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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[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
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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 clearance centers in existing markets. However, in new markets,
the Company may choose to retain such real estate. The Company also
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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 provide furnished
apartments and individual residents seeking to rent furnishings for their own
homes and apartments.
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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 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.
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<PAGE>
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 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.
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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 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.
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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 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.
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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:
District Locations Number of Showrooms
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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
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
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District Locations Number of Showrooms
- ----------------------------------------- -------------------
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
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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
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
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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.
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 co-founder and Chairman of Instant Interiors
Corporation from 1978 until the acquisition.
ANTHONY J. BELLERDINE, Senior Group Vice President. Mr. Bellerdine has been with
CORT since July 1991. He was appointed to Senior Group Vice President in January
1999, having served as Group Vice President, 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 Executive Vice
President and Chief Operating Officer in January 1999, having served as Group
Vice President, Group Manager and District Manager.
STEVEN D. JOBES, Executive Vice President & Chief Marketing Officer. Mr. Jobes
has been with CORT for 27 years and served as Group Vice President and Vice
President-Marketing, Merchandising, Sales and National Accounts prior to
assuming his current position in January 1999.
LLOYD LENSON, Executive Vice President & Chief Operating Officer--Division I.
Mr. Lenson has been with CORT for 20 years serving in his current position since
January 1999. He previously served as Group Vice President and as Vice
President--Marketing, Sales and Acquisitions.
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.
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 co-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.
-9-
<PAGE>
FRANCES ANN ZIEMNIAK, Executive Vice President, Chief Financial Officer and
Secretary. Ms. Ziemniak has been with CORT since March 1995. She was appointed
to her current position in January 1999 having served as Vice President-Finance
and Chief Financial Officer. Prior to joining CORT, Ms. Ziemniak was an
independent consultant focusing on risk-management and retail acquisition
analysis from 1992 to 1995. 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
Based solely on review of the copies of the forms furnished to the Company,
or written representations that no form was required to be filed, the Company
believes that during the fiscal year ended December 31, 1998, all Section 16(a)
filing requirements applicable to its officers, directors and beneficial owners
of more than ten percent of the Company's Common Stock were satisfied.
ITEM 11. Executive Compensation
The following table sets forth, for the fiscal years ended December 31,
1996, 1997, and 1998, certain information regarding the cash compensation paid
by the Company, as well as certain other compensation paid or accrued for those
years, to each of the five most highly compensated executive officers of the
Company, in all capacities in which they served:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Securities
-------------------------- Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus(1) Compensation(2) Options Compensation(3)
- --------------------------- ---- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Paul N. Arnold 1998 $248,125 $ 74,631 -- 83,000 $10,577
President & Chief 1997 233,750 233,750 -- 4,500 11,754
Executive Officer 1996 223,750 190,188 -- 2,850 11,781
Kenneth W. Hemm 1998 148,633 34,857 -- 31,000 23,935
Executive Vice President 1997 142,625 100,716 -- 3,500 23,939
& Chief Operating Officer 1996 132,764 91,363 -- 2,850 24,161
--Division II
Steven D. Jobes 1998 130,665 33,248 -- 31,000 --
Executive Vice President 1997 125,140 87,723 -- 3,500 --
& Chief Marketing Officer 1996 119,287 82,427 -- 2,850 --
Lloyd Lenson
Executive Vice President 1998 142,400 32,500 -- 31,000 5,994
& Chief Operating Officer 1997 136,125 69,301 -- 3,500 5,504
--Division I 1996 129,988 74,964 -- 2,850 5,193
Frances Ann Ziemniak 1998 131,286 33,406 -- 25,500 19,667
Executive Vice President, 1997 125,268 87,813 -- 3,500 18,216
Chief Financial Officer & 1996 120,400 83,196 $132,153 2,850 15,916
Secretary
</TABLE>
- ----------
(1) The amounts shown consist of cash bonuses earned in the fiscal year
identified but paid in subsequent fiscal years.
(2) In 1996, the Company made payments to reimburse moving expenses ($74,820)
and to cover applicable taxes on reimbursed moving expenses ($57,333).
(3) The Company maintains an investment and profit-sharing defined contribution
retirement plan. All of the Company's employees are eligible to participate
after one year of service. The Company makes a matching contribution as a
percentage of the employee contributions. The Company may, at its
discretion, make additional contributions based on the Company's
performance. The amounts shown include both the matching contribution and
the Company's discretionary payment on behalf of the named executives in
which all of the above, except Ms. Ziemniak, are fully vested. In addition,
the amounts shown include the amounts allocated to certain management
employees in the defined contribution portion of the CORT Furniture Rental
Supplemental Executive Retirement Plan. The Company contributes a fixed
dollar amount per plan member with the total contribution allocated among
all plan members on the basis of their age and years of service.
-12-
<PAGE>
Stock Options
Options Granted
The following table sets forth information regarding stock options granted
under the 1995 Stock-Based Incentive Compensation Plan (the "1995 Plan") during
the fiscal year 1998 to the named executive officers of the Company:
Option Grants in 1998
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
---------------------------------------------- Value at Assumed
Number of Annual Rates of Stock
Securities Percent of Total Price Appreciation
Underlying Options Granted for Option Term(2)
Options to Employees in Exercise Price Expiration -----------------------
Name Granted(1) Fiscal Year (per share) Date 5% 10%
- -------------------- ---------- ---------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul N. Arnold 75,000 18.3% $40.375 04/24/08 $1,904,372 $4,826,051
8,000 2.0 39.4375 05/12/08 198,416 502,826
Kenneth W. Hemm 25,000 6.1 $40.375 04/24/08 634,791 1,608,684
6,000 1.5 39.4375 05/12/08 148,812 377,119
Steven D. Jobes 25,000 6.1 $40.375 04/24/08 634,791 1,608,684
6,000 1.5 39.4375 05/12/08 148,812 377,119
Lloyd Lenson 25,000 6.1 $40.375 04/24/08 634,791 1,608,684
6,000 1.5 39.4375 05/12/08 148,812 377,119
Frances Ann Ziemniak 20,000 4.9 $40.375 04/24/08 507,832 1,286,947
5,500 1.3 39.4375 05/12/08 136,411 345,693
</TABLE>
- ----------
(1) Options under the 1995 Plan are exercisable when vested.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10%, compounded
annually from the date the respective options were granted to their
expiration date and are not presented to forecast possible future
appreciation, if any, in the Common Stock. The potential realizable values
shown are net of the option exercise price, but do not include deductions
for taxes or other expenses associated with the exercise of the options or
the sale of the underlying shares. The actual realizable values, if any, on
the stock option exercises will depend on the future performance of the
Common Stock, the optionee's continued employment through applicable
vesting periods and the date on which the options are exercised.
-13-
<PAGE>
The following table sets forth information regarding 1998 year-end option
values for the named executive officers of the Company:
Aggregated Options Exercised in 1998 and 1998 Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options at Fiscal Year End at Fiscal Year End
on Value -------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul N. Arnold -- -- 177,856 86,950 $2,865,200 $3,325
Kenneth W. Hemm -- -- 61,850 34,283 981,033 3,325
Steven D. Jobes -- -- 72,279 34,283 1,313,326 3,325
Lloyd Lenson -- -- 71,574 34,283 1,289,656 3,325
Frances Ann Ziemniak -- -- 46,497 28,783 687,807 3,325
</TABLE>
Supplemental Executive Retirement Plan
The CORT Furniture Rental Supplemental Executive Retirement Plan (the "SERP
Plan") provides a supplement to the retirement benefits that certain key
management employees will receive from the Retirement Plan for Salaried and
Sales Employees of Mohasco Corporation (the "Mohasco Plan") and the CORT
Furniture Rental Investment Savings and Profit Sharing Retirement Plan (the
"401(k) Plan"). The SERP Plan consists of a defined benefit plan and a defined
contribution plan.
Certain key management employees of the Company with at least five years of
service (employment) had been selected by the Board of Directors as participants
in the defined benefit portion of the SERP Plan. Such officers include Messrs.
Arnold, Lenson and Jobes. The defined SERP Plan benefits are a function of
service with the Company and Final Average Compensation (average monthly
compensation during the 36 consecutive months out of the last 60 months of the
participant's employment that produce the highest average). Compensation
includes salary, bonuses and 401(k) Plan salary deferrals. Benefits are equal to
a targeted percentage as determined by the Board of Directors upon selection of
the employee to participate in the SERP Plan--(55% in the case of Mr. Arnold and
50% in the case of Mr. Jobes and Mr. Lenson) of the Final Average Compensation
as of the date of the participant's retirement or termination of employment
multiplied by the ratio of the participant's actual years of service as of the
applicable event to the participant's years of service projected to the
participant's Normal Retirement Date (first day of the month after the date the
participant attains age 65). The benefits are reduced by (i) the annuity value
of Company contributions made on behalf of the participant to the 401(k) Plan
and (ii) the annuity benefit, on a single life basis only, payable to the
participant under the Mohasco Plan.
The estimated annual benefits payable upon retirement, expressed as a
straight life annuity, before reduction for the 401(k) Plan or the Mohasco Plan,
are as follows:
TARGETED PERCENTAGE: 55%
Years of Service
----------------------------------------------------
Remuneration 15 20 25 30 35
------------ -------- -------- -------- -------- --------
$125,000 $ 65,528 $ 65,528 $ 65,528 $ 65,528 $ 65,528
150,000 78,634 78,634 78,634 78,634 78,634
175,000 91,739 91,739 91,739 91,739 91,739
200,000 104,845 104,845 104,845 104,845 104,845
225,000 117,951 117,951 117,951 117,951 117,951
250,000 131,056 131,056 131,056 131,056 131,056
300,000 157,268 157,268 157,268 157,268 157,268
400,000 209,690 209,690 209,690 209,690 209,690
450,000 235,901 235,901 235,901 235,901 235,901
500,000 262,113 262,113 262,113 262,113 262,113
-14-
<PAGE>
TARGETED PERCENTAGE: 50%
Years of Service
----------------------------------------------------
Remuneration 15 20 25 30 35
------------ -------- -------- -------- -------- --------
$125,000 $ 59,571 $ 59,571 $ 59,571 $ 59,571 $ 59,571
150,000 71,485 71,485 71,485 71,485 71,485
175,000 83,399 83,399 83,399 83,399 83,399
200,000 95,314 95,314 95,314 95,314 95,314
225,000 107,228 107,228 107,228 107,228 107,228
250,000 119,142 119,142 119,142 119,142 119,142
300,000 142,971 142,971 142,971 142,971 142,971
400,000 190,627 190,627 190,627 190,627 190,627
450,000 214,456 214,456 214,456 214,456 214,456
500,000 238,284 238,284 238,284 238,284 238,284
As of December 31, 1998, Mr. Arnold was credited with 30 years of service,
Mr. Jobes with 27 years of service and Mr. Lenson with 20 years of service.
Other key management employees have been selected by the Board of Directors
as participants in the defined contribution portion of the SERP Plan. Such
officers include Mr. Hemm and Ms. Ziemniak. Defined contribution benefits are
equal to the balance in an executive's SERP Account (the annual contribution
credited to such executive's account, adjusted to reflect gains, losses or
forfeitures incurred), as of the last day of the month in which the executive is
employed.
A participant in either the defined benefit or defined contribution portion
of the SERP Plan whose employment with the Company is terminated without Cause
(i.e., other than as a result of willful gross misconduct materially or
demonstrably injurious to the Company or willful refusal to perform
substantially the duties reasonably assigned to him/her) or who has a
substantial reduction in duties and responsibilities or in compensation will
vest immediately in his/her SERP Plan benefit. In addition, such a participant
(other than the Chief Executive Officer) will be entitled to receive a lump sum
payment equal to the amount of compensation he/she received during the final six
or 12 months based on length of service (12 months in the case of Messrs.
Arnold, Hemm, Jobes and Lenson and six months in the case of Ms. Ziemniak) prior
to such event. The Chief Executive Officer is entitled to a severance payment of
twice this amount. Amounts paid by the Company under any employment agreement or
other severance arrangement will reduce the severance payment under the SERP
Plan. In addition, the Company and Mr. Arnold have agreed that one-half of such
severance payment will be paid in a lump sum and the remaining half will be paid
in eighteen equal monthly installments commencing one month after the date of
his termination. Each participant in the SERP Plan has agreed not to compete
with the Company for a period of 18 months following the termination of his/her
employment with the Company unless such participant's employment was terminated
without Cause.
Director's Compensation
Directors who are not employees of the Company or CVC receive a monthly
payment of $1,000, $500 for attendance at each meeting of the Board of Directors
and $500 for attendance at each meeting of a committee of the Board of Directors
and are reimbursed for expenses incurred in connection with attendance at
meetings of the Board of Directors or committees thereof. In addition, directors
not employed by the Company are entitled to receive options for Common Stock
pursuant to the 1997 Directors Stock Option Plan (the "Directors Plan").
The Company adopted the Directors Plan, which provides for the granting of
stock options on a non-discretionary basis to non-employee directors of the
Company. An aggregate of 50,000 shares of Common Stock have been reserved for
issuance under the Directors Plan. The Directors Plan provides for automatic
grants of options to purchase 2,000 shares of Common Stock to each of the
Company's non-employee directors on the business day immediately following the
Company's annual meeting of stockholders in calendar years 1997, 1998, 1999,
2000 and 2001, which options will become exercisable over a three-year period.
The option exercise price is equal to 100% of the fair market value of the
Common Stock on the date of grant of the option. Options granted to directors
under the Directors Plan will be treated as nonstatutory stock options under the
Internal Revenue Code, as amended. The Company granted 10,000 options in 1998
pursuant to the terms of the Directors Plan.
-15-
<PAGE>
Change of Control Agreements
CORT has entered into change of control agreements with several executive
officers. These agreements terminate one year from March 25, 1999, the date on
which they were entered. Under the agreement with Chief Executive Officer Paul
Arnold, in the event of a change of control (as defined in the agreement) of
CORT, Mr. Arnold will receive a cash payment within three days after the change
of control in the amount of $1,200,000. In addition to the payment, if Mr.
Arnold is terminated by the Company within one year of a change of control other
than for cause or by Mr. Arnold for "good reason," as these terms are defined in
the agreement, Mr. Arnold is entitled to a continuation of certain welfare
benefits for three years after his termination at the same cost and coverage
level as in effect on his date of termination. Other executives are entitled to
payments in amounts of either $150,000 or $400,000 in the event they are
terminated by the Company within one year of a change of control other than for
cause or by them for "good reason." These executives also would receive welfare
benefits for three years after their termination at the same cost and coverage
level as in effect on their dates of termination.
In addition, pursuant to a Change of Control Bonus Plan, certain management
employees are eligible for payments if they are terminated within one year of a
change of control by the Company other than for cause or by the management
employee for "good reason," as defined in the plan. The Compensation Committee,
in its sole discretion, shall determine the amount of the payment, if any,
payable to each management employee on or before the date of a change of
control. The aggregate amount of all payments under the plan shall not exceed
$400,000.
The Agreement and Plan of Merger discussed in Item 1 will not result in a
change of control under the change of control agreements or the plan.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee reviews and approves salary and other
compensation of officers and administers certain benefit plans. The Compensation
Committee also has the authority to administer, grant and award stock options
under the Corporation's stock option plans. Current members of the Committee are
Messrs. Urry, Chairman; Bruckmann, and Delaney.
Report of the Compensation Committee of the Board of Directors
on Executive Compensation
Role of Committee. The Compensation Committee of the Board of Directors
(the "Committee") establishes, oversees and directs the Company's executive
compensation programs and policies and administers the Company's stock option
plans. The Committee seeks to align executive compensation with Company
objectives and strategies, management programs, business financial performance
and enhanced stockholder value. The Committee consists of independent outside
directors, none of whom is or was an officer or employee of the Company or CFR.
The Committee's objectives include (i) attracting and retaining exceptional
individuals as executive officers and (ii) providing key executives with
motivation to perform to the full extent of their abilities in an effort to
maximize Company performance to deliver enhanced value to the Company's
stockholders. The Committee believes it is important to place a greater
percentage of executive officers' compensation at risk, as compared to
non-executives, by tying compensation directly to the performance of the
business and value of the Common Stock. Executive compensation generally
consists of (i) a base salary, (ii) a cash bonus opportunity that is linked to
the performance of the Company and (iii) long-term equity-based compensation.
Compensation. The annual salaries and bonuses of the Company's executive
officers are set at levels designed to attract and retain exceptional
individuals by rewarding them for individual and Company achievements. The
Committee reviews the annual salary and bonus of each executive officer in
relation to such officer's performance and previous compensation and general
market and industry conditions or trends and makes appropriate adjustments. The
Committee reviews each executive officer's salary annually to determine if it is
appropriate to adjust such salary based on various factors including each
executive officer's past performance and expected future contributions, the
scope and nature of responsibilities, including changes in such
responsibilities, and competitive compensation data relating to each executive
officer.
-16-
<PAGE>
The Committee believes that a portion of the executives' compensation
should be tied to the financial results of the Company in order to reward
individual performance and overall Company success. Each year, objective targets
are established for each officer. Such targets include the Company's financial
targets, such as revenue, earnings and return on assets, as well as individual
strategic and operating targets. Additionally, a portion of each officer's bonus
is based on subjective criteria particular to each officer's individual
operating responsibilities. In 1998, the Company and the executive officers
exceeded certain goals established by the Committee. Accordingly, Messrs.
Arnold, Hemm, Jobes and Lenson and Ms. Ziemniak earned a portion of their
bonuses which was attributable to their respective targets and objectives.
The Company has employee stock option plans in order to offer key employees
the opportunity to acquire an equity interest in the Company, thereby aligning
the interests of these employees more closely with the long-term interests of
stockholders. Awards under these employee stock option plans may be in the form
of options, deferred stock, restricted stock or stock appreciation rights. In
1998, the Company granted standard stock options and performance-accelerated
stock options to the Company's executive officers. All such options have an
exercise price equal to the market value of the Common Stock on the date of
grant. The standard stock options vest over a three-year period. The
performance-accelerated options vest seven years from the date of grant;
however, the vesting of the performance-accelerated options can be accelerated
upon achievement of specified goals relating to the Common Stock price.
1998 Chief Executive Officer Compensation. The Committee determined the
1998 compensation of Mr. Arnold, President and Chief Executive Officer, in
accordance with the above discussion. In addition, the Committee based Mr.
Arnold's bonus on his overall leadership and management of the Company.
Deductibility of Compensation. Section 162(m) of the Internal Revenue Code
imposes a $1 million limit on the deductibility of compensation paid to
executive officers of public companies. The Committee believes that all of the
compensation awarded to the Company's executive officers will be fully
deductible in accordance with this limit.
COMPENSATION COMMITTEE
James A. Urry, Chairman
Bruce C. Bruckmann
Michael A. Delaney
-17-
<PAGE>
Stockholder Return Performance Graph
The following graph compares the percentage change in cumulative total
stockholder return on the Company's Common Stock against the cumulative total
return of the Standard & Poor's 500 Index and the Dow Jones Other Industrial and
Commercial Services Index from the initial public offering price on November 17,
1995 to December 31, 1998. Cumulative total return to stockholders is measured
by dividing (x) the sum of (i) total dividends for the period (assuming dividend
reinvestment) plus (ii) per-share price change for the period by (y) the share
price at the beginning of the period. The graph is based on an investment of
$100 at the initial public offering price on November 17, 1995 in the Common
Stock and in each index.
COMPARISON OF 37 MONTH CUMULATIVE TOTAL RETURN*
AMONG CORT BUSINESS SERVICES CORPORATION, THE S & P 500 INDEX
AND THE DOW JONES OTHER INDUSTRIAL & COMMERCIAL SERVICES INDEX
[GRAPHIC OMITTED]
-18-
<PAGE>
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership of Common Stock as of April 15, 1999 by (i) each of the
Company's directors and certain of its executive officers, (ii) each person who
is known by the Company to own beneficially more than 5% of the Company's Common
Stock and (iii) by all of the Company's directors and executive officers as a
group. The Company owns all of the issued and outstanding capital stock of CORT
Furniture Rental Corporation (CFR).
Common Stock(1)
--------------------------------------
Number of Shares Percentage of Class
---------------- -------------------
Directors:
Paul N. Arnold ....................... 209,429(2) 1.6%
Bruce C. Bruckmann ................... 182,506(2) 1.4%
Keith E. Alessi ...................... 51,660(2) *
Gregory B. Maffei .................... 42,526(2) *
Charles M. Egan ...................... 31,382(2) *
James A. Urry ........................ 13,934(2) *
Michael A. Delaney ................... 10,501(2) *
Certain Executive Officers:
Lloyd Lenson ......................... 122,987(2) *
Kenneth W. Hemm ...................... 88,916(2) *
Steven D. Jobes ...................... 78,796(2) *
Frances Ann Ziemniak ................. 71,475(2) *
Five Percent Stockholders:(3)
Citicorp Venture Capital, Ltd.(4) .... 5,778,518 44.1%
399 Park Avenue, 14th Floor
New York, New York 10043
T. Rowe Price Associates, Inc.(5) ....
100 E. Pratt Street 1,366,400 10.4%
Baltimore, MD 21202
All Directors and Executive Officers
as a group (17 persons) .............. 983,610(2) 7.2%
- ----------
* Less than 1%.
(1) The Company has two authorized classes of common stock: Common Stock
(voting) and Class B Common Stock (nonvoting). There are 4,350,411 shares
of the Company's Class B Common Stock issued and outstanding (see note 4).
(2) Includes shares under option which are exercisable or will become
exercisable within 60 days of April 15, 1999 of 182,023; 8,001; 3,667;
9,001; 16,068; 8,001; 8,001; 74,741; 65,017; 75,446; 49,498 for Messrs.
Arnold, Bruckman, Alessi, Maffei, Egan, Urry, Delaney, Lenson, Hemm, Jobes
and Ms. Ziemniak, respectively, and 572,044 in total for all Directors and
Executive Officers as a group.
(3) The Board of Directors and Management are not aware of any other person or
entity who holds beneficially more than 5% of the outstanding Common Stock
of the Corporation.
(4) Includes 4,350,411 shares of Class B Common Stock, which is convertible
into Common Stock.
(5) These securities are owned by various individual and institutional
investors including T. Rowe Price Small Cap Value Fund, Inc. (which owns
670,000 shares, representing 5.1% of the shares outstanding), which T. Rowe
Price Associates, Inc. ("Price Associates") serves as an investment adviser
with power to direct investments and/or sole power to vote the securities.
For the purposes of the reporting requirements of the Securities Exchange
Act of 1934, Price Associates is deemed to be a beneficial owner of such
securities; however, Price Associates expressly disclaims that it is, in
fact, the beneficial owner of such securities.
Changes in Control
The information required by Item 403 of Regulation S-K is included in Part
I, Item 1 Business - Subsequent Event.
ITEM 13. Certain Relationships and Related Transactions
None.
-19-
<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)
-20-
<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: April 29, 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.
Signatures Title Date
---------- ----- ----
/s/ Paul N. Arnold President, Chief Executive Officer April 29, 1999
- ------------------------- (principal executive officer) and
Paul N. Arnold Director
/s/ Charles M. Egan Chairman and Director April 29, 1999
- -------------------------
Charles M. Egan
/s/ Frances Ann Ziemniak Executive Vice President, Chief April 29, 1999
- ------------------------- Financial Officer and Secretary
Frances Ann Ziemniak
/s/ Keith E. Alessi Director April 29, 1999
- -------------------------
Keith E. Alessi
/s/ Bruce C. Bruckmann Director April 29, 1999
- -------------------------
Bruce C. Bruckmann
/s/ Michael A. Delaney Director April 29, 1999
- -------------------------
Michael A. Delaney
/s/ Gregory B. Maffei Director April 29, 1999
- -------------------------
Gregory B. Maffei
/s/ James A. Urry Director April 29, 1999
- -------------------------
James A. Urry
-21-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements ...................................................... 13
Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant ................ S-1
Schedule II - Valuation and Qualifying Accounts ........................... S-3
F-1
<PAGE>
Exhibit
Number Description Page
- ------- -------------------------------------------------------------- ----
2.1 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
E-1
<PAGE>
Exhibit
Number Description Page
- ------- -------------------------------------------------------------- ----
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 25 of the Company's 1998 Annual Report to
stockholders
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
23.1 Consent of KPMG LLP
27 Financial Data Schedules
E-2
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in thousands)
Condensed Balance Sheets:
As of December 31,
-----------------------
1997 1998
-------- --------
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
======== ========
Condensed Statements of Operations:
Year Ended December 31,
-------------------------------
1996 1997 1998
------- ------- -------
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
======= ======= =======
S-1
<PAGE>
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows:
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
EXHIBIT 21.1
LIST OF SUBSIDIARIES
CORT Furniture Rental Corporation, a Delaware corporation
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
<LEGEND>
Art. 5 FDS for 1998 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 703
<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>
