing preference
for renting over buying to conserve cash are key dynamics driving the
rent-to-rent furniture industry.
In The Residential Market, Comfort Counts
The furniture and furnishings needs of businesspeople away from home--as so
many are so often--don't end at the close of the workday. Being productive and
energetic during the day requires a comfortable environment at night and on
weekends. Hotels and motels are often expensive and lack the comforts of home.
But this sector of our customer base is composed of workers with choices.
And they are choosing to rent comfortable, cost-efficient apartments for
intervals ranging from a few months to a year or more. Once an apartment is
rented, CORT handles the rest, from the furniture in the living room and
bedrooms down to the smallest housewares and accessories. When CORT is finished,
a house has become a home.
In The Aftermarket, Recovering Costs
CORT's ability to generate revenues from furniture does not end with
rentals. By visiting a CORT furniture clearance center, customers can purchase
previously rented furniture at prices significantly below conventional retail
stores.
[reverse insert with picture]
"CORT welcomes
new ideas and
opportunities
that can draw
us closer to cus-
tomers through
established and
new businesses."
By the time a furniture item goes on sale in a clearance center, it has
been rented an average of three times in about three years. The item is still
stylish and attractive and represents excellent value to the buyer. CORT's
direct furniture investment is fully recovered through clearance center sales.
In addition to incremental revenue generation, clearance center sales enable us
to maintain the showroom quality of our rental products.
7
<PAGE>
Reaching More Customers with More Services
New Sources Of Growth
As a resourceful and innovative company, CORT welcomes new ideas and
opportunities that project our business identity and draw us closer to present
and potential customers.
Ironically, some of our most noteworthy success comes not from change, but
from consistency. In the traditional rent-to-rent segment of our business, for
example, we have followed the same game plan for years and now have nearly twice
the market share of our closest competitor. We intend to implement our proven
strategic plan with even greater energy and precision.
Even as we keep up the pressure in the traditional furniture rental market,
we seek new avenues of growth from related areas.
For example, we continue to invest in "incubator" businesses. These augment
our basic furniture rental activities by introducing new products and services
with high customer appeal.
Our housewares unit, which provides kitchen, bedroom and bathroom
accessories, was begun on an extremely modest investment. This unit has now
achieved a strategic importance consistent with a full-fledged business.
The CORT Trade Show Furnishings Division also began as an incubator
business. Trade shows, conventions and special events figure prominently in a
corporate marketing mix. CORT provides the display and workspace furniture, plus
"quiet room" furnishings, which make conventions such effective sales
environments.
The rapid growth of this unit has been supplemented by acquisitions, the
most recent of which was the purchase of the trade show furnishings business of
Aaron Rents, Inc. This strengthens our existing activities in Las Vegas,
Chicago, Dallas, Orlando, Atlanta, New York, Los Angeles and San Francisco.
The trade show business shows signs of becoming CORT's next breakthrough
success.
While not an incubator business in the traditional sense, CORT's growing
and increasingly sophisticated use of the Internet illustrates how quickly we
can turn opportunity to our advantage.
We operate two Internet addresses: relocationcentral.com is aimed at
relocating employees through corporate human resources departments--an important
part of our customer base. It provides updated newcomer information about
housing and apartment availabilities, schools, taxes, transportation and
recreational and cultural activities in many cities. The other, CORT1.com,
provides visitors with a showroom locator and an on-line catalog that can be
used to shop for CORT products and services.
www.relocationcentral.com
[picture]
www.CORT1.com
[picture]
8
<PAGE>
CORT Business Services and Subsidary
Financial Review
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
9
<PAGE>
CORT Business Services and Subsidary
Selected Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1994 1995 1996(1) 1997 1998
---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Furniture rental revenue .............................. $130,026 $141,988 $191,560 $237,212 $265,871
Furniture sales revenue ............................... 34,534 37,321 42,589 50,006 53,093
-------- -------- -------- -------- --------
Total revenue ....................................... 164,560 179,309 234,149 287,218 318,964
Furniture rental gross profit ......................... 104,255 114,038 154,602 191,578 218,008
Furniture sales gross profit .......................... 13,885 15,118 17,382 19,749 20,739
-------- -------- -------- -------- --------
Total gross profit .................................. 118,140 129,156 171,984 211,327 238,747
Selling, general and administrative expenses........... 95,526 102,435 136,536 165,019 186,100
-------- -------- -------- -------- --------
Operating earnings .................................... 22,614 26,721 35,448 46,308 52,647
Interest expense, net ................................. 16,246 15,917 8,251 8,374 7,837
Income (loss) before extraordinary loss ............... 3,546 6,218 15,936 22,326 25,903
Net income (loss) ..................................... $ 3,546 $ 2,075 $ 15,936 $ 22,326 $ 23,395
Earnings per common share before extraordinary loss(2) $ 0.91 $ 1.26 $ 1.40 $ 1.74 $ 1.99
Earnings per common share before extraordinary
loss--assuming dilution(2) ........................... $ 0.85 $ 1.11 $ 1.31 $ 1.67 $ 1.92
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1994 1995 1996 1997 1998
- ------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets........................................... $178,275 $173,722 $247,199 $277,841 $332,896
Total debt............................................. 123,645 53,800 65,600 63,132 90,800
Stockholders' equity................................... 6,963 75,421 125,152 149,332 175,662
</TABLE>
- --------------
(1) 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.
(2) 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 outstanding during the year. In connection with the
Company's 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.
10
<PAGE>
CORT Business Services and Subsidary
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 in this Annual Report
(dollars in thousands, except per share data).
Results of Operations
CORT Business Services Corporation ("the Company") is a holding company with no
assets other than its investment in CORT Furniture Rental Corporation ("CFR").
The following analysis compares the results of operations of the Company for the
years ended December 31, 1996, 1997 and 1998. The following table sets forth,
for the periods indicated, certain income statement data as a percentage of
total revenue, unless otherwise indicated.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Rental revenue ............................. 81.8% 82.6% 83.4%
Sales revenue .............................. 18.2 17.4 16.6
----- ----- -----
Total revenue ............................ 100.0 100.0 100.0
Cost of rental(1) .......................... 19.3 19.2 18.0
Cost of sales(1) ........................... 59.2 60.5 60.9
Gross profit margin ........................ 73.4 73.6 74.9
Selling, general and
administrative expenses .................. 58.3 57.5 58.4
----- ----- -----
Operating earnings ......................... 15.1 16.1 16.5
Interest expense, net ...................... 3.5 2.9 2.5
Income taxes ............................... 4.8 5.4 5.9
----- ----- -----
Income before extraordinary loss ........... 6.8% 7.8% 8.1%
Net income ................................. 6.8% 7.8% 7.3%
</TABLE>
- -------------
(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. 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 25%
to 40% of original cost. 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, non-rental depreciation, and
amortization of goodwill.
YEAR ENDED DECEMBER 31, 1998
AS COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue. Total revenue increased 11.1% to $318,964 in 1998 from $287,218 in
1997. Furniture rental revenue for the year was $265,871, a 12.1% increase from
$237,212 in 1997. Rental revenue growth before the impact of acquisitions, trade
show operations and merged markets was approximately 5% which reflects growth in
the number of leases as well as revenue per lease. Furniture sales increased
6.2% to $53,093 in 1998 from $50,006 in 1997. Excluding the impact of an
unusually large corporate sale in the second quarter of 1997, furniture sales
would have shown an increase of 10.1%. This increase reflects the Company's
continued efforts to maintain the quality of its rental furniture line-up.
Gross Profit. Gross profit margin on total revenue increased to 74.9% for the
year ended December 31, 1998 from 73.6% for the year ended December 31, 1997.
The gross profit margin on furniture rental revenue increased to 82.0% in 1998
from 80.8% in 1997. This improvement is primarily attributed to the expansion of
CORT's housewares business, a reduction in depreciation as a percent of revenue
and improvements in inventory control from the continued installation of the
perpetual system. Gross profit margin on furniture sales revenue decreased to
39.1% in 1998 from 39.5% in 1997. The gross profit margin on furniture sales
revenue for 1997 would have been 40.1% without the unusually large corporate
sale.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $186,100 or 58.4% of total revenue in 1998 as
compared to $165,019 or 57.5% of total revenue in 1997. This increase as a
percentage of revenue is attributed to investments in personnel, facilities and
marketing efforts which the Company believes are an integral part of its plans
for future growth.
Operating Earnings. As a result of the changes in revenue, gross margin and
selling, general and administrative expenses discussed above, operating earnings
increased to $52,647, or 16.5% of total revenue in 1998 from $46,308, or 16.1%
of total revenue in 1997.
Interest Expense, net. Interest expense decreased to $7,837 in 1998 from $8,374
in 1997. This decrease is due to the replacement of the senior notes with the
lower interest rate debt of the revolving credit facility and the effect of the
lower market interest rate on the revolving credit facility, partially offset by
additional borrowings for acquisitions.
11
<PAGE>
CORT Business Services and Subsidary
Mangement's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Extraordinary Loss. As a result of the early retirement of the senior notes, the
Company recognized a loss of $2,508, 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, 1998. The extraordinary loss includes $3,495 of
premiums on the senior note retirement, the write-off of $677 of deferred
financing fees and $8 of other associated costs.
Furniture Purchases. Furniture purchases totaled $81,671 in 1998, an increase of
7.4% from the $76,010 purchased in 1997. Furniture purchases increased primarily
due to purchases in acquired businesses. The remaining increase reflects normal
business requirements offset in part by a reduction for merged markets.
YEAR ENDED DECEMBER 31, 1997
AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue. Total revenue increased 22.7% to $287,218 in 1997 from $234,149 in
1996. Furniture rental revenue for the year was $237,212, a 23.8% increase from
$191,560 in 1996. Rental revenue growth before the impact of acquisitions and
merged markets was approximately 13% which reflects growth in the number of
leases as well as revenue per lease. Furniture sales increased 17.4% to $50,006
in 1997 from $42,589 in 1996. Excluding the impact of an unusually large
corporate sale in the second quarter of 1997, furniture sales would have shown
an increase of 13.3%. This increase reflects the Company's continued efforts to
maintain the quality of its rental furniture line-up.
Gross Profit. Gross profit margin on total revenue increased to 73.6% for the
year ended December 31, 1997 from 73.4% for the year ended December 31, 1996.
The gross profit margin on furniture rental revenue was 80.8% in 1997 and 80.7%
in 1996. Gross profit margin on furniture sales revenue decreased to 39.5% in
1997 from 40.8% in 1996. The profit margin on furniture sales revenue for 1997
would have been 40.1% without the unusually large corporate sale.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $165,019 or 57.5% of total revenue in 1997 as
compared to $136,536 or 58.3% of total revenue in 1996. This percentage decrease
is attributed to the efficiencies gained in California by integrating Evans
Rents, as well as the growth and productivity of the startups the Company opened
in prior years. In addition, 1996 included $425 of certain charges associated
with duplicate showroom closings related to the acquisition of Evans Rents.
Operating Earnings. As a result of the changes in revenue, gross margin and
selling, general and administrative expenses discussed above, operating earnings
increased to $46,308, or 16.1% of total revenue in 1997 from $35,448, or 15.1%
of total revenue in 1996.
Interest Expense, net. Interest expense increased to $8,374 in 1997 from $8,251
in 1996.
Furniture Purchases. Furniture purchases totaled $76,010 in 1997, a decrease of
1.7% from the $77,323 purchased in 1996. Purchases in 1996 were significantly
higher as the Company converted the Evans Rents business to the CORT Furniture
line. In 1997, furniture purchases supported normal growth and replenishment of
furniture which had been sold or disposed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for purchases of rental
furniture. 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
$77,323, $76,010 and $81,671 in 1996, 1997 and 1998, 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 leasehold improvements, warehouse and office equipment,
standard programming enhancements and computer hardware necessary for
installation of the management information system in additional districts. Net
purchases of property, plant and equipment were $5,652, $7,638 and $8,898 in
1996, 1997 and 1998, respectively.
During 1996, 1997 and 1998, net cash provided by operations was $78,374,
$100,639 and $108,189, respectively. During 1996, 1997 and 1998, net cash used
in investing activities was $122,927, $100,665 and $132,234 respectively,
consisting primarily of purchases of rental furniture and portfolio acquisitions
and in 1996, the acquisitions of Evans Rents and AFR and in 1998, the
acquisition of Instant Interiors Corporation. During 1996, 1997 and 1998, net
cash provided (used) by financing activities was $44,297, ($97) and $24,748,
respectively. 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.
12
<PAGE>
CORT Business Services and Subsidary
Mangement's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
CFR maintains a revolving credit facility that provides a $125,000 line of
credit to meet acquisition and expansion needs as well as seasonal working
capital and general corporate requirements. The revolving credit facility
expires February 2002 and restricts the ability of CFR to make advances and pay
dividends to the Company. 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, 1997 and 1998 on the revolving credit
facility was 7.30%, 7.25% and 6.70%, respectively. A commitment fee calculated
based upon the unused portion of the revolving credit facility is payable
quarterly in arrears. The Company had $30,447 available under the revolving
credit facility at December 31, 1998.
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 Internal Revenue Service ("IRS") had 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. The IRS challenge included 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. Fairwood Corporation
has indicated to the Company that it has reached an agreement with the IRS
regarding a settlement of the proposed adjustments. The bankruptcy court
handling Fairwood Corporation's bankruptcy filing approved the terms of the
settlement in October 1998. The total tax liability of the Former Group under
the terms of the settlement is approximately $5 million, including interest
through December 31, 1998. 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 $4 million for such
periods (including interest through December 31, 1998) under the terms of the
settlement. 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. The Company is not in a position to
determine the probable impact on the Company's consolidated financial
statements, if any.
YEAR 2000 COMPLIANCE
As is the case with other companies using computers in their operations, the
Company is faced with the task of addressing the Year 2000 issue. The Year 2000
issue arises from the widespread use of computer programs that rely on two-digit
codes to perform computations or decision-making functions. The Company has done
a comprehensive review of its significant computer programs to identify the
systems that would be affected by the Year 2000 issue.
The Company relies on computer-based technology and utilizes a variety of
third-party hardware and software. The Company's rental and retail functions,
including lease writing, inventory control, billing and accounts receivable use
the software called "RTR." This software, which is the Company's primary
operating system, has been recently developed and installed in most of the
Company's operations. The RTR software has been modified for Year 2000
compliance and is currently being tested. The installation of RTR in the
Company's remaining operations, as well as the Year 2000 modification, is
expected to be completed in the third quarter of 1999.
The Company utilizes third-party software for administrative functions such as
accounting, payroll and human resources. The Company expects to upgrade the
administrative function third-party software to the Year 2000 version or install
new software which is Year 2000 compliant in the first half of 1999. The Company
currently estimates the cost of modifying its computer systems to be Year 2000
compliant to be approximately $250; the majority of these costs will be incurred
by March 31, 1999.
13
<PAGE>
CORT Business Services and Subsidary
Mangement's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The Company is still in the process of reviewing its Year 2000 exposure to
customers and vendors. The Company is not dependent on any one supplier or
customer for more than 10% of its rental furniture or revenue, respectively. The
Company is sending inquiries as to Year 2000 readiness to selected vendors in
order to identify any significant exposures that may exist and establish
alternative sources or strategies where necessary. The Company is currently
unaware of any Year 2000 problems faced by any customers or vendors that are
likely to have a material adverse effect on the Company.
In a worst-case scenario, if the Company's operating system was not to be ready
for Year 2000, the Company would continue to make deliveries, record revenue and
bill customers utilizing a personal computer until the computer system was
ready. This would not stop the operations of the Company and currently is done
whenever a location experiences temporary down time.
There can be no guarantee that the foregoing cost estimates or deadlines will be
achieved and actual results could differ from current expectations. Specific
factors that might cause differences include, but are not limited to, the
ability of customers, suppliers, and other companies on which the Company's
operations rely to modify or convert their systems to be Year 2000 ready, the
ability of the Company to locate and correct all relevant computer code, or
similar uncertainties. The Company is in the process of developing contingency
plans for such scenarios.
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 effect on the
Company's future opportunities for sustained growth.
NEW ACCOUNTING PRONOUNCEMENTS
On April 3, 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities
(SOP 98-5) effective for the Company for fiscal year 1999. SOP 98-5 requires
costs of start-up activities, including organization costs, to be expensed as
incurred. The Company currently expenses all such start-up costs; accordingly,
the adoption of SOP 98-5 will have no impact on the Company's consolidated
financial statements.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report includes certain
forward-looking statements as such term is defined in Section 27A of the
Securities Act and Section 21E of the Exchange Act. These forward-looking
statements involve certain risks and uncertainties, including but not limited to
acquisitions, additional financing requirements, development of new products and
services, the effect of competitive products and pricing and the effect of
general economic conditions, that could cause actual results to differ
materially from those in such forward-looking statements.
14
<PAGE>
CORT Business Services and Subsidary
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................ $ -- $ 703
Accounts receivable, less allowance for doubtful
accounts of $2,891 and $3,179 in 1997 and 1998,
respectively ............................................ 13,521 14,585
Prepaid expenses ......................................... 4,127 5,918
Rental furniture, net (note 2) ........................... 164,323 189,059
Property, plant and equipment, net (note 4) .............. 38,777 43,861
Investment ............................................... -- 3,000
Other receivables and assets, net (note 5) ............... 3,183 3,048
Goodwill, net of accumulated amortization of $4,224 and
$6,159 in 1997 and 1998, respectively (note 12) ........ 53,910 72,722
-------- --------
$277,841 $332,896
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ......................................... $ 5,551 $ 3,417
Rental security deposits ................................. 7,978 9,581
Accrued expenses (note 10) ............................... 27,936 21,076
Deferred rental revenue .................................. 9,239 11,541
Long-term debt (note 6) .................................. 63,132 90,800
Deferred income taxes (note 5) ........................... 14,673 20,819
-------- --------
128,509 157,234
======== ========
Commitments and contingencies (notes 5, 7 and 9)
Stockholders' equity (notes 3, 8, and 11):
Common stock, voting, $.01 par value, 20,000,000
shares authorized, 12,869,306 and 13,084,541 shares
issued and outstanding in 1997 and 1998, respectively 129 131
Common stock, Class B, nonvoting, $.01 par value,
20,000,000 shares authorized, and none issued and
outstanding ........................................... -- --
Additional paid-in capital ............................. 103,007 105,940
Retained earnings ...................................... 46,196 69,591
-------- --------
Total stockholders' equity ........................... 149,332 175,662
-------- --------
$277,841 $332,896
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
CORT Business Services and Subsidary
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1996 1997 1998
Revenue:
<S> <C> <C> <C>
Furniture rental .............................. $191,560 $237,212 $265,871
Furniture sales ............................... 42,589 50,006 53,093
-------- -------- --------
Total revenue ............................... 234,149 287,218 318,964
-------- -------- --------
Operating costs and expenses:
Cost of furniture rental ...................... 36,958 45,634 47,863
Cost of furniture sales ....................... 25,207 30,257 32,354
Employee, delivery and advertising expenses ... 95,204 114,674 128,710
Occupancy, utilities and nonrental depreciation 22,722 27,747 32,496
Amortization of goodwill ...................... 961 1,546 1,935
Other operating expenses ...................... 17,649 21,052 22,959
-------- -------- --------
Total costs and expenses .................... 198,701 240,910 266,317
-------- -------- --------
Operating earnings .......................... 35,448 46,308 52,647
Interest expense, net ........................... 8,251 8,374 7,837
-------- -------- --------
Income before income taxes and
extraordinary loss ......................... 27,197 37,934 44,810
Income tax expense (note 5) ..................... 11,261 15,608 18,907
-------- -------- --------
Income before extraordinary loss ............ 15,936 22,326 25,903
Extraordinary loss on early retirement
of debt, net of income tax benefit of
$1,672 (notes 5 and 6) ......................... -- -- 2,508
-------- -------- --------
Net income .................................. $ 15,936 $ 22,326 $ 23,395
======== ======== ========
Earnings per common share before
extraordinary loss (note 13) ................... $ 1.40 $ 1.74 $ 1.99
Extraordinary loss per common share ............. -- -- .19
-------- -------- --------
Earnings per common share ....................... $ 1.40 $ 1.74 $ 1.80
======== ======== ========
Weighted average number of common shares
used in computation ............................ 11,416 12,804 13,019
-------- -------- --------
Earnings per common share before
extraordinary loss--assuming dilution
(note 13) ...................................... $ 1.31 $ 1.67 $ 1.92
Extraordinary loss per common share--
assuming dilution .............................. -- -- .19
-------- -------- --------
Earnings per common share--assuming dilution .... $ 1.31 $ 1.67 $ 1.73
======== ======== ========
Weighted average number of common shares
used in computation--assuming dilution ......... 12,144 13,378 13,491
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
CORT Business Services and Subsidary
Consolidated Statements of Stockholder's Equity
(in thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
----- ------- -------- ------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 ..................................... $ 104 $ 67,383 $ 7,934 $ 75,421
Net income ................................................... -- -- 15,936 15,936
Income tax benefit from stock options exercised .............. -- 571 -- 571
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
-------- -------- -------- --------
Balance, December 31, 1996 ..................................... 127 101,155 23,870 125,152
-------- -------- -------- --------
Net income ................................................... -- -- 22,326 22,326
Income tax benefit from stock options exercised .............. -- 1,177 -- 1,177
Issuance of common stock from exercise of stock options ...... 1 660 -- 661
Issuance of common stock from exercise of warrants ........... 1 15 -- 16
-------- -------- -------- -------
Balance, December 31, 1997 ..................................... 129 103,007 46,196 149,332
-------- -------- -------- -------
Net income ................................................... -- -- 23,395 23,395
Income tax benefit from stock options exercised .............. -- 2,109 -- 2,109
Issuance of common stock from exercise of stock options, net . 1 810 -- 811
Issuance of common stock from exercise of warrants ........... 1 14 -- 15
-------- -------- -------- -------
Balance, December 31, 1998 ..................................... $ 131 $105,940 $ 69,591 $175,662
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CORT Business Services and Subsidary
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1997 1998
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income .................................... $ 15,936 $ 22,326 $ 23,395
Proceeds of disposals of rental furniture
in excess of gross profit ...................... 24,118 27,697 31,487
Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary loss on early retirement
of debt .................................... -- -- 2,508
Depreciation and amortization:
Rental furniture .......................... 26,887 33,704 36,461
Other depreciation and amortization ....... 3,804 4,871 6,213
Goodwill .................................. 961 1,546 1,935
Deferred financing fees ................... 698 726 629
Rental furniture inventory shrinkage ........ 2,261 3,567 2,927
Deferred income taxes ....................... 2,990 3,972 4,762
Changes in assets and liabilities, net
of acquisitions:
Accounts receivable ....................... (2,795) (364) 1,271
Prepaid expenses .......................... (8) 195 (1,619)
Other receivables and assets .............. 27 83 (1,248)
Accounts payable, accrued expenses and
rental security deposits, net ............ 1,746 262 (2,465)
Deferred rental revenue ................... 1,749 2,054 1,933
--------- --------- ---------
Net cash provided by operating activities 78,374 100,639 108,189
--------- --------- ---------
Cash flows from investing activities:
Purchases of rental furniture ................. (77,323) (76,010) (81,671)
Portfolio acquisitions ........................ (2,790) (16,851) (21,970)
Purchases of property, plant and equipment .... (6,238) (8,628) (9,173)
Sale of property, plant and equipment ......... 586 990 275
Purchase of Evans Rents ....................... (27,778) -- --
Purchase of AFR ............................... (9,384) (166) --
Purchase of Instant Interiors ................. -- -- (16,695)
Purchase of investment ........................ -- -- (3,000)
--------- --------- ---------
Net cash used in investing activities ... (122,927) (100,665) (132,234)
--------- --------- ---------
Cash flows from financing activities:
Repayments of senior notes .................... (573) (68) (49,932)
Payments of premium to retire senior notes .... -- -- (3,503)
Payment of deferred financing fees ............ (154) -- (243)
Borrowings on the line of credit .............. 87,400 54,200 131,500
Repayments on the line of credit .............. (75,600) (56,600) (53,900)
Issuance of common stock ...................... 33,224 677 826
Other ......................................... -- 1,694 --
--------- --------- ---------
Net cash provided (used) by financing
activities ............................. 44,297 (97) 24,748
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents ....................... (256) (123) 703
Cash and cash equivalents at beginning of year .. 379 123 --
--------- --------- ---------
Cash and cash equivalents at end of year ........ $ 123 $ -- $ 703
========= ========= =========
Supplemental disclosures of cash
flow information:
Cash paid for:
Interest .................................... $ 7,487 $ 7,664 $ 8,541
Income taxes ................................ 8,089 11,626 11,433
Noncash financing activities:
Tax benefit from exercise of stock options .... $ 571 $ 1,177 $ 2,109
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CORT Business Services and Subsidary
Notes to Consolidated Financial Statements
(1) FORMATION AND DESCRIPTION OF THE COMPANY
CORT Business Services Corporation (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 CORT Furniture Rental Corporation ("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, 1997 and 1998, and for
the years ended December 31, 1996, 1997 and 1998, include the accounts of CORT
Business Services Corporation and its wholly owned subsidiary. 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 primarily on a
declining-balance method over 3 to 5 years, with an estimated salvage value of
25 to 40 percent of original cost. Accumulated depreciation on rental furniture
was $66,797,000 and $79,871,000 at December 31, 1997 and 1998, respectively.
Reserves for purchase options and shrinkage on rental furniture were $4,406,000
and $2,825,000 at December 31, 1997 and 1998, 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. Depreciation is 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; computer hardware and software from
3 to 5 years; and leasehold improvements over the shorter of the term of the
related leases or the estimated useful lives.
(e) Investment
Investment consists of an equity ownership of less than 20% in a company and is
accounted for under the cost method and evaluated for recoverability on a
regular basis.
(f) Goodwill
Goodwill, representing the excess of the cost over the fair value of net assets
acquired, is amortized using the straight-line method over 20 to 40 years. The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
(g) 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, 1998 consisted primarily of overnight repurchase
funds.
(h) Rental Security Deposits
The Company may require a non-interest bearing security deposit of one month's
rent based on the Company's 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.
(i) 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
19
<PAGE>
CORT Business Services and Subsidary
Notes to Consolidated Financial Statements (continued)
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.
(j) 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 in income in the period that includes the
enactment date.
(k) Deferred Financing Fees
Costs incurred with the issuance of long-term debt are capitalized and amortized
over the term of the related debt using a method which approximates the
effective interest method.
(l) Earnings Per Common Share
Earnings per common share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Earnings
per common share--assuming dilution is computed by dividing net income by the
weighted average number of shares of common stock and dilutive potential common
stock. Dilutive securities are comprised entirely of stock options and warrants.
The Company has no other potentially dilutive securities.
(m) Advertising Costs
Advertising production costs are generally expensed the first time the
advertisement is run. Media placement costs are generally expensed in the month
the advertising appears. At December 31, 1997 and 1998, approximately $1,962,000
and $2,475,000 of deferred advertising expenses were reported in prepaid
expenses. Advertising expenses were approximately $10,983,000, $12,632,000 and
$14,552,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
(n) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presenting of
comprehensive income and its components in a full set of financial statements.
Comprehensive income of the Company consists solely of net income and,
accordingly, the adoption of SFAS No. 130 had no impact on the Company's
consolidated financial statements. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations.
(3) Public Offering of Common Stock
In July 1996, the Company sold, through an underwritten public offering,
1,865,100 common shares at $18.75 per share. The 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.
(4) Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
---- ----
<S> <C> <C>
Land and land improvements ........................ $ 6,772 $ 6,772
Buildings and improvements ........................ 15,418 15,650
Machinery and equipment ........................... 5,243 6,183
Leasehold improvements ............................ 14,657 19,242
Computer hardware and software .................... 7,257 11,060
Furniture and fixtures ............................ 1,793 2,803
Other ............................................. 2,391 2,880
------- -------
53,531 64,590
Accumulated depreciation and amortization ........ 14,754 20,729
------- -------
$38,777 $43,861
======= =======
</TABLE>
(5) Income Taxes
Components of the expense for income taxes are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
---- ---- ----
Current:
<S> <C> <C> <C>
Federal ........................... $ 6,117 $ 9,037 $ 11,275
State and local ................... 1,489 2,453 2,870
-------- -------- --------
7,606 11,490 14,145
-------- -------- --------
Deferred:
Federal ........................... 3,107 3,515 4,161
State and local ................... 548 603 601
-------- -------- --------
3,655 4,118 4,762
-------- -------- --------
Total expense before
extraordinary loss ................. $ 11,261 $ 15,608 $ 18,907
Income tax benefit from
extraordinary loss on
early retirement of debt ........... -- -- (1,672)
-------- -------- --------
Total income tax expense ............ $ 11,261 $ 15,608 $ 17,235
======== ======== ========
</TABLE>
The difference between the actual expense for taxes and taxes computed at the
Federal income tax rate of 35 percent in 1996, 1997 and 1998 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Tax expense computed
at Federal rate ...................... $ 9,519 $ 13,277 $ 15,684
State and local taxes, net of
Federal benefit ....................... 1,324 1,986 2,153
Effects of goodwill amortization ...... 336 395 397
Other, net ............................. 82 (50) 673
-------- -------- --------
Total expense before
extraordinary loss .................. $ 11,261 $ 15,608 $ 18,907
======== ======== ========
</TABLE>
20
<PAGE>
CORT Business Services and Subsidary
Notes to Consolidated Financial Statements (continued)
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):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts .............. $ 1,156 $ 1,271
Compensated absences, principally due to
accrual for financial reporting purposes ..... 845 989
Deferred financing fees ........................ 352 --
Deferred rental revenue ........................ 3,715 4,617
Reserve for unfavorable operating lease
and duplicate facilities ..................... 2,526 829
Reserve for purchase options and
shrinkage on rental property .................. 1,762 1,130
Accrued insurance .............................. 998 991
Net operating loss carryforwards ............... 205 --
AMT credit carryforward ........................ 394 104
Other .......................................... 1,141 2,036
------- -------
Total gross deferred tax assets .............. 13,094 11,967
------- -------
Deferred tax liabilities:
Rental furniture, principally due to
differences in depreciation ................. 22,387 29,320
Property, plant and equipment, principally
due to differences in depreciation .......... 5,140 2,453
Other .......................................... 240 1,013
------- -------
Total gross deferred tax liabilities ......... 27,767 32,786
------- -------
Net deferred tax liability ................... $14,673 $20,819
======= =======
</TABLE>
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
The Company is expecting refunds from Federal and state taxing authorities of
approximately $1,030,000 which are included in other receivables and assets. The
Company has alternative minimum tax credit carryforwards of approximately
$104,000 which are available to reduce future Federal regular income taxes, if
any, over an indefinite period.
The Internal Revenue Service ("IRS") had proposed the disallowance of certain
deductions taken by Fairwood Corporation for a consolidated tax group of which
CORT Furniture Rental Corporation ("CFR") was previously a member (the "Former
Group") through the year ended December 31, 1988. The IRS challenge included 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. Fairwood Corporation has indicated to the Company that it has
reached an agreement with the IRS regarding a settlement of the proposed
adjustments. The bankruptcy court handling Fairwood Corporation's bankruptcy
filing approved the terms of the settlement in October 1998. The total tax
liability of the Former Group under the terms of the settlement is approximately
$5 million, including interest through December 31, 1998. 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 $4
million for such periods (including interest through December 31, 1998) under
the terms of the settlement. 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. The Company is not in a
position to determine the probable impact on the Company's consolidated
financial statements, if any.
(6) Long-Term Debt
The outstanding long-term debt was as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
---- ----
<S> <C> <C>
Revolving credit facility .................... $13,200 $90,800
Senior notes ................................. 49,932 --
------- -------
$63,132 $90,800
======= =======
</TABLE>
CFR maintains a revolving credit facility with a group of banks. This facility,
for which the Company is guarantor, provides a $125 million line of credit to
meet acquisition and expansion needs as well as seasonal working capital and
general corporate requirements. The revolving credit facility expires February
2002 and is unsecured but does restrict the ability of CFR to pledge its assets
as security. This facility also restricts the ability of CFR to make advances
and pay dividends to the Company. 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, 1997 and 1998 on the revolving
credit facility was 7.30%, 7.25% and 6.70%, respectively. A commitment fee
calculated based upon the unused portion of the revolving credit facility is
payable quarterly in arrears. The Company had approximately $3,753,000 in
letters of credit outstanding at December 31, 1998 which reduced the borrowing
base under the revolving credit facility. The Company had approximately
$30,447,000 available under the revolving credit facility at December 31, 1998.
On September 10, 1998, the Company redeemed the remaining $49,932,000 of its 12%
Senior Notes at a price of 107% of the principal amount plus accrued and unpaid
interest to the date of redemption. The Company used borrowings under an
expanded credit line with its existing bank group to redeem the notes. As a
result of the early retirement of the Senior Notes, the Company
21
<PAGE>
CORT Business Services and Subsidary
Notes to Consolidated Financial Statements (continued)
recognized an extraordinary loss of $2,508,000, net of income tax benefit of
$1,672,000 in the third quarter of 1998.
The estimated fair value of the Company's consolidated long-term debt based on
the quoted market price and other available information was approximately
$68,100,000 and $90,800,000 for December 31, 1997 and 1998, respectively.
Other assets include debt issuance costs, net of accumulated amortization of
$1,264,000 and $201,000 at December 31, 1997 and 1998, respectively.
(7) 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 $1,080,000,
$1,215,000 and $1,335,000 for the years ended December 31, 1996, 1997, and 1998,
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 $119,000, $152,000 and $118,000 for the years ended December
31, 1996, 1997, and 1998, respectively. The accrued, unfunded liability under
the plan as of December 31, 1998 was not significant.
The Company maintains an employee stock purchase plan. All employees are
eligible to participate in the plan after 90 days of service. The price of the
shares purchased in the open market is the average price paid for all the shares
purchased by the broker on the investment date. The Company assumes the cost of
all brokerage commissions and service charges for all purchases made under the
plan. During 1997 and 1998, 3,174 and 10,672 shares of common stock were
purchased through the plan at average prices of $37.30 and $33.66 per share,
respectively.
(8) Stock Options
At December 31, 1998, the Company had four stock-based compensation plans, which
were adopted by the Board of Directors and approved by the Company's
stockholders. These plans 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 Company's four 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):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
---- ---- ----
Net income
<S> <C> <C> <C>
As Reported .................. $ 15,936 $ 22,326 $ 23,395
Pro Forma .................... $ 15,327 $ 21,461 $ 21,783
Earnings per common share
As Reported .................. $ 1.40 $ 1.74 $ 1.80
Pro Forma .................... $ 1.34 $ 1.68 $ 1.67
Earnings per common share
assuming dilution
As Reported ................ $ 1.31 $ 1.67 $ 1.73
Pro Forma .................. $ 1.26 $ 1.60 $ 1.61
</TABLE>
The effects of compensation cost as determined under FASB Statement No. 123 on
net income in 1996, 1997 and 1998 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.
Contemporaneously with the initial public offering of the Company in 1995, all
debt securities were exchanged for common stock. There is no further obligation
to purchase debt securities under the 1994 Plan. An option under the 1994 Plan
vests over a five-year period and is exercisable over a ten-year period.
1995 Stock-Based Incentive Compensation Plan
The 1995 Stock-Based Incentive Compensation Plan (the "1995 Plan") became
effective on October 31, 1995. The 1995 Plan was amended in May 1997 to increase
the number of stock options available for grant. The 1995 Plan provides for the
granting of a maximum of 1,210,000 stock options to key employees of the
Company. 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 1996, 1997 and 1998 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 or
seven-year period and the expiration period may not exceed ten years.
22
<PAGE>
CORT Business Services and Subsidary
Notes to Consolidated Financial Statements (continued)
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 1996, 1997 and 1998, respectively: 0.0% dividend
yield for all years; expected volatility of 30% for 1996 and 1997 and 36% for
1998; risk-free interest rates of 6.29%, 6.25%, and 5.61%; expected lives of
five years, six years, and seven years, respectively.
1995 Directors Stock Option Plan
The 1995 Directors Stock Option Plan (the "1995 Directors Plan") became
effective on October 18, 1995. The 1995 Directors Plan provided 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 became
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.
1997 Directors Stock Option Plan
The 1997 Directors Stock Option Plan (the "1997 Directors Plan") became
effective on May 14, 1997. The 1997 Directors Plan provides for the granting of
a maximum of 50,000 stock options to non-employee directors of the Company. The
1997 Directors Plan provides for automatic grants of 2,000 shares of common
stock for each of the Company's non-employee directors on the business day
immediately following the Company's Annual Meeting of Stockholders for calendar
years 1997, 1998, 1999, 2000 and 2001. The option price per share is equal to
the fair market value of common stock on the date the option is granted. An
option under the 1997 Directors 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 1997 and 1998, respectively: 0.0% dividend yield
for both years; expected volatility of 30% for 1997 and 36% for 1998; risk-free
interest rate of 6.54% and 5.74%; and expected lives of seven years for both
years.
<TABLE>
<CAPTION>
1994 Plan 1995 Plan 1995 Directors Plan 1997 Directors Plan
------------------- ---------------------- -------------------- -------------------
Weighted Weighted Weighted Weighted
Shares Average Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price Option Price
------ ----- ------ ----- ------ ----- ------ -----
Outstanding at
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995 ..... 627,556 $0.57 439,800 $ 12.00 21,000 $ 12.00 -- --
Granted .............. -- -- 131,300 19.87 10,000 22.75 -- --
Exercised ............ (52,558) .33 (39,501) 12.00 -- -- -- --
Forfeited ............ -- -- -- -- -- -- -- --
------- ----- ------- -------- ------- ------- ------ -------
Outstanding at
December 31, 1996 ..... 574,998 $0.59 531,599 $ 13.94 31,000 $ 15.47 -- --
Granted .............. -- -- 106,500 25.68 -- -- 10,000 $ 25.50
Exercised ............ (70,565) 0.55 (50,115) 12.55 -- -- -- --
Forfeited ............ (17,937) 0.79 (2,833) 18.31 -- -- -- --
------- ----- ------- ------- ------ ------- ---------- -------
Outstanding at
December 31, 1997 ...... 486,496 $0.59 585,151 $ 16.18 31,000 $ 15.47 10,000 $25.50
Granted .............. -- -- 479,500 36.92 -- -- 10,000 39.63
Exercised ............ (78,834) 0.59 (60,259) 14.90 (3,667) 14.93 (667) 25.50
Repriced ............. -- -- (70,250) 39.36 -- -- -- --
Forfeited ............ (3,969) 0.71 (8,563) 21.65 -- -- -- --
------- ----- ------- ------- ------ ------- ------- ------
Outstanding at
December 31, 1998 ...... 403,693 $0.59 925,579 $ 14.34 27,333 $ 15.54 19,333 $32.81
-------- ----- -------- -------- ------ ------- ------ ------
Options exercisable at:
December 31, 1996....... 574,998 120,280 7,003 --
December 31, 1997....... 486,496 255,420 19,002 --
December 31, 1998....... 403,693 408,113 27,333 2,668
Weighted average fair
value at date of grant
of options granted
during the year ended:
December 31, 1996..... $ -- $ 7.58 $10.59 $ --
December 31, 1997..... -- 11.01 -- 12.00
December 31, 1998..... -- 15.63 -- 19.49
</TABLE>
23
<PAGE>
CORT Business Services and Subsidary
Notes to Consolidated Financial Statements (continued)
The following table summarizes information about the Company's stock options
outstanding at December 31, 1998:
<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- 1.098 403,693 5.47 $ 0.59 403,693 $ 0.59
-12.00 331,125 6.88 12.00 331,125 12.00
17.6875-29.1875 319,870 8.47 23.61 106,155 22.07
33.875 -40.375 321,250 9.32 40.02 834 33.88
------------------ -------------------
1,375,938 841,807
================== ===================
</TABLE>
(9)RENTAL COMMITMENTS
The Company leases certain warehouse and showroom facilities and equipment.
Future minimum lease payments at December 31, 1998 under all noncancelable
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999.......................................................... $ 21,378
2000.......................................................... 18,931
2001.......................................................... 16,816
2002.......................................................... 14,268
2003.......................................................... 11,545
Thereafter.................................................... 31,872
--------
Total minimum lease payments............................... 114,810
Less sublease rentals......................................... 1,329
--------
Net minimum operating lease payments....................... $113,481
========
</TABLE>
Rental expense, net of sublease income, was approximately $12,145,000,
$15,964,000, and $19,300,000 for the years ended December 31, 1996, 1997 and
1998, respectively (including approximately $2,460,000, $3,880,000, and
$4,446,000 for short-term vehicle leases).
(10)ACCRUED EXPENSES
Accrued expenses are comprised of (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Accrued salaries, wages and incentives.............. $ 7,568 $ 5,627
Accrued interest.................................... 2,065 727
Accrued vacation.................................... 2,113 2,474
Reserves for unfavorable operating lease
and duplicate facilities.......................... 6,317 2,230
Accrued property, payroll,
sales and use taxes............................... 2,170 2,685
Accrued insurance................................... 2,496 2,477
Acquisition holdbacks............................... 887 662
Other accrued expenses.............................. 4,320 4,194
----------- -----------
$27,936 $21,076
=========== ===========
</TABLE>
(11) WARRANTS TO PURCHASE COMMON STOCK
For the years ended December 31, 1997 and 1998, 474,610 and 415,320 warrants
were exercised for an aggregate of 78,504 and 81,019 shares of the common stock,
respectively. The warrants were subject to certain anti-dilution provisions
relating to issuances of the common stock. All of the Company's warrants to
purchase shares of common stock expired September 1, 1998. 18,480 warrants
expired without being exercised.
(12) ACQUISITIONS
Instant Interiors Corporation
On August 14, 1998, the Company acquired certain assets of Instant Interiors
Corporation, a provider of rental furniture in the Midwest area, for
approximately $16,695,000, in a transaction accounted for as a purchase business
combination. Based on the allocation of the purchase price to the net assets
acquired, goodwill of approximately $7,970,000 was recorded. Such goodwill is
being amortized on a straight-line basis over 40 years.
Other Acquisitions
In 1997, the Company acquired certain assets of Alco Trade Show Services, Delta
Furniture Rentals, Inc. and Integrity Furniture Inc. In addition, the Company
acquired the stock of Levitt Investment Company and McGregor Enterprises. Each
of these transactions were accounted for as a purchase business combination.
Based on the allocation of the purchase price to the net assets acquired, a
total of approximately $10,235,000 of goodwill was recorded. Such goodwill is
being amortized on a straight-line basis over 20 to 40 years.
In 1998, the Company acquired certain assets of IS Furniture Rental Corp.,
Furniture Rentors of America, Inc. and the trade show furnishings business of
Aaron's Rents, Inc., as well as two other small businesses. Each of these
transactions were accounted for as a purchase business combination. Based on the
allocation of the purchase price to the net assets acquired, a total of
approximately $14,665,000 of goodwill was recorded. Such goodwill is being
amortized on a straight-line basis over 20 to 40 years.
24
<PAGE>
CORT Business Services and Subsidary
Notes to Consolidated Financial Statements (continued)
(13) EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Income before extraordinary loss....... $15,936 $22,326 $25,903
Extraordinary loss, net of taxes....... -- -- 2,508
------- ------- -------
Net income applicable to common shares. $15,936 $22,326 $23,395
======= ======= =======
Weighted average shares outstanding.... 11,416 12,804 13,019
Effect of dilutive securities:
Stock options........................ 457 489 443
Warrants............................. 271 85 29
------- ------- -------
Weighted average shares and
assumed conversions.................. 12,144 13,378 13,491
======= ======= =======
Earnings per common share
before extraordinary loss............ $ 1.40 $ 1.74 $ 1.99
Extraordinary loss per share........... -- -- .19
------- ------- -------
Earnings per common share.............. $ 1.40 $ 1.74 $ 1.80
======= ======= =======
Earnings per common share before
extraordinary loss--assuming dilution $ 1.31 $ 1.67 $ 1.92
Extraordinary loss per share--
assuming dilution.................... -- -- .19
------- ------- -------
Earnings per common share--
assuming dilution.................... $ 1.31 $ 1.67 $ 1.73
======= ======= =======
</TABLE>
(14) SEGMENT REPORTING
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 requires CORT
to present certain information about each identified segment that exceeds
certain quantitative thresholds for revenue, profit or loss, and assets.
The Company has identified the following operating segments based on the
distinct products/services from which each derives revenue:
Furniture Rental--rental of residential and office furniture and accessories to
individual and corporate customers.
Furniture Sales--sale of new or previously rented residential and office
furniture to the general public.
Trade Show Operations--short-term rental of display and work-place furnishings
for trade shows, conventions, and special events to corporate customers and
trade show associations.
Housewares Operations--rental of kitchen, bedroom and bathroom accessories to
the Furniture Rental segment.
Furniture rental and furniture sales segments represent the aggregation of
individual districts, all of which have similar economic characteristics and
distribution methods.
Trade Show Operations and Housewares Operations do not meet the quantitative
thresholds outlined by SFAS No. 131 and are aggregated with furniture rental and
furniture sales for reporting purposes.
The Company reports separately, in its Consolidated Statements of Operations,
the revenue and associated cost of revenue of its remaining reportable segments.
Operating segments are measured on the basis of gross margin; operating
expenses, goodwill amortization, interest expense, tax expense, and
extraordinary items are not allocated to the individual segments.
Assets and liabilities are not specifically allocated between Furniture Rental
and Furniture Sales. All rental furniture is available for rental or sale.
25
<PAGE>
CORT Business Services and Subsidary
Notes to Consolidated Financial Statements (continued)
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- ---------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Furniture rental revenue....................... $62,814 $65,065 $68,477 $69,515
Furniture sales revenue........................ 12,629 13,065 14,254 13,145
Operating earnings............................. 12,575 13,354 13,881 12,837
Income before income taxes..................... 10,608 11,283 11,755 11,164
Income before extraordinary loss............... 6,191 6,520 6,795 6,397
Earnings per common share before
extraordinary loss........................... $ .48 $ .50 $ .52 $ .49
Earnings per common share before
extraordinary loss--assuming dilution........ $ .46 $ .48 $ .50 $ .48
</TABLE>
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- ---------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Furniture rental revenue....................... $55,553 $59,679 $61,135 $60,845
Furniture sales revenue........................ 11,748 14,802 12,253 11,203
Operating earnings............................. 10,411 11,743 12,103 12,051
Income before income taxes..................... 8,426 9,490 9,978 10,040
Income before extraordinary loss............... 4,930 5,607 5,876 5,913
Earnings per common share before
extraordinary loss........................... $ .39 $ .44 $ .46 $ .46
Earnings per common share before
extraordinary loss--assuming dilution........ $ .37 $ .42 $ .44 $ .44
</TABLE>
26
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors
CORT Business Services Corporation and subsidiary:
We have audited the accompanying consolidated balance sheets of CORT Business
Services Corporation and subsidiary as of December 31, 1998 and 1997, 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, 1998.
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 subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/KPMG LLP
-------------------------
KPMG LLP
Washington, D.C.
February 12, 1999
27
<PAGE>
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") trades
on the New York Stock Exchange under the symbol "CBZ." The following table sets
forth, for the period indicated, the high and low sales price per share of
common stock.
<TABLE>
<CAPTION>
1997 1998
---------------- ----------------
High Low High Low
-------- ------- ------ --------
<S> <C> <C> <C> <C>
1st Quarter............................ 25-1/2 20-3/4 47-1/2 33-3/4
2nd Quarter............................ 30-14/16 21-1/4 48 31-1/8
3rd Quarter............................ 43-1/4 27-13/16 37-13/16 24-1/16
4th Quarter............................ 41-6/16 32-7/16 26-5/8 15
</TABLE>
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 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 restricts the ability of CFR to make advances and pay dividends
to the Company.
HOLDERS
As of March 22, 1999, the Company had approximately 202 holders of record of its
common stock. The Company believes there are in excess of 2,000 beneficial
owners of its Common Stock.
28
<PAGE>
[CORT LOGO]
<TABLE>
<S> <C> <C>
Directors
Maureen C. Thune Annual Meeting
Keith E. Alessi Vice President, Controller & CORT Business Services
Chairman, President & CEO Assistant Secretary Corporation's Annual Meeting of
TeleSpectrum Worldwide Inc. Stockholder's will be held on
Frances Ann Zienmiak Tuesday, May 11, 1999 at 2:00 p.m.
Paul N. Arnold Executive Vice President at the Holiday Inn Fair Oaks
President & Chief Chief Financial Officer 11787 Lee Jackson Highway
Executive Officer of and Secretary Fairfax, VA 22033
Cort Business
Services Corporation Division Officers Registrar and Transfer Agent
American Stock Transfer &
Bruce C. Bruckmann George Bertrand Trust Company
Managing Director of Group Vice President 40 Wall Street
Bruckman, Rosser, New York, NY 10005
Sherrill & Co., Inc. Louis C. Caston
Group Vice President
Michael A. Delaney Corporate Headquarters
Managing Director of Citicorp Duane B. DeArmond 4401 Fair Lakes Court
Venture Capital Ltd. Group Vice President Suite 300
Fairfax, VA 22033
Charles M. Egan David C. Janecek 703-968-8500
Chairman of CORT Business Group Vice President
Services Corporation
Mark M. Koepsell Stockholder Inquiries
Gregory B. Maffei Vice President--National Accounts A copy of the annual report as filed
Chief Financial Officer of with the Securities and Exchange
Microsoft Corporation John C. Lackey Commission on Form 10-K is
Group Vice President available without charge, exclusive of
James A. Urry exhibits, upon written request to:
Vice President of Citicorp Richard W. Ritter III Chief Financial Officer
Venture Capital Ltd. Group Vice President CORT Business Services Corporation
4401 Fair Lakes Court
Corporate Directory Suite 300
Corporate Officers Fairfax, VA 22033
Corporate Legal Counsel FAX: 703-968-8503
Paul N. Arnold Dechert Price & Rhoads
President & Chief Executive Officer Philadelphia, PA
Robert S. Baker Independent Accountants
Group Vice President--CORT/Instant KPMG LLP
Washington, DC
Anthony J. Ballerdine
Senior Group Vice President
Michael G. Connors
Vice President--Real Estate
Charles M. Egan
Chairman
Kenneth W. Hemm
Executive Vice President &
Chief Operating Officer--Division II
Steven D. Jobes
Executive Vice President &
Chief Marketing Officer
Lloyd Lenson
Executive Vice President &
Chief Operating Officer--Division I
Victoria L. Stiles
Vice President--Human Resources &
Corporate Risk Management
William T. Swets [picture]
Vice President--Business Development CORT's new showroom design, Pleasonton, California
</TABLE>
<PAGE>
o Albuquerque o Grand Rapids o Orlando
o Ann Arbor o Houston o Pensacola
o Atlanta o Huntsville o Philadelphia
o Austin o Indianapolis o Phoenix
o Baltimore o Jacksonville o Pittsburgh
o Baton Rouge o Kalamazoo o Portland
o Birmingham o Kansas City o Raleigh
o Boston o Lafayette o Richmond
o Charlotte o Lansing o Sacramento
o Chicago o Las Vegas o Salt Lake City
o Cincinnati o Lexington o San Antonio
o Clearwater o Little Rock o San Diego
o Cleveland o Los Angeles o San Francisco
o Columbus o Louisville o San Jose
o Corpus Christi o Memphis o Seattle
o Dallas o Miami o St. Louis
o Dayton o Minneapolis o St. Paul
o Denver o Nashville o Tampa
o Detroit o New Orleans o Tulsa
o Durham o New York o Virginia Beach
o El Paso o Newark o Washington, DC
o Ft. Lauderdale o Oklahoma City o Westchester County
o Ft. Worth o Orange County o Wilmington
[CORT logo]
4401 Fair Lakes Court, Suite 300
Fairfax, VA 22033
Phone: 1-800-962-CORT
Internet Address: http://www.CORT1.com
EXHIBIT 21.1
LIST OF SUBSIDIARIES
CORT Furniture Rental Corporation, a Delaware corporation
S-4
EXHIBIT 23.1
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULES
The Board of Directors and Stockholders
CORT Business Services Corporation and subsidiary:
The audits referred to in our report dated February 12, 1999 included the
related financial statement schedules as of December 31, 1998 and 1997, and for
each of the years in the three-year period ended December 31, 1998, 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 Forms
S-8 (Nos. 33-72724, 333-15611, 333-15613, 333-52641, 333-52643) of CORT Business
Services Corporation of our report dated February 12, 1999, relating to the
consolidated balance sheets of CORT Business Services Corporation and subsidiary
as of December 31, 1998 and 1997, 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, 1998, and all related schedules, which
reports appear, or are incorporated by reference, in the December 31, 1998
annual report on form 10-K of CORT Business Services Corporation.
KPMG LLP
Washington, DC
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 17,764
<ALLOWANCES> 3,179
<INVENTORY> 189,059
<CURRENT-ASSETS> 0
<PP&E> 64,590
<DEPRECIATION> 20,729
<TOTAL-ASSETS> 332,896
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 131
<OTHER-SE> 175,531
<TOTAL-LIABILITY-AND-EQUITY> 332,896
<SALES> 53,093
<TOTAL-REVENUES> 318,964
<CGS> 32,354
<TOTAL-COSTS> 80,217
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,710
<INTEREST-EXPENSE> 7,837
<INCOME-PRETAX> 44,810
<INCOME-TAX> 18,907
<INCOME-CONTINUING> 25,903
<DISCONTINUED> 0
<EXTRAORDINARY> 2,508
<CHANGES> 0
<NET-INCOME> 23,395
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.73
</TABLE>
