-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QF6ErU8iMpLY7nq+gtcz6fxREQS3UzCOzR7QC66222jHoYg3FZ36On8hmIcNsmyQ VBpxEzklUqpiBtQjlqQ3hg== 0000950112-96-002525.txt : 19960726 0000950112-96-002525.hdr.sgml : 19960726 ACCESSION NUMBER: 0000950112-96-002525 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960725 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORT BUSINESS SERVICES CORP CENTRAL INDEX KEY: 0000905401 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 541662135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-05935 FILM NUMBER: 96598827 BUSINESS ADDRESS: STREET 1: 4401 FAIR LAKES CT STE 300 CITY: FAIRFAX STATE: VA ZIP: 22033 BUSINESS PHONE: 7039688500 MAIL ADDRESS: STREET 2: 4401 FAIR LAKES COURT STE 300 CITY: FAIRFAX STATE: VA ZIP: 22033 FORMER COMPANY: FORMER CONFORMED NAME: NEW CORT HOLDINGS CORP DATE OF NAME CHANGE: 19930825 S-3/A 1 CORT BUSINESS SERVICES CORPORATION AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 25, 1996 REGISTRATION NO. 333-05935 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- AMENDMENT NO. 2 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- 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 incorporation or organization) Identification No.)
------------------- 4401 FAIR LAKES COURT FAIRFAX, VIRGINIA 22033 (703) 968-8500 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) FRANCES ANN ZIEMNIAK CORT BUSINESS SERVICES CORPORATION 4401 FAIR LAKES COURT FAIRFAX, VIRGINIA 22033 (703) 968-8500 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------- COPIES TO: CHRISTOPHER G. KARRAS KIRK A. DAVENPORT DECHERT PRICE & RHOADS LATHAM & WATKINS 4000 BELL ATLANTIC TOWER 885 THIRD AVENUE 1717 ARCH STREET NEW YORK, NEW YORK 10022 PHILADELPHIA, PENNSYLVANIA 19103-2793 (212) 906-1200 (215) 994-4000
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable on or after the effective date of this Registration Statement. ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CORT BUSINESS SERVICES CORPORATION ------------------- CROSS REFERENCE SHEET PURSUANT TO ITEM 501 OF REGULATION S-K
FORM S-3 ITEM AND CAPTION LOCATION IN PROSPECTUS --------------------------------------------------------- ----------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus................................. Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Prospectus............................................... Cover Pages of Prospectus 3. Risk Factors............................................. Risk Factors 4. Use of Proceeds.......................................... Use of Proceeds 5. Determination of Offering Price.......................... Not Applicable 6. Dilution................................................. Not Applicable 7. Selling Security Holders................................. Not Applicable 8. Plan of Distribution..................................... Underwriting 9. Description of Securities to be Registered............... Not Applicable 10. Interests of Named Experts and Counsel................... Legal Matters; Experts 11. Material Changes......................................... Prospectus Summary; Unaudited Pro Forma Selected Condensed Consolidated Financial Data; Business 12. Incorporation of Certain Information by Reference........ Incorporation of Certain Documents by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................... Not Applicable
SUBJECT TO COMPLETION, DATED JULY 25, 1996 PROSPECTUS 1,700,000 SHARES [CORT BUSINESS SERVICES LOGO] CORT BUSINESS SERVICES CORPORATION COMMON STOCK -------------- All of the shares of Common Stock (the "Common Stock") offered hereby are being issued and sold by CORT Business Services Corporation ("CORT" or the "Company") through the several Underwriters named herein (the "Offering"). The Common Stock is quoted on the New York Stock Exchange ("NYSE") under the symbol "CBS." On July 9, 1996, the last reported sales price of the Common Stock on the NYSE was $19.00 per share. See "Price Range of Common Stock and Dividend Policy." SEE "RISK FACTORS" ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. -------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. UNDERWRITING PROCEEDS PRICE TO DISCOUNTS AND TO THE THE PUBLIC COMMISSIONS(1) COMPANY(2) Per Share $ $ $ Total(3) $ $ $
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $ . (3) The Company has granted the Underwriters a 30-day option to purchase up to 255,000 additional shares of Common Stock on the same terms as set forth above solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." -------------- The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by the Underwriters and subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about , 1996 at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. -------------- SMITH BARNEY INC. MONTGOMERY SECURITIES , 1996 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any State. [LOGO] CORT is the nation's largest "rent-to-rent" furniture rental company. The Company operates under the names CORT Furniture Rental and General Furniture Leasing in 104 rental showrooms, 65 furniture clearance centers and 57 distribution centers in 29 states and the District of Columbia, as shown in the shaded areas on the map below. [MAP ARTWORK] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information (including the consolidated financial statements and the notes thereto) appearing elsewhere in this Prospectus or incorporated herein by reference. Unless otherwise indicated, (i) all references in this Prospectus to the Company shall mean the Company and its subsidiary, CORT Furniture Rental Corporation ("CFR"), and CFR's subsidiaries, on a consolidated basis, and (ii) the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. THE COMPANY OVERVIEW CORT Business Services Corporation ("CORT" or the "Company"), through its wholly-owned subsidiary CORT Furniture Rental Corporation, 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, which differs from the "rent-to-own" segment by serving customers who typically do not seek ownership of the rented merchandise, 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 580 salespeople and a network of 104 showrooms in 29 states and the District of Columbia. The Company believes that approximately 80% of its rental revenue is derived from its corporate customers, while the remainder is derived principally from rentals to middle-and upper-income level individuals. Management believes that the Company's focus on corporate and upper-income individual customers allows it to maintain a high-quality lease portfolio, which contributes to generally higher operating margins than those of its competitors. The Company maintains the showroom quality condition of its merchandise available for rent by selling its previously rented merchandise through a network of 65 company-operated clearance centers, thereby enabling the Company to regularly update its inventory with new styles and new merchandise. Sales of furniture through clearance centers, at prices which for the last five years have averaged 110% of the furniture's original cost, allow the Company to maximize the residual value of its rental merchandise. Furniture sales through clearance centers and other sales accounted for approximately 21% of the Company's total 1995 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. Corporate customers generally enter into leases for office furniture to meet seasonal, temporary or start-up needs. Corporate customers also lease residential furniture in order to provide furnishings for their employees who have been relocated or are on temporary assignment or, in the case of operators of apartment communities, in order to provide furnished apartments. The Company's corporate customers include Fortune 500 companies, small businesses and professionals, and owners and operators of apartment communities. According to industry estimates, revenues of the "rent-to-rent" furniture rental industry in 1994 were in excess of $650 million. A significant portion of these revenues is generated by single-location and small regional businesses which present attractive consolidation opportunities for the larger "rent- to-rent" furniture rental companies such as CORT. Management believes that CORT is well-positioned to continue capitalizing on the consolidation trend in the "rent-to-rent" furniture rental industry due to its national presence, leading market share and financial capacity. The Company's total revenue increased 19.0% on an annual basis, from $106.5 million in 1992 to $179.3 million in 1995, as the result of the Company's 1993 acquisition of a significant competitor, General Furniture Leasing Company ("General Furniture"), small lease portfolio acquisitions and new showroom openings, as well as growth in existing operations. Operating earnings increased 25.5% on an 3 annual basis from $13.5 million in 1992, excluding non-recurring charges of $10.0 million, to $26.7 million in 1995. Total revenue and operating earnings were $106.9 million and $15.4 million, respectively, in the first six months of 1996, representing an increase of 20.5% in revenue and 21.3% in operating earnings as compared to the same period in 1995. BUSINESS STRATEGY Management believes that CORT's size, national presence, consistently high-level customer service, product quality and broad product selection, depth of management and efficient clearance centers have been key contributors to the Company's success. The Company's objective is to build on these fundamentals and increase further its revenue and operating earnings and expand its margins by continuing to pursue its growth strategy. The key components of this strategy are (i) making selective acquisitions; (ii) initiating operations in new markets and adding showrooms in existing markets utilizing the CORT Furniture Rental and General Furniture Leasing operating formats; (iii) expanding its corporate customer base with an emphasis on the rental of high-margin office furniture products; and (iv) continuing to invest in the development of new 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 1992, the Company has completed 13 small lease portfolio acquisitions. The Company is currently negotiating a portfolio acquisition in a new market. In addition, the Company has acquired two larger regional companies: General Furniture in September 1993, which had total revenues of approximately $41.5 million for fiscal year 1992, and Evans Rents in April 1996, which had total revenues of approximately $30.5 million for fiscal year 1995. The acquisition of General Furniture provided CORT with immediate access to new market areas, additional critical mass in CORT's existing markets and an alternative operating strategy targeted at a different segment of the "rent-to-rent" furniture market. Evans Rents provides CORT with additional critical mass in the greater Los Angeles and San Francisco areas, increases the percentage of rental revenue derived from the rental of higher-margin office furniture products and contributes additional expertise in the supply of furniture for conventions. New Markets and Additional Showrooms. The Company continues to expand the number of showrooms within its existing markets as well as initiate new operations, including showrooms, distribution facilities and clearance centers, in strategically identified geographic locations where it currently does not conduct business and where attractive acquisition opportunities do not exist. By increasing the number of showrooms associated with existing distribution facilities and clearance centers, the Company is able to distribute its real estate, personnel and other fixed costs over a larger revenue base. Since the beginning of 1995, CORT has begun operations in four new metropolitan markets. The Company operates under the CORT Furniture Rental and General Furniture Leasing tradenames. Furniture showrooms operated under the General Furniture Leasing tradename are typically targeted at smaller markets and offer lower price-point furniture rentals. The different formats and cost structures of the CORT Furniture Rental and General Furniture Leasing operations provide the Company with the capability to maximize expansion opportunities in markets of various sizes. 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. New Product and Service Development. The Company continues to invest in the development of new products and services. Products and services currently under development include the rental of houseware amenity packages, interior design services and furniture for model homes and the supply of 4 furniture for conventions. Management believes that the gradual introduction of new products and services allows the Company to experiment with such products and services at a relatively low initial cost. ACQUISITION OF EVANS RENTS In April 1996, the Company acquired Evans Rents, a "rent-to-rent" furniture rental company located exclusively in California, for a purchase price of approximately $27 million. Prior to the acquisition, Evans Rents operated 17 showrooms located primarily in the greater Los Angeles and San Francisco areas. Management believes that Evans Rents, using an operating format similar to that of CORT Furniture Rental, derives its rental revenue from a comparable customer base, while generating a higher percentage of revenue from rentals of office furniture products. Evans Rents' total 1995 revenues were approximately $30.5 million. As the Company integrates Evans Rents into its West Coast region, operating margins are expected to benefit from the Company's ability to better leverage its fixed costs and infrastructure over a larger revenue base. The Company expects to reduce operating expenses by closing 12 duplicate showrooms. ------------------- CORT Business Services Corporation was incorporated in Delaware on March 29, 1993. The Company is a holding company with no independent operations and no material assets other than its ownership of all of the outstanding capital stock of CFR. The principal executive offices of the Company are located at 4401 Fair Lakes Court, Fairfax, Virginia 22033, and the Company's telephone number is (703) 968-8500. THE OFFERING
Common Stock offered hereby.................. 1,700,000 shares Common Stock to be outstanding after the Offering(1).................................. 12,384,944 shares Use of Proceeds.............................. To repay indebtedness under the Credit Facility. See "Use of Proceeds." New York Stock Exchange symbol............... CBS
- ------------ (1) At June 30, 1996. Does not include 1,119,210 shares of Common Stock issuable upon exercise of employee and director stock options granted by the Company, 138,994 shares of Common Stock reserved for issuance under the Company's employee and director stock option plans, and 182,496 shares of Common Stock reserved for issuance pursuant to outstanding warrants issued by the Company. 5 SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------------ ---------------------------- PRO PRO COMBINED(1) THE COMPANY FORMA(2) THE COMPANY FORMA(2) ----------- ----------------------- -------- ----------------- -------- 1993 1994 1995 1995 1995 1996 1996 ----------- ---------- ---------- -------- ------- ------- -------- STATEMENT OF OPERATIONS DATA: Furniture rental revenue.......... $ 100,499 $130,026 $141,988 $170,679 $69,054 $85,437 $ 94,798 Furniture sales revenue........... 28,074 34,534 37,321 39,135 19,604 21,440 21,999 ----------- ---------- ---------- -------- ------- ------- -------- Total revenue............... 128,573 164,560 179,309 209,814 88,658 106,877 116,797 Furniture rental gross profit..... 80,769 104,255 114,038 136,930 55,624 68,809 76,474 Furniture sales gross profit...... 11,264 13,885 15,118 15,543 7,992 8,862 9,031 ----------- ---------- ---------- -------- ------- ------- -------- Total gross profit.......... 92,033 118,140 129,156 152,473 63,616 77,671 85,505 Selling, general and administrative expenses(3)...... 75,769 95,526 102,435 121,747 50,939 62,294 68,550 ----------- ---------- ---------- -------- ------- ------- -------- Operating earnings................ 16,264 22,614 26,721 30,726 12,677 15,377 16,955 Interest expense.................. 9,820 16,246 15,917 7,079 8,344 4,045 3,642 ----------- ---------- ---------- -------- ------- ------- -------- Income before taxes............... 6,444 6,368 10,804 23,647 4,333 11,332 13,313 Income before extraordinary loss............................... 4,289 3,546 6,218 13,790 2,468 6,643 7,790 Extraordinary loss from early retirement of debt(4)........... -- -- 4,143 -- -- -- -- Net income........................ 4,289 3,546 2,075 13,790 2,468 6,643 7,790 PER SHARE DATA: Earnings per share................ $ 1.05 $ 0.58 Weighted average number of shares used in computation............. 13,183 13,319 OTHER DATA: Number of leases at end of period............................. 48,771 48,747 51,118 56,332 52,038 63,213 63,213 Number of leases per showroom at end of period................... 493 519 538 563 554 608 608 Number of showrooms at end of period(5).......................... 99 94 95 100 94 104 104 Aggregate monthly base rent at end of period(6).................... $ 9,167 $ 9,696 $ 10,949 $ 12,945 $10,678 $14,951 $ 14,951 Clearance center furniture sales cost recovery(7)................ 112.1% 110.5% 110.0% 110.0% 110.1% 110.2% 110.2%
AS OF JUNE 30, 1996 -------------------- PRO ACTUAL FORMA(2) -------- -------- BALANCE SHEET DATA: Total assets............................................................ $227,234 $227,234 Total debt.............................................................. 91,416 61,473 Stockholders' equity.................................................... 82,120 112,063
- ------------ (1) For the year ended December 31, 1993, represents CFR information for the three months ended March 31, 1993 combined with information of the Company for the nine months ended December 31, 1993. Includes the results of operations of General Furniture Leasing for the four months ended December 31, 1993. The September 1, 1993 acquisition of General Furniture was accounted for as a purchase business combination. Revenue of General Furniture Leasing for the four months ended December 31, 1993 was $13,438,000. (2) For the year ended December 31, 1995, reflects the Offering (assuming a public offering price of $19.00 per share), the acquisition of Evans Rents, the IPO, the Exchange for Common Stock, the Senior Notes Retirement and borrowings under the Company's bank credit facility. As of June 30, 1996 and for the six months then ended, reflects the Offering and the acquisition of Evans Rents. See "Unaudited Pro Forma Condensed Consolidated Financial Data." (Footnotes continued on following page) 6 (Footnotes continued from preceding page) (3) Selling, general and administrative expenses include employee, delivery and advertising expenses, occupancy, utilities and nonrental depreciation expenses, other operating expenses and amortization of goodwill. (4) For the year ended December 31, 1995, the extraordinary loss relates to the early retirement of $50,000,000 principal amount of CFR's 12% Senior Notes. (5) Data for the pro forma periods exclude 12 duplicate showrooms which are expected to be closed as a result of the acquisition of Evans Rents. (6) The aggregate monthly base rent at the end of the period represents the aggregate monthly rental payments due under outstanding furniture leases, excluding fees and one-time charges. (7) Clearance center furniture sales cost recovery represents the aggregate proceeds from the sale of rental furniture through clearance centers as a percentage of the aggregate original cost of the furniture sold. 7 RISK FACTORS Prospective purchasers of the Common Stock offered hereby should consider carefully the specific risk factors set forth below as well as the other information set forth elsewhere and incorporated by reference in this Prospectus. Certain information set forth elsewhere or incorporated by reference herein contains forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). These forward-looking statements include the benefits expected to result from the integration of Evans Rents into CORT's West Coast region including improvements in operating margins and leveraging of the Company's fixed costs and infrastructure over a larger revenue base. Certain factors discussed herein could cause actual results to differ materially from those in the forward-looking statements. POSSIBLE ADDITIONAL TAX PAYMENTS The Internal Revenue Service ("IRS") has examined the federal income tax returns of CFR for the years 1989 through June 30, 1992 and has proposed certain adjustments to CFR's taxable income, relating primarily to methods of depreciation, period of cost recovery and certain capitalized financing fees. The Company has agreed in principle with the IRS appeals officer handling the administrative appeal of the examination as to a settlement of the proposed adjustments. The settlement agreed to in principle will not result in any additional financial statement tax expenses, as the Company's reserves are adequate to cover such expenses, and will not require the Company to alter its methods of depreciation or cost recovery period. The Company will be required to make a payment to the IRS and certain state jurisdictions for income and franchise purposes. The total amount of the proposed settlement is approximately $3 million (including interest through June 30, 1996) of which the Company made an initial deposit of approximately $925,000 in February 1996. This agreement is only an agreement in principle, however, and is subject to final IRS approval. A final settlement will become effective only upon approval by the appropriate IRS personnel and execution of definitive settlement documentation. See Note 6 of CORT's Consolidated Financial Statements and Note 4 of CORT's Unaudited Condensed Consolidated Financial Statements. The IRS has also proposed the disallowance of certain deductions taken by Fairwood Corporation for a consolidated tax group of which CFR was previously a member ("Former Group") through the year ended December 31, 1988. The IRS challenge includes the assertion that certain interest deductions taken by the Former Group should be recharacterized as non-deductible dividend distributions and that deductions for certain expenses related to the acquisition of Consolidated Furniture Corporation (formerly known as Mohasco Corporation), CFR's former shareholder, be disallowed. Under IRS regulations, the Company and each other member of the Former Group is severally liable for the full amount of any federal income tax liability of the Former Group while CFR was a member of the Former Group, which could be as much as approximately $29 million for such periods (including interest through June 30, 1996). Under the agreement of sale for CFR, Consolidated Furniture Corporation agreed to indemnify CFR 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. Although Fairwood Corporation has stated that it believes the IRS's position with respect to those proposed disallowances is unjustified and is contesting the matter vigorously, neither the Company nor Fairwood Corporation can predict a successful resolution to the IRS examination. No assurance can be given that, if Consolidated Furniture Corporation becomes liable for federal income tax as a result of the examination, and if the IRS were to collect any resulting tax directly from CFR, that CFR would be able to recover all or part of the deficiency from Consolidated Furniture Corporation under its indemnity or from other members of the Former Group under rights of contribution. No reserves are included in the Company's financial statements with respect to potential tax liabilities of the Former Group. There can be no assurance, however, that the Company's ultimate liability with respect to periods during which CFR was a member 8 of the Former Group will not be material. See Note 6 of CORT's Consolidated Financial Statements and Note 4 of CORT's Unaudited Condensed Consolidated Financial Statements. GROWTH THROUGH ACQUISITIONS To expand its markets and take advantage of the consolidation trend in the "rent-to-rent" furniture rental industry, the Company's business strategy includes growth through acquisitions. Although the Company believes that the operations of General Furniture, which was acquired by CORT in 1993, have been successfully integrated with CORT's operations and that the operations of Evans Rents, which was acquired by CORT in April 1996, will be integrated into CORT's operations successfully, there can be no assurance that additional suitable acquisition candidates will be identified, that acquisitions can be consummated on acceptable terms or that any acquired companies can be successfully integrated into the Company's operations. The Company is currently negotiating a portfolio acquisition, but has no commitments, understandings or arrangements with respect to any specific acquisitions. The Company may use Common Stock for all or a portion of the consideration to be paid in future acquisitions, which could result in dilution to the purchasers of the Common Stock offered hereby. The Company's ability to make future acquisitions may also be constrained by the terms of its outstanding debt. See "Business--Business Strategy." EFFECTIVE CONTROL BY PRINCIPAL STOCKHOLDER Upon completion of the Offering, Citicorp Venture Capital Ltd. ("CVC") will continue to own beneficially approximately 47% of the Company's outstanding Common Stock. Accordingly, CVC together with certain directors and officers of the Company will have sufficient voting power to control the outcome of matters (including the election of directors, and any merger, consolidation or sale of all or substantially all of the Company's assets) submitted to the stockholders for approval and may be deemed to have effective control over the affairs and management of the Company. This controlling interest in the Company could have the effect of making certain transactions more difficult or impossible, absent the support of CVC. See "Principal Stockholders." DOWNTURN IN GENERAL ECONOMIC CONDITIONS The Company believes that the furniture rental industry is significantly influenced by economic conditions generally and particularly by levels of job creation, relocations of employees and general business activity. There can be no assurance that a prolonged economic downturn would not have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Inflation and General Economic Conditions." COMPETITION The "rent-to-rent" furniture rental business is competitive and the Company competes against a number of other companies, including local and regional furniture rental businesses. With regard to the sale of furniture through its clearance centers, the Company competes with both used and new office and residential furniture retailers. Some of the Company's competitors may be in a stronger financial position than the Company. See "Business--Competition." DEPENDENCE ON KEY PERSONNEL The success of the Company depends to a significant degree on the efforts of the Company's senior management. The Company's operations may be adversely affected if one or more members of senior management cease to be active in the Company. See "Management" and "Principal Stockholders." 9 LEVERAGE Following the Offering, the Company will continue to have indebtedness that is substantial in relation to its total capitalization. At June 30, 1996, on a pro forma basis the ratio of the Company's debt to equity was 0.5 to 1.0. If the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock, which is quoted on the New York Stock Exchange, may be subject to significant fluctuations in response to operating results, announcements by competitors and other factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These market fluctuations may adversely affect the market price of the Common Stock. DIVIDEND POLICY The Company intends to retain its earnings, if any, for use in its operations. In addition, the terms of CFR's outstanding indebtedness restrict its ability to advance funds and issue dividends to the Company. The Company does not expect to pay dividends on its Common Stock in the foreseeable future. See "Price Range of Common Stock and Dividend Policy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." SHARES ELIGIBLE FOR FUTURE SALE AS OF JUNE 30, 1996; REGISTRATION RIGHTS Upon consummation of this Offering, the Company will have 12,384,944 shares of Common Stock outstanding. The shares sold in this Offering will be freely tradeable without restriction or further registration under the Securities Act, unless acquired by an "affiliate" of the Company (defined in Rule 144 under the Securities Act, generally, as a person who, by virtue of equity ownership or otherwise, controls, or is controlled by, or is under common control with, the Company). The Company and its directors and executive officers and CVC (who in the aggregate hold 6,328,480 outstanding shares of Common Stock) have agreed, except as described below, not to offer, sell, contract to sell or otherwise dispose in a public sale, public distribution or other public disposition, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, other than the shares subject to the Underwriters' over-allotment option, without the prior written consent of Smith Barney Inc., for a period of 90 days after the date of this Prospectus (the "Lock-up Agreements"). The Underwriters have agreed that Messrs. Arnold, Egan and Jobes may sell up to 20,000, 22,000 and 15,000 shares, respectively, after 15 days following the date of the Prospectus. The Company has granted certain registration rights with respect to the Common Stock held by CVC and certain stockholders of the Company who in the aggregate hold 6,425,416 shares of Common Stock. After the Offering, if the Company proposes to register any additional shares of Common Stock under the Securities Act, such stockholders will be entitled, subject to the Lock-up Agreements and certain other conditions, to include all or a portion of their shares in such registration. In addition, CVC, which will hold in the aggregate 5,778,518 shares of Common Stock after the Offering, has the right, subject to its Lock-up Agreement and certain other conditions, to require the registration of all or a portion of its shares. No predictions can be made as to the effect, if any, that market sales of shares or the availability of such shares for future sale will have on the market price of shares of Common Stock prevailing from time to time. The prevailing market price of the Common Stock after the Offering could be adversely affected by future sales of substantial amounts of Common Stock by existing stockholders or the perception that such sales may occur. See "Shares Eligible for Future Sale," "Principal Stockholders" and "Underwriting." 10 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,700,000 shares of Common Stock offered hereby, after deducting underwriting discounts and commissions and other fees, will be approximately $29.9 million at a public offering price of $19.00 per share (approximately $34.5 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds from the Offering to repay indebtedness under its bank credit facility (the "Credit Facility"). As of June 30, 1996, $41.4 million was outstanding under the Credit Facility, $27.7 million of which was incurred to acquire Evans Rents and $4.8 million of which was used to redeem a portion of CFR's 12% Senior Notes due 2000. Borrowings under the Credit Facility mature on November 21, 1998 and 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 on borrowings under the Credit Facility at June 30, 1996 was 7.01%. In May 1996, the Company amended the Credit Facility to increase its borrowing capacity from $50 million to $70 million. The Company uses borrowings under the Credit Facility to meet acquisition and expansion needs as well as seasonal working capital and general corporate requirements. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock commenced trading on the Nasdaq Stock Market on November 17, 1995. Prior to that date there was no established public trading market for the Common Stock. The Company delisted the Common Stock from the Nasdaq Stock Market on December 20, 1995, and the Common Stock commenced trading on the New York Stock Exchange under the symbol "CBS" on December 21, 1995. The following table sets forth, for the period indicated, the high and low sales prices of the Common Stock as reported on such exchanges.
HIGH LOW ------------- ------------- Year ended December 31, 1995 Fourth Quarter (November 17 through December 31).......................... $ 17 3/4 $ 13 1/4 Year ended December 31, 1996 First Quarter............................................................. $ 19 5/8 $ 15 Second Quarter............................................................ $ 19 1/2 $ 17 Third Quarter (through July 23, 1996)..................................... $ 19 3/4 $ 18 1/4
The last reported sale price for the Common Stock on the New York Stock Exchange on July 9, 1996 was $19.00. As of June 30, 1996, the Company had approximately 290 holders of record of its Common Stock. The Company has not paid any dividends on its Common Stock to date. The payment of dividends, if any, in the future is within the discretion of the Board of Directors and will depend on the Company's earnings, its capital requirements and financial condition. It is the present intention of the Board of Directors to retain all earnings, if any, for use in the Company's business operations and, accordingly, the Board of Directors does not expect to declare or pay any dividends in the foreseeable future. In addition, as a holding company, the Company's ability to pay dividends is dependent on the receipt of dividends or advances from CFR. CFR's debt obligations restrict its ability to make advances and pay dividends to the Company. 11 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as of June 30, 1996, and pro forma to give effect to the Offering, as described under "Use of Proceeds."
AS OF JUNE 30, 1996 ----------------------- HISTORICAL PRO FORMA ---------- --------- (DOLLARS IN THOUSANDS) DEBT: Credit Facility and other......................................... $ 41,416 $ 11,473 Senior Notes...................................................... 50,000 50,000 ---------- --------- Total debt.................................................... 91,416 61,473 STOCKHOLDERS' EQUITY: Common Stock, voting, par value $.01 per share; 15,500,000 authorized, 10,684,944 issued and outstanding; and 12,384,944 issued and outstanding, pro forma (1)............................... 107 124 Common Stock, Class B, nonvoting, par value $.01 per share; 15,500,000 authorized; none issued and outstanding.................. -- -- Additional paid-in capital........................................ 67,436 97,362 Accumulated earnings.............................................. 14,577 14,577 ---------- --------- Total stockholders' equity.................................... 82,120 112,063 ---------- --------- Total capitalization.......................................... $ 173,536 $ 173,536 ---------- --------- ---------- ---------
- ------------ (1) Does not include 1,119,210 shares of Common Stock issuable upon exercise of employee and director stock options granted by the Company, 138,994 shares of Common Stock reserved for issuance under the Company's employee and director stock option plans, and 182,496 shares of Common Stock that are reserved for issuance pursuant to outstanding warrants issued by the Company. 12 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The following unaudited pro forma condensed consolidated financial data consists of Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 31, 1995 and the six months ended June 30, 1996, and an Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1996 (collectively, the "Pro Forma Statements"). The Unaudited Pro Forma Condensed Consolidated Statements of Operations give effect to the initial public offering (the "IPO") of the Common Stock of CORT completed in November 1995, the exchange of all of the Company's 14.5% Subordinated Debentures, the Company's 15% Junior Subordinated Debentures and CFR's 14% Senior Subordinated Pay-In-Kind Notes for shares of the Company's Common Stock in the fourth quarter of 1995 (the "Exchange for Common Stock"), the retirement of $50 million in aggregate principal amount of CFR's 12% Senior Notes due 2000, which was effected contemporaneously with the IPO (the "Senior Notes Retirement"), initial borrowings under the Credit Facility entered into contemporaneously with the IPO, the Company's acquisition of Evans Rents in April 1996 and the Offering as if they occurred on January 1, 1995. The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to the Offering as if it occurred on June 30, 1996. The IPO, the Exchange for Common Stock, the Senior Notes Retirement and the initial borrowings under the Credit Facility were effected before December 31, 1995 and have been reflected in the Company's historical unaudited condensed consolidated balance sheet as of June 30, 1996. Management believes that, on the basis set forth herein, the Pro Forma Statements reflect a reasonable estimate of these transactions based on currently available information. The pro forma financial data are presented for informational purposes only and do not purport to represent what the Company's financial position or actual results of operations would have been had these transactions in fact occurred on the dates assumed or that may result from future operations. The Pro Forma Statements should be read in conjunction with the consolidated financial statements and related notes of the Company appearing elsewhere in this Prospectus. 13 CORT BUSINESS SERVICES CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
HISTORICAL ADJUSTMENTS -------------------------------- ------------------------- PRO THE COMPANY(1) EVANS RENTS(2) ACQUISITION OFFERING FORMA -------------- -------------- ----------- -------- ------- Revenue: Furniture rental............. $ 85,437 $9,361 -- -- $94,798 Furniture sales.............. 21,440 559 -- -- 21,999 ------- ------ ----------- -------- ------- Total revenue............ 106,877 9,920 -- -- 116,797 ------- ------ ----------- -------- ------- Operating costs and expenses: Cost of furniture rental..... 16,628 3,460 $ (28)(3) -- (1,736)(4) -- 18,324 Cost of furniture sales...... 12,578 390 -- -- 12,968 Amortization of goodwill..... 390 -- 105(5) -- 495 Selling, general and administrative expenses........ 61,904 4,623 (208)(6) 1,736(4) -- 68,055 ------- ------ ----------- -------- ------- Total costs and expenses....................... 91,500 8,473 (131) -- 99,842 ------- ------ ----------- -------- ------- Operating income......... 15,377 1,447 131 -- 16,955 Interest expense............... 4,045 887 637(7) (842)(8) $ (1,085)(9) 3,642 ------- ------ ----------- -------- ------- Income before income taxes..... 11,332 560 336 1,085 13,313 Income taxes................... 4,689 62 162(10) 176(11) 434(11) 5,523 ------- ------ ----------- -------- ------- Net income............... $ 6,643 498 (2) $ 651 $ 7,790 ------- ------ ----------- -------- ------- ------- ------ ----------- -------- ------- Earnings per share............. $ 0.58 Weighted average number of shares used in computation..... 13,319
See accompanying notes. 14 CORT BUSINESS SERVICES CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
HISTORICAL ADJUSTMENTS -------------------------- -------------------------- PRO THE COMPANY EVANS RENTS ACQUISITION OFFERINGS FORMA ----------- ----------- ----------- --------- -------- Revenue: Furniture rental............... $ 141,988 $28,691 -- -- $170,679 Furniture sales................ 37,321 1,814 -- -- 39,135 ----------- ----------- ----------- --------- -------- Total revenue.............. 179,309 30,505 -- -- 209,814 ----------- ----------- ----------- --------- -------- Operating costs and expenses: Cost of furniture rental....... 27,950 12,865 $ (89)(3) (6,977)(4) -- 33,749 Cost of furniture sales........ 22,203 1,389 -- -- 23,592 Amortization of goodwill....... 662 -- 333(5) -- 995 Selling, general and administrative expenses...... 101,773 12,864 (862)(6) 6,977(4) -- 120,752 ----------- ----------- ----------- --------- -------- Total costs and expenses... 152,588 27,118 (618) -- 179,088 ----------- ----------- ----------- --------- -------- Operating income........... 26,721 3,387 618 -- 30,726 Interest expense, net............ 15,917 3,653 2,010(7) $ (2,171)(9) (3,478)(8) (8,852)(12) 7,079 ----------- ----------- ----------- --------- -------- Income (loss) before income taxes............................ 10,804 (266) 2,086 11,023 23,647 Income taxes (benefit)........... 4,586 104 (210)(10) 968(11) 4,409(11) 9,857 ----------- ----------- ----------- --------- -------- Net income (loss)(13)...... $ 6,218 $ (370) $ 1,328 $ 6,614 $ 13,790 ----------- ----------- ----------- --------- -------- ----------- ----------- ----------- --------- -------- Earnings per share............... $ 1.05 Weighted average number of shares used in computation.............. 13,183
See accompanying notes. 15 (1) Includes Evans Rents subsequent to its acquisition on April 24, 1996. (2) Represents results of operations prior to the acquisition of Evans Rents on April 24, 1996. (3) Adjusts Evans Rents' historical depreciation expense on rental property to conform to the Company's depreciation policy after giving effect to the write-down of Evans Rents' rental property to fair market value. See Note (1) to the Unaudited Pro Forma Condensed Consolidated Balance Sheet. (4) Reclassifies certain of Evans Rents' cost of furniture rental as selling, general and administrative expenses to conform to the Company's presentation policies. (5) Recognizes the amortization expense of goodwill resulting from the acquisition of Evans Rents over a 40-year period. (6) Eliminates compensation expense associated with certain management employees of Evans Rents who ceased employment following the acquisition and will not be replaced. (7) Reflects increased interest expense related to borrowings under the Credit Facility of $27,725,000, assumed to bear interest at approximately 7.25% (LIBOR + 175 basis points), in connection with the acquisition of Evans Rents. An interest rate increase of 1/8% would increase pro forma interest expense on the Credit Facility by an aggregate of $17,000 and $35,000 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. This increase in interest expense would decrease pro forma income before taxes by the same amount. There would be no impact on earnings per share. (8) Eliminates interest expense associated with the debt of Evans Rents outstanding prior to the acquisition, excluding certain debt associated with Evans Rents' delivery trucks which was assumed by the Company. (9) Reflects the reduction of interest expense resulting from the repayment of debt with the net proceeds of the Offering. (10) Adjusts Evans Rents' historical income taxes to reflect an assumed tax rate of 40%. Prior to the acquisition, Evans Rents was subject only to alternative minimum tax due to substantial net operating losses. The utilization of such net operating losses by the Company will be limited. (11) Recognizes the combined federal and state income tax effect of the net increase in income before income taxes, at an assumed combined tax rate of 40%. (12) Reflects the reduction of historical interest expense relating to the Exchange for Common Stock and the Senior Notes Retirement both of which occurred contemporaneously with the IPO. In addition, reflects the interest expense related to the assumed average borrowings of $3,800,000 under the Credit Facility assumed to bear interest at approximately 7.25% (LIBOR + 175 basis points), the elimination of amortization of deferred financing fees associated with the Senior Notes Retirement and the additional amortization of deferred financing fees relating to the Credit Facility. An interest rate increase of 1/8% would increase pro forma interest expense on the Credit Facility by an aggregate of $5,000 for the year ended December 31, 1995. This increase in interest expense would decrease pro forma income before income taxes by the same amount. There would be no impact on earnings per share. (13) Net income for the year ended December 31, 1995 is presented before an extraordinary loss of $4,143,000, net of taxes, associated with the Senior Notes Retirement. 16 CORT BUSINESS SERVICES CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (DOLLARS IN THOUSANDS)
OFFERING PRO HISTORICAL ADJUSTMENTS FORMA ---------- ----------- -------- ASSETS: Cash and cash equivalents............................ $ 598 -- $ 598 Accounts receivable, net............................. $ 9,036 -- 9,036 Prepaid expenses..................................... 3,730 -- 3,730 Rental furniture, net................................ 137,322 -- 137,322 Property, plant and equipment, net................... 34,790 -- 34,790 Intangible and other assets.......................... 41,758 -- 41,758 ---------- ----------- -------- $ 227,234 -- $227,234 ---------- ----------- -------- ---------- ----------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY: Accounts payable & accrued expenses.................. $ 32,796 -- $ 32,796 Deferred revenue & security deposits................. 13,805 -- 13,805 Credit Facility and other............................ 41,416 $ (29,943)(1) 11,473 Senior Notes......................................... 50,000 -- 50,000 Deferred taxes and other............................. 7,097 -- 7,097 ---------- ----------- -------- Total liabilities................................ 145,114 (29,943) 115,171 Stockholders' equity................................. 82,120 29,943(2) 112,063 ---------- ----------- -------- $ 227,234 $ 0 $227,234 ---------- ----------- -------- ---------- ----------- --------
- ------------ (1) Reflects the repayment of debt from the net proceeds of the Offering. (2) Reflects the estimated proceeds from the Offering of $32,300,000, net of $2,357,000 in underwriting discounts and commissions and other fees. 17 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth the selected historical financial data of the Company since its formation and acquisition of CFR on March 31, 1993, and the selected historical financial data of CFR prior to the acquisition by the Company. The financial data of the Company as of and for the nine months ended December 31, 1993 and as of and for the years ended December 31, 1994 and 1995 have been derived from the consolidated financial statements of the Company which have been audited by KPMG Peat Marwick LLP. The financial data of CFR as of and for the years ended December 31, 1991 and 1992, and for the three months ended March 31, 1993 have been derived from the financial statements of CFR which have been audited by KPMG Peat Marwick LLP. The combined financial data for the year ended December 31, 1993 represent CFR information for the three months ended March 31, 1993 combined with information for the Company for the nine months ended December 31, 1993. The financial data as of June 30, 1996 and for the six months ended June 30, 1995 and 1996 are derived from the unaudited condensed consolidated financial statements of the Company. In the opinion of management of the Company, such unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of the financial position and the results of operations as of and for such periods. The selected historical financial data should be read in conjunction with the Company's and CFR's financial statements and notes thereto included elsewhere in this Prospectus. Operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. 18 CORT BUSINESS SERVICES CORPORATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREDECESSOR(1) THE COMPANY ------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, THREE ---------------------------------- SIX MONTHS NINE MONTHS MONTHS YEAR ENDED ENDED ENDED COMBINED ENDED DECEMBER 31, MARCH 31, DECEMBER 31,(2) (2)(3) HISTORICAL JUNE 30, ------------------- --------- --------------- -------- ----------------------- -------- 1991 1992 1993 1993 1993 1994 1995 1995 -------- -------- --------- --------------- -------- ---------- ---------- -------- STATEMENT OF OPERATIONS DATA: Furniture rental revenue....... $ 84,213 $ 83,351 $ 21,497 $ 79,002 $100,499 $ 130,026 $ 141,988 $ 69,054 Furniture sales revenue........ 22,358 23,109 6,228 21,846 28,074 34,534 37,321 19,604 -------- -------- --------- ------- -------- ---------- ---------- -------- Total revenue............. 106,571 106,460 27,725 100,848 128,573 164,560 179,309 88,658 Furniture rental gross profit.......................... 68,481 68,555 17,451 63,318 80,769 104,255 114,038 55,624 Furniture sales gross profit... 9,318 9,633 2,548 8,716 11,264 13,885 15,118 7,992 -------- -------- --------- ------- -------- ---------- ---------- -------- Total gross profit........ 77,799 78,188 19,999 72,034 92,033 118,140 129,156 63,616 Selling, general and administrative expenses(4)... 68,345 74,671 16,779 58,990 75,769 95,526 102,435 50,939 -------- -------- --------- ------- -------- ---------- ---------- -------- Operating earnings(5).......... 9,454 3,517 3,220 13,044 16,264 22,614 26,721 12,677 Interest expense(6)............ 18,618 10,979 879 8,941 9,820 16,246 15,917 8,344 -------- -------- --------- ------- -------- ---------- ---------- -------- Income (loss) before taxes and extraordinary loss.............. (9,164) (7,462) 2,341 4,103 6,444 6,368 10,804 4,333 Income (loss) before extraordinary loss.............. (8,710) (6,862) 1,976 2,313 4,289 3,546 6,218 2,468 Extraordinary loss from early retirement of debt(7)........ -- -- -- -- -- -- 4,143 -- Net income (loss).............. (8,710) (6,862) 1,976 2,313 4,289 3,546 2,075 2,468 PER SHARE DATA: Earnings per share before extraordinary loss........... $ 0.81 $ 1.08 $ 0.51 Extraordinary loss per share... -- 0.53 -- ---------- ---------- -------- Earnings per share............. $ 0.81 $ 0.55 $ 0.51 ---------- ---------- -------- ---------- ---------- -------- Weighted average number of shares used in computation(8)............... 7,049 7,759 7,241 AS OF DECEMBER 31, AS OF DECEMBER 31, ------------------- ---------------------------------- 1991 1992 1993 1994 1995 -------- -------- -------- ---------- ---------- BALANCE SHEET DATA: Total assets................... $157,988 $154,262 $169,777 $ 178,275 $ 173,722 Total debt..................... 145,513 147,948 120,269 123,645 53,800 Cumulative Redeemable Preferred Stock........................... 1,253 -- -- -- -- Stockholders' equity (deficit)....................... (11,659) (17,268) 3,341 6,963 75,421 1996 --------- STATEMENT OF OPERATIONS DATA: Furniture rental revenue....... $ 85,437 Furniture sales revenue........ 21,440 --------- Total revenue............. 106,877 Furniture rental gross profit.......................... 68,809 Furniture sales gross profit... 8,862 --------- Total gross profit........ 77,671 Selling, general and administrative expenses(4)... 62,294 --------- Operating earnings(5).......... 15,377 Interest expense(6)............ 4,045 --------- Income (loss) before taxes and extraordinary loss.............. 11,332 Income (loss) before extraordinary loss.............. 6,643 Extraordinary loss from early retirement of debt(7)........ -- Net income (loss).............. 6,643 PER SHARE DATA: Earnings per share before extraordinary loss........... $ 0.57 Extraordinary loss per share... -- --------- Earnings per share............. $ 0.57 --------- --------- Weighted average number of shares used in computation(8)............... 11,619 AS OF JUNE 30, --------- 1996 --------- BALANCE SHEET DATA: Total assets................... $ 227,234 Total debt..................... 91,416 Cumulative Redeemable Preferred Stock........................... -- Stockholders' equity (deficit)....................... 82,120
- ------------ (1) Represents CFR prior to its acquisition by the Company on March 31, 1993. The Company was formed in March 1993 for the purpose of acquiring all of the outstanding stock of CFR. (2) Income statement data for the nine months ended and combined year ended December 31, 1993 include the results of operations of General Furniture Leasing for the four months ended December 31, 1993. The September 1, 1993 acquisition of General Furniture was accounted for as a purchase business combination. Revenue of General Furniture Leasing for the four months ended December 31, 1993 was $13,438,000. (3) Data for the combined year ended December 31, 1993 represent CFR information for the three months ended March 31, 1993 combined with information of the Company for the nine months ended December 31, 1993. (4) Selling, general and administrative expenses include employee, delivery and advertising expenses, occupancy, utilities and nonrental depreciation expenses, other operating expenses and amortization of goodwill. (5) Operating earnings for 1992 include $1,149,000 of severance and relocation costs resulting from the promotion of a new senior management team. Operating earnings for 1991 and 1992 include $3,779,000 and $8,877,000, respectively, relating to the discontinuation of the development of a computer system. Management of the Company believes that these charges are non-recurring in nature. Adjusted for these non-recurring expenses, operating earnings would have been $13,233,000 and $13,543,000 for the years ended December 31, 1991 and 1992, respectively. (6) Interest expense in 1992 and for the three months ended March 31, 1993 reflects the impact of a restructuring of CFR on June 30, 1992. Interest expense for the six months ended December 31, 1992 and the three months ended March 31, 1993 was recognized at an effective rate of 1.8% as a result of applying the accounting principles of a troubled debt restructuring. (7) For the year ended December 31, 1995, the extraordinary loss relates to the early retirement of $50,000,000 principal amount of CFR's 12% Senior Notes. (8) The computation of earnings per share for 1994 and 1995 assumes that the Exchange for Common Stock and the reduction in the related historical interest expense occurred as of January 1, 1994. See Note 2 of CORT's Consolidated Financial Statements. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain information set forth or incorporated by reference herein contains 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 include the benefits expected to result from the integration of Evans Rents into CORT's West Coast region including improvements in operating margins and leveraging of the Company's fixed costs and infrastructure over a larger revenue base. Certain factors as discussed in "Risk Factors" could cause actual results to differ materially from those in the forward-looking statements. The following information should be read together with the consolidated financial statements and notes thereto appearing elsewhere herein (dollars in thousands except per share data). RESULTS OF OPERATIONS CORT Business Services Corporation was formed on March 29, 1993 and contemporaneously acquired all of the stock of CORT Furniture Rental Corporation in a business combination accounted for using the purchase method. The Company is a holding company with no independent operations and no material assets other than its investment in CFR. The following analysis compares the results of operations of the Company for the six months ended June 30, 1996 and 1995, for the years ended December 31, 1995 and 1994, and for the year ended December 31, 1994 and the combined results of operations of the Company for the nine months ended December 31, 1993 and of CFR for the three months ended March 31, 1993. The following table sets forth, for the period indicated, certain income statement data as a percentage of total revenue, unless otherwise indicated.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------- ---------------------- 1993 1994 1995 1995 1996 ------ -------- -------- -------- -------- Revenue Rental revenue............................ 78.2% 79.0% 79.2% 77.9% 79.9% Sales revenue............................. 21.8 21.0 20.8 22.1 20.1 ------ -------- -------- -------- -------- Total revenue........................... 100.0 100.0 100.0 100.0 100.0 Cost of rental(1)........................... 19.6 19.8 19.7 19.4 19.5 Cost of sales(1)............................ 59.9 59.8 59.5 59.2 58.7 Gross margin................................ 71.6 71.8 72.0 71.8 72.7 Selling, general and administrative expenses.................................... 58.9 58.0 57.1 57.5 58.3 ------ -------- -------- -------- -------- Operating earnings.......................... 12.6 13.7 14.9 14.3 14.4 Interest.................................... 7.6 9.9 8.9 9.4 3.8 Income taxes................................ 1.7 1.7 2.6 2.1 4.4 ------ -------- -------- -------- -------- Income before extraordinary loss............ 3.3% 2.2% 3.4% 2.8% 6.2% Net income.................................. 3.3% 2.2% 1.2% 2.8% 6.2%
- ------------ (1) Cost of rental is calculated as a percentage of rental revenue. Cost of sales is calculated as a percentage of sales revenue. Components of Operating Earnings Revenue. Substantially all of the Company's revenue is derived from base rent and fees from its outstanding furniture leases and from the sale of rental furniture. Rental revenue is recognized in the month in which it is due. Furniture sales revenue is recognized in the month of furniture delivery. 20 Cost of Furniture Rental. The primary component of cost of furniture rental is depreciation of rental furniture which is a noncash charge included in the statements of cash flows as a component of cash provided by operating activities. The Company depreciates most of its rental furniture on a declining-balance method over five years, with an estimated salvage value of 40% of original cost, the remainder (approximately one-third) is depreciated on a straight line basis over six years with an estimated salvage value of 25%. The Company also records the 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 and advertising expenses, occupancy, utilities and nonrental depreciation expenses, other operating expenses and amortization of goodwill. Six months ended June 30, 1996 as compared to six months ended June 30, 1995 Revenue. Total revenue increased 20.5% to $106,877 for the six months ended June 30, 1996 from $88,658 for the six months ended June 30, 1995. The acquisition of Evans Rents contributed approximately $5,922 or 6.7% of the percentage increase for the six months ended June 30, 1996. Furniture rental revenue for the six months ended June 30, 1996 was $85,437, a 23.7% increase from $69,054 for the six months ended June 30, 1995. The acquisition of Evans Rents resulted in approximately $5,676 or 8.2% of additional furniture rental revenue for the six months ended June 30, 1996. The remaining 15.5% increase reflects growth in the number of leases as well as revenue per lease. Furniture sales increased 9.4% to $21,440 in the six months ended June 30, 1996 from $19,604 in the six months ended June 30, 1995. The Evans Rents acquisition contributed approximately 1.2% of the increase in furniture sales for the six months ended June 30, 1996. Excluding the impact of an unusually large corporate sale in the first quarter of 1995, retail sales would have shown an increase of 17.9%. Operating Costs and Expenses. Cost of furniture rental has increased from 19.4% of furniture rental revenue in 1995 to 19.5% of furniture rental revenue in 1996. This increase is due to the impact of start-up operations. Cost of furniture sales decreased from 59.2% of furniture sales revenue in 1995 to 58.7% of furniture sales revenue in 1996. The cost of furniture sales for 1995 included the large corporate sale which had a reduced margin. Selling, general and administrative expenses totaled $62,294 or 58.3% of total revenue for the six months ended June 30, 1996 as compared to $50,939 or 57.5% of total revenue for the six months ended June 30, 1995. However, excluding $425 of certain charges associated with duplicate showrooms related to the Evans Rents acquisition, selling, general and administrative expenses would have been 57.9%. The remaining percentage increase is due to the impact of start-up operations. Operating Earnings. As a result of the changes in revenue, operating costs and expenses discussed above, operating earnings were $15,377 or 14.4% of total revenue for the six months ended June 30, 1996 compared to $12,677 or 14.3% of total revenue for the six months ended June 30, 1995. Excluding the charges related to the Evans Rents acquisition, operating earnings would have been 14.8% of the total revenue for the six months ended June 30, 1996. Interest Expense. Interest expense for the six months ended June 30, 1996 decreased to $4,045 from $8,344 in 1995. The decrease is a result of the early retirement of $50,000 in Senior Notes and the exchange of the Company's and CFR's subordinated debentures for common stock, both of which occurred in the fourth quarter of 1995, net of borrowings for the Evans Rents acquisition in April 1996. Furniture Purchases. Furniture purchases totaled $43,252 in the six months ended June 30, 1996, an increase of 39.0% from the $31,116 purchased in the six months ended June 30, 1995. Approximately 11.2% of the increase resulted from the acquisition of Evans Rents and start-up operations in 21 four new markets. The remaining increase supports the growth in furniture rental revenue and replenishes furniture which has been sold or disposed of. Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994 Impact of Initial Public Offering and Early Debt Retirement. Due to the proximity of the Company's initial public offering and related debt retirement transactions to December 31, 1995, management believes that pro forma income before extraordinary loss and related per share data provide a more meaningful comparison than historical results. Therefore, pro forma income before extraordinary loss has been adjusted to reflect the impact of the initial public offering and related debt retirement transactions as if they occurred at the beginning of 1994. Pro forma income excludes $4,143, net of tax, associated with the early retirement of debt and also excludes interest associated with the Company's and CFR's subordinated debentures and $50,000 of CFR's Senior Notes. Pro forma earnings per common share before extraordinary loss have been calculated using 11,608,000 shares, the actual number of common and common stock equivalents outstanding as of December 31, 1995 on a fully diluted basis. Given the above adjustments, pro forma income before extraordinary loss for the year ended December 31, 1995 was $11,529, or $0.99 per share compared to $9,067, or $0.78 per share. Revenue. Total revenue increased 9.0% to $179,309 in 1995 from $164,560 in 1994. Furniture rental revenue for the year was $141,988, an increase of 9.2% from $130,026 in 1994. This increase reflects an average increase of 9.6% in base rent as well as an average of 3.1% growth in the number of leases. Furniture sales increased 8.1% in 1995 to $37,321 from $34,534 in 1994. Excluding the impact of an unusually large corporate sale in the first quarter of 1995, furniture sales would have shown an increase of 5.2%. Gross Profit. Gross profit margin on total revenue increased to 72.0% for the year ended December 31, 1995 from 71.8% for the year ended December 31, 1994. The gross profit margin on furniture rental revenue increased to 80.3% in 1995 from 80.2% in 1994. Gross profit margin on furniture sales revenue increased to 40.5% in 1995 from 40.2% in 1994. Selling, General and Administrative Expenses. Selling, general and administrative expenses totaled $102,435 or 57.1% of total revenue in 1995 as compared to $95,526 or 58.0% of total revenue in 1994. This percentage decrease is primarily attributed to revenue increasing faster than occupancy expenses. Operating Earnings. As a result of the changes in revenue, gross margin and selling, general and administrative expenses discussed above, operating earnings increased to $26,721, or 14.9% of total revenue in 1995 from $22,614, or 13.7% of total revenue in 1994. Interest Expense. Interest expense decreased to $15,917 in 1995 from $16,246 in 1994. The decrease is related to the early retirement of $50,000 in aggregate principal amount of CFR's Senior Notes, as well as the exchange of the Company's and CFR's subordinated debentures for Common Stock, both of which occurred in the last quarter of 1995. Extraordinary Loss. As a result of the early retirement of CFR's Senior Notes and the termination of CFR's prior revolving credit facility, the Company recognized a loss of $4,143, net of taxes, which has been reflected in the Company's consolidated statement of operations as an extraordinary loss for the year ended December 31, 1995. The extraordinary loss includes $4,600 of premiums on the Senior Notes retirement, the write off of $1,907 of deferred financing fees and $398 of other associated costs. Furniture Purchases. Furniture purchases totaled $54,153 in 1995, an increase of 25.3% over total purchases of $43,233 in 1994. Of this increase, $1,072 or 2.5% represents furniture acquired in connection with small portfolio acquisitions. The remaining increase supports the increase in furniture rental revenue and replenishes furniture which has been sold or disposed of while still reducing idle inventory. 22 Year Ended December 31, 1994 as Compared to Combined Year Ended December 31, 1993 Impact of General Furniture Acquisition. In September 1993, the Company made the significant acquisition of General Furniture. As a result, the financial information reported for the years ended December 31, 1994 and combined December 31, 1993 is not comparable. The Company's revenue growth and operating earnings, on a pro forma basis after giving effect to the acquisition, should be evaluated in light of the changes made subsequent to the acquisition, which include the consolidation of certain underperforming operations and the realization of certain operating efficiencies. Revenue. Total revenue increased 28.0% to $164,560 in 1994 from $128,573 in 1993. However, the 1993 reported revenue includes only 4 months of General Furniture. On a pro forma basis for 1993, after giving effect to the acquisition of General Furniture, revenue was $156,166 as compared to 1994 revenue of $164,560, an increase of 5.4%. Furniture rental revenue for the year was $130,026, an increase of 29.4% from $100,499 in 1993. On a pro forma basis for 1993, after giving effect to the acquisition of General Furniture, furniture rental revenue was $121,761 and comparatively 1994 furniture rental revenue was $130,026, an increase of 6.8%. This increase is attributed to an improved economy and a strong focus on the office market which increased 12.5%. Furniture sales increased 23.0% in 1994 to $34,534 from $28,074 in 1993. On a pro forma basis for 1993, furniture sales were $34,405 and comparatively, 1994 furniture sales increased 0.4%. Gross Profit. Gross profit margin on total revenue increased to 71.8% for the year ended December 31, 1994 from 71.6% for the year ended December 31, 1993. However, the 1993 reported margin includes only four months of General Furniture operations. On a pro forma basis for 1993, gross profit margin on total revenue increased to 71.8% from 70.5%. The gross profit margin on furniture rental revenue decreased from 80.4% in 1993 to 80.2% in 1994. On a pro forma basis, the gross profit margin on furniture rental revenue increased from 79.6% for the combined operations for the full year 1993 to 80.2% in 1994. This increase is attributed to improvements in underperforming business locations, improvements from the integration of General Furniture into operations and the increased revenue from the office segment which is typically more profitable to the Company. Gross profit margin on furniture sales revenue increased to 40.2% in 1994 from 40.1% in 1993. On a pro forma basis, the gross profit margin on furniture sales revenue increased from 38.1% in 1993 to 40.2% in 1994. This increase is also attributed to the improvements in underperforming business locations and improvements from the integration of General Furniture into operations. Selling, General and Administrative Expenses. Selling, general and administrative expenses totaled $95,526 or 58.0% of total revenue in 1994 as compared to $75,769 or 58.9% of total revenue in 1993. On a pro forma basis, selling, general and administrative expenses totaled $90,712, or 58.1% of total revenue for 1993. The decrease as a percentage of total revenue in selling, general and administrative expenses is attributed to the synergies of the General Furniture acquisition. Operating Earnings. As a result of the changes in revenue, gross margin and selling, general and administrative expenses discussed above, operating earnings increased to $22,614, or 13.7% of total revenue in 1994 from $16,264, or 12.6% of total revenue in 1993. On a pro forma basis, operating earnings increased to $22,614 or 13.7% of total revenue in 1994 from $19,325 or 12.4% of total revenue in 1993. Interest Expense. Interest expense increased to $16,246 in 1994 from $9,820 in 1993. The increase is directly related to the increase in the Company's outstanding debt and interest rates from the issuance of CFR's Senior Notes in September 1993. Furniture Purchases. Furniture purchases totaled $43,233 in 1994, an increase of 15.6% over total purchases of $37,408 in 1993. On a pro forma basis, furniture purchases totaled $41,441 for 1993, an increase of 4.3%. The increase in purchases was necessary to provide for the 5.4% increase, on a pro forma basis, in total revenue in 1994 while decreasing idle inventory. 23 LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirements are for purchases of rental furniture (including new furniture purchases and lease portfolio acquisitions) and debt service. The Company purchases furniture throughout each year to replace furniture which has been sold and to maintain adequate levels of rental furniture to meet existing and new customer needs. Furniture purchases were $37,408, $43,233, and $54,153 in 1993, 1994, and 1995, respectively and $31,116 and $43,252 for the first six months of 1995 and 1996, respectively. As the Company's growth strategies continue to be implemented, furniture purchases are expected to increase. The Company's other capital requirements consist of purchases of property, plant and equipment, including warehouse and showroom improvements, office equipment, trucks and computer hardware and standard programming enhancements necessary for installation of the new management information system in additional districts. Net purchases of property, plant and equipment were $1,818, $2,780, and $4,108 in 1993, 1994, and 1995, respectively and $1,739 and $3,443 for the first six months of 1995 and 1996, respectively. During 1993, 1994, 1995 and for the six months ended June 30, 1996, net cash provided by operations was $43,460, $52,019, $55,563 and $37,540, respectively. During 1993, 1994, 1995 and for the six months ended June 30, 1996, net cash used in investing activities was $98,981, $46,645, $54,237 and $74,420, respectively, consisting primarily of purchases of rental furniture. In 1993, $27,500 was used to acquire CFR and $28,863 was used to acquire General Furniture. In 1996, approximately $27,725 was used for the acquisition of Evans Rents. During 1993, 1994, 1995 and for the six months ended June 30, 1996, net cash provided (used) by financing activities was $58,917, ($329), ($14,108) and $37,099, respectively. In 1993, $96,667 was provided by CFR's Senior Notes offering which was used to pay off $67,927 in existing debt, and to finance the acquisition of General Furniture. In addition, the initial investors provided $1,000 in equity and $26,500 in debentures in conjunction with the initial capitalization of the Company. In 1995, $36,995 was provided by the initial public offering, net of expenses, which was used along with other cash resources to pay off $50,000 of CFR's Senior Notes. In 1996, approximately $27,725 was borrowed to acquire Evans Rents. CFR entered into the Credit Facility concurrently with the consummation of the initial public offering of the Company. The Credit Facility, amended as of May 24, 1996, now provides a $70,000 line of credit, subject to certain borrowing base restrictions, to meet acquisition and expansion needs as well as seasonal working capital and general corporate requirements. The Credit Facility expires on November 21, 1998. Borrowings under the 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 1995 on the Credit Facility was 7.9%. A commitment fee calculated based upon the unused portion of the Credit Facility is payable quarterly in arrears. The Company had approximately $41,400 outstanding under the Credit Facility at June 30, 1996. The net proceeds from the initial public offering of the Company, together with available cash and borrowings of $4,800 under the Credit Facility were used to retire $50,000 in aggregate principal amount of CFR's Senior Notes. The Company is required to make annual interest payments on the remaining $50,000 in aggregate principal amount of the Senior Notes outstanding totalling $6,000 annually, payable on March 1 and September 1, in arrears. The Company will not be required to make principal repayments on the Senior Notes until maturity in September 2000. The Credit Facility and indenture governing the Senior Notes restrict the ability of CFR to make advances and pay dividends to the Company. The Company believes that future cash flows from operations, together with the borrowings available under the 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 Credit Facility. The Company may not be able to generate sufficient cash flows from operations to pay 24 the entire principal amount of the remaining $50,000 of Senior Notes when due in September 2000. In such event, the Company intends to refinance such amount primarily through additional equity offerings or alternative forms of debt financing. However, there can be no assurance that the Company will be able to obtain financing on acceptable terms. The IRS has examined the Federal income tax returns of CFR for the years 1989 through June 30, 1992. In connection with that examination, the IRS has proposed adjustments for each year related to methods of depreciation and cost recovery used by CFR. In addition, the IRS has notified CFR of proposed changes with regard to legal and other fees previously deducted. If successfully asserted by the IRS, the proposed adjustments would result in approximately $22 million of additional tax liability, including accrued interest through June 30, 1996. The Company, however, has agreed in principle with the IRS appeals officer handling the administrative appeal of the examination on a settlement of the proposed adjustments. The settlement agreed to in principle will not result in any additional financial statement tax expenses, as the Company's reserves included in deferred income taxes are adequate to cover such expenses, and will not require the Company to alter its methods of depreciation or cost recovery period. The Company will be required to make a payment to the IRS and certain state jurisdictions for income and franchise tax purposes. The total amount of the proposed settlement is approximately $3.0 million (including interest through June 30, 1996) of which the Company made an initial deposit of approximately $925 in February 1996. This agreement is only an agreement in principle, and thus could change. The tentative settlement will become effective only upon approval by the proper IRS personnel and execution of definitive settlement documentation. Upon final IRS approval, the Company will make the remaining required payment from either cash on hand or borrowings under the Credit Facility. The IRS has also proposed the disallowance of certain deductions taken by Fairwood Corporation for a consolidated tax group of which CFR was previously a member ("Former Group") through the year ended December 31, 1988 and subsequent years. The IRS challenge includes the assertion that certain interest deductions taken by the Former Group should be recharacterized as non-deductible dividend distributions and that deductions for certain expenses related to the acquisition of Mohasco Corporation (now Consolidated Furniture Corporation), CFR's former shareholder, be disallowed. Under IRS regulations, 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 $29 million for such periods (including interest through June 30, 1996). Under the agreement of sale for CFR, Consolidated Furniture Corporation 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. Although Fairwood Corporation has stated that it believes the IRS's position with respect to those proposed disallowances is unjustified and is contesting the matter vigorously, neither the Company nor Fairwood Corporation can predict a successful resolution to the IRS examination. No assurance can be given that, if Consolidated Furniture Corporation becomes liable for Federal income tax as a result of the examination, and if the IRS were to collect any resulting tax directly from CFR, that CFR would be able to recover all or part of the deficiency from Consolidated Furniture Corporation under its indemnity or from other members of the Former Group under rights of contribution. No reserves are included in the Company's financial statements with respect to potential tax liabilities of the Former Group. There can be no assurance, however, that the Company's ultimate liability with respect to periods during which CFR was a member of the Former Group will not result in a material impact on the Company's financial condition or results of operations. 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. 25 BUSINESS OVERVIEW The Company 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 580 salespeople and a network of 104 showrooms in 29 states and the District of Columbia. The Company believes that approximately 80% of its rental revenue is derived from its corporate customers, while the remainder is derived principally from rentals to middle- and upper-income level individuals. Management believes that the Company's focus on corporate and upper-income individual customers allows it to maintain a high-quality lease portfolio, which contributes to generally higher operating margins than those of its competitors. The Company maintains the showroom quality condition of its merchandise available for rent by selling its previously rented merchandise through a network of 65 company-operated clearance centers, thereby enabling the Company to regularly update its inventory with new styles and new merchandise. Sales of furniture through clearance centers, at prices which for the last five years have averaged 110% of the furniture's original cost, allow the Company to maximize the residual value of its rental merchandise. Furniture sales through clearance centers and other sales accounted for approximately 21% of the Company's total 1995 revenue. As the industry leader and the only "rent-to-rent" furniture rental company with a national presence, CORT is well-positioned to take advantage of growing demand for furniture rental services. This demand is believed to be driven by continued growth in management and professional employment, the increasing importance to American business of flexibility and outsourcing and the impact of a more mobile and transitory population. The Company is called upon to meet business-related furniture rental service needs by a corporate customer base which includes Fortune 500 companies, small businesses and professionals, and owners and operators of apartment communities. According to industry estimates, revenues of the "rent-to-rent" furniture rental industry in 1994 were in excess of $650 million. A significant portion of these revenues is generated by single-location and small regional businesses which present attractive consolidation opportunities for the larger "rent- to-rent" furniture rental companies such as CORT. Since the beginning of 1992, the Company has acquired two of its significant competitors, General Furniture and Evans Rents, and has completed and successfully integrated 13 small lease portfolio acquisitions. Management believes that CORT is well-positioned to continue capitalizing on the consolidation trend in the "rent-to-rent" furniture rental industry due to its national presence, leading market share and financial capacity. The Company's total revenue increased 19.0% on an annual basis, from $106.5 million in 1992 to $179.3 million in 1995, as a result of the acquisition of General Furniture, small lease portfolio acquisitions and new showroom openings, as well as growth in existing operations. Operating earnings increased 25.5% on an annual basis from $13.5 million in 1992, excluding non-recurring charges of $10.0 million, to $26.7 million in 1995. Total revenue and operating earnings were $106.9 million and $15.4 million, respectively, in the first six months of 1996, representing an increase of 20.5% in revenue and 21.3% in operating earnings as compared to the same period in 1995. BUSINESS STRATEGY Management believes that CORT's size, national presence, consistently high-level customer service, product quality and broad product selection, depth of management and efficient clearance centers have been key contributors to the Company's success. The Company's objective is to build on these fundamentals and increase further its revenue and operating earnings and expand its margins by continuing to pursue its growth strategy. The key components of this strategy are (i) making selective acquisitions; (ii) initiating operations in new markets and adding showrooms in existing markets utilizing the CORT Furniture Rental and General Furniture Leasing operating formats; (iii) expanding 26 its corporate customer base with an emphasis on the rental of high-margin office furniture products; and (iv) continuing to invest in the development of new 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 1992, the Company has completed 13 small lease portfolio acquisitions. The Company is currently negotiating a portfolio acquisition in a new market. In a typical lease portfolio acquisition, the Company acquires existing leases and rental furniture. Additionally, the Company may also retain sales personnel with strong local customer relationships. The Company generally does not acquire showrooms, distribution facilities or clearance centers in existing markets. However, in new markets, the Company may choose to retain such real estate. The Company also believes that there are a select number of opportunities to acquire larger regional companies in order to enter new markets and increase its market share in existing markets. For example, the Company has acquired two larger regional companies: General Furniture in September 1993, which had total revenues of approximately $41.5 million for fiscal year 1992, and Evans Rents in April 1996, which had total revenues of approximately $30.5 million for fiscal year 1995. The acquisition of General Furniture provided CORT with immediate access to new market areas, additional critical mass in CORT's existing markets and an alternative operating strategy targeted at a different segment of the "rent-to-rent" furniture market. Evans Rents provides CORT with additional critical mass in the greater Los Angeles and San Francisco areas, increases the percentage of rental revenue derived from the rental of higher-margin office furniture products and contributes additional expertise in the supply of furniture for conventions. New Markets and Additional Showrooms The Company continues to expand the number of showrooms within its existing markets as well as initiate new operations, including showrooms, distribution facilities and clearance centers, in strategically identified geographic locations where it currently does not conduct business and where attractive acquisition opportunities do not exist. By increasing the number of showrooms associated with existing distribution facilities and clearance centers, the Company is able to distribute its real estate, personnel and other fixed costs over a larger revenue base. Since the beginning of 1995, CORT has begun operations in four new metropolitan markets. The Company operates under the CORT Furniture Rental and General Furniture Leasing tradenames. Furniture showrooms operated under the General Furniture Leasing tradename are typically targeted at smaller markets and offer lower price-point furniture rentals. The different formats and cost structures of the CORT Furniture Rental and General Furniture Leasing operations provide the Company with the capability to maximize expansion opportunities in markets of various sizes. Expanded Corporate Customer Base The Company seeks to increase its corporate customer base in order to capitalize on the longer lease terms, higher average lease amounts and multiple lease transactions associated with corporate customers. In addition, corporate customers more frequently enter into higher-margin office furniture leases. The Company intends to grow revenue by increasing its corporate customer base through expanded emphasis on national accounts, further development of sales personnel with business-to-business sales experience and continued advertising. The Company intends to increase awareness among its sales force of the benefits and breadth of its office product offerings through expanded training programs and to focus the efforts of its sales force on these products by increased incentive compensation for office product rentals. New Product and Service Development The Company continues to invest in the development of new products and services. Products and services currently under development include the rental of houseware amenity packages, interior design services and furniture for model homes and the supply of furniture for conventions. Management 27 believes that the gradual introduction of new products and services allows the Company to experiment with such products and services at a relatively low initial cost. See "--Products--New Products." ACQUISITION OF EVANS RENTS In April 1996, the Company acquired Evans Rents, a "rent-to-rent" furniture rental company located exclusively in California, for a purchase price of approximately $27 million. Prior to the acquisition, Evans Rents operated 17 showrooms primarily in the greater Los Angeles and San Francisco areas. Management believes that Evans Rents, using an operating format similar to that of CORT Furniture Rental, derives its rental revenue from a comparable customer base, while generating a higher percentage of revenue from rentals of office furniture products. Evans Rents' total 1995 revenues were approximately $30.5 million. As the Company integrates Evans Rents into its West Coast region, operating margins are expected to benefit from the Company's ability to better leverage its fixed costs and infrastructure over a larger revenue base. The Company expects to reduce operating expenses by closing 12 duplicate showrooms. 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 merchandise for their own homes and apartments. According to industry estimates, the "rent-to-rent" furniture rental industry generated in excess of $650 million of revenue in 1994. The demand for rental products is believed to be driven by continued growth in management and professional employment levels, the changing trends in American business towards flexibility and outsourcing and the impact of a more mobile and transitory population. The industry is highly competitive and consolidating with many participants operating single locations and small regional businesses. See "--Competition." The "rent-to-rent" business is differentiated from the "rent-to-own" business primarily by the terms of the rental arrangements and the type of customer served. "Rent-to-rent" customers generally desire high quality furniture to meet temporary needs, have established credit, and pay on a monthly basis. Typically, these customers do not seek to acquire the property rented. In the typical "rent-to-rent" transaction, the customer agrees to rent merchandise for three to six months, subject to extension by the customer on a month-to-month basis. By contrast, "rent-to-own" arrangements are generally made by customers without established credit whose objective is to acquire ownership of the property. "Rent-to-own" arrangements are typically entered into on a month-to-month basis and require weekly rental payments. PRODUCTS The Company rents a full line of furniture and accessories throughout the United States for office and residential purposes. The Company classifies its furniture leases based on the type of furniture leased and the expected use of the furniture. Office Products In order to capitalize on the significant profit potential available from the longer average rental periods and the higher average monthly rent for office products, the Company's strategy is to emphasize office furniture rentals. The Company offers a full range of office, conference room and reception area 28 furniture, including desks, chairs, tables, credenzas, panel systems and accessories. In order to promote longer office lease terms, the Company leases furniture to its corporate customers at rates that reflect a premium on leases that are less than six months and a discount on leases of more than six months. The Company's office furniture customers consist primarily of large companies that desire flexibility to satisfy temporary and transitional needs and small or start-up businesses that have immediate and changing furniture requirements but seek to minimize capital outlay. The Company emphasizes its ability to outfit an entire office with high quality furniture in two business days, as well as its ability to provide consistent customer service and product quality nationwide. Residential Products The Company leases residential products to corporate customers who are temporarily or permanently relocating employees, to apartment managers and owners who are providing furnished apartments and to individual end users of the furniture. The Company offers a broad range of household furniture, including dining room, living room and bedroom pieces, as well as certain electronic products. A significant portion of the Company's residential furniture rentals are derived from corporate relocations and temporary assignments, as new and transferred employees of the Company's corporate customers enter into leases for residential furniture. The Company's sales personnel maintain contacts with corporate relocation departments. By presenting the possibility of obtaining fully-furnished rental apartments as a lower cost alternative to hotel accommodations, the Company offers its corporate rental customers a way to reduce the costs of corporate relocations 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. New Products CORT offers several new 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 generally has distributed houseware amenity packages through third-party contractors either under subcontract arrangements or direct referrals. Management estimates that 1995 revenues referred or subcontracted were approximately $3.5 million. The Company continues to expand the distribution of its own houseware amenity packages to capture profits currently accruing to third party contractors and has made a lease portfolio acquisition in 1996 of a housewares rental business. In addition, CORT currently offers interior design services and furnishings for model homes in three major metropolitan areas. Revenues generated from these creative design services grew from $3.1 million in 1994 to $4.2 million in 1995. The Company is also currently providing rental furniture to the convention industry through its operations in New Orleans and the California operations acquired with Evans Rents. The additional experience of Evans Rents will provide the Company with further expertise in the convention services business. OPERATIONS Lease Terms The Company typically leases furniture to individuals and corporate accounts for three-, six- and twelve-month terms, which may be and often are extended by its customers on a month-to-month basis. Management believes that, on average, furniture remains on lease for approximately nine months at a time. Although rental contracts may give the customer the option to purchase the merchandise rented, only a small percentage of the Company's rental leases lead to customer ownership. The Company's strategy is to price rentals to recover the original cost of the furniture over a ten-month rental "payout period." However, pricing and payout periods often vary with the length of the leases. The Company frequently charges a delivery fee and, in the absence of proof of insurance, a 29 waiver fee. Within general company guidelines, each district has discretion to set prices based upon local market factors. The Company may also require a security deposit from a customer which will be returned at the end of the lease upon satisfactory compliance with the terms of the lease. The Company requires applications from prospective rental customers and performs credit investigations before approving such applications. In each of the last five years, the Company's bad debt losses have been limited to 0.7% of revenue or less. Dual Operating Strategy The Company operates under two names: CORT Furniture Rental and General Furniture Leasing. Although there is some overlap between their ultimate customer base, CORT Furniture Rental and General Furniture Leasing primarily target different markets. CORT Furniture Rental attracts more corporate customers and upper-income individuals, while General Furniture Leasing focuses on middle-income individuals and residential customers. A privately-commissioned survey determined that the average annual income of a CORT Furniture Rental individual customer in 1994 was approximately $73,000, compared to approximately $47,000 for a General Furniture Leasing individual customer. Typically, General Furniture Leasing leases are for shorter average lease terms and involve lower price-point merchandise. Management believes that the customer and lease base for Evans Rents is similar to that of CORT Furniture Rental. The Company believes that the different target customers and cost structures of CORT Furniture Rental and General Furniture Leasing allow the Company to maximize expansion opportunities in markets of varying sizes. 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 and centralized national billing for customers who have furniture needs in multiple locations, offering consistent quality of products and services at all CORT locations, and offering a broad spectrum of products to customers. Under its Personal Service Guaranty, which management believes is the only written service guarantee of its kind in the "rent-to-rent" industry, the Company ensures customers of CORT Furniture Rental that they will be satisfied with the furniture they rent or the Company will exchange it for similar furniture within two business days free of charge. Additionally, the Company's employees assist customers with space planning, interior design and apartment location services. Furniture Sales For the last five years the Company has derived an average of 76% of its furniture sales revenue from clearance centers sales. The remaining furniture sales revenue is derived primarily from lease conversions and sales of new furniture. Sales of rental furniture allow the Company to control inventory levels and maintain showroom quality of rental inventory. On average, furniture is typically sold through the clearance centers three years after its initial purchase by the Company. For the last five years, sales of rental furniture through the clearance centers have had an average recovery margin on the original cost of furniture of approximately 110%, a price which is usually considerably lower than the price of comparable new merchandise. Management believes that its ability to recover the original cost of its furniture through its clearance centers is a key contributor to the Company's profitability. 30 COST RECOVERY RATIO TABLE (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, SIX MONTHS --------------------------------------------------- ENDED 1991 1992 1993(1) 1994 1995 JUNE 30, 1996(2) ------- ------- ------- ------- ------- ---------------- Clearance Center sales revenue..... $17,288 $18,226 $22,490 $26,136 $26,021 $ 14,628 Original cost of furniture......... 16,406 16,517 20,067 23,651 23,666 13,280 Cost recovery ratio................ 105.4% 110.3% 112.1% 110.5% 110.0% 110.2%
- ------------ (1) Includes four months of combined data pursuant to the acquisition of General Furniture. (2) Includes Evans Rents subsequent to its acquisition on April 24, 1996. COST OF SALES TABLE (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, SIX MONTHS --------------------------------------------------- ENDED 1991 1992 1993(1) 1994 1995 JUNE 30, 1996(2) ------- ------- ------- ------- ------- ---------------- Cost of Clearance Center sales..... $10,022 $10,452 $13,354 $15,371 $15,060 $ 8,344 Cost of other furniture sales...... 3,018 3,024 3,456 5,278 7,143 4,234 ------- ------- ------- ------- ------- ------- Total cost of sales................ $13,040 $13,476 $16,810 $20,649 $22,203 $ 12,578 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- ------------ (1) Includes four months of combined data pursuant to the acquisition of General Furniture. (2) Includes Evans Rents subsequent to its acquisition on April 24, 1996. Sales, Marketing and Advertising The Company employs a sales force of approximately 580 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 districts. Utilizing the Company's national distribution network to emphasize its ability to serve customers throughout the country, the Company employs eight national account representatives who are responsible for customers with business in more than one district. All of CORT Furniture Rental'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 national accounts. The Company markets its services through brochures, newspapers, periodicals, yellow pages, radio, television and direct response media and over the internet (http://www.cort1.com). The Company designs its advertising program both to promote the business and to increase awareness of the advantages of renting in the residential and office furniture markets. The Company also supports its clearance center sales through newspaper, radio and television advertising. Purchasing and Distribution The Company has a national product line chosen by its merchandising group. Each district manager, in consultation with his or her regional merchandising manager, selects from the national product line based on an analysis of customer demand within such manager's specific market. Each district then places purchase orders directly with the Company's vendors and shipment is arranged through the Company's freight analyst directly to the district warehouse. 31 The Company acquires furniture from a large number of manufacturers and is not dependent on any particular manufacturer as a source of supply. In 1995, no furniture manufacturer accounted for more than 10% of the Company's furniture purchases. Management believes that the Company is able to purchase furniture at lower prices than its competitors due to the centralized selection of its product line and large volume of purchases. The Company is generally able to obtain prompt delivery of furniture from its suppliers and has not experienced material interruptions in its business resulting from delays in acquiring furniture. Merchandise is typically delivered to rental customers by Company employees via owned or leased trucks within two business days 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. Inventory Management System In order to enhance inventory management capabilities and to facilitate the collections process, the Company is currently installing a new management information system. The new system provides a perpetual inventory system, thereby supplying more accurate data regarding merchandise available for rent throughout each district. This personal computer based system was developed explicitly for use in the furniture rental industry. The Company has completed certain required software modifications and has successfully installed the system in 15 districts to date. The Company expects the system to be installed in all 34 CORT Furniture Rental districts by mid-1998. The remaining cost of the installation of the system is limited to the personal computer hardware required by districts and standard programming enhancements required by operations. PROPERTIES The Company carries out its rental, sales and warehouse operations through 127 facilities, of which 22 are owned and 105 are leased. The leased facilities have lease terms with expiration dates ranging from 1996 to 2008. Upon the expiration of its leases, the Company generally has been able to either extend its leases or obtain suitable alternative facilities on satisfactory terms. Management seeks to locate properties in new markets where rental, clearance and warehouse operations can be combined in one facility. As the Company expands in a particular district, the Company seeks to open free-standing showrooms that can be serviced from pre-existing warehouses. The Company's showrooms generally have 3,500 to 4,000 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. Based upon this analysis, management also determines whether it believes the market would be more receptive to a CORT Furniture Rental operation or a General Furniture Leasing operation. 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. 32 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:
CORT GENERAL FURNITURE FURNITURE RENTAL LEASING TOTAL DISTRICT LOCATIONS SHOWROOMS SHOWROOMS SHOWROOMS - ------------------------------------------- --------- --------- --------- ALABAMA-- Birmingham -- 1 1 ARIZONA-- Phoenix 1 -- 1 ARKANSAS-- Little Rock -- 1 1 CALIFORNIA(1)-- Orange County 3 -- 3 Los Angeles 6 -- 6 Sacramento 1 -- 1 San Diego 1 -- 1 San Francisco 4 -- 4 Santa Clara 3 -- 3 COLORADO-- Denver 2 -- 2 DISTRICT OF COLUMBIA-- (2) 6 -- 6 FLORIDA-- Ft. Lauderdale 3 1 4 Jacksonville 1 1 2 Orlando 2 1 3 Pensacola -- 1 1 Tampa 2 2 4 GEORGIA-- Atlanta 3 2 5 ILLINOIS-- Chicago 3 -- 3 INDIANA-- Indianapolis 1 -- 1 KANSAS-- Kansas City 1 -- 1 KENTUCKY-- Louisville 2 -- 2 LOUISIANA-- Baton Rouge 2 -- 2 New Orleans(3) 1 -- 1 MASSACHUSETTS-- Boston 3 -- 3 MICHIGAN-- Detroit 3 -- 3 MINNESOTA-- Minneapolis 2 2 4 MISSOURI-- St. Louis 1 -- 1 NEW MEXICO-- Albuquerque 1 -- 1 NORTH CAROLINA-- Raleigh 2 -- 2 Charlotte 1 -- 1 OHIO-- Cincinnati 2 -- 2 Columbus 1 -- 1 OKLAHOMA-- Oklahoma City -- 1 1 Tulsa -- 1 1 OREGON-- Portland 1 -- 1 PENNSYLVANIA-- Philadelphia(4) 4 -- 4 TENNESSEE-- Memphis 1 -- 1 Nashville -- 1 1 TEXAS-- Austin 1 1 2 Corpus Christi -- 1 1 Dallas 4 -- 4 Houston -- 4 4 San Antonio 1 2 3 VIRGINIA-- Richmond -- 1 1 Virginia Beach -- 1 1 WASHINGTON-- Seattle 3 -- 3 -- -- --- TOTAL 79 25 104
- ------------ (1) CORT's showrooms operate under the name CORT/EVANS in California. Excludes 12 duplicate showrooms which are expected to be closed as a result of the acquisition of Evans Rents. (2) Includes locations in Washington, D.C., Maryland and Virginia. (3) CORT's showrooms operate under the name Weiner Cort Furniture Rental in the New Orleans area. (4) Includes locations in Pennsylvania, New Jersey and Delaware. 33 The Company distributes its furniture using a fleet of approximately 145 leased and 70 company-owned delivery trucks. The trucks are usually rented for a period of five to six years under operating leases and typically display the CORT Furniture Rental, CORT/EVANS or General Furniture Leasing logo. 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 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 June 30, 1996, the Company employed approximately 1,800 people of whom approximately 50 were employed at corporate headquarters. Approximately 580 people were employed as salespersons, 840 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 65 people) are represented by an independent union under a contract which expires in December 1996. The Company believes that its relationships with its employees are good. TRADEMARKS AND NAME RECOGNITION The Company engages in business under both the CORT Furniture Rental and General Furniture Leasing tradenames. The Company has established its reputation under the CORT Furniture Rental tradename over the past 22 years as a provider of quality furniture and customer service. Prior to its acquisition by CORT, General Furniture had been in the furniture rental business since 1969. Since the acquisition of Evans Rents, the Company has been operating in California under the name CORT/EVANS. The Company feels that the reputation and name recognition of CORT Furniture Rental, General Furniture Leasing and Evans Rents are important to customers. LEGAL PROCEEDINGS At June 30, 1996, the Company was involved in certain legal proceedings arising in the normal course of its business. The Company believes the outcome of these matters will not have a material adverse effect on the Company. The Company has recently undergone an examination of its Federal income tax returns and is currently appealing the outcome. See "Risk Factors--Possible Additional Tax Payments" and Note 6 of CORT's Consolidated Financial Statements. REGULATORY MATTERS Compliance with federal, state and local laws and regulations governing pollution and protection of the environment is not expected to have any material effect upon the financial condition or results of operations of the Company. 34 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the directors and executive officers of the Company.
NAME AGE POSITION - ------------------------------------------ --- ------------------------------------------ Paul N. Arnold (1)........................ 50 President, Chief Executive Officer and Director Edward J. Baer, Jr. (2)................... 52 Vice President--Human Resources & Corporate Risk Management and Secretary Anthony J. Bellerdine..................... 47 Group Vice President Michael G. Connors........................ 39 Vice President--Real Estate Charles M. Egan (1)....................... 59 Chairman and Director Kenneth W. Hemm........................... 42 Group Vice President Steven D. Jobes........................... 46 Vice President--Marketing, Merchandising, Sales & National Accounts Lloyd Lenson.............................. 45 Group Vice President Frank Martini............................. 47 Group Vice President/President, General Furniture Leasing Maureen C. Thune.......................... 30 Controller and Assistant Secretary Frances Ann Ziemniak...................... 45 Vice President--Finance, Chief Financial Officer & Assistant Secretary Keith E. Alessi (3)....................... 41 Director Bruce C. Bruckmann (3)(4)................. 42 Director Michael A. Delaney (4).................... 42 Director Gregory B. Maffei (3)..................... 36 Director James A. Urry (4)......................... 42 Director
- ------------ (1) Member of Directors Stock Option Committee (2) It is to the deep regret of the Company that Mr. Baer passed away in July of 1996. (3) Member of Audit Committee (4) Member of Compensation Committee Paul N. Arnold, President, Chief Executive Officer and Director. Mr. Arnold has been with the Company and Mohasco Corporation, its former parent, for 27 years, has held group management positions within the Company since 1976 and has held his current position since July 1992. Edward J. Baer, Jr., Vice President--Human Resources & Corporate Risk Management and Secretary. Mr. Baer was with the Company for 22 years, and had been a Vice President since January 1990 after having held a number of senior human resource positions at the Company and Mohasco Corporation. It is to the deep regret of the Company that Mr. Baer passed away in July of 1996. Anthony J. Bellerdine, Group Vice President. Mr. Bellerdine has been with the Company since July 1991. He was appointed Group Vice President in December 1994, having served as Area Vice President and Senior District Manager. Prior to joining the Company, Mr. Bellerdine was Senior Vice President of Sales and Marketing of Stern Office Furniture for eight years. 35 Michael G. Connors, Vice President--Real Estate. Mr. Connors joined the Company 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 the Company since the acquisition of General Furniture 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 CFR from 1980-1985. Kenneth W. Hemm, Group Vice President. Mr. Hemm has been with the Company for 16 years. He was appointed Group Vice President in June 1992, having served as Regional Manager since January 1991. Steven D. Jobes, Vice President--Marketing, Merchandising, Sales & National Accounts. Mr. Jobes has been with the Company for 24 years and served as a Group Vice President, prior to assuming his current position in May 1993. Lloyd Lenson, Group Vice President. Mr. Lenson has been with the Company for 18 years serving in his current position since May 1993. He previously served as Group Vice President and as Vice President--Marketing, Sales and Acquisitions. Frank Martini, Group Vice President/President, General Furniture Leasing. Mr. Martini has been with the Company for 20 years serving in his current position since July 1994. He previously served as Area General Manager and District General Manager. Maureen C. Thune, Controller and Assistant Secretary. Ms. Thune joined the Company in August 1992 after five years with KPMG Peat Marwick LLP, having most recently served as a Manager. Frances Ann Ziemniak, Vice President--Finance, Chief Financial Officer & Assistant 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 Arthur Young & Company. Keith E. Alessi, Director. Mr. Alessi has been a director of the Company since October 1993. Mr. Alessi was recently appointed as President and Chief Executive Officer of Jackson Hewitt, Inc., of which he has been a director since December 1995. Mr. Alessi has been Vice Chairman and Chief Financial Officer of Farm Fresh, Inc. since June 1994. 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. Bruce C. Bruckmann, Director. Mr. Bruckmann has been a director of the Company since March 1993. Mr. Bruckmann was a Vice President of Citicorp Venture Capital Ltd., which is a principal stockholder of the Company, through 1993 and a Managing Director from 1993 through 1994. He currently is Managing Director of Bruckmann, Rosser, Sherrill & Co., Inc. He is also a Director of Mohawk Industries, Inc., AmeriSource Health Corporation, Chromcraft-Revington, Inc. and Jitney Jungle Stores of America, Inc. Michael A. Delaney, Director. Mr. Delaney has been a director of the Company since May 1995. Mr. Delaney has been a Vice President of Citicorp Venture Capital Ltd., which is a principal stockholder of the Company, since 1989. From 1986 through 1989 he was Vice President of Citicorp Mergers and Acquisitions. Mr. Delaney is also a director of Sybron Chemicals, Inc., GVC Holdings, JAC Holdings, Delco Remy International, Enterprise Media Inc., FF Holdings Corporation, SC Processing, Inc., Triumph Holdings, Inc., Palomar Technologies, Inc. and AmeriSource Health Corporation. 36 Gregory B. Maffei, Director. Mr. Maffei has been a director of the Company since November 1995. He was a director of CFR from 1988 to 1992. Mr. Maffei has been with Microsoft Corporation since April 1993, serving as Treasurer since 1994. Before joining Microsoft, he was self-employed from September 1992 to March 1993, serving as a consultant for various companies including Microsoft. From April 1991 to August 1992, he served as Vice President and Chief Financial Officer of Pay 'N Pak Stores, Inc., which filed a voluntary bankruptcy petition on September 21, 1991. Before joining Pay 'N Pak Stores, Inc., Mr. Maffei was a Vice President of Citicorp Venture Capital Ltd., which is a principal stockholder of the Company. Mr. Maffei is also a Director of Mobile Telecommunications Technologies Corporation and Citrix Systems, Inc. James A. Urry, Director. Mr. Urry has been a director of the Company since March 1993. Mr. Urry has been with Citibank, N.A. since 1981, serving as a Vice President since 1986. He has been a Vice President of Citicorp Venture Capital Ltd., which is a principal stockholder of the Company, since 1989. He is also a Director of AmeriSource Health Corporation, FF Holdings Corporation, Hancor Holding Corporation and York International Corporation. ------------------- The term of office of each director of the Company ends at the next annual meeting of the Company's stockholders or when his or her successor is elected and qualified. Executive officers of the Company serve at the discretion of the Board of Directors. EXECUTIVE COMPENSATION The following table sets forth, for the fiscal years ended December 31, 1993, 1994, and 1995, 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
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES ---------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS COMPENSATION(2) - ------------------------------------- ---- -------- -------- ------------ --------------- Paul N. Arnold 1995 $210,000 $145,593 128,467 $ 8,983 President & Chief Executive Officer 1994 189,306 113,454 101,971 8,279 1993 183,750 118,151 -- 4,194 Edward J. Baer 1995 105,121 61,317 19,750 31,337 Vice President, Human Resources and 1994 98,769 50,451 40,251 18,619 Corporate Risk Management 1993 93,769 46,069 -- 16,849 Kenneth W. Hemm 1995 125,591 74,639 67,667 26,284 Group Vice President 1994 117,573 69,070 53,669 19,477 1993 107,239 61,869 -- 16,969 Steven D. Jobes Vice President, Marketing, 1995 116,707 68,306 35,117 -- Merchandising, Sales and National 1994 109,218 55,937 53,669 967 Accounts 1993 102,891 35,371 -- 797 Lloyd Lenson 1995 129,410 61,852 43,167 5,323 Group Vice President 1994 118,723 60,701 67,086 4,213 1993 108,846 38,234 -- 2,091
- ------------ (1) The amounts shown consist of cash bonuses earned in the fiscal year identified but paid in the subsequent fiscal year. 37 (2) 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 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. STOCK OPTIONS Employee Stock Option and Stock Purchase Plan The Company adopted the Employee Stock Option and Stock Purchase Plan (the "1994 Plan") which authorized the grant of options to purchase 966,040 shares of Common Stock. Under the terms of the 1994 Plan, certain key employees of the Company were granted, at the discretion of the Board of Directors, the right to purchase varying amounts of the subordinated debt securities of the Company and CFR (the "Debt Securities") and options to purchase Common Stock. The 1994 Plan required a participant to purchase the Debt Securities in order to become entitled to exercise options for Common Stock. In the fourth quarter of 1995, all holders of the Debt Securities agreed to exchange all of their right, title and interest in such securities for Common Stock of the Company. In connection with such exchange, the requirement to purchase the Debt Securities was waived and all options granted under the 1994 Plan became immediately exercisable. All shares of Common Stock acquired by a participant pursuant to the 1994 Plan (including those shares acquired in the exchange of Debt Securities for Common Stock) are subject to the Company's right, at its option, to repurchase those shares upon termination of such participant's employment prior to the completion of a five-year vesting period for reasons other than retirement, death, disability or termination without cause. The purchase price in such event would equal the amount originally paid by such participant (upon exercise of the underlying options or for the Debt Securities exchanged for such Common Stock, as the case may be) without regard to appreciation in the value of the Common Stock. A holder of shares of Common Stock pursuant to the 1994 Plan is entitled to transfer such shares provided such holder remits to the Company to be held in trust a portion of such holder's net proceeds upon such transfer. Any amounts so held by the Company will be included in cash and reflected as a liability on the Company's balance sheet. Any such proceeds held by the Company will be distributed to the holder who remitted such proceeds to the Company, pro rata on the anniversary dates of the option grants to such holder over the five-year vesting period. A participant in the 1994 Plan who has remitted to the Company proceeds upon the transfer of Common Stock and whose employment with the Company is terminated prior to the completion of the five-year vesting period for reasons other than retirement, death, disability or without cause, will forfeit any of such proceeds then being held by the Company. Any forfeited proceeds will be divided among the remaining participants at the end of the five-year vesting period, and will be reflected by the Company as a compensation expense. The Company has granted options for all shares of Common Stock available under the 1994 Plan, except that any shares of Common Stock that are reacquired by the Company under the 1994 Plan or with respect to which the options lapse may be the subject of a new grant to an employee of the Company under the 1994 Plan. 1995 Stock-Based Incentive Compensation Plan The Board of Directors adopted and the stockholders approved the 1995 Stock-Based Incentive Compensation Plan (the "1995 Plan"), the purpose of which is to assist the Company in attracting and retaining valued personnel by offering them a greater stake in the Company's success and a closer identity with the Company, and to encourage ownership of the Company's Common Stock by such personnel. The 1995 Plan became effective October 31, 1995. The 1995 Plan is administered by the Compensation Committee of the Board of Directors. The aggregate maximum number of shares of Common Stock available for awards under the 1995 Plan is 38 577,427 shares. Awards under the 1995 Plan may be made to officers and key employees of the Company. No awards can be made under the 1995 Plan after October 31, 1997. Deferred and Restricted Stock The Compensation Committee may grant shares of Common Stock in the form of either Deferred Stock or Restricted Stock. In a Deferred Stock award, the Company agrees to deliver, subject to certain conditions, a fixed number of shares of Common Stock at the end of a specified deferral period or periods. During such period, the holder has no rights as a stockholder with respect to any such shares. Amounts equal to any dividends declared during the deferral period with respect to such Deferred Stock will either be paid to the holder, reinvested in additional shares of Deferred Stock or otherwise reinvested, as determined by the Compensation Committee at the time of the award. In a Restricted Stock award, the Compensation Committee grants to eligible personnel shares of Common Stock that are subject to certain restrictions, including forfeiture of such stock upon the happening of certain events. During the restriction period, holders of Restricted Stock have the right to receive dividends from and to vote the shares of Restricted Stock. Options and SARS Options granted under the 1995 Plan may be either incentive stock options ("ISOs") or non-qualified stock options (together, the "Options"). ISOs are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code. Unless an Option is specifically designated at the time of grant as an ISO, Options under the 1995 Plan will be non-qualified options. The exercise price of the Options will be determined by the Compensation Committee, although the exercise price of an ISO will be at least 100% of the fair market value of a share of Common Stock on the date the Option is granted, or at least 110% of the fair market value of a share of Common Stock on the date the Option is granted if the recipient owns, directly or indirectly, shares possessing more than 10% of the total combined voting power of all classes of stock of the Company. The Compensation Committee may grant stock appreciation rights ("SARs") in tandem with all or a portion of a related Option under the 1995 Plan (a "Tandem SAR") or may grant SARs separately (a "Freestanding SAR"). Each SAR entitles the holder to receive payment in cash, in shares of Common Stock, Restricted Stock or Deferred Stock, or any combination thereof, as determined by the Compensation Committee, equal to the excess of the fair market value on the date of exercise of the shares of Common Stock covered by the SAR over the base price of the SAR. The base price of a Tandem SAR is the option price under the related Option. The base price of a Freestanding SAR is at least 100% of the fair market value of the Common Stock on the date of grant of the Freestanding SAR. A Tandem SAR may be granted either at the time of the grant of the Option or at any time thereafter during the term of the option and is exercisable only to the extent that the related Option is exercisable. The exercise of either a Tandem SAR or an Option related to a Tandem SAR, as to some or all of the shares of Common Stock covered by such grant, automatically cancels to the extent of the number of shares of Common Stock actually covered by such exercise, the number of shares covered respectively by the Related Option or Tandem SAR. The maximum term of an Option or SAR granted under the 1995 Plan shall not exceed ten years from the date of grant or five years from the date of grant if the recipient on the date of grant owns, directly or indirectly, shares possessing more than 10% of the total combined voting power of all classes of stock of the Company. No Option or SAR may be exercisable sooner than six months from the date the Option or SAR is granted. 39 Options Granted The following table sets forth information regarding stock options granted under the 1994 Plan and 1995 Plan during the fiscal year 1995 to the named executive officers of the Company: OPTION GRANTS IN 1995
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ---------------------------------------------------------------------- ANNUAL RATES OF NUMBER OF STOCK PRICE SECURITIES PERCENT OF TOTAL APPRECIATION UNDERLYING OPTIONS GRANTED FOR OPTION TERM(2) OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION ---------------------- NAME PLAN GRANTED(1) FISCAL YEAR (PER SHARE) DATE 5% 10% - --------------------- ---- ---------- ---------------- -------------- ---------- -------- ---------- Paul N. Arnold 1994 13,417 5.5% $1.098 02/01/05 $ 9,265 $ 23,480 1995 115,050 26.2% $12.00 11/15/05 868,252 2,200,321 Edward J. Baer 1995 19,750 4.5% $12.00 11/15/05 149,048 377,717 Kenneth W. Hemm 1994 13,417 5.5% $1.098 02/01/05 9,265 23,480 1995 54,250 12.3% $12.00 11/15/05 409,410 1,037,526 Steven D. Jobes 1994 5,367 2.2% $1.098 02/01/05 3,706 9,392 1995 29,750 6.8% $12.00 11/15/05 224,515 568,966 Lloyd Lenson 1994 13,417 5.5% $1.098 02/01/05 9,265 23,480 1995 29,750 6.8% $12.00 11/15/05 224,515 568,966
- ------------ (1) Options under the 1994 Plan are unrestricted and exercisable. Options under the 1995 Plan are exercisable when vested. No options under the 1995 Plan were vested at December 31, 1995. (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. The following table sets forth information regarding 1995 year-end option values for the named executive officers of the Company; none of such individuals exercised options during 1995: AGGREGATED 1995 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------------------------- ----------- ------------- ----------- ------------- Paul N. Arnold.............................. 62,406 115,050 $ 1,002,292 $ 517,725 Edward J. Baer.............................. 28,375 19,750 460,845 88,875 Kenneth W. Hemm............................. 22,616 54,250 356,052 244,125 Steven D. Jobes............................. 57,462 29,750 928,751 133,875 Lloyd Lenson................................ 38,757 29,750 618,202 133,875
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. 40 Certain key management employees of the Company with at least five years of service (employment) have 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
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
41 As of December 31, 1995, Mr. Arnold was credited with 27 years of service, Mr. Jobes with 24 years of service and Mr. Lenson with 18 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. Baer and Mr. Hemm. 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 attained age 65. 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) or who has a substantial reduction in duties and responsibilities or in compensation will vest immediately in his 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 received during the final six or 12 months based on length of service (12 months in the case of Messrs. Arnold, Baer, Hemm, Jobes and Lenson) 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 his 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 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 Citicorp Venture Capital Ltd. 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 may also be entitled to receive options for common stock pursuant to the 1995 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 an option to purchase shares of common stock to non-employee directors on November 15, 1995 and 1996, which options will become exercisable over time. The option exercise price will be 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 21,000 options in 1995 pursuant to the terms of the Directors Plan. 42 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as of June 30, 1996, by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each director and named executive officer of the Company, and (iii) all executive officers and directors of the Company as a group. Unless otherwise noted, the Company believes all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. This information gives effect to the exercise of options exercisable within 60 days and warrants by the certain stockholders listed herein, and is adjusted to reflect the sale of the shares offered by this Prospectus, assuming no exercise of the Underwriters' over-allotment option.
PERCENT OF COMMON STOCK OWNED ----------------------- NUMBER OF SHARES(1) BEFORE THE AFTER THE BENEFICIALLY OWNED OFFERING OFFERING ------------------- ---------- --------- FIVE PERCENT STOCKHOLDER Citicorp Venture Capital Ltd.(2).................. 5,778,518 54.1% 46.7% 399 Park Avenue, 14th Floor New York, New York 10043 DIRECTORS AND EXECUTIVE OFFICERS Bruce C. Bruckmann................................ 161,405 1.5 1.3 Paul N. Arnold.................................... 129,412(3) 1.2 1.0 Lloyd Lenson...................................... 93,503(3) * * Kenneth W. Hemm................................... 79,516(3) * * Charles M. Egan................................... 64,116(3) * * Steven D. Jobes................................... 60,812(3) * * Edward J. Baer(4)................................. 45,277(3) * * Keith E. Alessi................................... 43,659 * * Gregory B. Maffei................................. 33,525 * * James A. Urry..................................... 22,403 ]* * Michael A. Delaney................................ 5,875 * * All Directors and Executive Officers as a group (16 persons).................................... 876,719(3) 8.0 6.9
- ------------ * Less than 1%. (1) The Company has two authorized classes of common stock: Common Stock (voting) and Class B Common Stock (nonvoting); however, there are no shares of the Company's Class B Common Stock issued or outstanding. (2) CVC is a party to an agreement with the Company, dated March 30, 1993, pursuant to which CVC is required by April 1, 1999 (or such later date as the Small Business Administration may approve) to reduce (by conversion to non-voting stock or other disposition) its ownership of the Company's Common Stock (voting) to a percentage at which CVC will no longer be presumed to have "control" of the Company under regulations of the Small Business Administration. In general, the presumption of control exists so long as a person holds 20% or more of the issuer's outstanding voting Common Stock. (3) Includes shares under option of 62,406; 28,375; 26,834; 22,617; 57,462 and 38,757 for Messrs. Arnold, Baer, Egan, Hemm, Jobes, and Lenson, respectively, and 326,757 in total for all Directors and Officers as a group. (4) It is to the deep regret of the Company that Mr. Baer passed away in July of 1996. 43 SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Offering, the Company will have outstanding 12,387,444 shares of Common Stock. The shares of Common Stock to be sold in the Offering made hereby will be freely tradeable without restriction under the Securities Act, unless acquired by an "affiliate" of the Company (defined in Rule 144 under the Securities Act, generally, as a person who, by virtue of equity ownership or otherwise, controls, or is controlled by, or is under common control with, the Company). The Company and its directors and executive officers and CVC (who in the aggregate held 6,328,480 outstanding shares of Common Stock at June 30, 1996) have agreed, except as described below, not to offer, sell, contract to sell or otherwise dispose of in a public sale, public distribution or other public disposition, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, other than the shares subject to the Underwriters' over-allotment option, without the prior written consent of Smith Barney Inc., for a period of 90 days after the date of this Prospectus (collectively, the "Lock-up Agreements"). Such persons have further agreed not to transfer any such securities in one or a series of private sales unless the transferee(s) agrees to be bound by the same restrictions for the remainder of the 90 day term. The Underwriters have agreed that Messrs. Arnold, Egan and Jobes may sell up to 20,000, 22,000 and 15,000 shares, respectively, after 15 days following the date of the Prospectus. No predictions can be made as to the effect, if any, that market sales of shares of existing stockholders or the availability of such shares for future sale will have on the market price of shares of Common Stock prevailing from time to time. The prevailing market price of the Common Stock after the Offering could be adversely affected by future sales of substantial amounts of Common Stock by existing stockholders or by the perception that such future sales are likely. See "Principal Stockholders" and "Underwriting." Shares of Common Stock held by affiliates and restricted securities may not be sold unless they are registered under the Securities Act or are sold pursuant to an applicable exemption from registration, including the exemption from registration set forth in Rule 144 promulgated by the Securities and Exchange Commission (the "Commission"). Generally, subject to the provisions of the Lock-up Agreements, Rule 144 will permit an affiliate or a person who has held restricted securities for more than two years to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume of such stock during the four calendar weeks preceding such sale, provided that the Company has either filed certain periodic reports with the Commission or made publicly available certain information concerning it and provided that such sales are made in normal "brokers' transactions" or in transactions directly with a "market maker" without the solicitation of buy orders by the brokers or such affiliates. A person who is deemed not to be an affiliate of the Company at any time during the three months preceding a sale and who has held restricted securities for more than three years may sell such shares under Rule 144 without regard to the volume limitations described. The Common Stock is listed on the New York Stock Exchange under the symbol "CBS." The holders of Common Stock prior to the IPO were granted piggyback registration rights with respect to the Common Stock when they purchased their shares. In addition, CVC has been granted demand rights to require the registration of its shares. Sales of substantial amounts of Common Stock in the public market under Rule 144 or the perception that such future sales are likely could have an adverse effect on the price of the Common Stock. 44 UNDERWRITING Upon the terms and subject to the conditions stated in the Underwriting Agreement dated the date hereof, each Underwriter named below has severally agreed to purchase, and the Company has agreed to sell to such Underwriter, the number of shares of Common Stock set forth opposite the name of such Underwriter.
NUMBER OF UNDERWRITER SHARES - ---------------------------------------------------------------- --------- Smith Barney Inc................................................ Montgomery Securities........................................... --------- Total........................................................... 1,700,000 --------- ---------
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters, for whom Smith Barney Inc. and Montgomery Securities are acting as Representatives, propose to offer part of the shares directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the Offering, the public offering price and such concessions may be changed by the Underwriters. The Representatives of the Underwriters have advised the Company that the Underwriters do not intend to confirm any shares to any accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 255,000 additional shares of Common Stock at the price to the public set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the offering of the shares offered hereby. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth opposite each Underwriter's name in the preceding table bears to the total number of shares listed in such table. 45 The Company and its executive officers and directors and CVC have agreed, except as described below, that, for a period of 90 days from the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell or otherwise dispose in a public sale, public distribution or other public disposition, any shares of Common Stock of the Company or any securities convertible into, or exercisable or exchangeable for, any class of Common Stock of the Company. The Underwriters have agreed that Messrs. Arnold, Egan and Jobes may sell up to 20,000, 22,000 and 15,000 shares, respectively, after 15 days following the date of the Prospectus. The Company, on the one hand, and the Underwriters, on the other hand, have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters will be passed upon for the Company by Dechert Price & Rhoads, Philadelphia, Pennsylvania, and for the Underwriters by Latham & Watkins, New York, New York. EXPERTS The consolidated financial statements and schedules of the Company as of December 31, 1995 and 1994, and for the years ended December 31, 1995 and 1994, the nine months ended December 31, 1993, and the financial statements and schedule of CFR for the three months ended March 31, 1993, included or incorporated by reference in this Prospectus and in the Registration Statement have been included or incorporated by reference herein and in the Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and in the Registration Statement, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Evans Rents as of December 31, 1995 and 1994, and for the years ended December 31, 1995 and 1994, included in this Prospectus and in the Registration Statement have been included herein and in the Registration Statement in reliance on the report of Ernst & Young LLP, independent certified accountants, appearing elsewhere herein and in the Registration Statement, and upon the authority of said firm as experts in accounting and auditing. 46 AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement (the "Registration Statement") under the Securities Act with respect to the securities offered by this Prospectus. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Offering, reference is made to the Registration Statement, including the exhibits filed therewith, which may be inspected without charge at the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the Registration Statement may be obtained from the Commission at its principal office upon payment of prescribed fees. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, where the contract or other document has been filed as an exhibit to the Registration Statement, each such statement is qualified in all respects by reference to the applicable document filed with the Commission. The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports and other information with the Commission. Such reports and other information, when filed, can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York, 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. 47 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents heretofore filed by the Company with the Commission (File No. 1-14146) pursuant to the Exchange Act are incorporated herein by reference: (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1995; (ii) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, and June 30, 1996; (iii) the Company's Current Reports on Form 8-K dated May 9, and July 15, 1996 and on Form 8-K/A dated June 13, 1996; and (iv) the description of the capital stock of the Company included in the Company's Registration Statement on Form 8-A/A, filed on December 18, 1995. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the Offering made hereby shall be deemed to be incorporated by reference in this Prospectus and to be part hereof from the date of filing of such documents. Certain information incorporated by reference herein contains 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 include the benefits expected to result from the integration of Evans Rents into CORT's West Coast region including improvements in operating margins and leveraging of the Company's fixed costs and infrastructure over a larger revenue base. Certain factors as discussed in "Risk Factors" could cause actual results to differ materially from those in the forward-looking statements. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is incorporated or deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. To the extent that any proxy statement is incorporated by reference herein, such incorporation shall not include any information contained in such proxy statement that is not, pursuant to the Commission's rules, deemed to be "filed" with the Commission or subject to the liabilities of Section 18 of the Exchange Act. The Company will provide without charge to each person to whom this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the documents incorporated herein by reference (other than exhibits to such documents unless such exhibits are specifically incorporated by reference into such documents). Any such request should be directed to the Vice President--Finance, CORT Business Services Corporation, 4401 Fair Lakes Court, Suite 300, Fairfax, Virginia 22033 (telephone number (703) 968-8500). 48 INDEX TO FINANCIAL STATEMENTS CORT BUSINESS SERVICES CORPORATION Unaudited Condensed Consolidated Balance Sheet as of June 30, 1996................... F-2 Unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 1995 and 1996............................................................... F-3 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and 1996............................................................... F-4 Notes to Unaudited Condensed Consolidated Financial Statements....................... F-5 Independent Auditors' Report......................................................... F-9 Consolidated Balance Sheets as of December 31, 1994 and 1995......................... F-10 Consolidated Statements of Operations for the three months ended March 31, 1993, the nine months ended December 31, 1993, and the years ended December 31, 1994 and 1995................................................................................. F-11 Consolidated Statements of Stockholders' Equity (Deficit) for the three months ended March 31, 1993, the nine months ended December 31, 1993, and the years ended December 31, 1994 and 1995........................................................... F-12 Consolidated Statements of Cash Flows for the three months ended March 31, 1993, the nine months ended December 31, 1993, and the years ended December 31, 1994 and 1995................................................................................. F-13 Notes to Consolidated Financial Statements........................................... F-14 EVANS RENTS Unaudited Condensed Consolidated Balance Sheet as of March 31, 1996.................. F-27 Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 1995 and 1996.............................................................. F-28 Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1995 and 1996.............................................................. F-29 Notes to Unaudited Condensed Consolidated Financial Statements....................... F-30 Report of Independent Auditors....................................................... F-31 Consolidated Balance Sheets as of December 31, 1994 and 1995......................... F-32 Consolidated Statements of Operations for the years ended December 31, 1994 and 1995................................................................................. F-33 Consolidated Statements of Shareholders' Deficit for the years ended December 31, 1994 and 1995...................................................................... F-34 Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995................................................................................. F-35 Notes to Consolidated Financial Statements........................................... F-36
F-1 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
JUNE 30, 1996 ----------- ASSETS Cash and cash equivalents........................................................ $ 598 Accounts receivable, net......................................................... 9,036 Prepaid expenses................................................................. 3,730 Rental furniture, net............................................................ 137,322 Property, plant and equipment, net............................................... 34,790 Other receivables and assets, net................................................ 3,229 Goodwill, net.................................................................... 38,529 ----------- Total assets............................................................... $ 227,234 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable........................................................... $ 7,093 Accrued expenses........................................................... 25,703 Deferred revenue and security deposits..................................... 13,805 Revolving credit facility, secured and other............................... 41,416 Senior notes, 12%.......................................................... 50,000 Deferred income taxes...................................................... 7,097 ----------- Total liabilities........................................................ 145,114 Stockholders' equity............................................................. 82,120 ----------- Total liabilities and stockholders' equity................................. $ 227,234 ----------- -----------
See accompanying notes to unaudited condensed consolidated financial statements. F-2 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, ------------------- 1995 1996 ------- -------- Revenue: Furniture rental...................................................... $69,054 $ 85,437 Furniture sales....................................................... 19,604 21,440 ------- -------- Total revenue..................................................... 88,658 106,877 Operating costs and expenses: Cost of furniture rental.............................................. 13,430 16,628 Cost of furniture sales............................................... 11,612 12,578 Selling, general and administrative expenses.......................... 50,939 62,294 ------- -------- Total costs and expenses.......................................... 75,981 91,500 ------- -------- Operating earnings................................................ 12,677 15,377 Interest expense........................................................ 8,344 4,045 ------- -------- Income before income taxes............................................ 4,333 11,332 Income taxes............................................................ 1,865 4,689 ------- -------- Net income............................................................ $ 2,468 $ 6,643 ------- -------- ------- -------- Earnings per share...................................................... $ 0.51 $ 0.57 Weighted average number of shares used in computation................... 7,241 11,619
See accompanying notes to unaudited condensed consolidated financial statements. F-3 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ---------------------- 1995 1996 --------- --------- Cash flows from operating activities: Net income........................................................... $ 2,468 $ 6,643 Proceeds of disposals of rental furniture in excess of gross profit................................................................. 11,459 12,090 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization: Rental furniture depreciation.................................... 9,240 11,934 Other depreciation............................................... 1,229 1,629 Goodwill amortization............................................ 331 390 Amortization of debt issuance costs.............................. 378 337 Discount on junior subordinated debentures....................... 33 -- Current period interest converted to debt.......................... 621 -- Rental furniture inventory shrinkage............................... 606 712 Changes in operating accounts, net................................. 1,807 3,805 --------- --------- Net cash provided by operating activities........................ 28,172 37,540 --------- --------- Cash flows from investing activities: Purchases of rental furniture........................................ (31,116) (43,252) Purchases of property, plant and equipment........................... (1,947) (3,479) Sales of property, plant and equipment............................... 208 36 Purchase of Evans Rents.............................................. -- (27,725) Purchase of short-term investments................................... (870) -- --------- --------- Net cash used by investing activities.......................... (33,725) (74,420) --------- --------- Cash flows from financing activities: Issuance of common stock............................................. 8 56 Repayments on the line of credit..................................... -- (15,153) Borrowings on the line of credit..................................... -- 52,753 Proceeds from issuance of long term debt............................. 287 -- Repayments of long term debt......................................... (287) (557) --------- --------- Net cash provided by financing activities.......................... 8 37,099 --------- --------- Net decrease in cash and cash equivalents.......................... (5,545) 219 Cash and cash equivalents at beginning of period....................... 13,161 379 --------- --------- Cash and cash equivalents at end of period............................. $ 7,616 $ 598 --------- --------- --------- --------- Supplemental disclosure of cash flow information: Debentures issued in lieu of cash interest........................... $ 1,865 $ -- Interest paid........................................................ 6,474 3,579 Income taxes paid.................................................... 1,012 4,117
See accompanying notes to unaudited condensed consolidated financial statements. F-4 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (1) BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the consolidated financial position of CORT Business Services Corporation ("CORT" or the "Company") and Subsidiaries as of June 30, 1996, and the results of their operations for the three months ended June 30, 1996 and 1995 and six months ended June 30, 1996 and 1995, and cash flows for the six months ended June 30, 1996 and 1995. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements are unaudited, and do not include all related footnote disclosures. The interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's 1995 Annual Report on Form 10-K. (2) CREDIT FACILITY On May 24, 1996, the Company amended the bank credit facility ("Credit Facility") to increase its borrowing capacity from $50 million to $70 million, subject to certain borrowing base restrictions. No other substantial changes were made to the Credit Facility pursuant to this amendment. (3) ACQUISITION OF EVANS RENTS On April 24, 1996, the Company acquired Evans Rents, a provider of rental furniture in California, for approximately $27,725,000, including costs of acquisition, in a transaction accounted for as a purchase business combination. As such, the fair value of Evans Rents' assets and liabilities were recognized as of April 24, 1996, and the Company's results of operations include Evans Rents' operations subsequent to that date. The purchase price has been allocated to assets and liabilities based on preliminary estimates of fair value as of the date of acquisition. The final allocation of the purchase price will be determined when appraisals and other studies are completed. As part of the purchase price allocation, the Company recorded a reserve for estimated costs to be incurred in the consolidation of duplicate Evans Rents' facilities and termination of employment of certain members of Evans Rents' management who will not be replaced. Based on the allocation of the purchase price over the net assets acquired, goodwill of approximately $14,167,000 was recorded. Such goodwill is being amortized on a straight-line basis over 40 years. The purchase price has been allocated as follows (in thousands): Cash............................................................. $ 25 Accounts receivable.............................................. 1,967 Prepaid expenses and other assets................................ 182 Rental property.................................................. 15,066 Property, plant and equipment.................................... 1,932 Deferred taxes................................................... 2,600 Goodwill......................................................... 14,167 Accounts payable and accrued expenses............................ (2,235) Notes payable.................................................... (573) Deferred revenue................................................. (1,543) Other liabilities, including reserve for duplicate facilities.... (3,863) ------- $27,725 -------
The Company financed the acquisition of Evans Rents with borrowings under the Credit Facility. F-5 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 (4) INCOME TAXES The Internal Revenue Service ("IRS") has examined the Federal income tax returns of CORT Furniture Rental Corporation ("CFR") for the years 1989 through June 30, 1992 and has proposed certain adjustments to CFR's taxable income, relating primarily to methods of depreciation, period of cost recovery and certain capitalized financing fees. If successfully asserted by the IRS, the proposed adjustments would result in approximately $22 million of additional tax liability, including accrued interest through June 30, 1996. The Company, however, has agreed in principle with the IRS appeals officer handling the administrative appeal of the examination as to a settlement of the proposed adjustments. The settlement agreed to in principle will not result in any additional financial statement tax expenses, as the Company's reserves included in deferred income taxes are adequate to cover such expenses, and will not require the Company to alter its methods of depreciation or cost recovery period. The Company will be required to make a payment to the IRS and certain state jurisdictions for income and franchise tax purposes. The total amount of the proposed settlement is approximately $3 million, including interest through June 30, 1996, of which the Company made an initial deposit of approximately $925,000 in February 1996. This agreement is only an agreement in principle, however, and is subject to final IRS approval and thus could change. The tentative settlement will become effective only upon approval by the proper IRS personnel and execution of definitive settlement documentation. Upon final IRS approval, the Company will make the remaining required payment. The IRS has also proposed the disallowance of certain deductions taken by Fairwood Corporation for the Former Group through the year ended December 31, 1988 and subsequent years. The IRS challenge includes the assertion that certain interest deductions taken by the Former Group should be recharacterized as non-deductible dividend distributions and that deductions for certain expenses related to the acquisition of Mohasco Corporation (now Consolidated Furniture Corporation ("Consolidated")), CFR's former shareholder, be disallowed. Under IRS regulations, the Company and each other member of the Former Group is severally liable for the full amount of any Federal income tax liability of the Former Group while CFR was a member of the Former Group, which could be as much as approximately $29 million for such periods (including interest through June 30, 1996). Under the agreement of sale for CFR, Consolidated agreed to indemnify the Company in full for any consolidated tax liability of the Former Group for the years during which CFR was a member of the Former Group. In addition, the Company may have rights of contribution against other members of the Former Group if the Company were required to pay more than its equitable share of any consolidated tax liability. Although Fairwood Corporation has stated that it believes the IRS's position with respect to those proposed disallowances is unjustified and is contesting the matter vigorously, neither the Company nor Fairwood Corporation can predict a successful resolution to the IRS examination. Due to the preliminary nature of the IRS challenge, the Company is not in a position to determine the probable outcome and its impact on the Company, if any. F-6 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 (5) STOCK OPTIONS The Company maintains the Stock Option and Stock Purchase Plan (the "1994 Plan"), the 1995 Stock-Based Incentive Plan (the "1995 Plan") and the 1995 Directors Stock Option Plan (the "Director Plan") for key employees and non-employee directors of the Company. The following stock option activity has occurred in the six months ended June 30, 1996 under these plans:
1994 1995 DIRECTOR PLAN PLAN PLAN -------- ------- -------- Shares under option: Outstanding at January 1, 1996............................ 632,930 439,800 21,000 Granted.................................... -- 33,000 -- Exercised.................................. (2,146) -- -- Forfeited.................................. (5,374) -- -- -------- ------- -------- Outstanding at June 30, 1996.............................. 625,410 472,800 21,000 -------- ------- -------- -------- ------- -------- Options available to grant at June 30, 1996.............................. 5,367 104,627 29,000 Exercise price per share: At June 30, 1996........................... $0.25875 $12--$18 $ 12 --$1.098 Options exercisable: At June 30, 1996........................... 625,417 -- --
(6) PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma condensed consolidated financial information presents the combined results of operations of the Company and Evans Rents as if the acquisition had occurred as of January 1, 1995. This information gives effect to certain adjustments including amortization of goodwill, elimination of certain compensation expense, interest expense on borrowings and related income tax effects. In addition, the information gives effect to the initial public offering of the Company completed in November 1995 as well as the exchange of all the Company's and CFR's subordinated debentures, the retirement of $50 million in aggregate principal amount of CFR's 12% Senior Notes and initial borrowings under the Credit Facility, which all occurred contemporaneously with the initial public offering. The pro forma consolidated financial information does not necessarily reflect the results of operations that would have occurred had the Company and Evans Rents constituted a single entity during the periods. F-7 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ -------------------- 1995 1996 1995 1996 ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue: Furniture rental.................................. $42,492 $48,818 $ 83,651 $ 94,798 Furniture sales................................... 9,703 11,328 20,328 21,999 ------- ------- -------- -------- Total revenue................................. 52,195 60,146 103,979 116,797 Operating costs and expenses: Cost of furniture rental.......................... 8,440 9,541 16,338 18,324 Cost of furniture sales........................... 5,766 6,718 12,191 12,968 Amortization of goodwill.......................... 249 246 497 495 Selling, general and administrative expenses...... 30,346 35,146 59,997 68,055 ------- ------- -------- -------- Total costs and expenses...................... 44,801 51,651 89,023 99,842 ------- ------- -------- -------- Operating earnings............................ 7,394 8,495 14,956 16,955 Interest expense.................................... 2,291 2,403 4,570 4,727 ------- ------- -------- -------- Income before income taxes...................... 5,103 6,092 10,386 12,228 Income tax expense.................................. 2,137 2,528 4,353 5,089 ------- ------- -------- -------- Net income...................................... $ 2,966 $ 3,564 $ 6,033 $ 7,139 ------- ------- -------- -------- ------- ------- -------- -------- Earnings per share.................................. $ 0.26 $ 0.31 $ 0.52 $ 0.61 Weighted average number of shares used in computation......................................... 11,608 11,623 11,608 11,619
F-8 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 (the "Successor"), as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1995 and 1994 and the nine months ended December 31, 1993 (the "Successor periods"), and the statements of operations, stockholders' equity (deficit) and cash flows of CORT Furniture Rental Corporation (the "Predecessor") for the three months ended March 31, 1993 (the "Predecessor period"). These consolidated financial statements are the responsibility of the Companies' 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 aforementioned Successor consolidated financial statements present fairly, in all material respects, the financial position of CORT Business Services Corporation and subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the Successor periods, in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor financial statements present fairly, in all material respects, the results of its operations and its cash flows for the Predecessor period, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective March 31, 1993, CORT Business Services Corporation acquired all of the outstanding stock of CORT Furniture Rental Corporation in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. As discussed in Note 2 to the consolidated financial statements, the Predecessor adopted the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, as of January 1, 1993. KPMG PEAT MARWICK LLP Washington, D.C. February 12, 1996 except as to Note 14 which is as of March 15, 1996 F-9 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ ASSETS Cash and cash equivalents.......................................... $ 13,161 $ 379 Short-term investments............................................. 4,024 -- Accounts receivable, less allowance for doubtful accounts of $917 and $938 in 1994 and 1995, respectively.......................... 5,472 6,019 Prepaid expenses................................................... 2,975 3,973 Rental furniture, net (note 2)..................................... 92,432 103,741 Property, plant and equipment, net (note 5)........................ 29,537 31,044 Other receivables and assets, net.................................. 5,260 3,814 Goodwill, net of accumulated amortization of $1,055 and $1,717 in 1994 and 1995, respectively (notes 1 and 13)....................... 25,414 24,752 ------------ ------------ $178,275 $173,722 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable................................................... $ 4,539 $ 3,597 Rental security deposits........................................... 4,774 5,761 Accrued expenses (note 11)......................................... 22,153 19,096 Deferred rental revenue............................................ 4,887 5,425 Long-term debt (notes 1 and 7)..................................... 123,645 53,800 Deferred income taxes (note 6)..................................... 11,314 10,622 ------------ ------------ Total liabilities............................................ 171,312 98,301 ------------ ------------ Commitments and contingencies (notes 6, 8, 10 and 14) Stockholders' equity (notes 1, 3, 4, 7, 9, and 12): Common Stock, voting, $.01 par value, 15,500,000 shares authorized, 4,159,307 shares issued and outstanding and 10,415,367 issued and outstanding.............................. 42 104 Common Stock, Class B, nonvoting, $.01 par value, 15,500,000 shares authorized, and none issued and outstanding............. -- -- Additional paid-in capital....................................... 1,062 67,383 Accumulated earnings............................................. 5,859 7,934 ------------ ------------ Total stockholders' equity................................... 6,963 75,421 ------------ ------------ $178,275 $173,722 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. F-10 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSOR CORT BUSINESS SERVICES ------------ -------------------------------------------- THREE MONTHS NINE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1993 1994 1995 ------------ ------------ ------------ ------------ Revenue: Furniture rental........................ $ 21,497 $ 79,002 $130,026 $141,988 Furniture sales......................... 6,228 21,846 34,534 37,321 ------------ ------------ ------------ ------------ Total revenue......................... 27,725 100,848 164,560 179,309 ------------ ------------ ------------ ------------ Operating costs and expenses: Cost of furniture rental................ 4,046 15,684 25,771 27,950 Cost of furniture sales................. 3,680 13,130 20,649 22,203 Employee, delivery and advertising expenses.................................. 11,484 41,193 66,256 72,379 Occupancy, utilities and nonrental depreciation.............................. 2,737 9,776 16,370 16,724 Amortization of goodwill................ 471 373 682 662 Other operating expenses................ 2,087 7,648 12,218 12,670 ------------ ------------ ------------ ------------ Total costs and expenses.............. 24,505 87,804 141,946 152,588 ------------ ------------ ------------ ------------ Operating earnings.................... 3,220 13,044 22,614 26,721 Interest expense, net..................... 879 8,941 16,246 15,917 ------------ ------------ ------------ ------------ Income before income taxes and extraordinary loss........................ 2,341 4,103 6,368 10,804 Income tax expense (note 6)............... 365 1,790 2,822 4,586 ------------ ------------ ------------ ------------ Income before extraordinary loss.......... 1,976 2,313 3,546 6,218 Extraordinary loss on early retirement of debt, net of income tax benefit of $2,762 (notes 6 and 7).................. -- -- -- 4,143 ------------ ------------ ------------ ------------ Net income............................ $ 1,976 $ 2,313 $ 3,546 $ 2,075 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Earnings per common share before extraordinary loss........................ $ 0.81 $ 1.08 Extraordinary loss per common share....... -- 0.53 ------------ ------------ Earnings per common share................. $ 0.81 $ 0.55 ------------ ------------ ------------ ------------ Weighted average number of common shares used in computation....................... 7,049 7,759
See accompanying notes to consolidated financial statements. F-11 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
TOTAL PREFERRED COMMON ADDITIONAL ACCUMULATED STOCKHOLDERS' STOCK STOCK PAID-IN CAPITAL EARNINGS (DEFICIT) EQUITY (DEFICIT) --------- ------ --------------- ------------------ ---------------- PREDECESSOR: Balance, December 31, 1992.............. $ 1 $ 3 $ 3,327 $(20,599) $(17,268) Net income............................ -- -- -- 1,976 1,976 --------- ------ --------------- -------- -------- Balance, March 31, 1993................. $ 1 $ 3 $ 3,327 $(18,623) $(15,292) --------- ------ --------------- --------- ------ --------------- -------- -------- -------- -------- CORT BUSINESS SERVICES: Initial capitalization................ -$- $ 40 $ 960 $-- $ 1,000 Issuance of stock warrants............ -- -- 28 -- 28 Net income............................ -- -- -- 2,313 2,313 --------- ------ --------------- -------- -------- Balance, December 31, 1993.............. -- 40 988 2,313 3,341 Stock cancellation.................... -- (1) 1 -- -- Issuance of common stock from exercise of stock options........................ -- 3 73 -- 76 Net income............................ -- -- -- 3,546 3,546 --------- ------ --------------- -------- -------- Balance, December 31, 1994.............. -- 42 1,062 5,859 6,963 Issuance of common stock from public offering, net of expenses............... -- 34 36,961 -- 36,995 Issuance of common stock from exercise of stock options........................ -- -- 32 -- 32 Issuance of common stock from exercise of warrants............................. -- 1 17 -- 18 Issuance of common stock in debt to equity exchange......................... -- 27 29,311 -- 29,338 Net income............................ -- -- -- 2,075 2,075 --------- ------ --------------- -------- -------- Balance, December 31, 1995.............. -$- $104 $67,383 $ 7,934 $ 75,421 --------- ------ --------------- --------- ------ --------------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. F-12 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR CORT BUSINESS SERVICES ------------ ------------------------------------------ THREE MONTHS NINE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1993 1994 1995 ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income...................................... $ 1,976 $ 2,313 $ 3,546 $ 2,075 Proceeds of disposals of rental furniture in excess of gross profit........................ 3,814 14,241 21,299 22,312 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on early retirement of debt............................................. -- -- -- 4,143 Depreciation and amortization: Rental furniture........................ 2,823 11,414 18,281 19,551 Other................................... 427 1,364 2,358 2,601 Goodwill................................ 471 373 682 662 Debt issuance costs..................... 201 240 755 729 Discount on junior subordinated debentures....................................... -- 15 68 65 Rental furniture inventory shrinkage........ 227 406 569 981 Deferred income taxes....................... 369 2,250 1,054 2,811 Pay-in-kind interest converted to long term debt............................................. -- -- 2,277 3,598 Changes in assets and liabilities: Accounts receivable..................... (425) (488) 106 (547) Prepaid expenses........................ (288) 730 (122) (998) Other receivables and assets............ (172) (3,863) (736) (1,190) Accounts payable, accrued expenses and rental security deposits, net.......... 887 2,876 1,455 (1,768) Deferred rental revenue................. 277 1,002 427 538 ------------ ------------ ------------ ------------ Net cash provided by operating activities....................................... 10,587 32,873 52,019 55,563 ------------ ------------ ------------ ------------ Cash flows from investing activities: Purchases of rental furniture................... (11,398) (26,010) (43,233) (54,153) Purchases of property, plant and equipment...... (215) (1,731) (2,812) (4,521) Sale of property, plant and equipment........... 5 123 32 413 Purchase of CORT Furniture Rental Corporation... -- (27,500) -- -- Purchase of General Furniture Leasing Company... -- (28,863) -- -- Purchase of short-term investments.............. -- (3,392) (632) (1,024) Sale of short-term investments.................. -- -- -- 5,048 ------------ ------------ ------------ ------------ Net cash used in investing activities... (11,608) (87,373) (46,645) (54,237) ------------ ------------ ------------ ------------ Cash flows from financing activities: Initial financing............................... -- 27,500 -- -- Repayments of long-term debt.................... (6,310) (67,927) (795) (50,287) Payments to retire debt......................... -- -- -- (4,998) Proceeds from issuance of long-term debt........ -- 96,667 749 332 Repayments on the line of credit................ (30,133) (65,199) -- (1,000) Borrowings on the line of credit................ 33,966 66,381 -- 4,800 Payments on capital lease obligation............ (16) (318) (359) -- Contribution of equity by parent................ 4,306 -- -- -- Issuance of common stock........................ -- -- 76 37,045 ------------ ------------ ------------ ------------ Net cash provided (used) by financing activities....................................... 1,813 57,104 (329) (14,108) ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents...................................... 792 2,604 5,045 (12,782) Cash and cash equivalents at beginning of period........................................... 4,720 5,512 8,116 13,161 ------------ ------------ ------------ ------------ Cash and cash equivalents at end of year......... $ 5,512 $ 8,116 $ 13,161 $ 379 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosures of cash flow information: Cash paid for: Interest................................ $ 2,702 $ 4,612 $ 12,178 $ 13,408 Income taxes............................ 245 720 2,213 2,161 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Noncash financing activities: Tax benefit from exchange of debt for equity........................................... $ -- $ -- $ -- $ 741 Exchange of debt for equity (note 7).... -- -- -- 28,597 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. F-13 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) FORMATION AND DESCRIPTION OF THE COMPANY CORT Business Services Corporation (the "Company"), was formed on March 29, 1993 and contemporaneously acquired all of the stock of CORT Furniture Rental Corporation ("CFR"). The Company is a holding company with no independent operations and no material assets other than its ownership of all the outstanding capital stock of CFR. The Company is largely dependent on the receipt of dividends or distributions from CFR to fund its obligations. CFR is a provider of rental furniture, accessories and related services to both corporate and individual customers. In addition, CFR sells previously rented furniture. CFR was acquired principally from Westinghouse Credit Corporation ("WCC") on March 31, 1993. As a result of this change in control, the acquisition by the Company was accounted for as a purchase business combination, and as such the fair value of CFR's assets and liabilities was recognized as of March 31, 1993. The Company acquired CFR for a purchase price of approximately $86.2 million, including costs of acquisition. The purchase price was comprised of approximately $4.3 million of equity, the assumption of $58.7 million under a senior debt facility due to WCC, a note payable transferred by WCC to the Company of approximately $10.7 million, and senior subordinated debentures of $12.5 million due to the controlling and certain other stockholders of the Company (see note 7). The fair value allocated to the identifiable assets and liabilities of CFR was determined by independent appraisal. As part of the purchase price allocation, the Company recorded a reserve for an unfavorable operating lease on one of CFR's California facilities of approximately $4.0 million. Based on the allocation of the purchase price to the net tangible assets and liabilities, an excess of purchase price over net assets acquired (goodwill) of approximately $20.2 million was recorded. Such goodwill is being amortized on a straight-line basis over 40 years. The purchase price was allocated as follows (in thousands):
Cash............................................................. $ 5,500 Accounts receivable.............................................. 3,400 Prepaid expenses and other....................................... 3,000 Rental property.................................................. 63,700 Property, plant and equipment.................................... 22,200 Goodwill......................................................... 20,200 Accounts payable................................................. (5,900) Security deposits................................................ (3,700) Accrued expenses................................................. (11,800) Other liabilities, including unfavorable lease................... (10,400) -------- $ 86,200 -------- --------
The Company financed the acquisition of CFR with $6.4 million of 13.5% Senior Subordinated Debentures and $7.6 million of 13.75% Subordinated Debentures (the "Bridge Debentures") payable to the controlling and certain other stockholders of the Company. The Bridge Debentures were refinanced with the Company's 14.5% Subordinated Debentures and the Company's 15% Junior Subordinated Debentures on September 1, 1993 simultaneously with the public offering of Senior Notes. During 1995, these debentures were exchanged for Common Stock, Class A, $.01 par value ("Common Stock") contemporaneously with the initial public offering of the Company (see notes 4 and 7). F-14 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation and Presentation The consolidated financial statements as of December 31, 1994 and 1995, and for the nine months ended December 31, 1993 and the years ended December 31, 1994 and 1995, include the accounts of CORT Business Services Corporation and its wholly owned subsidiary subsequent to the Company's acquisition of CFR. The financial statements for the three months ended March 31, 1993 represent those of CFR prior to its acquisition. All significant intercompany transactions have been eliminated. (b) Accounting Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from these estimates. (c) Rental Furniture Rental furniture includes residential and office furniture which is rented to customers or is available for rental and/or sale and is recorded at the lower of depreciated cost or market value. Rental furniture is depreciated on a declining-balance or straight-line method over 3 to 6 years, with an estimated salvage value of 25 to 40 percent of original cost. Accumulated depreciation on rental furniture was $25,638,000 and $45,199,000 at December 31, 1994 and 1995, respectively. Reserves for purchase options and shrinkage on rental furniture were $1,588,000 and $1,793,000 at December 31, 1994 and 1995, 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; and leasehold improvements over the term of the related leases. F-15 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (e) Goodwill The excess of purchase cost over the fair value of net assets acquired (goodwill) is amortized using the straight-line method over 40 years. The Company evaluates the recoverability of its goodwill annually. In making such evaluation, the Company compares certain financial indicators such as expected undiscounted future revenues and cash flows to the carrying amount of goodwill. Impairment losses, if any, are measured as the excess of the carrying amount of goodwill over estimated fair market value. (f) Cash and Cash Equivalents Cash and cash equivalents include cash in banks and investments having a maturity of three months or less on the date of purchase. At December 31, 1994, $6,000,000 of cash and cash equivalents was invested in commercial paper. The remaining balance of cash and cash equivalents at December 31, 1994 and December 31, 1995 consisted primarily of overnight repurchase funds. (g) Investments Investments in debt securities having an original maturity of greater than three months are classified as short-term investments. The Company intends to hold these investments to maturity and as such are recognized at cost plus accrued interest. At December 31, 1994, the Company had short-term investments of $4,024,000 primarily consisting of U.S. Government backed debt securities. Amortized cost approximates market value for such investments. (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) Income Taxes Income taxes are reported under the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under the asset and liability method of Statement 109, 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. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. Effective January 1, 1993, CFR adopted Statement 109. In prior years, CFR applied the deferred method of APB Opinion 11. The change in the method of accounting for income taxes resulted in no cumulative effect adjustment. (j) Debt Issue Costs Costs incurred with the issuance of long-term debt have been capitalized and are being amortized over the term of the related debt using a method which approximates the effective interest method. F-16 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (k) Earnings Per Common Share Earnings per common share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Common stock equivalents are comprised entirely of stock options and warrants. The Company has no other potentially dilutive securities. Fully-diluted earnings per common share is presented only to the extent that it results in dilution in excess of 3% of primary earnings per common share. Common stock issued and common stock options granted during the 12-month period preceding the date of the Company's initial public offering (see note 4) have been included in the calculation of weighted average common shares outstanding for all of 1994 and 1995 using the treasury stock method based on the initial public offering price. In connection with the Company's initial public offering of Common Stock, the Company exchanged CFR's 14% Senior Subordinated Pay-In-Kind Notes, the Company's 14.5% Subordinated Debentures, the Company's 15% Junior Subordinated Debentures, including the unamortized discount, and accrued interest on all such debentures for 2,728,167 shares of Common Stock. For purposes of the computations of earnings 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. (3) REVERSE STOCK SPLIT On November 9, 1995, the Company effected a 1 for 7.5 reverse split of Common Stock whereby each 7.5 shares of existing Common Stock were exchanged for one share of Common Stock. All share and per share data appearing in the consolidated financial statements and notes thereto have been retroactively adjusted for this reverse split. (4) INITIAL PUBLIC OFFERING OF COMMON STOCK In November 1995, the Company sold, through an underwritten initial public offering, 3,402,260 common shares at $12.00 per share. The net proceeds of approximately $36,995,000, net of associated underwriting discounts and other expenses of the offering, were used to retire a portion of the Senior Notes (see note 7). (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following (in thousands):
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Land and land improvements........................ $ 6,984 $ 6,996 Buildings and improvements........................ 15,113 15,151 Machinery, equipment and computer................. 3,102 4,896 Leasehold improvements............................ 5,379 7,647 Furniture and fixtures............................ 1,241 1,421 Other............................................. 1,438 1,252 ------------ ------------ 33,257 37,363 Accumulated depreciation and amortization......... 3,720 6,319 ------------ ------------ $ 29,537 $ 31,044 ------------ ------------ ------------ ------------
F-17 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (6) INCOME TAXES Components of the expense for income taxes are summarized as follows (in thousands):
PREDECESSOR CORT BUSINESS SERVICES ------------ -------------------------------------------- THREE MONTHS NINE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1993 1994 1995 ------------ ------------ ------------ ------------ Current: Federal................................. $157 $ 153 $1,367 $ 1,257 State and local......................... 48 100 263 494 ----- ------------ ------------ ------------ 205 253 1,630 1,751 ----- ------------ ------------ ------------ Deferred: Federal................................. 136 1,306 1,013 2,410 State and local......................... 24 231 179 425 ----- ------------ ------------ ------------ 160 1,537 1,192 2,835 ----- ------------ ------------ ------------ Total expense before extraordinary loss... 365 1,790 2,822 4,586 Income tax benefit from extraordinary loss on early retirement of debt............... -- -- -- (2,762) ----- ------------ ------------ ------------ Total income tax expense.................. $365 $1,790 $2,822 $ 1,824 ----- ------------ ------------ ------------ ----- ------------ ------------ ------------
The difference between the actual expense for taxes and taxes computed at the Federal income tax rate of 34 percent is summarized as follows (in thousands):
PREDECESSOR CORT BUSINESS SERVICES ------------ -------------------------------------------- THREE MONTHS NINE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1993 1994 1995 ------------ ------------ ------------ ------------ Tax expense computed at Federal rate...... $796 $1,395 $2,165 $ 3,673 State and local taxes, net of Federal benefit................................... 55 218 292 607 Effects of goodwill amortization.......... 160 127 232 225 Deductible interest due to restructuring............................. (646) -- -- -- Other, net................................ -- 50 133 81 ----- ------------ ------------ ------------ Total expense before extraordinary loss... $365 $1,790 $2,822 $ 4,586 ----- ------------ ------------ ------------ ----- ------------ ------------ ------------
F-18 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (6) INCOME TAXES--(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):
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts........................................................... $ 367 $ 375 Compensated absences, principally due to accrual for financial reporting purposes................................................. 477 530 Debt issuance costs.............................................. -- 638 Deferred rental revenue.......................................... 1,954 2,209 Reserve for unfavorable operating lease and duplicate facilities......................................................... 2,886 2,377 Net operating loss carryforwards................................. 3,185 1,511 AMT credit carryforward.......................................... 2,841 4,093 Other............................................................ 1,280 2,105 ------------ ------------ Total gross deferred tax assets.............................. 12,990 13,838 ------------ ------------ Deferred tax liabilities: Rental property, principally due to differences in depreciation....................................................... 20,181 20,547 Property, plant and equipment, principally due to differences in depreciation....................................................... 4,123 3,913 ------------ ------------ Total gross deferred tax liabilities......................... 24,304 24,460 ------------ ------------ Net deferred tax liability................................... $ 11,314 $ 10,622 ------------ ------------ ------------ ------------
At December 31, 1995, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $3,778,000 which are available to offset future Federal taxable income, if any, through 2008. In addition, the Company has alternative minimum tax credit carryforwards of approximately $4,093,000 which are available to reduce future Federal regular income taxes, if any, over an indefinite period. The Internal Revenue Service ("IRS") has examined the federal income tax returns of CFR for the years 1989 through June 30, 1992 and has proposed certain adjustments to CFR's taxable income, relating primarily to methods of depreciation, period of cost recovery and certain capitalized financing fees. If successfully asserted by the IRS, the proposed adjustments would result in approximately $21 million of additional tax liability, including accrued interest through December 31, 1995. During September 1995, the Company agreed in principle with the IRS appeals officer handling the administrative appeal of the examination as to a method of settlement of the proposed adjustments. The method agreed to in principle will not result in any additional financial statement tax expenses, as the Company's reserves included in deferred income taxes are adequate to cover such expenses, and will not require the Company to alter its methods of depreciation or cost recovery period. The Company will be required to make a payment to the IRS and certain state jurisdictions for income and franchise purposes. The total amount of the proposed settlement is approximately $3 million (including interest through December 31, 1995). In February 1996, the Company made an initial deposit of approximately $925,000 to the IRS. This agreement is only an agreement in principle, however, and is subject to final IRS approval, and thus could change. A final settlement will become effective only upon approval by the appropriate IRS personnel and execution of definitive settlement documentation. F-19 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (6) INCOME TAXES--(CONTINUED) The Company has received notification that the IRS is challenging certain deductions taken by a consolidated tax group of which CFR was previously a member (the "Former Group") in connection with the examination of the consolidated Federal income tax returns of the Former Group for the year ended December 31, 1988 and subsequent years. The IRS challenge includes the assertion that certain interest deductions taken by the Former Group should be recharacterized as non-deductible dividend distributions and that deductions for certain expenses related to the acquisition of CFR's former parent be disallowed. The IRS could seek to recover from the Company (as well as from other Former Group members) the full amount of any resulting tax liability relating to periods while CFR was a member of the Former Group, which could be as much as approximately $28 million (including interest through December 31, 1995). CFR's former parent, under the agreement of sale for CFR, agreed to indemnify the Company in full for any consolidated tax liability of the Former Group for years while CFR was a member of the Former Group. Further, the Company may have rights of contribution against members of the Former Group if the Company were required to pay more than its equitable share of any consolidated tax liability. CFR's former parent has stated that it believes the IRS's position with respect to these proposed disallowances is unjustified and is contesting the matter vigorously. Due to the preliminary nature of the IRS challenge, the Company is not in a position to determine the probable outcome and its impact on the Company, if any. (7) LONG-TERM DEBT The outstanding long-term debt was as follows (in thousands):
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Revolving Credit Facility, secured................................. $ -- $ 3,800 Old Revolving Credit Facility, secured............................. -- -- Senior Notes, 12%, unsecured....................................... 100,000 50,000 Senior Subordinated PIK Notes, 14%................................. 7,140 -- Subordinated Debentures, 14.5%..................................... 7,346 -- Junior Subordinated Debentures, 15%, net of discount of $1,913 in 1994................................ 9,159 -- ------------ ------------ $123,645 $ 53,800 ------------ ------------ ------------ ------------
CFR had an Old Revolving Credit Facility with a bank for $15 million, which was terminated on November 22, 1995. Borrowings under the Old Revolving Credit Facility carried an interest rate of the prime rate plus one percent. CFR entered into a new Revolving Credit Facility with a group of banks concurrently with the consummation of the initial public offering of the Company. The Revolving Credit Facility, for which the Company is guarantor, provides a $50 million line of credit, subject to certain borrowing base restrictions, to meet acquisition and expansion needs as well as seasonal working capital and general corporate requirements. The Revolving Credit Facility expires on November 22, 1998. Borrowings under the Revolving Credit Facility bear interest at a fluctuating rate based on, at the Company's option, either the lead lender's base rate or the London Interbank Offer Rate (LIBOR). The average interest rate paid by CFR during 1995 on the Revolving Credit Facility was 7.9%. A commitment fee calculated based upon the unused portion of the Revolving Credit Facility is payable quarterly in arrears. The Revolving Credit Facility is collateralized by substantially all of CFR's assets. The Senior Notes bear interest at 12% with interest payable semi-annually on March 1 and September 1. The Senior Notes are unsecured and are due September 1, 2000. The Company may not F-20 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (7) LONG-TERM DEBT--(CONTINUED) redeem the Senior Notes prior to September 1, 1998 except in certain circumstances. Early redemptions must be made at a premium. With the proceeds of the initial public offering, borrowings under the Revolving Credit Facility and cash on hand, $20 million in aggregate principal amount of Senior Notes were retired at a repurchase price of 108% of the principal amount, plus accrued and unpaid interest thereon, and $30 million in aggregate principal amount of Senior Notes were retired at a redemption price of 110% of the principal amount plus accrued and unpaid interest thereon. The Revolving Credit Facility and indenture governing the Senior Notes restrict the ability of CFR to make advances and pay dividends to the Company. As a result of the early retirement of the Senior Notes, the Company recognized a loss of $4,143,000, net of taxes, which has been reflected in the Company's consolidated statement of operations as an extraordinary loss for the year ended December 31, 1995. The extraordinary loss includes $4,600,000 of redemption premiums on the Senior Notes retirement, the write-off of approximately $1,907,000 of deferred financing fees and approximately $398,000 of other associated costs. Contemporaneously with the initial public offering, CFR's 14% Senior Subordinated Pay-In-Kind Notes, the Company's 14.5% Subordinated Debentures and the Company's 15% Junior Subordinated Debentures (collectively the "Debt Securities"), due to controlling and certain other stockholders of the Company, were exchanged for an aggregate of 2,728,167 shares of Common Stock, which represented all principal, accrued interest and unamortized discount of the Debt Securities. During the nine months ended December 31, 1993 and the years ended December 31, 1994 and 1995, the aggregate interest expense incurred on the Debt Securities was approximately $1,081,000, $3,518,000 and $3,598,000, respectively, all of which was settled through the issuance of additional debentures. On March 31, 1993, CFR entered into a Bridge Loan and Security Agreement upon its acquisition by the Company (see note 1). The Bridge Loan and Security Agreement provided a line of credit up to $8,791,320 on a revolving basis and $50,000,000 on a term basis from WCC. In addition, CFR's 13.5% Senior Subordinated Debentures of $12,500,000 were issued to the controlling and certain other stockholders of the Company. All amounts due under the Bridge Loan and Security Agreement as well as $6,250,000 of CFR's 13.5% Senior Subordinated Debentures were retired with a portion of the proceeds of the Senior Notes. The remainder of CFR's 13.5% Senior Subordinated Debentures were refinanced with CFR's 14% Senior Subordinated Pay-In-Kind Notes. The estimated fair value of the Company's consolidated long-term debt based on the market price and other available information was approximately $117,895,000 and $57,300,000 at December 31, 1994 and 1995, respectively. Other assets include debt issuance costs, net of accumulated amortization, of $4,210,000 and $2,534,000 at December 31, 1994 and 1995, respectively. (8) EMPLOYEE BENEFIT PLANS The Company maintains an investment and profit-sharing defined contribution retirement plan. All the Company's employees are eligible to participate after one year of service. The Company makes a 50 percent matching contribution on the first four percent of employee contributions to the Plan. The Company may, at its discretion, make additional contributions based on the Company's performance. The aggregate plan contributions were approximately $40,000, $198,000, $650,000, and $940,000 for the three months ended March 31, 1993, the nine months ended December 31, 1993, and the years ended December 31, 1994 and 1995, respectively. F-21 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (8) EMPLOYEE BENEFIT PLANS--(CONTINUED) 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 $0, $60,000, $139,000, and $148,000 for the three months ended March 31, 1993, the nine months ended December 31, 1993, and the years ended December 31, 1994 and 1995, respectively. The accrued, unfunded liability under the Plan as of December 31, 1995 was not significant. (9) STOCK OPTIONS Stock Option and Stock Purchase Plan Under the terms of the Stock Option and Stock Purchase Plan (the "1994 Plan"), certain key employees were granted, at the discretion of the Board of Directors, the right to purchase varying amounts of Debt Securities and options to purchase Common Stock. Concurrent with the adoption of the 1994 Plan, all members of management who previously held common stock of the Company gave up their rights to such stock. At the date of grant, each employee had the option to purchase immediately in cash all granted amounts of the Debt Securities, or defer purchase of these securities, plus interest, over a five-year vesting period. In either case, assuming all obligations to purchase the Debt Securities were fulfilled, the exercise price of the options to purchase Common Stock was fixed and the options are exercisable over a ten-year period. Contemporaneously with the initial public offering, all Debt Securities were exchanged for Common Stock (see note 7). There is no further obligation to purchase Debt Securities under the 1994 Plan. 1995 Stock-Based Incentive Compensation Plan The 1995 Stock-Based Incentive Compensation Plan (the "1995 Plan") was adopted by the Board of Directors and approved by the Company's stockholders. The 1995 Plan became effective on October 31, 1995. The 1995 Plan provides for the granting of a maximum of 577,427 stock options to key employees of the Company. No awards can be made under the 1995 Plan after October 31, 1997. The shares granted under the 1995 Plan may be in the form of deferred stock, restricted stock, incentive stock options, non-qualified stock options or stock appreciation rights. All awards made in 1995 were in the form of non-qualified stock options. The exercise price of an option under the 1995 Plan is equal to the fair market value of common stock on the date the option is granted. An option under the 1995 Plan vests over a three-year period and the expiration period may not exceed ten years. 1995 Directors Stock Option Plan The 1995 Directors Stock Option Plan (the "Director Plan") was adopted by the Board of Directors and approved by the Company's stockholders. The Director Plan became effective on October 18, 1995. The Director Plan provides for the granting of a maximum of 50,000 stock options to non-employee directors of the Company. The Director Plan provides for automatic grants of options to purchase shares of Common Stock on November 15, 1995 and 1996. The option exercise price per share is equal to the fair market value of common stock on the date the option is granted. All options granted will be vested on November 15, 1998. The expiration period may not exceed ten years. F-22 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (9) STOCK OPTIONS--(CONTINUED) Stock Option Activity Summary The following table summarizes the Company's stock option plans below:
1994 1995 DIRECTOR PLAN PLAN PLAN --------- -------- -------- Shares under option: Outstanding at January 1, 1994............................................ -- -- -- Granted.................................................... 784,642 -- -- Exercised.................................................. (295,133) -- -- Forfeited.................................................. (53,669) -- -- --------- -------- -------- Outstanding at December 31, 1994.......................................... 435,840 -- -- Granted.................................................... 245,800 439,800 21,000 Exercised.................................................. (37,976) -- -- Forfeited.................................................. (10,734) -- -- --------- -------- -------- Outstanding at December 31, 1995.......................................... 632,930 439,800 21,000 --------- -------- -------- --------- -------- -------- Options available to grant at December 31, 1995.......................................... -- 137,627 29,000 Exercise price per share: At December 31, 1994....................................... $ 0.25875 -- -- At December 31, 1995....................................... $ 0.25875 $ 12.00 $12.00 --$1.098 Options exercisable: At December 31, 1994....................................... 70,188 -- -- At December 31, 1995....................................... 632,930 -- --
F-23 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (10) RENTAL COMMITMENTS The Company leases certain warehouse and showroom facilities and equipment. Future minimum lease payments at December 31, 1995 under all noncancelable operating leases are as follows (in thousands):
1996............................................................ $ 10,054 1997............................................................ 9,007 1998............................................................ 7,650 1999............................................................ 6,647 2000............................................................ 5,337 Thereafter...................................................... 15,403 -------- Total minimum lease payments.............................. 54,098 Less sublease rentals........................................... 167 -------- Net minimum operating lease payments...................... $ 53,931 -------- --------
Rental expense was approximately $1,756,000, $5,864,000, $9,291,000, and $9,177,000 for the three months ended March 31, 1993, the nine months ended December 31, 1993, and the years ended December 31, 1994 and 1995, respectively, (including approximately $410,000, $1,285,000, $1,795,000, and $1,826,000 for short-term vehicle leases). (11) ACCRUED EXPENSES Accrued expenses are comprised of (in thousands):
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Accrued salaries, wages and incentives............ $ 3,796 $ 4,159 Accrued interest.................................. 5,260 2,026 Accrued vacation.................................. 1,193 1,325 Reserve for unfavorable operating lease and duplicate facilities............................ 7,216 5,942 Accrued property, sales and use taxes............. 1,458 1,529 Other accrued expenses............................ 3,230 4,115 ------------ ------------ $ 22,153 $ 19,096 ------------ ------------ ------------ ------------
(12) WARRANTS TO PURCHASE COMMON STOCK At December 31, 1995, 2,762,200 warrants to purchase an aggregate of 450,238 shares of Common Stock were outstanding. In December 1995, 537,800 warrants were exercised for an aggregate of 87,657 shares of the Common Stock. Each warrant is exercisable at a price of $.0345. The warrants are subject to certain anti-dilution provisions relating to future issuances of the Common Stock. (13) ACQUISITION OF GENERAL FURNITURE LEASING COMPANY CFR acquired General Furniture Leasing Company ("General Furniture") on September 1, 1993 for approximately $28,900,000 including costs of acquisition in a transaction accounted for as a purchase business combination. As such, the fair value of General Furniture's assets and liabilities were recognized as of September 1, 1993, and the Company's results of operations include General Furniture's operations subsequent to September 1, 1993. General Furniture was subsequently merged into CFR. F-24 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (13) ACQUISITION OF GENERAL FURNITURE LEASING COMPANY--(CONTINUED) The fair value allocated to the identifiable assets and liabilities of General Furniture was determined by independent appraisal. As part of the purchase price allocation, CFR recorded a reserve for estimated costs to be incurred in the consolidation of duplicate General Furniture facilities. Based on the allocation of the purchase price to the tangible and identifiable intangible assets and liabilities, an excess of purchase price over net assets acquired (goodwill) of approximately $6,100,000 was recorded. Such goodwill is being amortized on a straight-line basis over 40 years. The purchase price has been allocated as follows (in thousands):
Cash............................................................. $ 500 Accounts receivable.............................................. 1,400 Prepaid expenses and other assets................................ 700 Rental property.................................................. 25,700 Property, plant and equipment.................................... 6,700 Goodwill......................................................... 6,100 Accounts payable and accrued expenses............................ (3,400) Other liabilities, including reserve for duplicate facilities.... (8,800) ------- $28,900 ------- -------
CFR financed the acquisition of General Furniture with a portion of the proceeds from the September 1, 1993 public offering of $100,000,000 12% Senior Notes (see note 7). (14) SUBSEQUENT EVENT On March 15, 1996 the Company signed an agreement to acquire the stock of privately held Evans Rents, a provider of rental furniture in California, for approximately $27 million in cash, exclusive of transaction costs. The acquisition is subject to satisfaction of customary closing conditions including regulatory approval. F-25 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (15) QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands except per share data)
THREE MONTHS ENDED ------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1995 1995 1995 1995 --------- -------- ------------- ------------ Furniture rental revenue....................... $33,815 $ 35,239 $36,354 $ 36,580 Furniture sales revenue........................ 10,316 9,288 9,137 8,580 Operating earnings............................. 6,252 6,425 6,893 7,151 Income before income taxes and extraordinary loss........................................... 2,107 2,226 2,675 3,796 Extraordinary loss, net of tax................. -- -- -- 4,143 Net income (loss).............................. 1,195 1,273 1,539 (1,932) Earnings per common share before extraordinary loss......................................... $ 0.25 $ 0.26 $ 0.30 $ 0.29 Earnings (loss) per common share............... $ 0.25 $ 0.26 $ 0.30 $ (0.17)
THREE MONTHS ENDED ------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1994 1994 1994 1994 --------- -------- ------------- ------------ Furniture rental revenue....................... $31,484 $ 32,777 $33,384 $ 32,381 Furniture sales revenue........................ 8,667 8,581 9,049 8,237 Operating earnings............................. 5,151 5,454 5,852 6,157 Income before income taxes..................... 1,141 1,385 1,789 2,053 Net income..................................... 606 769 1,007 1,164 Earnings per common share...................... $ 0.16 $ 0.18 $ 0.22 $ 0.24
F-26 EVANS RENTS UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
MARCH 31, 1996 --------- ASSETS Cash.............................................................................. $ 351 Accounts receivable, less allowance for doubtful accounts of $238................. 2,265 Prepaid expenses.................................................................. 12 Rental merchandise, net........................................................... 17,663 Property, equipment and leasehold improvements, net............................... 2,288 Deposits and other assets......................................................... 175 --------- Total assets.................................................................. $22,754 --------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities: Senior obligations payable.................................................... $ 9,529 Convertible subordinated notes................................................ 15,735 Accounts payable.............................................................. 754 Accrued expenses.............................................................. 1,583 Accrued interest.............................................................. 9,244 Deferred revenue.............................................................. 1,531 --------- Total liabilities........................................................... 38,376 Redeemable Preferred Stock........................................................ 5,000 Shareholders' deficit............................................................. (20,622) --------- Total liabilities and shareholders' deficit................................... $22,754 --------- ---------
See accompanying notes to unaudited condensed consolidated financial statements. F-27 EVANS RENTS UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------- 1995 1996 ------ ------ Revenue: Rental income........................................................ $6,624 $6,906 Relocation income and fees........................................... 719 519 Sales of merchandise................................................. 309 457 ------ ------ Total revenue.................................................... 7,652 7,882 ------ ------ Costs and operating expenses: Cost of merchandise sold............................................. 223 312 Depreciation: Rental merchandise................................................. 638 726 Property, equipment and leasehold improvements..................... 154 203 Operating expenses................................................... 2,469 2,377 General and administrative expenses.................................. 2,946 3,064 ------ ------ Total costs and operating expenses............................... 6,430 6,682 ------ ------ Operating profit................................................. 1,222 1,200 Interest expense, net.................................................. 906 830 ------ ------ Income before taxes.................................................. 316 370 Income taxes........................................................... 40 48 ------ ------ Net income........................................................... $ 276 $ 322 ------ ------ ------ ------
See accompanying notes to unaudited condensed consolidated financial statements. F-28 EVANS RENTS UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------- 1995 1996 --------- --------- OPERATING ACTIVITIES: Net income............................................................ $ 276 $ 322 Adjustments to reconcile net income to net cash provided by operating activities: Net book value of rental merchandise disposals...................... 265 314 Depreciation: Rental merchandise................................................ 638 726 Property, equipment and leasehold improvements.................... 154 203 Changes in operating accounts, net.................................. 1,467 (342) --------- --------- Net cash provided by operating activities....................... 2,800 1,223 --------- --------- INVESTING ACTIVITIES: Purchases and refurbishing of rental merchandise...................... (3,064) (761) Purchases of property, equipment and leasehold improvements........... (259) (89) --------- --------- Net cash used by investing activities........................... (3,323) (850) --------- --------- FINANCING ACTIVITIES: Net borrowings (payments) under line of credit agreements............. 471 (91) Net borrowings (payments) under notes payable......................... 35 (55) --------- --------- Net cash provided (used) by financing activities................ 506 (146) --------- --------- Net increase (decrease) in cash......................................... (17) 227 Cash at beginning of period............................................. 52 124 --------- --------- Cash at end of period................................................... $ 35 $ 351 --------- --------- --------- --------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest............................................................ $ 279 $ 227 Income taxes........................................................ 3 --
See accompanying notes to unaudited condensed consolidated financial statements. F-29 EVANS RENTS NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 (1) BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the consolidated financial position of Evans Rents as of March 31, 1996, and the results of operations and cash flows for the three months ended March 31, 1996 and 1995. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements are unaudited, and do not include all related footnote disclosures. The interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included herein. (2) SUBSEQUENT EVENT On April 24, 1996, Evans Rents was acquired by CORT Business Services Corporation whereby CORT acquired all of the outstanding equity interest in Evans Rents. F-30 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders EVANS RENTS We have audited the accompanying consolidated balance sheets of Evans Rents as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 consolidated financial position of Evans Rents at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Los Angeles, CA March 15, 1996 F-31 EVANS RENTS CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (RESTATED--NOTE 1) -------------------------- 1994 1995 ----------- ----------- ASSETS Cash............................................................. $ 51,952 $ 123,652 Accounts receivable, less allowance for doubtful accounts of $169,158 and $241,016.......................................... 2,209,596 2,168,192 Prepaid expenses................................................. 31,279 14,800 Rental merchandise:.............................................. 19,004,754 22,180,052 Less accumulated depreciation.................................. (3,434,998) (4,237,967) ----------- ----------- Net rental merchandise........................................... 15,569,756 17,942,085 Property, equipment and leasehold improvements, at cost: Leasehold improvements......................................... 1,581,124 1,948,890 Office and warehouse equipment................................. 638,360 679,692 Showroom furniture and equipment............................... 692,745 1,008,080 Vehicles....................................................... 1,028,889 1,484,556 ----------- ----------- 3,941,118 5,121,218 Less accumulated depreciation and amortization................. (2,143,826) (2,718,661) ----------- ----------- Net property, equipment and leasehold improvements............... 1,797,292 2,402,557 Deposits and other assets........................................ 191,926 178,716 ----------- ----------- Total assets............................................... $19,851,801 $22,830,002 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' DEFICIT Liabilities: Senior obligations payable (Note 2)............................ $ 8,874,286 $ 9,674,563 Convertible subordinated notes................................. 15,735,000 15,735,000 Accounts payable............................................... 945,972 1,207,436 Accrued expenses............................................... 2,073,517 1,971,762 Accrued interest............................................... 6,294,000 8,654,250 Deferred revenue............................................... 1,506,501 1,531,131 ----------- ----------- 35,429,276 38,774,142 Commitments (Note 8) 10% noncumulative convertible redeemable preferred stock at $.001 par value: Series F, 5,000,000 shares authorized;] 4,100,000 issued and outstanding............................. 4,100,000 4,100,000 Series G, 900,000 shares authorized, issued and outstanding.... 900,000 900,000 Shareholders' deficit: Series A Preferred Stock, $.001 par value, 100,000 shares authorized; 93,300 issued and outstanding (82,500 issued and outstanding in 1994)............................................. 83 93 Series B Preferred Stock, $.001 par value, 50,000 shares authorized, issued and outstanding............................... -- 50 Common stock, $.001 par value, 20,000,000 shares authorized; 159,574 issued and outstanding (108,489 shares issued and outstanding in 1994)............................................. 108 160 Additional paid-in capital..................................... 15,674,747 15,678,085 Accumulated deficit............................................ (36,252,413) (36,622,528) ----------- ----------- Total shareholders' deficit...................................... (20,577,475) (20,944,140) ----------- ----------- Total liabilities and shareholders' deficit................ $19,851,801 $22,830,002 ----------- ----------- ----------- -----------
See accompanying notes. F-32 EVANS RENTS CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 (RESTATED--NOTE 1) -------------------------- 1994 1995 ----------- ----------- Revenues: Rental income.................................................. $22,716,405 $25,972,474 Relocation income and fees..................................... 3,042,549 2,718,778 Sales of merchandise........................................... 1,363,321 1,814,269 ----------- ----------- Total revenues............................................. 27,122,275 30,505,521 Costs and operating expenses: Cost of merchandise sold....................................... 847,986 1,388,612 Depreciation:.................................................. Rental merchandise........................................... 2,413,204 2,732,502 Property, equipment and leasehold improvements............... 505,749 688,444 Operating expenses............................................. 9,005,871 10,132,443 General and administrative expenses............................ 11,849,072 12,176,190 ----------- ----------- Total costs and operating expenses......................... 24,621,882 27,118,191 ----------- ----------- Operating profit........................................... 2,500,393 3,387,330 Interest expense, net............................................ 3,509,928 3,653,445 ----------- ----------- Loss before taxes.............................................. (1,009,535) (266,115) Income taxes..................................................... 51,882 104,000 ----------- ----------- Net loss....................................................... $(1,061,417) $ (370,115) ----------- ----------- ----------- -----------
See accompanying notes. F-33 EVANS RENTS CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(RESTATED--NOTE 1) --------------------------------------------------------------------------- SERIES A SERIES B ADDITIONAL TOTAL PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED SHAREHOLDERS' STOCK STOCK STOCK CAPITAL DEFICIT DEFICIT --------- --------- ------ ----------- ------------ ------------- Balance at December 31, 1993.. $ 91 $-- $108 $15,694,115 $(35,190,996) $ (19,496,682) Issuance of shares.......... 16 -- -- 1,584 -- 1,600 Repurchase of shares........ (24) -- -- (952) -- (976) Repurchase of warrants...... -- -- -- (20,000) -- (20,000) Net loss.................... -- -- -- -- (1,061,417) (1,061,417) --------- --------- ------ ----------- ------------ ------------- Balance, December 31, 1994.... 83 -- 108 15,674,747 (36,252,413) (20,577,475) Issuance of shares.......... 15 50 52 3,583 -- 3,700 Repurchase of shares........ (5) -- -- (245) -- (250) Net loss.................... -- -- -- -- (370,115) (370,115) --------- --------- ------ ----------- ------------ ------------- Balance, December 31, 1995.... $ 93 $ 50 $160 $15,678,085 $(36,622,528) $ (20,944,140) --------- --------- ------ ----------- ------------ ------------- --------- --------- ------ ----------- ------------ -------------
See accompanying notes. F-34 EVANS RENTS CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, (RESTATED--NOTE 1) -------------------------- 1994 1995 ----------- ----------- OPERATING ACTIVITIES: Net loss........................................................ $(1,061,417) $ (370,115) Adjustments to reconcile net loss to net cash provided by operating activities: Net book value of rental merchandise disposals................ 1,254,303 1,408,675 Depreciation: Rental merchandise.......................................... 2,413,204 2,732,502 Property, equipment and leasehold improvements.............. 505,749 688,444 Disposals of property, equipment and leasehold improvements... 4,946 21,439 Changes in assets and liabilities: Accounts receivable......................................... (582,582) 41,404 Prepaid expenses............................................ 14,598 16,479 Deposits and other assets, net.............................. 10,220 13,210 Accounts payable............................................ (602,657) 261,464 Accrued interest............................................ 2,360,250 2,360,250 Accrued expenses............................................ 289,550 (101,755) Deferred revenue............................................ 307,849 24,630 ----------- ----------- Net cash provided by operating activities................. 4,914,013 7,096,627 INVESTING ACTIVITIES Purchases and refurbishing of rental merchandise................ (7,135,662) (6,513,506) Purchases of property, equipment and leasehold improvements..... (860,271) (1,315,148) ----------- ----------- Net cash used in investing activities..................... (7,995,933) (7,828,654) FINANCING ACTIVITIES Net borrowings under line of credit agreements.................. 2,844,648 598,138 Net borrowings (payments) under notes payable................... (42,650) 202,139 Net (payments) proceeds from issuance (repurchase) of stock or warrants.......................................................... (19,375) 3,450 ----------- ----------- Net cash provided by financing activities................. 2,782,623 803,727 ----------- ----------- Net increase (decrease) in cash................................... (299,297) 71,700 Cash at beginning of year......................................... 351,249 51,952 ----------- ----------- Cash at end of year............................................... $ 51,952 $ 123,652 ----------- ----------- ----------- ----------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest...................................................... $ 990,479 $ 1,204,813 Income taxes.................................................. 65,282 94,150
See accompanying notes. F-35 EVANS RENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization of the Company In 1985, Evans Rents and its wholly owned subsidiaries (collectively, the Company), were incorporated in the state of California. The Company is primarily engaged in renting furniture to commercial and residential customers. Additionally, the Company sells furniture rented by customers and furniture no longer usable for rental purposes. As of December 31, 1995, the Company operated 17 showrooms and two warehouses in California. All significant intercompany accounts have been eliminated. Restatement of Financial Statements The accompanying financial statements have been restated to conform with certain requirements of the Securities and Exchange Commission, principally relating to the classification of redeemable preferred stock and convertible subordinated notes and the accrual of contingent interest payable. Rental Merchandise Merchandise is rented to customers under rental agreements which generally range from two to 24 months. Customers may terminate the agreement at any time after the minimum lease period of two months, or continue on a month-to-month basis. Upon termination, rental merchandise is returned to the Company. Rental income is recognized in monthly installments, beginning the day of delivery and each month thereafter. Merchandise rented to customers or available for rent is classified in the consolidated balance sheet as rental merchandise. At December 31, 1995, approximately 74% of the total rental merchandise was under rental agreements with customers. Merchandise is valued at the lower of cost, less accumulated depreciation, or market. Merchandise is depreciated on a straight-line basis ranging over a period of 3 to 10 years. Sales of merchandise consists of sales of rental merchandise directly to customers who wish to purchase the furniture they are renting or sales of used furniture. Cost of merchandise sold is determined using acquisition cost, less applicable accumulated depreciation. Market Value of Financial Instruments The carrying amounts reported in the balance sheet for the Company's financial instruments (cash and senior obligations payable) approximate their market value. The market value of the convertible subordinated notes are approximately $5.4 million based on transactions described in "Subsequent Events" (Note 10). Property, Equipment and Leasehold Improvements Depreciation of property, equipment and leasehold improvements is provided on a straight-line basis over the lesser of the lease term, if applicable, or the estimated useful lives of the respective assets, principally five to ten years. F-36 EVANS RENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. SENIOR OBLIGATIONS PAYABLE Senior obligations payable were as follows for the years ended December 31:
1994 1995 ---------- ---------- $20,000,000 revolving line of credit, expiring August 31, 1996................................... $8,419,295 $9,017,433 Notes payable..................................... 454,991 657,130 ---------- ---------- $8,874,286 $9,674,563 ---------- ---------- ---------- ----------
The Company has a revolving credit agreement with a lender which provides for maximum aggregate borrowings of $20,000,000 through August 31, 1996. The revolving credit agreement is automatically and continuously renewed for successive one-year periods unless terminated. The agreement requires monthly interest payments at 1/2% over the prime rate (8.5% at December 31, 1995), on average outstanding borrowings. Regardless of the outstanding principal balance, the Company is required to pay minimum interest each month of $10,000 through August 31, 1996. Borrowings are secured by substantially all of the assets of the Company. Notes payable at December 31, 1995, relate primarily to purchase of vehicles and are secured by the vehicles, and to obligations related to tenant improvements on certain facilities. Interest rates vary for 3.1% to 12.5%. Future annual payments under these notes are as follows:
FISCAL YEAR ENDING - ---------------------------------------------------------------- 1996............................................................ $237,475 1997............................................................ 175,114 1998............................................................ 146,986 1999............................................................ 76,046 2000............................................................ 21,509 -------- Total future payments........................................... $657,130 -------- --------
3. INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes," which requires the use of the liability method of accounting for deferred income taxes. In addition, SFAS 109 requires the recognition of future tax benefits, such as net operating loss carryforwards (NOLs), to the extent that realization of such benefits are more likely than not. There was no cumulative effect of this accounting change at the time of adoption. F-37 EVANS RENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. INCOME TAXES--(CONTINUED) Significant components of the Company's deferred tax assets as of December 31, 1995 are as follows:
Deferred tax assets: Book over tax depreciation................................. $ 360,000 Net operating loss carryforward............................ 11,100,000 ------------ Total deferred tax assets.................................... 11,460,000 Valuation allowance for deferred tax assets.................. (11,460,000) ------------ Net deferred tax assets...................................... $ -- ------------ ------------
A valuation allowance for the amount of the net deferred tax assets has been provided due to the uncertain nature of their ultimate realization based upon the past earnings performance and the expiration of NOL carryforwards. Realization is entirely dependent upon future earnings. Income taxes for 1995 and 1994 are composed primarily of alternative minimum taxes. 4. CONVERTIBLE SUBORDINATED NOTES In April 1989, the Company issued $15,735,000 principal amount of 15% subordinated debentures (Debentures) due April 21, 1996. On April 30, 1992, the Debentures were exchanged for 15% convertible subordinated notes (Notes). The Company semiannually is required to pay to the holders of the Notes on October 31 and April 30, 80% of Earnings Available to Service Notes, as defined, if any. To the extent such payment does not exceed the interest portion of the Notes, any interest not paid shall accrue as unpaid interest but shall not be treated as principal for purposes of any pro rata allocation of any future redemption amount. The redemption value of the Notes prior to May 1, 2002, is based upon the amount available from a Qualified Liquidity Event or Qualified Initial Public Offering Event and a proceeds-sharing formula with the holders of the Series A, B, F, and G Preferred Stock. Upon the occurrence of a Qualified Initial Public Offering Event, unless the Company has elected to redeem the Notes or the holder has elected to convert such Notes into new notes, the Notes shall be automatically converted into common stock, based upon the amount available from a Qualified Initial Public Offering Event and the actual initial public offering price of one share of common stock. The Notes are subordinated and junior to any senior indebtedness and the Series F and G Preferred Stock. There were no interest payments in 1995 and 1994, given the terms of the "Earnings Available to Service Notes." 5. REDEEMABLE PREFERRED STOCK The Company issued in a private placement on April 30, 1992, 3,725,000 shares of Series F and 900,000 shares of Series G 10% noncumulative convertible redeemable preferred stock (Series F and G preferred stock) for an aggregate consideration of $4,625,000. Subsequently 375,000 additional shares of Series F were issued for $375,000. At the option of the holder, each share of Series F Preferred Stock shall be convertible into one share of common stock, subject to adjustment as provided in the Company's related articles of incorporation. Each share of Series G Preferred Stock is convertible into one share of Series F Preferred Stock at the option of the holder or is automatically converted upon a Qualified Liquidity Event, as defined, or a Qualified Initial Publc Offering, as defined. Upon written notice of a majority of holders of the Series F and G Preferred Stock after April 24, 1997, the Company shall redeem the stock at $1 per F-38 EVANS RENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. REDEEMABLE PREFERRED STOCK--(CONTINUED) share plus declared but unpaid dividends provided the Company's debt agreements do not prohibit such redemption. Upon liquidation, the holders are entitled to a preference equal to $1 per share for each share held, plus an amount equal to all declared and unpaid dividends thereon. The holders of Series F Preferred Stock are entitled to vote on all matters; however, the Series G Preferred Stock are nonvoting. 6. SHAREHOLDERS' DEFICIT The authorized capital stock of the Company consists of 20,000,000 shares of common stock, par value $0.001 per share; and 6,050,000 shares of preferred stock, par value $0.001 per share, 100,000 shares of which are designated Series A Preferred Stock; 50,000 shares of which are designated Series B Preferred Stock. Issuances in 1995 were to officers based on management's estimate of the Company's value of approximately $20,000,000. Series A and B Preferred Stock are nonvoting. In November 1988, in conjunction with the renegotiation of the line of credit issued at that time, warrants to purchase a maximum of 237,200 shares of Series E 4% noncumulative convertible preferred stock at $4.25 per share were issued to two financial institutions providing a $7,500,000 revolving line of credit. The warrants expire in November 1998. The then estimated fair market value of the Series E warrants of $709,856 was included in additional paid-in capital and was deducted from the carrying value of borrowings under the line of credit. In 1994, warrants to purchase a maximum of 158,132 shares were repurchased. As a result of the recapitalization, the Series E preferred stock warrants were converted into warrants to purchase common stock. In addition, the exercise prices and outstanding shares of the Series E warrants and the outstanding options (see Note 5) have been adjusted because of the reverse stock split. As a result of the reverse stock split, the remaining warrants are now exercisable for 53 shares at $6,322 per share. During 1989, in conjunction with the issuance of promissory notes payable, the Company issued warrants to such promissory note holders which are exercisable for 276,250 shares of the Company's common stock at $4 per share during the next equity financing in excess of $100,000. These warrants terminated during 1994. The Company has reserved the equivalent of 5,000,000 shares of common stock for issuance upon conversion of the Series F Preferred Stock, 136,597 shares for issuance upon conversion of warrants, and 300,600 shares for issuance under the Company's 1986 Incentive Stock Option Plan. 7. STOCK OPTION PLAN In 1986 the Board of Directors authorized an Incentive Stock Option Plan and the Board has reserved 1,300,000 shares of common stock for issuance under the plan. The Company has granted options under this plan to its employees at prices ranging from $.20-$.50 per share. As a result of the F-39 EVANS RENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. STOCK OPTION PLAN--(CONTINUED) reverse stock split the exercise price per share has been adjusted to prices ranging from $298-$744 per share as follows:
SHARES --------------- DECEMBER 31 --------------- 1994 1995 ---- ---- Outstanding at beginning of period........................ 525 461 Granted................................................... -- -- Exercised................................................. -- -- Canceled.................................................. (64) (14) ---- ---- Outstanding at end of period.............................. 461 447 ---- ---- ---- ---- Exercisable............................................... 461 447 ---- ---- ---- ----
These options are noncompensatory and vest over a four-year period; 25% on the first anniversary of the date of grant, then 2% per month thereafter until fully vested. Additionally, the Company issued nonqualified stock options, as follows: In 1987, the Company issued nonqualified stock options for 3 shares at $446 per share, which vest 1/18 per month. These options terminated during 1994. In 1988, the Company issued nonqualified stock options for 7 shares at $744 per share, which vest 1/18 per month. On December 31,1994, all options were vested and exercisable. These options terminated during 1995. 8. COMMITMENTS The Company leases its showrooms and warehouse facilities under long-term operating lease arrangements. Management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases. At December 31, 1995, the future minimum annual rental payments required under noncancelable operating leases are as follows:
Fiscal Year Ending Operating - --------------------------------------------------------------- ---------- 1996........................................................... $2,193,643 1997........................................................... 1,638,893 1998........................................................... 854,095 1999........................................................... 578,726 2000........................................................... 468,655 Thereafter..................................................... 1,815,629 ---------- Total future payments.......................................... $7,549,641 ---------- ----------
Rent expense under noncancelable operating leases aggregated approximately $2,233,467 and $2,242,551 for the years ended December 31, 1994 and 1995, respectively. F-40 EVANS RENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. SHOWROOM AND WAREHOUSE RELOCATION COSTS Showroom and warehouse relocation costs of $264,116 in 1994, relate primarily to the Company's decision to relocate its Northern California warehouse and terminate its lease early and are included in general and administrative expenses. 10. SUBSEQUENT EVENTS On March 15, 1996, the Company entered into an agreement with CORT Business Services Corporation whereby CORT would acquire all of the outstanding equity interest in the Company. If the acquisition is completed it is anticipated that the Company will be merged into a subsidiary of CORT. F-41 - ---------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH 1,700,000 SHARES INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR CORT BUSINESS AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT SERVICES RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER CORPORATION IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------- TABLE OF CONTENTS COMMON STOCK PAGE [CORT BUSINESS SERVICES LOGO] ---- Prospectus Summary.................... 3 Risk Factors.......................... 8 Use of Proceeds....................... 11 Price Range of Common Stock and Dividend Policy..................... 11 Capitalization........................ 12 Unaudited Pro Forma Condensed Consolidated Financial Data........... 13 Selected Consolidated Financial Data.................................. 18 ------ Management's Discussion and Analysis of Financial Condition and Results PROSPECTUS of Operations....................... 20 , 1996 Business.............................. 26 ------ Management............................ 35 Principal Stockholders................ 43 Shares Eligible for Future Sale....... 44 Underwriting.......................... 45 Legal Matters......................... 46 Experts............................... 46 Available Information................. 47 SMITH BARNEY INC. Incorporation of Certain Documents by MONTGOMERY SECURITIES Reference........................... 48 Index to Financial Statements......... F-1 - ---------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the registrant's expenses in connection with the issuance of the securities being registered. SEC Registration Fee..................................................... $ 12,472 NASD Filing Fee.......................................................... 4,117 NYSE listing fee......................................................... 6,843 Blue Sky Fees and Expenses............................................... 7,500* Printing and Engraving Expenses.......................................... 120,000* Legal Fees and Expenses.................................................. 225,000* Accounting Fees and Expenses............................................. 100,000* Transfer Agent and Registrar Fees and Expenses........................... 2,000* Miscellaneous............................................................ 22,068* -------- Total.......................................................... $500,000* -------- --------
- ------------ * Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Certificate of Incorporation, as amended (the "Charter"), of CORT Business Services Corporation (the "Company") provides that directors of the Company shall be entitled to all limitations on the liability of directors available under the Delaware General Corporation Law (the "DGCL"). Further, the Charter provides that a director shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions by the director not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) for actions described under Section 174 of the DGCL relating to the declaration of dividends and purchase or redemption of shares in violation of the DGCL or (iv) for any transactions from which a director derived an improper personal benefit. In addition, Section 145 of the DGCL, under certain circumstances, provides for the indemnification of the Company's officers and directors against liabilities which they may incur in such capacities. In general, any officer or director of the Company shall be indemnified by the Company against expenses including attorneys' fees, judgments, fines and settlements actually and reasonably incurred by that person in connection with a legal proceeding as a result of such relationship, whether or not the indemnified liability arises from an action by or in the right of the Company, if the officer or director acted in good faith, and in the manner believed to be in or not opposed to the Company's best interest; and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. Such indemnity is limited to the extent that (i) such person is not otherwise indemnified and (ii) such indemnification is not prohibited by the DGCL or any other applicable law. Any indemnification under the previous paragraph (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon the determination that indemnification of the director or officer is proper in the circumstances because that person has met the applicable standard of conduct set forth above. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum of disinterested directors who are not parties to such action or (ii) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion. To the extent that a director or officer of the Company shall be successful in prosecuting an indemnity claim, the reasonable expenses of any such person and the fees and expenses of any special legal counsel engaged to determine the possibility of indemnification shall be borne by the Company. II-1 Expenses incurred by a director or officer of the Company in defending a civil or criminal action, suit or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that that person is not entitled to be indemnified by the Company as authorized by the Bylaws. The indemnification and advancement of expenses provided by, or granted pursuant to Article IV of the Bylaws is not deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled, both as to action in that person's official capacity and as to action in another capacity while holding such office. The Board of Directors has the power to authorize the Company to purchase and maintain insurance on behalf of the Company and others to the extent that the power to do so has not been prohibited by the DGCL, create any fund to secure any of its indemnification obligations and give other indemnification to the extent permitted by law. The obligations of the Company to indemnify a director or officer under Article IV of the Bylaws is a contract between the Company and such director or officer and no modification or repeal of the Bylaws shall detrimentally affect such officer or director with regard to that person's acts or omissions prior to such amendment or repeal. The Company has also purchased insurance for its directors and officers for certain losses arising from claims or charges made against them in their capacities as directors and officers of the Company. ITEM 16. EXHIBITS. The following exhibits are filed herewith unless otherwise indicated: 1.1 --Form of Underwriting Agreement 2.1 --Stock Purchase Agreement, dated June 22, 1993, by and among the Company, Interfinancial, Inc., General Furniture Leasing Company and Fortis, Inc.; incorporated by reference to Exhibit 2.1 to CFR's Registration Statement on Form S-1, No. 33-65094, filed on June 25, 1993 2.2 --First Amendment to Stock Purchase Agreement, dated as of August 31, 1993, by and among the Company, Fortis, Inc., Interfinancial, Inc. and General Furniture Leasing Company; incorporated by reference to Exhibit 2.2 to CFR's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1993 2.3 --Assignment and Assumption Agreement, dated as of August 31, 1993, between the Com- pany and CFR; incorporated by reference to Exhibit 2.3 to CFR's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1993 2.4 --Acquisition Agreement, dated March 15, 1996, by and among the Company, CE Merger Sub Inc. and Evans Rents; incorporated by reference to Exhibit 2.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 4.1 --Restated Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on November 9, 1995; incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Company's Registration Statement on Form S-1, No. 33-97568, filed on November 15, 1995 4.2 --By-laws of the Company, dated November 9, 1995; incorporated by reference to Exhibit 3.2 to Amendment No. 4 to the Company's Registration Statement on Form S-1, No. 33-97568, filed on November 15, 1995 4.3 --Specimen Common Stock Certificate 5.1 --Opinion of Dechert Price & Rhoads regarding legality of the Common Stock being registered 23.1 --Consent of Dechert Price & Rhoads included in the opinion filed as Exhibit 5.1 23.2 --Consent of KPMG Peat Marwick LLP 23.3 --Consent of Ernst & Young LLP 24.1 --Powers of Attorney (included on signature pages)
II-2 ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) For purposes of determining any liability under the Act, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Company certifies that is has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fairfax, Commonwealth of Virginia on July 25, 1996. CORT BUSINESS SERVICES CORPORATION By: /s/ F.A. ZIEMNIAK .................................. Frances Ann Ziemniak Vice President--Finance and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 2 to the Registration Statement has been signed on July 25, 1996 by the following persons in the capacities indicated.
SIGNATURE TITLE - -------------------------------------- --------------------------------------------------- /s/ PAUL N. ARNOLD* President, Chief Executive (principal executive ...................................... officer) and Director Paul N. Arnold /s/ F.A. ZIEMNIAK Vice President--Finance and Chief Financial Officer ...................................... (principal financial and principal accounting Frances Ann Ziemniak officer) /s/ KEITH E. ALESSI* Director ...................................... Keith E. Alessi /s/ BRUCE C. BRUCKMANN* Director ...................................... Bruce C. Bruckmann /s/ MICHAEL A. DELANEY* Director ...................................... Michael A. Delaney /s/ CHARLES M. EGAN* Director ...................................... Charles M. Egan /s/ G.B. MAFFEI* Director ...................................... Gregory B. Maffei /s/ JAMES A. URRY* Director ...................................... James A. Urry *By: /s/ F.A. ZIEMNIAK .................................. Frances Ann Ziemniak Attorney-in-Fact
II-4 EXHIBIT INDEX
EXHIBIT PAGE - ------- ---- 1.1 --Form of Underwriting Agreement 4.3 --Specimen Common Stock Certificate -- Opinion of Dechert Price & Rhoads regarding legality of Common Stock being 5.1 registered 23.2 --Consent of KPMG Peat Marwick LLP........................................... 23.3 --Consent of Ernst & Young LLP...............................................
EX-1.1 2 Exhibit 1.1 1,700,000 Shares CORT BUSINESS SERVICES CORPORATION Common Stock UNDERWRITING AGREEMENT ---------------------- July ______, 1996 SMITH BARNEY INC. MONTGOMERY SECURITIES As Representatives of the Several Underwriters c/o SMITH BARNEY INC. 388 Greenwich Street New York, New York 10013 Dear Ladies and Gentlemen: CORT Business Services Corporation, a Delaware corporation (the "Company"), proposes to issue and sell an aggregate of 1,700,000 shares (the "Firm Shares") of its common stock, par value $.01 per share (the "Common Stock"), to the several Underwriters named in Schedule I hereto (the "Underwriters"). The Company also proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 2 hereof, up to an additional 255,000 shares (the "Additional Shares") of Common Stock. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares." The Company and Cort Furniture Rental Corporation, a Delaware corporation and a wholly-owned subsidiary of the company ("CFR"), wish to confirm as follows their agreement with you (the "Representatives") and the other several Underwriters on whose behalf you are acting, in connection with the purchases of the Shares by the Underwriters. 1. Registration Statement and Prospectus. The Company has prepared and ------------------------------------- filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-3 under the Act (the "registration statement"), including a prospectus subject to completion relating to the Shares. The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective, or, if the registration statement became effective prior to the execution of this Agreement, as supplemented or amended prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by such post- effective amendment. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the information contained in the prospectus as filed with the Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the registration statement at the time of the initial filing of the registration statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. 2. Agreements to Sell and Purchase. The Company hereby agrees, subject ------------------------------- to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $_____________ per Share (the "purchase price per share"), the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof). The Company also agrees, subject to all the terms and conditions set forth herein, to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Company, at the purchase price per share, pursuant to an option (the "over-allotment option") which may be exercised at any time (but in any event not more than once) prior to 9:00 P.M., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading), up to an aggregate of 255,000 Additional Shares. Upon any exercise of the over-allotment option, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments as you may determine in order to avoid fractional shares) which bears the same proportion to the number of Additional Shares to be purchased by the Underwriters as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof) bears to the aggregate number of Firm Shares. 3. Terms of Public Offering. The Company has been advised by you that ------------------------ the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery of the Shares and Payment Therefor. Delivery to the ------------------------------------------- Underwriters of and payment for the Firm Shares shall be made at the office of Latham & Watkins, 885 Third Avenue, New York, NY 10022, at 10:00 A.M., New York City time, on ______________ _____, 1996 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement among you and the Company. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at the aforementioned office of Latham & Watkins at such time on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than three nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Company of the Underwriters' determination to purchase a number, specified in such notice, of 2 Additional Shares. The place of closing for any Additional Shares and the Option Closing Date for such Shares may be varied by agreement among you and the Company. Certificates for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor by certified or official bank check or checks payable in New York Clearing House (next day) funds to the order of the Company. 5. Agreements of the Company. The Company agrees with the several ------------------------- Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause the Registration Statement or such post-effective amendment to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when the Registration Statement or such post-effective amendment has become effective. (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period of time referred to in paragraph (f) below, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations, or of the happening of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any addition to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge, three signed copies of the registration statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto, and will also furnish to you, without charge, such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may request. (d) The Company will not (i) file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus of which you shall not previously have been 3 advised or to which you shall reasonably object after being so advised (it being understood that if the Company is legally required to amend or supplement the Registration Statement or the Prospectus then you shall not be entitled to object thereto) or (ii) so long as, in the opinion of counsel for the Underwriters, a Prospectus is required to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), without delivering a copy of such information, documents or reports to you, as Representatives of the Underwriters, prior to or concurrently with such filing. (e) Prior to the execution and delivery of this Agreement, the Company has delivered to you, without charge, in such quantities as you have requested, copies of each form of the Prepricing Prospectus. The Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may reasonably request. The Company consents to the use of the Prospectus (and of any amendment or supplement thereto), in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Company or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with the Act or any other law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto or a report under the Exchange Act, and will expeditiously furnish to the Underwriters and dealers a reasonable number of copies thereof. (g) The Company will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to service of process in suits or taxation, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Company will make generally available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve- month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act. 4 (i) During the period of five years from the date of this Agreement, the Company will furnish to you (i) as soon as practicable, a copy of each report of the Company mailed to stockholders or filed with the Commission, and (ii) from time to time such other publicly available information concerning the Company as you may reasonably request. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provision hereof (otherwise than pursuant to the second paragraph of Section 10 hereof or by notice given by you terminating this Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company to comply with the terms or fulfill any of the conditions of this Agreement, the Company agrees to reimburse the Representatives for all out- of-pocket expenses (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. (k) The Company will apply the net proceeds from the sale of the Shares substantially in accordance with the description set forth in the Prospectus. (l) If Rule 430A of the Act is employed, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) Except for (i) the grant of stock or options under the Company's 1995 Stock-Based Incentive Compensation Plan, (ii) sales pursuant to the registered offering on Form S-3 of 182,496 shares of Common Stock issuable to holders of the Company's 1,119,610 currently outstanding warrants (the "Warrants") outstanding as of June 30, 1996 upon the exercise thereof, (iii) the grant of options under the Company's 1995 Directors Stock Option Plan and (iv) the Shares to be issued pursuant to this Agreement, the Company will not sell, offer to sell, solicit an offer to buy, contract to sell, grant any options or warrants to purchase or otherwise issue, transfer or dispose of, in a public sale, public distribution or other public disposition, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, for a period of 90 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc. (n) The Company has furnished "lock-up" letters, in form and substance satisfactory to you, signed by (i) the Company, (ii) the directors and executive officers named in the Prospectus of the Company and (iii) Citicorp Venture Capital Ltd. (o) The Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (p) The Company will use its best efforts to have the Firms Shares listed on the New York Stock Exchange concurrently with the effectiveness of the registration statement and the Additional Shares prior to their issuance. (q) For the period of one year from the Closing Date, the Company will inform you of all material developments regarding the pending Internal Revenue Service audits described in the Prospectus under the caption "Risk Factors -- Tax Matters" (the "Tax Audits") including, without limitation, all material oral and written communications from, to or with representatives of the Internal Revenue Service or any current or former members of the Former Group (as such term is defined in the Prospectus) with respect thereto. 5 6. Representations and Warranties of the Company. The Company and CFR --------------------------------------------- hereby jointly and severally represent and warrant to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the provisions of the Act. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The registration statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the Prospectus and any supplement or amendment thereto when filed with the Commission under Rule 424(b) under the Act, complied or will comply in all material respects with the provisions of the Act and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the registration statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. (c) All the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive rights or similar rights contained in any contract or agreement; the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights that entitle or will entitle any person to acquire any Shares upon the issuance thereof by the Company; no adjustment to the number of shares of Common Stock issuable upon exercise of the outstanding Warrants will be required as a result of the transactions contemplated hereby; the authorized and outstanding capital stock is as set forth under the caption "Capitalization" in the Registration Statement and the Prospectus; the capital stock of the Company conforms to the description thereof in the Registration Statement and the Prospectus. (d) The Company is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, assets, liabilities, prospects, net worth or results of operations of the Company and the Subsidiaries (as defined below) taken as a whole (a "Material Adverse Effect"). (e) Each of the Company's direct or indirect subsidiaries (each a "Subsidiary" and collectively the "Subsidiaries") is set forth on Schedule II. Each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify would not have a Material Adverse Effect; all the outstanding shares of capital stock of each 6 Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable, and are owned beneficially and of record by the Company, CFR or Evans Rents, as applicable, free and clear of any lien, adverse claim, security interest, equity, or other encumbrance. (f) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened, against the Company or any Subsidiary, or to which the Company or any Subsidiary or any of their respective properties is subject, or with respect to which either the Company or any Subsidiary may have any liability or other obligations, that are required to be described in the Registration Statement or the Prospectus but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that are not described and filed as required by the Act. (g) Neither the Company nor any Subsidiary is (i) in violation of (A) its certificate of incorporation, bylaws or other organizational documents, (B) in any material respect any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any Subsidiary (excluding any possible findings or settlements pertaining to the Tax Audits described herein) or (C) any decree of any court or governmental agency or body having jurisdiction over the Company or any Subsidiary, or (ii) in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any agreement, indenture, lease or other instrument to which the Company or any Subsidiary is a party or by which either of them or any of their respective properties may be bound, which defaults under this clause (ii), singly or in the aggregate, would have a Material Adverse Effect. (h) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement by the Company, the compliance by the Company with the provisions hereof nor the consummation by the Company and the Subsidiaries of the transactions contemplated by this Agreement, the Registration Statement and the Prospectus (A) requires any consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required for the registration of the Shares under the Act and the Exchange Act and compliance with state securities or Blue Sky laws, all of which have been or will be effected in accordance with this Agreement), (B) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, (1) the certificate of incorporation or bylaws, or other organizational documents, of the Company or any Subsidiary or (2) any material agreement, indenture, lease or other instrument to which the Company or any Subsidiary is a party or by which any of them or any of their respective properties may be bound, (C) violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Company or any Subsidiary or any of their respective properties, or (D) results or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary pursuant to the terms of any material agreement or instrument to which any of them is a party or by which any of them may be bound or to which any of the property or assets of any of them is subject, which breach, default, violation, lien, charge or encumbrance would result in a Material Adverse Effect. (i) Each of KPMG Peat Marwick LLP and Ernst & Young LLP, who have certified or shall certify the financial statements included in the Registration Statement and the Prospectus (or any amendment or supplement thereto), are independent public accountants as required by Act. 7 (j) The financial statements, together with related schedules and notes, included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company and the Subsidiaries on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; the other financial and statistical information and data included in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company and the Subsidiaries; and the pro forma financial statements and the related notes thereto included in the Registration Statement and the Prospectus have been prepared in accordance with the applicable requirements of the Act and on the bases described therein and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable, and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (k) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver the Shares to the Underwriters as provided herein, and the execution and delivery of, and the performance by the Company of its obligations under, this Agreement have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws. (l) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), neither the Company nor any Subsidiary has incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Company and the Subsidiaries taken as a whole, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt, of the Company or any Subsidiary, or any other change or development that has, or that may reasonably be expected to have, a Material Adverse Effect. (m) The Company and the Subsidiaries have good and marketable title to all property (real and personal) described in the Registration Statement and the Prospectus as being owned by them, free and clear of all liens, claims, security interests or other encumbrances, except such as are described in the Registration Statement and the Prospectus or in a document filed as an exhibit to the Registration Statement or such that, singly or in the aggregate, would not create a Material Adverse Effect, and all the property described in the Prospectus as being held under lease by the Company or any Subsidiary is held under valid, subsisting and enforceable leases. (n) The Company has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the Act. (o) The Company and each Subsidiary have such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own their respective properties and to conduct their business in the manner described in the Prospectus, subject to 8 such qualifications as may be set forth in the Prospectus, except where the failure to have any such permit, singly or in the aggregate, would not result in a Material Adverse Effect; the Company and each Subsidiary have fulfilled and performed of all of their obligations with respect to such permits and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus, except where any such failure to perform or event, singly or in the aggregate, would not result in a Material Adverse Effect; and, except as described in the Prospectus, none of such permits contains any restriction that is materially burdensome to the Company and the Subsidiaries taken as a whole. (p) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (q) To the Company's knowledge, neither the Company nor any Subsidiary nor any employee or agent of the Company or any Subsidiary has made any payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (r) Except as described in the Prospectus, the Company and each Subsidiary have filed all tax returns required to be filed by them, which returns are complete and correct, and neither the Company nor any Subsidiary is in default in the payment of any taxes that were payable pursuant to said returns or any assessments with respect thereto. The Company has made available to you all material information regarding the Tax Audits available to it or any Subsidiary including, without limitation, all material written and oral communications with the Internal Revenue Service or any current or former members of the Former Group (as defined in the Prospectus). The statements in the Prospectus with respect to the Tax Audits are complete, fair and accurate, in all material respects. (s) Except as described in the Prospectus, there is no holder of any security of the Company or any other person who has the right, contractual or otherwise, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, the Shares or the right to have any Common Stock or any other security of the Company included in the registration statement or the right to require registration under the Act of any shares of Common Stock or any other security of the Company because of the filing of the registration statement or consummation of the transactions contemplated by this Agreement or otherwise. (t) The Company and each Subsidiary own or possess all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights (collectively, "Intellectual Property") described in the Prospectus as being owned by any of them or necessary for the conduct of their respective businesses (except for such Intellectual Property the loss of which, singly or in the aggregate, would not result in a Material Adverse Effect) and the Company is not aware of any claim to the contrary or any challenge by any other person to the Intellectual Property of the Company and each Subsidiary. 9 (u) The Company is not now, and after the sale of the Shares to be sold by it hereunder and the application of the net proceeds from such sale as described in the Prospectus under the caption "Use of Proceeds" will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (v) The Company has filed in a timely manner each document or report required to be filed by it pursuant to the Exchange Act and the rules and regulations thereunder; each such document or report at the time it was filed conformed to the requirements of the Exchange Act and the rules and regulations thereunder; and none of such documents or reports contained an untrue statement of any material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (w) Except as described in the Prospectus, there are no outstanding options, warrants or other rights calling for the issuance of, and there is no commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable or exercisable for capital stock of the Company. (x) The Company has complied with all provisions of Florida Statutes, Sec.517.075, relating to issuers doing business with Cuba. (y) Neither the Company nor any Subsidiary has violated any federal, state, local or foreign environmental safety or similar law or regulation applicable to its business relating to the protection of human health and safety or the environment or imposing liability or standards of conduct concerning any Hazardous Materials ("Environmental Laws") which, singly or in the aggregate, has had or might have a Material Adverse Effect. The term "Hazardous Material" means (a) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (b) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (c) any petroleum or petroleum Product, (d) any polychlorinated biphenyl and (e) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material, waste or substance regulated under or within the meaning of any other Environmental Law. There is no alleged liability, or to the best knowledge and information of the Company and each Subsidiary, potential liability (including, without limitation, alleged or potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) of the Company or any Subsidiary arising out of, based on or resulting from the presence or release into the environment of any Hazardous Material at any location at which the Company or any Subsidiary is currently conducting any business (whether or not owned by the Company or any Subsidiary) or that is owned by the Company or any Subsidiary, except for any liability that, singly or in the aggregate, would not have a Material Adverse Effect. (z) Neither the Company nor any Subsidiary has violated any federal, state or local law, statute, rule or regulation relating to discrimination in the hiring, promotion or pay of employees pursuant to any applicable wage or hour laws or any provisions of the Employee Retirement Income Security Act of 1974 ("ERISA") or the rules and regulations promulgated thereunder, and neither the Company nor any Subsidiary has engaged in any unfair labor practice, which in each case, singly or in the aggregate, would result in a Material Adverse Effect. There is (i) no significant unfair labor practice complaint pending against the Company or any Subsidiary or, to the Company's best knowledge, threatened against the Company or any Subsidiary before the National Labor Relations Board or any state or local labor relations board, and no significant grievance or significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or any Subsidiary 10 or, to the Company's best knowledge, threatened against the Company or any Subsidiary (ii) no significant strike, labor dispute, slowdown or stoppage pending against the Company or any Subsidiary or, to the Company's best knowledge, threatened against the Company or any Subsidiary and (iii) no union representation question existing with respect to the employees of the Company or any Subsidiary and there are no union organizing activities taking place, except (with respect to any matter specified in clause (i), (ii) or (iii) above, singly or in the aggregate) such as would not have a Material Adverse Effect. 7. Indemnification and Contribution. (a) The Company and CFR hereby -------------------------------- jointly and severally agree to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Prepricing Prospectus dated June 28, 1996 or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to the Prepricing Prospectus dated June 28, 1996 shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus; provided, that the Company has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability that the Company or CFR may otherwise have. (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company or CFR, such Underwriter or such controlling person shall promptly notify the Company in writing, and the Company shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the Company has agreed in writing to pay such fees and expenses, (ii) the Company has failed to assume the defense and employ counsel, or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the Company and such Underwriter or such controlling person shall have been advised in writing by its counsel that representation of such indemnified party and the Company by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the Company shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the Company and CFR shall, in connection with any one such action, suit or proceeding or separate but substantially 11 similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters and controlling persons, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. Neither the Company nor CFR shall be liable for any settlement of any such action, suit or proceeding effected without its written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the Company and CFR agree to indemnify and hold harmless any Underwriter, to the extent provided in the preceding paragraph, and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company and CFR to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or the Prepricing Prospectus dated June 28, 1996, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, any of its directors, any such officer, or any such controlling person based on the Registration Statement, the Prospectus or the Prepricing Prospectus dated June 28, 1996, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company by paragraph (b) above (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Company, its directors, any such officer, and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability that the Underwriters may otherwise have. (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 12 (e) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule I hereto (or such numbers of Firm Shares increased as set forth in Section 10 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers, or any person controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution, and reimbursement agreements contained in this Section 7. 8. Conditions of Underwriters' Obligations. The several obligations of --------------------------------------- the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the registration statement or such post-effective amendment shall have become effective not later than 1:00 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 424 and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the registration statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the registration statement or the Prospectus or otherwise) shall have been complied with to your satisfaction. 13 (b) Subsequent to the effective date of this Agreement there shall not have occurred any material adverse change or development in the condition (financial or other), business, assets, liabilities, prospects, net worth or results of operations of the Company and the Subsidiaries taken as a whole. (c) You shall have received on the Closing Date, an opinion of Dechert Price & Rhoads, counsel for the Company, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) The Company is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware with full corporate power and corporate authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction listed in such opinion. (ii) CFR is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware with full corporate power and corporate authority to own, lease, and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction listed in such opinion; and all the outstanding shares of capital stock of CFR have been duly authorized and validly issued, are fully paid and nonassessable, and are owned of record, and to the best of such counsel's knowledge beneficially, by the Company, free and clear of any perfected security interest, or, to the best knowledge of such counsel after reasonable inquiry, any other security interest, lien, adverse claim, equity or other encumbrance; (iii) The Company and each Subsidiary have, to the best of such counsel's knowledge, all necessary permits, licenses, franchises and authorizations of governmental or regulatory authorities as are necessary to own their respective properties and to conduct their respective businesses in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus, except where the failure to have any such permits, licenses, franchises or authorizations, singly or in the aggregate, would not have a Material Adverse Effect; (iv) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; (v) All the shares of capital stock of the Company outstanding prior to the issuance of the Shares have been duly authorized and validly issued, and are fully paid and nonassessable; (vi) The Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive rights or, to the best knowledge of such counsel after reasonable inquiry, similar rights to purchase Common Stock or other securities contained in any contract or agreement filed or incorporated by reference as an exhibit to the Registration Statement pursuant to Item 601(b)(4) or 601(b)(10) of Regulation S-K that entitle or will entitle any person to acquire any Shares upon the issuance thereof by the Company. No adjustment to the number of shares of Common Stock issuable upon exercise of the outstanding Warrants will be required as a result of the transactions contemplated hereby; 14 (vii) The form of certificates for the Shares conforms to the requirements of the General Corporation Law of the State of Delaware; (viii) Based solely upon telephonic confirmation from the Commission, the Registration Statement and all post-effective amendments, if any, thereto have become effective under the Act and to the best knowledge of such counsel after reasonable inquiry, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule 424(b); (ix) The Company has the corporate power and corporate authority to enter into this Agreement and to issue, sell and deliver the Shares to the Underwriters as provided herein, and this Agreement has been duly authorized, executed and delivered by the Company and is a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, except (i) as limited by the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights and remedies of creditors; (ii) as limited by the effect of general principles of equity, whether enforcement is considered in a proceeding in equity or at law, and the discretion of the court before which any proceeding therefor may be brought; (iii) as limited by the unenforceability under certain circumstances under law or court decisions of provisions providing for the indemnification of or contribution to a party with respect to a liability where such indemnification or contribution is contrary to public policy; and (iv) to the extent that enforceability may be limited due to the existence of an untrue statement of a material fact in the Prospectus or the Registration Statement or the omission to state a material fact therein necessary to make the statements in the Prospectus and the Registration Statement not misleading; (x) Except as may be disclosed in the Prospectus, neither the Company nor any Subsidiary is in violation of its respective certificate of incorporation or bylaws or, to the best knowledge of such counsel after reasonable inquiry, is in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or other evidence of indebtedness that is incorporated by reference as an exhibit to the Registration Statement pursuant to Item 601(b)(4) or 601(b)(10) of Regulation S- K, which default would result in a Material Adverse Effect; (xi) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement by the Company, the compliance by the Company with the provisions hereof nor the consummation by the Company and each Subsidiary of the transactions contemplated by this Agreement and the Prospectus (A) requires any consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency, or official (except such as may be required for the registration of the Shares under the Act and the Exchange Act and compliance with state securities or Blue Sky laws governing the purchase and distribution of the Shares), (B) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, (1) the certificate of incorporation or bylaws of the Company or any Subsidiary or (2) to the best of such counsel's knowledge after reasonable inquiry, any agreement, indenture, lease or other instrument to which the Company or any Subsidiary is a party or by which either of them or any of their respective properties is bound that have been incorporated by reference as exhibits to the Registration Statement pursuant to Item 601(b)(4) or 601(b)(10) of Regulation S-K, (C) violates or will violate any existing statute, law, regulation or filing (assuming compliance with all applicable state securities and Blue Sky laws) or judgment, injunction, order or decree known to such counsel after reasonable inquiry, applicable to the Company or any Subsidiary or any of their respective properties or (D) results or will result in the creation or imposition of any lien, charge or encumbrance upon any 15 property or assets of the Company or any Subsidiary pursuant to the terms of any agreement or instrument to which any of them is a party or by which any of them may be bound or to which any of the property or assets of any of them is subject that have been incorporated by reference as exhibits to the Registration Statement pursuant to Item 601(b)(4) or 601(b)(10) of Regulation S-K, which breach, default, violation, lien, charge or encumbrance would result in a Material Adverse Effect; (xii) The Registration Statement and the Prospectus and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the Act; (xiii) To the best knowledge of such counsel after reasonable inquiry, other than as described or contemplated in the Prospectus (or any supplement thereto), there are no legal or governmental proceedings pending or threatened against the Company or any Subsidiary or to which the Company or any Subsidiary or any of their respective properties is subject, that are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto); (xiv) The statements in the Registration Statement and Prospectus appearing under the captions specified in such opinion, insofar as they constitute summaries of contracts, agreements or other legal documents incorporated by reference or filed as exhibits to the Registration Statement (or otherwise identified in such opinion) are accurate in all material respects and fairly present the information required to be disclosed therein pursuant to the Act; (xv) Except as described in the Prospectus, to the best of such counsel's knowledge after reasonable inquiry, there are no outstanding options, warrants or other rights calling for the issuance of, and there is no commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable or exercisable for capital stock of the Company; (xvi) Except as described in the Prospectus, to the best of such counsel's knowledge after reasonable inquiry, there is no holder of any security of the Company or any other person who has the right, contractual or otherwise, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, the Shares or the right to have any Common Stock or any other security of the Company included in the registration statement or the right to require registration under the Act of any shares of Common Stock or any other security of the Company because of the filing of the registration statement; (xvii) The Company is not now, and after the sale of the Shares to be sold by it hereunder and the application of the proceeds from such sale as described in the Prospectus under the caption "Use of Proceeds" will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended; and (xviii) In addition, such counsel shall also state that it has participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants of the Company and representatives of the Underwriters, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel is not passing upon, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except as indicated otherwise in such counsel's opinion) and has not made any independent check or 16 verification thereof, on the basis of the foregoing (relying as to materiality to a large extent upon the statements of officers and other representatives of the Company) no facts have come to the attention of such counsel that have caused it to believe that the Registration Statement at the time it became effective or as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto, as of its respective date and as of the Closing Date or the Option Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no view with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by them or the Company as to laws of any jurisdiction other than the United States or the State of New York and other than the General Corporate Law of the State of Delaware; provided, that (1) each such local counsel is acceptable to the Representatives, (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is delivered to the Representatives and is, in form and substance satisfactory to them and their counsel, and (3) counsel shall state in their opinion that they believe that they and the Underwriters are justified in relying thereon. (d) You shall have received on the Closing Date an opinion of Latham & Watkins, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to certain matters referred to in clauses (vi), (viii), (ix), (xii) and (xviii) of the foregoing paragraph (c) and such other related matters as you may request. (e) You shall have received letters addressed to you, as Representatives of the several Underwriters, dated the date hereof and the Closing Date, from each of KPMG Peat Marwick LLP and Ernst & Young LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (f) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission at or prior to the Closing Date; (ii) there shall not have been any change in the capital stock of the Company nor any material increase in the short-term or long-term debt or other liabilities of the Company (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, assets, liabilities, prospects, net worth or results of operations of the Company and the Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company and the Subsidiaries taken as a whole, other than those reflected in the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated 17 the Closing Date and signed on behalf of the Company by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you), to the effect set forth in this Section 8(f) and in Section 8(g) hereof. (g) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (h) The Shares shall have been listed or approved for listing on the New York Stock Exchange. (i) The Company shall have furnished or caused to be furnished to you the "lock-up" letters contemplated by Section 5(n) hereof. (j) There shall have been no adverse developments regarding the Tax Audits since the dates as of which information with respect thereto is presented in the Prospectus. (k) The Company shall have furnished or caused to be furnished to you such further certificates and documents as you shall have reasonably requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to you and your counsel. Any certificate or document signed by any officer of the Company and delivered to you, as Representatives of the Underwriters, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Company to each Underwriter as to the statements made therein. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 8, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (h) shall be dated the Option Closing Date in question and the opinions called for by paragraphs (c), (d) and (e) shall be revised to reflect the sale of Additional Shares. 9. Expenses. The Company agrees to pay the following costs and expenses -------- and all other costs and expenses incident to the performance by it of its obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the registration statement, each Prepricing Prospectus, the Prospectus, and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the original issuance and sale of the Shares; (iv) the printing (or reproduction) and delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Shares; (v) the registration of the Common Stock under the Exchange Act and the listing of the Shares on the New York Stock Exchange; (vi) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several jurisdictions as provided in Section 5(g) hereof 18 (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction, and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification); (vii) the filing fees and the fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; (viii) the transportation and other expenses incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Shares; and (ix) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company. Except as expressly provided in this Section 9 and in Section 5(j), the Underwriters agree to pay all of their costs and expenses incurred in connection with the offering of the Shares, including, without limitation, legal fees. 10. Effective Date of Agreement. This Agreement shall become effective: --------------------------- (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Company. If any one or more of the Underwriters shall fail or refuse to purchase Shares that it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of Shares that such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one-tenth of the aggregate number of the Shares that the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares that such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Shares that it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares that the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you and the Company for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case that does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Company, purchases Shares that a defaulting Underwriter is obligated, but fails or refuses, to purchase. Any notice under this Section 10 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 11. Termination of Agreement. This Agreement shall be subject to ------------------------ termination in your absolute discretion, without liability on the part of any Underwriter to the Company, by notice to the 19 Company, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in New York or Virginia shall have been declared by either federal or state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Company by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 12. Information Furnished by the Underwriters. The statements set forth ----------------------------------------- in the last paragraph on the cover page, the stabilization legend on the inside cover page, and the statements in the first and third paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 6(b) and 7 hereof. 13. Miscellaneous. Except as otherwise provided in Sections 5, 10 and 11 ------------- hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Company, at the office of the Company at 4401 Fair Lakes Court, Suite 300, Fairfax, VA 22033, Attention: Frances Ann Ziemniak; or (ii) if to you, as Representatives of the several Underwriters, care of Smith Barney Inc., 338 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division. This Agreement has been and is made solely for the benefit of the several Underwriters, the Company, its directors and officers, and the other controlling persons referred to in Section 7 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 14. Applicable Law; Counterparts. This Agreement shall be governed by and ---------------------------- construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. 20 Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, CORT BUSINESS SERVICES CORPORATION By ----------------------- Paul N. Arnold President and Chief Executive Officer Confirmed as of the date first above mentioned on behalf of themselves and the other several Underwriters named in Schedule I hereto. SMITH BARNEY INC. MONTGOMERY SECURITIES As Representatives of the Several Underwriters By SMITH BARNEY INC. By ------------------------- Alex Weiss Managing Director 21 SCHEDULE I UNDERWRITERS Number of Underwriter Firm Shares ----------- ----------- Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Montgomery Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700,000 ========= 22 SCHEDULE II SUBSIDIARIES Jurisdiction Subsidiary of Incorporation ---------- ---------------- CORT Furniture Rental Corporation . . . . . . . . . . . . . . . . . . . Delaware Evans Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California Evans Relocation Services . . . . . . . . . . . . . . . . . . . . . . California Evans Convention Services . . . . . . . . . . . . . . . . . . . . . . California Clearance Club Home/Office . . . . . . . . . . . . . . . . . . . . . California 23 EX-4.3 3 EXHIBIT 4.3 COMMON STOCK COMMON STOCK PAR VALUE ONE CENT ($.01) PAR VALUE ONE CENT ($.01) INCORPORATED UNDER THE LAWS CUSIP 220493 10 0 OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS CORT BUSINESS SERVICES CORPORATION THIS CERTIFIES THAT IS THE OWNER OF FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, OF Cort Business Services Corporation transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate shall not be valid unless countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: AUTHORIZED SIGNATURE /s/ Edward J. Baer [CORPORATE SEAL] /s/ SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT BY AND REGISTRAR Upon request, the Corporation will furnish any holder of shares of Common Stock of the Corporation, without charge, with a full statement of the powers, designations, preferences and relative, participating, optional or other special rights of any class or series of capital stock of the Corporation, and the qualifications, limitations or restrictions of such preferences and/or rights. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian TEN ENT - as tenants by the entireties -------- ------ JT TEN - as joint tenants with right (Cust) (Minor) of survivorship and not as under Uniform Gifts to Minors tenants in common Act ------------------------- (State) Additional abbreviations may also be used though not in the above list. For value received hereby sell, assign and transfer unto ------------------------- PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE /--------------------------------------/ / / / / - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Please print or typewrite names and addresses including postal zip codes of assignee) - ------------------------------------------------------------------------------- Shares - ------------------------------------------------------------------------- of Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney - --------------------------------------------------------------------- to transfer the said Stock on the books of the within named Corporation with full power of substitution in the premises. Dated , 19 --------------------- ---- In presence of - ------------------------------- ---------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of this Certificate in every particular, without alteration or abbreviation or any change whatsoever. Signature(s) Guaranteed: - --------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM). PURSUANT TO S.E.C. RULE 17AD15. EX-5.1 4 EXHIBIT 5.1 [DECHERT PRICE & RHOADS LETTERHEAD] July 25, 1996 CORT Business Services Corporation 4401 Fair Lakes Court Suite 300 Fairfax, VA 22033 Re: 1,700,000 Shares of Common Stock, as described in the Registration Statement on Form S-3 (Registration No. 333-05935) ---------------------------------------- Gentlemen and Ladies: We have acted as your counsel in connection with the registration under the Securities Act of 1933, as amended, of 1,700,000 shares of your Common Stock, par value $.01 per share (the "Shares"), pursuant to the above-referenced Registration Statement (the "Registration Statement"). The Shares will be sold pursuant to an Underwriting Agreement (the "Underwriting Agreement") among you and the several underwriters (the "Underwriters") named in the Underwriting Agreement for whom Smith Barney Inc. and Montgomery Securities are representatives. We have participated in the preparation of the Registration Statement and have reviewed the proposed form of the Underwriting Agreement, and we have examined such corporate records and documents, certificates of officers and matters of law as we have considered appropriate to enable us to render this opinion. Based upon the foregoing, it is our opinion that the Shares have been duly authorized and, when delivered to the Underwriters against payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable. CORT Business Services Corporation July 25, 1996 Page 2 We hereby consent to the reference to our firm under the caption "Legal Matters" in the Prospectus included in the Registration Statement and to the filing of this opinion as Exhibit 5.1 to the Registration Statement. Very truly yours, /s/ Dechert Price & Rhoads EX-23.2 5 EXHIBIT 23.2 ACCOUNTANTS' CONSENT The Stockholders and Board of Directors CORT Business Services Corporation: We consent to the use of our reports included herein and incorporated herein by reference and to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the Prospectus. Our report on the consolidated financial statements refers to a change in accounting for income taxes by CORT Furniture Rental Corporation, the Predecessor to CORT Business Services Corporation. KPMG PEAT MARWICK LLP Washington, D.C. July 25, 1996 EX-23.3 6 EXHIBIT 23.3 ACCOUNTANTS' CONSENT To Stockholders and Board of Directors CORT Business Services Corporation: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the Prospectus. ERNST & YOUNG LLP Los Angeles, CA July 25, 1996 -----END PRIVACY-ENHANCED MESSAGE-----