-----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, EzwIb1oVeOiA6Uk3vW3cyLtp5yLYe/rX17oSU7evBh1Bf9YqZ9vLjQ8tSv9cip3L ZUVikH+vxd3pMOjdeIOlxg== 0000950164-99-000028.txt : 19990430 0000950164-99-000028.hdr.sgml : 19990430 ACCESSION NUMBER: 0000950164-99-000028 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990429 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: 10-K/A SEC ACT: SEC FILE NUMBER: 001-14146 FILM NUMBER: 99604821 BUSINESS ADDRESS: STREET 1: 4401 FAIR LAKES CT STE 300 CITY: FAIRFAX STATE: VA ZIP: 22033 BUSINESS PHONE: 7039688500 MAIL ADDRESS: STREET 1: 4401 FAIR LAKES COURT STE 300 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 10-K/A 1 FORM 10-K/A ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-14146 CORT BUSINESS SERVICES CORPORATION (Exact name of registrant as specified in its charter) Delaware 54-1662135 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4401 Fair Lakes Court, Fairfax, VA 22033 (Address of principal executive offices) (Zip Code) (703) 968-8500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] No [ ] Non-affiliates of CORT Business Services Corporation held 6,904,501 shares of Common Stock as of March 29, 1999. The fair market value of the stock held by non-affiliates is $159,666,586 based on the sale price of the shares on March 29, 1999. As of March 29, 1999, 8,744,174 shares of Common Stock, par value $.01, were outstanding. As of March 29, 1999, 4,350,411 shares of Class B Common Stock, par value $.01, were outstanding. Documents Incorporated by Reference: Document Part of Form 10-K -------- ----------------- Annual Report to Stockholders for the fiscal year Part II ended December 31, 1998 ================================================================================ PART I ITEM 1. Business Overview CORT Business Services Corporation (the "Company" or "CORT") through its wholly-owned subsidiary CORT Furniture Rental Corporation ("CFR") is the leading national provider of rental furniture, accessories and related services in the growing and fragmented "rent-to-rent" segment of the furniture rental industry. The "rent-to-rent" segment serves both corporate and individual customers who desire flexibility to meet their temporary and transitional needs. The Company focuses on corporate customers by offering office and residential furniture and related accessories through a direct sales force of approximately 900 salespeople and a network of 119 showrooms in 32 states and the District of Columbia. The Company believes that approximately 80% of its rental revenue is derived from its corporate customers, while the remainder is derived principally from rentals to middle- and upper-income level individuals. The Company maintains the showroom quality condition of its merchandise available for rent by selling its previously rented merchandise through a network of 83 company-operated clearance centers, thereby enabling the Company to regularly update its inventory with new styles and new merchandise. Sales of furniture through clearance centers, at prices which for the last five years have averaged 108% of the furniture's original cost, allow the Company to maximize the residual value of its rental merchandise. Furniture sales through clearance centers and other sales accounted for approximately 17% of the Company's total 1998 revenue. As the industry leader and the only "rent-to-rent" furniture rental company with a national presence, CORT is well-positioned to take advantage of growing demand for furniture rental services. This demand is believed to be driven by continued growth in management and professional employment, the increasing importance to American business of flexibility and outsourcing and the impact of a more mobile and transitory population. The Company is called upon to meet furniture rental needs of a corporate customer base which includes Fortune 500 companies, small businesses and professionals, and owners and operators of apartment communities. According to industry estimates, a significant portion of the "rent-to-rent" furniture rental revenues is derived from single-location and small regional rental businesses which present attractive consolidation opportunities for the larger "rent-to-rent" furniture rental companies such as CORT. Since the beginning of 1993, the Company has acquired two larger regional competitors, General Furniture Leasing and Evans Rents, and has completed and successfully integrated 19 lease portfolio acquisitions. Management believes that CORT is well-positioned to continue capitalizing on the industry's consolidation trend due to its national presence, leading market share and financial capacity. Business Strategy Management believes that CORT's size, national presence, consistently high-level customer service, product quality and broad product selection, depth of management and efficient clearance centers have been key contributors to the Company's success. The Company's objective is to build on these fundamentals and increase further its revenue and operating earnings and expand its margins by continuing to pursue its growth strategy. The key components of this strategy are (i) making selective acquisitions; (ii) initiating operations in new markets and adding showrooms and clearance centers in existing markets; (iii) expanding its corporate customer base and (iv) continuing to invest in the development of various products and services. Acquisitions The primary focus of the Company's growth strategy has been and will continue to be the selective acquisition of small lease portfolios and regional companies in new and existing markets. Since the beginning of 1993, the Company has completed 18 small lease portfolio acquisitions which include entrance into the New York City, Salt Lake City, Pittsburgh and Cleveland markets. In addition, the Company completed the purchase of the rental furniture business of Instant Interiors Corporation. This acquisition expands CORT's reach into the Midwest, particularly in Michigan, Illinois, Indiana, and Ohio, and provides a centralized distribution format that is cost effective in serving large geographic areas containing many smaller cities. In a typical lease portfolio acquisition, the Company acquires existing leases and rental furniture. Additionally, the Company retains sales personnel with strong local customer relationships. The Company generally does not acquire showrooms, distribution facilities or clearance centers in existing markets. However, in new markets, the Company may choose to retain such real estate. The Company also -1- believes that there are a select number of opportunities to acquire larger regional companies in order to enter new markets and increase its market share in existing markets. For example, the Company has acquired two larger regional companies: General Furniture Leasing in September 1993, which had total revenues of approximately $41.5 million for fiscal year 1992, and Evans Rents in April 1996, which had total revenues of approximately $30.5 million for fiscal year 1995. The acquisition of General Furniture Leasing provided CORT with immediate access to new market areas and additional critical mass in CORT's existing markets. Evans Rents provided CORT with additional critical mass in the greater Los Angeles and San Francisco areas, increased the percentage of rental revenue derived from the rental of higher-margin office furniture products and contributed additional expertise in the supply of furniture for trade shows and conventions. The Company entered the trade show furnishings business through acquisition of three businesses in 1997. These businesses have been integrated to create CORT's trade show furnishings segment and will establish CORT as one of the major players in this segment of the furniture rental industry. To further expand this segment, the Company purchased certain assets of the trade show furnishings business of Aaron Rents, Inc. in October 1998. The trade show furnishings business serves the major trade show contractors and corporate exhibitors nationwide and provides specialty rental furniture for use at conventions and trade shows. Major locations served include: Atlanta, Chicago, Dallas, Las Vegas, Los Angeles, New Orleans, Orlando, New York City, San Francisco, and Washington, D.C. New Markets and Additional Facilities The Company continues to expand the number of showrooms and clearance centers within its existing markets as well as initiate new operations, including showrooms, distribution facilities and clearance centers, in strategically identified geographic locations where it currently does not conduct business and where attractive acquisition opportunities do not exist. By increasing the number of showrooms and clearance centers associated with existing distribution facilities, the Company is able to distribute its real estate, personnel and other fixed costs over a larger revenue base. Since the beginning of 1995, CORT has begun operations in seven new metropolitan markets: Birmingham, AL; Huntsville, AL; Little Rock, AR; Portland, OR; St. Louis, MO; Las Vegas, NV and El Paso, TX. Expanded Corporate Customer Base The Company seeks to increase its corporate customer base in order to capitalize on the longer lease terms, higher average lease amounts and multiple lease transactions associated with corporate customers. In addition, corporate customers more frequently enter into higher-margin office furniture leases. The Company intends to grow revenue by increasing its corporate customer base through expanded emphasis on national accounts, further development of sales personnel with business-to-business sales experience and continued advertising. In addition, the Company has introduced the high quality brand of office systems furniture by Herman Miller. The Company continues to increase awareness among its sales force of the benefits and breadth of its office product offerings through expanded training programs and to focus the efforts of its sales force on these products by increased incentive compensation for office product rentals. Development of Products and Services The Company continues to invest in the development of other products and services. Products and services in various stages of development include the rental of housewares amenity packages, the supply of furniture for trade shows and conventions, and a website that provides information for relocating customers. Management believes that the gradual introduction of new products and services allows the Company to experiment with such products and services at a relatively low initial cost. The "Rent-to-Rent" Industry The "rent-to-rent" segment of the furniture rental industry serves both corporate and individual customers who generally have immediate, temporary needs for office or residential merchandise but who typically do not seek to own such merchandise. Office product customers range from large corporations who desire flexibility to meet their temporary and transitional needs, to small businesses and professionals who require office furnishings but seek to conserve capital. Residential product customers include corporations seeking to provide furnishings for corporate employees who have been relocated or who are on temporary assignment, apartment community managers seeking to provide furnished apartments and individual residents seeking to rent furnishings for their own homes and apartments. -2- Management believes the demand for rental products is driven by continued growth in management and professional employment levels, the changing trends in American business towards flexibility and outsourcing and the impact of a more mobile and transitory population. The "rent-to-rent" business is differentiated from the "rent-to-own" business primarily by the terms of the rental arrangements and the type of customer served. "Rent-to-rent" customers generally desire high quality furniture to meet temporary needs, have established credit, and pay on a monthly basis. Typically, these customers do not seek to acquire the property rented. In the typical "rent-to-rent" transaction, the customer agrees to rent merchandise for three to six months, subject to extension by the customer on a month-to-month basis. By contrast, "rent-to-own" arrangements are generally made by customers without established credit whose objective is to acquire ownership of the property. "Rent-to-own" arrangements are typically entered into on a month-to-month basis and require weekly rental payments. Operating Segments The Company has identified the following operating segments based on the distinct products/services from which each derives revenue: Furniture Rental - rental of residential and office furniture and accessories to individual and corporate customers. Furniture Sales - sale of new or previously rented residential and office furniture to the general public. Trade Show - short term rental of display and workplace furnishings for Operations trade shows, conventions, and special events to corporate customers and trade show associations. Housewares - rental of kitchen, bedroom and bathroom accessories to the Operations Furniture Rental segment. Furniture rental and furniture sales segments represent the aggregation of individual districts, all of which have similar economic characteristics and distribution methods. Trade Show Operations and Housewares Operations are aggregated with furniture rental and furniture sales for reporting purposes. The Company reports separately, in its Consolidated Statements of Operations, the revenue and associated cost of revenue of its reportable segments. Operating segments are measured on the basis of gross margin; operating expenses, goodwill amortization, interest expense, tax expense, and extraordinary items are not allocated to the individual segments. Assets and liabilities are not specifically allocated between Furniture Rental and Furniture Sales. All rental furniture is available for rental or sale. Products The Company rents a full line of furniture and accessories throughout the United States for office and residential purposes. The Company classifies its furniture leases based on the type of furniture leased and the expected use of the furniture. Office Products In order to capitalize on the significant profit potential available from the longer average rental periods and the higher average monthly rent for office products, the Company's strategy is to emphasize office furniture rentals. The Company offers a full range of office, conference room and reception area furniture, including desks, chairs, tables, credenzas, panel systems and accessories. In order to promote longer office lease terms, the Company leases furniture to its corporate customers at rates that reflect a premium on leases that are less than six months and a discount on leases of more than six months. The Company's office furniture customers consist primarily of large companies that desire flexibility to satisfy temporary and transitional needs and small or start-up businesses that have immediate and changing furniture requirements but seek to minimize capital outlay. The Company emphasizes its ability to outfit an entire office with high quality furniture in two business days, as well as its ability to provide consistent customer service and product quality nationwide. -3- Residential Products The Company leases residential products to corporate customers who are temporarily or permanently relocating employees, to apartment managers and owners who are providing furnished apartments and to individual end users of the furniture. The Company offers a broad range of household furniture, including dining room, living room and bedroom pieces, as well as certain electronic products. A significant portion of the Company's residential furniture rentals are derived from corporate relocations and temporary assignments, as new and transferred employees of the Company's corporate customers enter into leases for residential furniture. The Company's sales personnel maintain contact with corporate relocation departments and present the possibility of obtaining fully-furnished rental apartments as a lower cost alternative to hotel accommodations. Thus, the Company offers its corporate rental customers a way to reduce the costs of corporate relocations while developing residential business with new and transferred employees. The Company's ability to service both corporate and individual needs creates a broad corporate customer base accompanied by an increasing pool of employees utilizing the Company's residential services. Other Products and Services CORT offers several other products and services in selected markets. The Company offers houseware amenity packages (such as linens, towels, dishes, cookware and other kitchen, bedroom and bath accessories) for rent to its furniture rental customers. The Company had generally distributed houseware amenity packages through third-party contractors either under subcontract arrangements or direct referrals. The Company continues to expand the distribution of its own houseware amenity packages to capture profits currently realized by third-party contractors. The Company provides rental specialty furniture for short term use at trade shows and conventions through its trade show furnishings operation. The Company had operations in New Orleans and California. The trade show services business expanded through the acquisition of three trade show businesses in March 1997 and one trade show business in October 1998. The combination of CORT's national network with the experience of these organizations should provide the Company with a competitive advantage in the trade show and convention services business. The Company established Relocation Central, a website that provides information about major cities such as apartment finders, school systems, movers and local recreation for relocating individuals. Relocation Central provides the Company with an additional marketing tool while also providing valuable information to potential customers. Operations Lease Terms The Company typically leases furniture to individuals and corporate accounts for three-, six- and twelve-month terms, which may be and often are extended by its customers on a month-to-month basis. Management believes that, on average, furniture remains on lease for approximately nine months at a time. Although rental contracts may give the customer the option to purchase the merchandise rented, only a small percentage of the Company's rental leases lead to customer ownership. The Company's strategy is to price rentals to recover the original cost of the furniture over a ten-month rental "payout period." However, pricing and payout periods often vary with the length of the leases. The Company frequently charges a delivery fee and, in the absence of proof of insurance, a waiver fee. Within general company guidelines, each district has discretion to set prices based upon local market factors. The Company may also require a customer security deposit which will be returned at the end of the lease upon satisfactory compliance with the terms of the lease. The Company requires applications from prospective rental customers and performs credit investigations before approving such applications. In each of the last five years, the Company's bad debt losses have been limited to 0.7% of revenue or less. -4- Customer Services CORT is dedicated to providing consistently high quality customer service nationwide to its corporate and individual customers. Through its national network, the Company more efficiently services its corporate clients by providing a single point of contact for customers who have furniture needs in multiple locations, offering consistent quality of products and services at all CORT locations, and offering a broad spectrum of products to customers. Under its Personal Service Guaranty, the Company ensures customers of CORT Furniture Rental that they will be satisfied with the furniture they rent or the Company will exchange it for similar furniture within two business days, free of charge. Additionally, the Company's employees assist customers with space planning, interior design and apartment location services. Furniture Sales For the last five years, the Company has derived 71% of its furniture sales revenue from clearance centers sales. The remaining furniture sales revenue is derived primarily from lease conversions and sales of new furniture. Sales of rental furniture allow the Company to control inventory levels and maintain showroom quality of rental inventory. On average, furniture is typically sold through the clearance centers three years after its initial purchase by the Company. For the last five years, sales of rental furniture through the clearance centers have had an average recovery margin on the original cost of furniture of approximately 108%, at a price which is usually considerably lower than the price of comparable new merchandise. Management believes that its ability to recover the original cost of its furniture through its clearance centers is a key contributor to the Company's profitability. Sales, Marketing and Advertising The Company employs a sales force of approximately 900 people, including managers and supervisors, rental consultants, commercial account executives, residential account executives, and clearance center personnel. In general, rental consultants service walk-in showroom customers, clearance center sales personnel are responsible for walk-in clearance center customers and commercial and residential account executives work to develop office and residential customers in their markets. Utilizing the Company's national distribution network to emphasize its ability to serve customers throughout the country, the Company employs fourteen national account representatives who are responsible for customers with business in more than one district. CORT's sales representatives receive professional, business-to-business sales training through the Company's CORT University program, which was developed as part of the Company's continuing effort to increase rental revenue and improve customer service. Management believes that the program's emphasis on a problem solving, value-added approach to clients' needs enhances its relationships with customers and provides CORT with a competitive advantage in marketing to corporate customers. The Company markets its services through brochures, newspapers, periodicals, yellow pages, radio, television and direct response media and over the internet (http://www.cort1.com and http://www.relocationcentral.com). The Company designs its marketing program both to promote the business and to increase awareness of the advantages of renting in the residential and office furniture markets. Purchasing and Distribution The Company has a national product line chosen by its merchandising group. Each district manager, in consultation with his or her regional merchandising manager, selects from the national product line based on an analysis of customer demand within such manager's specific market. Each district then places purchase orders directly with the Company's vendors and shipment is arranged through the Company's freight analyst directly to the district warehouse. The Company acquires furniture from a large number of manufacturers and is not dependent on any particular manufacturer as a source of supply. In 1998, no furniture manufacturer accounted for more than 10% of the Company's furniture purchases. Management believes that the Company is able to purchase furniture at lower prices than its competitors due to the centralized selection of its product line and large volume of purchases. The Company is generally able to obtain prompt delivery of furniture from its suppliers and has not experienced significant interruptions in its business resulting from delays in acquiring furniture. -5- Merchandise is delivered to rental customers by Company employees via owned or leased trucks after a rental agreement has been signed. At the end of the lease term, rental furniture is returned to the Company's warehouses where it is inspected, cleaned and/or repaired in preparation for future rental or sale. If it is determined that the furniture is appropriate for sale rather than future rental, the furniture is then transferred to a clearance center. Company warehouses are typically located next to a clearance center, thereby allowing the Company to reduce shipping expenses and realize efficiency gains. Competition The "rent-to-rent" segment of the furniture rental industry is highly competitive. Management believes that Aaron Rents, Globe Business Resources and Brook Furniture Rental are the Company's most significant competitors. In addition, there are numerous smaller regional and local "rent-to-rent" furniture companies as well as retailers offering residential and office furniture. Management believes that the principal competitive factors in the furniture rental industry are product value, furniture condition, extent of furniture selection, terms of rental agreement, speed of delivery, exchange privilege, option to purchase, deposit requirements and customer service level. With respect to sales of furniture through its clearance centers, the Company competes with numerous used and new furniture retailers, some of which are larger than the Company and have greater financial resources. Management believes that price and value are the principal competitive factors in its furniture sales. Employees On December 31, 1998, the Company employed approximately 2,700 people, of whom approximately 106 were employed at corporate headquarters. Approximately 900 people were employed as salespersons, 1,500 people were employed in the warehouse and distribution portion of the business and the remainder in district and regional administrative positions. The Company's warehouse and delivery employees in Maryland (approximately 49 persons) are represented by an independent union under a contract which expires in December 1999. Additionally, 16 of the Company's warehouse and delivery employees in New York City are represented by the Local 840 of the International Brotherhood of Teamsters under a contract which expires in June 1999. The Company believes that its relationships with its employees are good. Trademarks and Name Recognition The Company engages in business primarily under the CORT Furniture Rental tradename, which has been used in the furniture rental business for over 20 years. The Company has established its reputation as a provider of quality furniture and customer service using this name. The Company feels that reputation and name recognition are important to customers. Therefore, following an acquisition in a new market, the Company may use a combination of the CORT and acquired business name to maintain customer recognition for a period of time. Regulatory Matters Compliance with Federal, state and local laws and regulations governing pollution and protection of the environ-ment is not expected to have any material effect upon the financial condition or results of operations of the Company. Subsequent Event On March 25, 1999 the Company entered into an Agreement and Plan of Merger among the Company, CBF Holding LLC, a Delaware limited liability company, and CBF Mergerco Inc., a Delaware corporation. Pursuant to the Merger Agreement, an investor group that includes Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS") and members of the Company's management team will acquire the Company for consideration of $24.00 per share in cash and $2.50 per share in liquidation value of a new series of preferred stock. Citicorp Venture Capital, Ltd. ("CVC") will retain a portion of its investment and thereby provide equity financing to the resulting corporation. The merger agreement requires approval by the holders of a majority of the Company's voting stock and, in addition, approval by the holders of a majority of the outstanding voting stock who are not affiliated with BRS, CVC or other members of the investor group. The merger is also subject to other conditions, including receipt of necessary financing, a limitation on the number of dissenting shareholders and certain regulatory approvals. The merger agreement will terminate if the investor group has not obtained customary commitment and highly confident letters to provide the required debt financing within thirty days after the date of the merger agreement. There can be no assurance that the merger will be completed, or that the merger will be completed as contemplated. -6- ITEM 2. Properties As of December 31, 1998, the Company carried out its rental, sales and warehouse operations through 277 facilities, of which 20 were owned and 257 were leased. The leased facilities have lease terms with expiration dates ranging from 1999 to 2014. Upon the expiration of its leases, the Company generally has been able to either extend its leases or obtain suitable alternative facilities on satisfactory terms. Management seeks to locate properties in new markets where rental, clearance and warehouse operations can be combined in one facility. As the Company expands in a particular district, the Company seeks to open free-standing showrooms and clearance centers that can be serviced from pre-existing warehouses. The Company's showrooms generally have 4,500 square feet of floor space. The Company regularly reviews the presentation and appearance of its furniture showrooms and clearance centers and periodically improves or refurbishes them to enhance their attractiveness to customers. The Company's decision to enter a new market is based upon its review of current demographic information, short-and long-term population and business growth projections and the level of existing competition. Once the decision is made to enter a new market, management selects individual showroom locations by reviewing demographic information, accessibility, visibility, customer traffic, location of competitors and cost. The metropolitan areas in which the Company operates, together with the number of showrooms in each metropolitan area, are set forth in the table below: District Locations Number of Showrooms - ----------------------------------------- ------------------- ALABAMA Birmingham 1 Huntsville 1 ARIZONA Phoenix 2 ARKANSAS Little Rock 1 CALIFORNIA Orange County 2 Los Angeles 6 Sacramento 1 San Diego 1 San Francisco 5 Santa Clara 2 COLORADO Denver 2 DISTRICT OF COLUMBIA (1) 7 FLORIDA Ft. Lauderdale 2 Jacksonville 1 Miami 2 Orlando 3 Pensacola 1 Tampa 2 GEORGIA Atlanta 6 ILLINOIS Chicago 4 INDIANA Indianapolis 3 KANSAS Kansas City 1 KENTUCKY Louisville 2 LOUISIANA Baton Rouge 2 New Orleans 1 MASSACHUSETTS Boston 3 MICHIGAN Ann Arbor 1 Detroit 4 Grand Rapids 1 Kalamazoo 1 Lansing 1 MINNESOTA Minneapolis 2 MISSOURI St. Louis 1 NEVADA Las Vegas 1 NEW JERSEY Kearny 3 NEW MEXICO Albuquerque 1 NEW YORK New York 1 NORTH CAROLINA Raleigh 2 Charlotte 2 -7- District Locations Number of Showrooms - ----------------------------------------- ------------------- OHIO Cincinnati 2 Cleveland 2 Columbus 1 OKLAHOMA Oklahoma City 1 Tulsa 1 OREGON Portland 1 PENNSYLVANIA Philadelphia(2) 4 Pittsburgh 1 TENNESSEE Memphis 1 Nashville 1 TEXAS Austin 1 Corpus Christi 1 Dallas 4 El Paso 1 Houston 4 San Antonio 2 UTAH Salt Lake City 1 VIRGINIA Richmond 1 Virginia Beach 1 WASHINGTON Seattle 3 --- TOTAL 119 - ---------- (1) Includes locations in Washington, D.C., Maryland and Virginia. (2) Includes locations in Pennsylvania, New Jersey and Delaware. The Company distributes its furniture using a fleet of approximately 352 leased and 47 company-owned delivery trucks. The trucks are usually rented for a period of five to six years under operating leases and typically display CORT's tradenames. ITEM 3. Legal Proceedings At December 31, 1998, the Company was involved in certain legal proceedings arising in the normal course of its business. The Company believes the outcome of these matters will not have a material adverse effect on the Company. ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 4a. Directors and Executive Officers of the Registrant The names of the executive officers and directors of CORT and their respective ages and positions with CORT are set forth in the following table. Directors are elected at the annual meeting of stockholders to serve until the next annual meeting and until their successors are elected and qualify.
Name Age Position - ---- --- -------- Paul N. Arnold (3) 52 President, Chief Executive Officer & Director Robert Baker 44 Group Vice President--CORT Instant Anthony J. Bellerdine 50 Senior Group Vice President Michael G. Connors 42 Vice President--Real Estate Charles M. Egan (3) 62 Chairman & Director Kenneth W. Hemm 44 Executive Vice President & Chief Operating Officer - Division II Steven D. Jobes 49 Executive Vice President & Chief Marketing Officer Lloyd Lenson 48 Executive Vice President & Chief Operating Officer - Division I Victoria L. Stiles 44 Vice President--Human Resources & Corporate Risk Management William Swets 44 Vice President--Business Development Maureen C. Thune 33 Vice President--Controller & Assistant Secretary Frances Ann Ziemniak 48 Executive Vice President, Chief Financial Officer & Secretary Keith E. Alessi (2) 44 Director Bruce C. Bruckmann (1)(2) 45 Director Michael A. Delaney(1) 44 Director Gregory B. Maffei(2) 38 Director James A. Urry (1) 45 Director
- ---------- (1) Member of Compensation Committee (2) Member of Audit Committee (3) Member of Directors Stock Option Committee -8- PAUL N. ARNOLD, President, Chief Executive Officer and Director. Mr. Arnold has been with CORT and Mohasco Corporation, its former parent, for 30 years and has held group management positions within CORT since 1976. He has held his current position since July 1992. He is also a Director of Town Sports International, Inc. ROBERT BAKER, Group Vice President--CORT/Instant. Mr. Baker joined the Company in August 1998 with the acquisition of certain assets of Instant Interiors Corporation. Mr. Baker was the co-founder and Chairman of Instant Interiors Corporation from 1978 until the acquisition. ANTHONY J. BELLERDINE, Senior Group Vice President. Mr. Bellerdine has been with CORT since July 1991. He was appointed to Senior Group Vice President in January 1999, having served as Group Vice President, Area Vice President and Senior District Manager. Prior to joining CORT, Mr. Bellerdine was Senior Vice President of Sales and Marketing of Stern Office Furniture for eight years. MICHAEL G. CONNORS, Vice President--Real Estate. Mr. Connors joined CORT in February 1986, after nearly eight years in Real Estate and Marketing with Mobil Oil Corporation and has served in his current position since March 1991. CHARLES M. EGAN, Chairman and Director. Mr. Egan has been with CORT since the acquisition of General Furniture Leasing Company in September 1993. Mr. Egan joined General Furniture Leasing Company in 1989 and became its President and Chief Executive Officer in 1992. From 1985 to 1989, Mr. Egan was Executive Vice President of Mohasco Corporation. Mr. Egan was President of CORT from 1980 to 1985. KENNETH W. HEMM, Executive Vice President & Chief Operating Officer--Division II. Mr. Hemm has been with CORT for 17 years. He was appointed Executive Vice President and Chief Operating Officer in January 1999, having served as Group Vice President, Group Manager and District Manager. STEVEN D. JOBES, Executive Vice President & Chief Marketing Officer. Mr. Jobes has been with CORT for 27 years and served as Group Vice President and Vice President-Marketing, Merchandising, Sales and National Accounts prior to assuming his current position in January 1999. LLOYD LENSON, Executive Vice President & Chief Operating Officer--Division I. Mr. Lenson has been with CORT for 20 years serving in his current position since January 1999. He previously served as Group Vice President and as Vice President--Marketing, Sales and Acquisitions. VICTORIA L. STILES, Vice President--Human Resources and Corporate Risk Management. Ms. Stiles joined CORT in November 1987, after nearly eight years in Personnel for the Hecht Company, a division of the May Company. She was appointed to Vice President in July 1996, having served as Director of Human Resources and Regional Manager of Human Resources. WILLIAM SWETS, Vice President--Business Development. Mr. Swets joined the Company in August 1998 with the acquisition of certain assets of Instant Interiors Corporation. Mr. Swets was the co-founder and President of Instant Interiors Corporation from 1978 until the acquisition. MAUREEN C. THUNE, Vice President--Corporate Controller and Assistant Secretary. Ms. Thune joined CORT in August 1992 after five years with KPMG Peat Marwick LLP, having most recently served as a Manager. -9- FRANCES ANN ZIEMNIAK, Executive Vice President, Chief Financial Officer and Secretary. Ms. Ziemniak has been with CORT since March 1995. She was appointed to her current position in January 1999 having served as Vice President-Finance and Chief Financial Officer. Prior to joining CORT, Ms. Ziemniak was an independent consultant focusing on risk-management and retail acquisition analysis from 1992 to 1995. Ms. Ziemniak was previously Vice President, Finance and Chief Financial Officer for Federated Merchandising, a division of Federated Department Stores, Inc. from 1987 to 1992 and Corporate Vice President, Financial Services for The GAP, Inc. from 1982 to 1987. Before Ms. Ziemniak joined The GAP, Inc. in 1979, she was employed by Ernst & Young LLP. KEITH E. ALESSI, Director. Mr. Alessi is currently President, Chief Executive Officer and Chairman of the Board of Directors of Telespectrum Worldwide, Inc. Mr. Alessi was President and Chief Executive Officer of Jackson Hewitt Inc. from June 1996 through March 1998. He was Vice Chairman and Chief Financial Officer of Farm Fresh, Inc. (which filed voluntary bankruptcy as part of a sale of the company in January 1998 and emerged from bankruptcy in February 1998) from June 1994 through June 1996. He had previously served in various executive capacities, including President, with Farm Fresh from 1988 to 1992. Mr. Alessi was Chairman and Chief Executive Officer of Virginia Supermarkets, Inc., from 1992 to 1994. He is also a Director of Town Sports International, Inc. BRUCE C. BRUCKMANN, Director. Mr. Bruckmann is currently Managing Director of Bruckmann, Rosser, Sherrill & Co., Inc. Mr. Bruckmann was a Vice President of Citicorp Venture Capital Ltd., which is an affiliate of the Company, through 1993 and a Managing Director from 1993 through 1994. He is also a Director of AmeriSource Health Corporation, Anvil Knitwear, Inc., Chromcraft-Revington, Inc., Jitney-Jungle Stores of America, Inc., MEDIQ, Incorporated, Mohawk Industries, Inc., Penhall International, Inc. and Town Sports International, Inc. MICHAEL A. DELANEY, Director. Mr. Delaney is currently a Managing Director of Citicorp Venture Capital Ltd., which is an affiliate of the Company. From 1989 through 1997, he was a Vice President of Citicorp Venture Capital Ltd. and from 1986 through 1989 he was Vice President of Citicorp Mergers and Acquisitions. Mr. Delaney is also a Director of Allied Digital Technologies Corporation, Aetna Industries, Inc., AmeriSource Health Corporation, CLARK Material Handling Corporation, Delco Remy International, Inc., Enterprise Media Inc., FabriSteel, Inc., Great Lakes Dredge & Dock Corporation, GVC Holdings, IKS Corporation, JAC Holdings, MSX International, Inc., Palomar Technologies, Inc., SC Processing, Inc., and Triumph Group, Inc. GREGORY B. MAFFEI, Director. Mr. Maffei is the Chief Financial Officer of Microsoft Corporation. He joined Microsoft in April 1993, served as Treasurer from 1994 to 1996 and Vice President, Corporate Development from 1996 to 1997, and was promoted to Chief Financial Officer in July 1997. Mr. Maffei is also a Director of Ragen MacKenzie Group Inc., Skytel Communications, Inc. and Starbucks Corporation. JAMES A. URRY, Director. Mr. Urry has been with Citibank, N.A. since 1981 serving as a Vice President since 1986. He has been a Vice President of Citicorp Venture Capital Ltd., which is an affiliate of the Company, since 1989. He is also a Director of Airxcel, Inc., AmeriSource Health Corporation, Brunner Mond Holdings, CLARK Material Handling Corporation, Hancor Holding Corporation, IKS Corporation, Palomar Products Inc., and York International Corporation. -10- PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required for this item is incorporated by reference to page 28 of the Company's 1998 Annual Report to Stockholders. ITEM 6. Selected Financial Data The information required for this item is incorporated by reference to page 10 of the Company's 1998 Annual Report to Stockholders. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required for this item is incorporated by reference to pages 11 through 14 of the Company's 1998 Annual Report to Stockholders. In addition to historic information, this Annual Report on Form 10-K includes certain forward-looking statements as such term is defined in Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements involve certain risks and uncertainties, including but limited to acquisitions, additional financing requirements, development of new products and services, the effect of competitive products and pricing and the effect of general economic conditions, that could cause actual results to differ materially from those in such forward-looking statements. ITEM 8. Financial Statements and Supplementary Data The consolidated balance sheets of CORT Business Services Corporation and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998 are incorporated by reference to pages 15 through 27 of the Company's 1998 Annual Report to Stockholders. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures No response to this Item is required. -11- PART III ITEM 10. Directors and Executive Officers of the Registrant The information required by Item 401 of Regulation S-K is included in Part I, Item 4a. Directors and Executive Officers of the Registrant. Compliance With Section 16(a) of the Securities Exchange Act of 1934 Based solely on review of the copies of the forms furnished to the Company, or written representations that no form was required to be filed, the Company believes that during the fiscal year ended December 31, 1998, all Section 16(a) filing requirements applicable to its officers, directors and beneficial owners of more than ten percent of the Company's Common Stock were satisfied. ITEM 11. Executive Compensation The following table sets forth, for the fiscal years ended December 31, 1996, 1997, and 1998, certain information regarding the cash compensation paid by the Company, as well as certain other compensation paid or accrued for those years, to each of the five most highly compensated executive officers of the Company, in all capacities in which they served: Summary Compensation Table
Long-Term Compensation ------------ Annual Compensation Securities -------------------------- Other Annual Underlying All Other Name and Principal Position Year Salary Bonus(1) Compensation(2) Options Compensation(3) - --------------------------- ---- -------- -------- --------------- ------------ --------------- Paul N. Arnold 1998 $248,125 $ 74,631 -- 83,000 $10,577 President & Chief 1997 233,750 233,750 -- 4,500 11,754 Executive Officer 1996 223,750 190,188 -- 2,850 11,781 Kenneth W. Hemm 1998 148,633 34,857 -- 31,000 23,935 Executive Vice President 1997 142,625 100,716 -- 3,500 23,939 & Chief Operating Officer 1996 132,764 91,363 -- 2,850 24,161 --Division II Steven D. Jobes 1998 130,665 33,248 -- 31,000 -- Executive Vice President 1997 125,140 87,723 -- 3,500 -- & Chief Marketing Officer 1996 119,287 82,427 -- 2,850 -- Lloyd Lenson Executive Vice President 1998 142,400 32,500 -- 31,000 5,994 & Chief Operating Officer 1997 136,125 69,301 -- 3,500 5,504 --Division I 1996 129,988 74,964 -- 2,850 5,193 Frances Ann Ziemniak 1998 131,286 33,406 -- 25,500 19,667 Executive Vice President, 1997 125,268 87,813 -- 3,500 18,216 Chief Financial Officer & 1996 120,400 83,196 $132,153 2,850 15,916 Secretary
- ---------- (1) The amounts shown consist of cash bonuses earned in the fiscal year identified but paid in subsequent fiscal years. (2) In 1996, the Company made payments to reimburse moving expenses ($74,820) and to cover applicable taxes on reimbursed moving expenses ($57,333). (3) The Company maintains an investment and profit-sharing defined contribution retirement plan. All of the Company's employees are eligible to participate after one year of service. The Company makes a matching contribution as a percentage of the employee contributions. The Company may, at its discretion, make additional contributions based on the Company's performance. The amounts shown include both the matching contribution and the Company's discretionary payment on behalf of the named executives in which all of the above, except Ms. Ziemniak, are fully vested. In addition, the amounts shown include the amounts allocated to certain management employees in the defined contribution portion of the CORT Furniture Rental Supplemental Executive Retirement Plan. The Company contributes a fixed dollar amount per plan member with the total contribution allocated among all plan members on the basis of their age and years of service. -12- Stock Options Options Granted The following table sets forth information regarding stock options granted under the 1995 Stock-Based Incentive Compensation Plan (the "1995 Plan") during the fiscal year 1998 to the named executive officers of the Company: Option Grants in 1998
Individual Grants Potential Realizable ---------------------------------------------- Value at Assumed Number of Annual Rates of Stock Securities Percent of Total Price Appreciation Underlying Options Granted for Option Term(2) Options to Employees in Exercise Price Expiration ----------------------- Name Granted(1) Fiscal Year (per share) Date 5% 10% - -------------------- ---------- ---------------- -------------- ---------- ---------- ---------- Paul N. Arnold 75,000 18.3% $40.375 04/24/08 $1,904,372 $4,826,051 8,000 2.0 39.4375 05/12/08 198,416 502,826 Kenneth W. Hemm 25,000 6.1 $40.375 04/24/08 634,791 1,608,684 6,000 1.5 39.4375 05/12/08 148,812 377,119 Steven D. Jobes 25,000 6.1 $40.375 04/24/08 634,791 1,608,684 6,000 1.5 39.4375 05/12/08 148,812 377,119 Lloyd Lenson 25,000 6.1 $40.375 04/24/08 634,791 1,608,684 6,000 1.5 39.4375 05/12/08 148,812 377,119 Frances Ann Ziemniak 20,000 4.9 $40.375 04/24/08 507,832 1,286,947 5,500 1.3 39.4375 05/12/08 136,411 345,693
- ---------- (1) Options under the 1995 Plan are exercisable when vested. (2) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10%, compounded annually from the date the respective options were granted to their expiration date and are not presented to forecast possible future appreciation, if any, in the Common Stock. The potential realizable values shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the options or the sale of the underlying shares. The actual realizable values, if any, on the stock option exercises will depend on the future performance of the Common Stock, the optionee's continued employment through applicable vesting periods and the date on which the options are exercised. -13- The following table sets forth information regarding 1998 year-end option values for the named executive officers of the Company: Aggregated Options Exercised in 1998 and 1998 Year-End Option Values
Number of Securities Value of Unexercised Shares Underlying Unexercised In-the-Money Options Acquired Options at Fiscal Year End at Fiscal Year End on Value -------------------------- -------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - -------------------- -------- -------- ----------- ------------- ----------- ------------- Paul N. Arnold -- -- 177,856 86,950 $2,865,200 $3,325 Kenneth W. Hemm -- -- 61,850 34,283 981,033 3,325 Steven D. Jobes -- -- 72,279 34,283 1,313,326 3,325 Lloyd Lenson -- -- 71,574 34,283 1,289,656 3,325 Frances Ann Ziemniak -- -- 46,497 28,783 687,807 3,325
Supplemental Executive Retirement Plan The CORT Furniture Rental Supplemental Executive Retirement Plan (the "SERP Plan") provides a supplement to the retirement benefits that certain key management employees will receive from the Retirement Plan for Salaried and Sales Employees of Mohasco Corporation (the "Mohasco Plan") and the CORT Furniture Rental Investment Savings and Profit Sharing Retirement Plan (the "401(k) Plan"). The SERP Plan consists of a defined benefit plan and a defined contribution plan. Certain key management employees of the Company with at least five years of service (employment) had been selected by the Board of Directors as participants in the defined benefit portion of the SERP Plan. Such officers include Messrs. Arnold, Lenson and Jobes. The defined SERP Plan benefits are a function of service with the Company and Final Average Compensation (average monthly compensation during the 36 consecutive months out of the last 60 months of the participant's employment that produce the highest average). Compensation includes salary, bonuses and 401(k) Plan salary deferrals. Benefits are equal to a targeted percentage as determined by the Board of Directors upon selection of the employee to participate in the SERP Plan--(55% in the case of Mr. Arnold and 50% in the case of Mr. Jobes and Mr. Lenson) of the Final Average Compensation as of the date of the participant's retirement or termination of employment multiplied by the ratio of the participant's actual years of service as of the applicable event to the participant's years of service projected to the participant's Normal Retirement Date (first day of the month after the date the participant attains age 65). The benefits are reduced by (i) the annuity value of Company contributions made on behalf of the participant to the 401(k) Plan and (ii) the annuity benefit, on a single life basis only, payable to the participant under the Mohasco Plan. The estimated annual benefits payable upon retirement, expressed as a straight life annuity, before reduction for the 401(k) Plan or the Mohasco Plan, are as follows: TARGETED PERCENTAGE: 55% Years of Service ---------------------------------------------------- Remuneration 15 20 25 30 35 ------------ -------- -------- -------- -------- -------- $125,000 $ 65,528 $ 65,528 $ 65,528 $ 65,528 $ 65,528 150,000 78,634 78,634 78,634 78,634 78,634 175,000 91,739 91,739 91,739 91,739 91,739 200,000 104,845 104,845 104,845 104,845 104,845 225,000 117,951 117,951 117,951 117,951 117,951 250,000 131,056 131,056 131,056 131,056 131,056 300,000 157,268 157,268 157,268 157,268 157,268 400,000 209,690 209,690 209,690 209,690 209,690 450,000 235,901 235,901 235,901 235,901 235,901 500,000 262,113 262,113 262,113 262,113 262,113 -14- TARGETED PERCENTAGE: 50% Years of Service ---------------------------------------------------- Remuneration 15 20 25 30 35 ------------ -------- -------- -------- -------- -------- $125,000 $ 59,571 $ 59,571 $ 59,571 $ 59,571 $ 59,571 150,000 71,485 71,485 71,485 71,485 71,485 175,000 83,399 83,399 83,399 83,399 83,399 200,000 95,314 95,314 95,314 95,314 95,314 225,000 107,228 107,228 107,228 107,228 107,228 250,000 119,142 119,142 119,142 119,142 119,142 300,000 142,971 142,971 142,971 142,971 142,971 400,000 190,627 190,627 190,627 190,627 190,627 450,000 214,456 214,456 214,456 214,456 214,456 500,000 238,284 238,284 238,284 238,284 238,284 As of December 31, 1998, Mr. Arnold was credited with 30 years of service, Mr. Jobes with 27 years of service and Mr. Lenson with 20 years of service. Other key management employees have been selected by the Board of Directors as participants in the defined contribution portion of the SERP Plan. Such officers include Mr. Hemm and Ms. Ziemniak. Defined contribution benefits are equal to the balance in an executive's SERP Account (the annual contribution credited to such executive's account, adjusted to reflect gains, losses or forfeitures incurred), as of the last day of the month in which the executive is employed. A participant in either the defined benefit or defined contribution portion of the SERP Plan whose employment with the Company is terminated without Cause (i.e., other than as a result of willful gross misconduct materially or demonstrably injurious to the Company or willful refusal to perform substantially the duties reasonably assigned to him/her) or who has a substantial reduction in duties and responsibilities or in compensation will vest immediately in his/her SERP Plan benefit. In addition, such a participant (other than the Chief Executive Officer) will be entitled to receive a lump sum payment equal to the amount of compensation he/she received during the final six or 12 months based on length of service (12 months in the case of Messrs. Arnold, Hemm, Jobes and Lenson and six months in the case of Ms. Ziemniak) prior to such event. The Chief Executive Officer is entitled to a severance payment of twice this amount. Amounts paid by the Company under any employment agreement or other severance arrangement will reduce the severance payment under the SERP Plan. In addition, the Company and Mr. Arnold have agreed that one-half of such severance payment will be paid in a lump sum and the remaining half will be paid in eighteen equal monthly installments commencing one month after the date of his termination. Each participant in the SERP Plan has agreed not to compete with the Company for a period of 18 months following the termination of his/her employment with the Company unless such participant's employment was terminated without Cause. Director's Compensation Directors who are not employees of the Company or CVC receive a monthly payment of $1,000, $500 for attendance at each meeting of the Board of Directors and $500 for attendance at each meeting of a committee of the Board of Directors and are reimbursed for expenses incurred in connection with attendance at meetings of the Board of Directors or committees thereof. In addition, directors not employed by the Company are entitled to receive options for Common Stock pursuant to the 1997 Directors Stock Option Plan (the "Directors Plan"). The Company adopted the Directors Plan, which provides for the granting of stock options on a non-discretionary basis to non-employee directors of the Company. An aggregate of 50,000 shares of Common Stock have been reserved for issuance under the Directors Plan. The Directors Plan provides for automatic grants of options to purchase 2,000 shares of Common Stock to each of the Company's non-employee directors on the business day immediately following the Company's annual meeting of stockholders in calendar years 1997, 1998, 1999, 2000 and 2001, which options will become exercisable over a three-year period. The option exercise price is equal to 100% of the fair market value of the Common Stock on the date of grant of the option. Options granted to directors under the Directors Plan will be treated as nonstatutory stock options under the Internal Revenue Code, as amended. The Company granted 10,000 options in 1998 pursuant to the terms of the Directors Plan. -15- Change of Control Agreements CORT has entered into change of control agreements with several executive officers. These agreements terminate one year from March 25, 1999, the date on which they were entered. Under the agreement with Chief Executive Officer Paul Arnold, in the event of a change of control (as defined in the agreement) of CORT, Mr. Arnold will receive a cash payment within three days after the change of control in the amount of $1,200,000. In addition to the payment, if Mr. Arnold is terminated by the Company within one year of a change of control other than for cause or by Mr. Arnold for "good reason," as these terms are defined in the agreement, Mr. Arnold is entitled to a continuation of certain welfare benefits for three years after his termination at the same cost and coverage level as in effect on his date of termination. Other executives are entitled to payments in amounts of either $150,000 or $400,000 in the event they are terminated by the Company within one year of a change of control other than for cause or by them for "good reason." These executives also would receive welfare benefits for three years after their termination at the same cost and coverage level as in effect on their dates of termination. In addition, pursuant to a Change of Control Bonus Plan, certain management employees are eligible for payments if they are terminated within one year of a change of control by the Company other than for cause or by the management employee for "good reason," as defined in the plan. The Compensation Committee, in its sole discretion, shall determine the amount of the payment, if any, payable to each management employee on or before the date of a change of control. The aggregate amount of all payments under the plan shall not exceed $400,000. The Agreement and Plan of Merger discussed in Item 1 will not result in a change of control under the change of control agreements or the plan. Compensation Committee Interlocks and Insider Participation The Compensation Committee reviews and approves salary and other compensation of officers and administers certain benefit plans. The Compensation Committee also has the authority to administer, grant and award stock options under the Corporation's stock option plans. Current members of the Committee are Messrs. Urry, Chairman; Bruckmann, and Delaney. Report of the Compensation Committee of the Board of Directors on Executive Compensation Role of Committee. The Compensation Committee of the Board of Directors (the "Committee") establishes, oversees and directs the Company's executive compensation programs and policies and administers the Company's stock option plans. The Committee seeks to align executive compensation with Company objectives and strategies, management programs, business financial performance and enhanced stockholder value. The Committee consists of independent outside directors, none of whom is or was an officer or employee of the Company or CFR. The Committee's objectives include (i) attracting and retaining exceptional individuals as executive officers and (ii) providing key executives with motivation to perform to the full extent of their abilities in an effort to maximize Company performance to deliver enhanced value to the Company's stockholders. The Committee believes it is important to place a greater percentage of executive officers' compensation at risk, as compared to non-executives, by tying compensation directly to the performance of the business and value of the Common Stock. Executive compensation generally consists of (i) a base salary, (ii) a cash bonus opportunity that is linked to the performance of the Company and (iii) long-term equity-based compensation. Compensation. The annual salaries and bonuses of the Company's executive officers are set at levels designed to attract and retain exceptional individuals by rewarding them for individual and Company achievements. The Committee reviews the annual salary and bonus of each executive officer in relation to such officer's performance and previous compensation and general market and industry conditions or trends and makes appropriate adjustments. The Committee reviews each executive officer's salary annually to determine if it is appropriate to adjust such salary based on various factors including each executive officer's past performance and expected future contributions, the scope and nature of responsibilities, including changes in such responsibilities, and competitive compensation data relating to each executive officer. -16- The Committee believes that a portion of the executives' compensation should be tied to the financial results of the Company in order to reward individual performance and overall Company success. Each year, objective targets are established for each officer. Such targets include the Company's financial targets, such as revenue, earnings and return on assets, as well as individual strategic and operating targets. Additionally, a portion of each officer's bonus is based on subjective criteria particular to each officer's individual operating responsibilities. In 1998, the Company and the executive officers exceeded certain goals established by the Committee. Accordingly, Messrs. Arnold, Hemm, Jobes and Lenson and Ms. Ziemniak earned a portion of their bonuses which was attributable to their respective targets and objectives. The Company has employee stock option plans in order to offer key employees the opportunity to acquire an equity interest in the Company, thereby aligning the interests of these employees more closely with the long-term interests of stockholders. Awards under these employee stock option plans may be in the form of options, deferred stock, restricted stock or stock appreciation rights. In 1998, the Company granted standard stock options and performance-accelerated stock options to the Company's executive officers. All such options have an exercise price equal to the market value of the Common Stock on the date of grant. The standard stock options vest over a three-year period. The performance-accelerated options vest seven years from the date of grant; however, the vesting of the performance-accelerated options can be accelerated upon achievement of specified goals relating to the Common Stock price. 1998 Chief Executive Officer Compensation. The Committee determined the 1998 compensation of Mr. Arnold, President and Chief Executive Officer, in accordance with the above discussion. In addition, the Committee based Mr. Arnold's bonus on his overall leadership and management of the Company. Deductibility of Compensation. Section 162(m) of the Internal Revenue Code imposes a $1 million limit on the deductibility of compensation paid to executive officers of public companies. The Committee believes that all of the compensation awarded to the Company's executive officers will be fully deductible in accordance with this limit. COMPENSATION COMMITTEE James A. Urry, Chairman Bruce C. Bruckmann Michael A. Delaney -17- Stockholder Return Performance Graph The following graph compares the percentage change in cumulative total stockholder return on the Company's Common Stock against the cumulative total return of the Standard & Poor's 500 Index and the Dow Jones Other Industrial and Commercial Services Index from the initial public offering price on November 17, 1995 to December 31, 1998. Cumulative total return to stockholders is measured by dividing (x) the sum of (i) total dividends for the period (assuming dividend reinvestment) plus (ii) per-share price change for the period by (y) the share price at the beginning of the period. The graph is based on an investment of $100 at the initial public offering price on November 17, 1995 in the Common Stock and in each index. COMPARISON OF 37 MONTH CUMULATIVE TOTAL RETURN* AMONG CORT BUSINESS SERVICES CORPORATION, THE S & P 500 INDEX AND THE DOW JONES OTHER INDUSTRIAL & COMMERCIAL SERVICES INDEX [GRAPHIC OMITTED] -18- ITEM 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information with respect to beneficial ownership of Common Stock as of April 15, 1999 by (i) each of the Company's directors and certain of its executive officers, (ii) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock and (iii) by all of the Company's directors and executive officers as a group. The Company owns all of the issued and outstanding capital stock of CORT Furniture Rental Corporation (CFR). Common Stock(1) -------------------------------------- Number of Shares Percentage of Class ---------------- ------------------- Directors: Paul N. Arnold ....................... 209,429(2) 1.6% Bruce C. Bruckmann ................... 182,506(2) 1.4% Keith E. Alessi ...................... 51,660(2) * Gregory B. Maffei .................... 42,526(2) * Charles M. Egan ...................... 31,382(2) * James A. Urry ........................ 13,934(2) * Michael A. Delaney ................... 10,501(2) * Certain Executive Officers: Lloyd Lenson ......................... 122,987(2) * Kenneth W. Hemm ...................... 88,916(2) * Steven D. Jobes ...................... 78,796(2) * Frances Ann Ziemniak ................. 71,475(2) * Five Percent Stockholders:(3) Citicorp Venture Capital, Ltd.(4) .... 5,778,518 44.1% 399 Park Avenue, 14th Floor New York, New York 10043 T. Rowe Price Associates, Inc.(5) .... 100 E. Pratt Street 1,366,400 10.4% Baltimore, MD 21202 All Directors and Executive Officers as a group (17 persons) .............. 983,610(2) 7.2% - ---------- * Less than 1%. (1) The Company has two authorized classes of common stock: Common Stock (voting) and Class B Common Stock (nonvoting). There are 4,350,411 shares of the Company's Class B Common Stock issued and outstanding (see note 4). (2) Includes shares under option which are exercisable or will become exercisable within 60 days of April 15, 1999 of 182,023; 8,001; 3,667; 9,001; 16,068; 8,001; 8,001; 74,741; 65,017; 75,446; 49,498 for Messrs. Arnold, Bruckman, Alessi, Maffei, Egan, Urry, Delaney, Lenson, Hemm, Jobes and Ms. Ziemniak, respectively, and 572,044 in total for all Directors and Executive Officers as a group. (3) The Board of Directors and Management are not aware of any other person or entity who holds beneficially more than 5% of the outstanding Common Stock of the Corporation. (4) Includes 4,350,411 shares of Class B Common Stock, which is convertible into Common Stock. (5) These securities are owned by various individual and institutional investors including T. Rowe Price Small Cap Value Fund, Inc. (which owns 670,000 shares, representing 5.1% of the shares outstanding), which T. Rowe Price Associates, Inc. ("Price Associates") serves as an investment adviser with power to direct investments and/or sole power to vote the securities. For the purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. Changes in Control The information required by Item 403 of Regulation S-K is included in Part I, Item 1 Business - Subsequent Event. ITEM 13. Certain Relationships and Related Transactions None. -19- PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) and (d) Financial Statements and Schedules (see Index on Page F-1) (b) Reports on Form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this report. (c) Exhibits (see Index on Page E-1) -20- CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORT BUSINESS SERVICES CORPORATION By: /s/ Frances Ann Ziemniak ----------------------------------- Frances Ann Ziemniak (Principal financial officer) By: /s/ Maureen C. Thune ----------------------------------- Maureen C. Thune (Principal accounting officer) Date: April 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- /s/ Paul N. Arnold President, Chief Executive Officer April 29, 1999 - ------------------------- (principal executive officer) and Paul N. Arnold Director /s/ Charles M. Egan Chairman and Director April 29, 1999 - ------------------------- Charles M. Egan /s/ Frances Ann Ziemniak Executive Vice President, Chief April 29, 1999 - ------------------------- Financial Officer and Secretary Frances Ann Ziemniak /s/ Keith E. Alessi Director April 29, 1999 - ------------------------- Keith E. Alessi /s/ Bruce C. Bruckmann Director April 29, 1999 - ------------------------- Bruce C. Bruckmann /s/ Michael A. Delaney Director April 29, 1999 - ------------------------- Michael A. Delaney /s/ Gregory B. Maffei Director April 29, 1999 - ------------------------- Gregory B. Maffei /s/ James A. Urry Director April 29, 1999 - ------------------------- James A. Urry -21- INDEX TO FINANCIAL STATEMENTS Page ---- Financial Statements ...................................................... 13 Financial Statement Schedules: Schedule I - Condensed Financial Information of Registrant ................ S-1 Schedule II - Valuation and Qualifying Accounts ........................... S-3 F-1 Exhibit Number Description Page - ------- -------------------------------------------------------------- ---- 2.1 Agreement and Plan of Merger, dated as of March 25, 1999, among the Company, CBF Holding LLC and CBF Mergerco, Inc.; incorporated by reference to Exhibit 2.1 the Company's Form 8-K, filed on March 29, 1999. 3.1 Restated Certificate of Incorporation of the Company; incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1, No. 33-97568 filed on November 13, 1995 3.2 Amendment to Restated Certificate of Incorporation; incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A, filed as of March 31, 1997 3.3 By-laws of the Company; incorporated by reference to Exhibit 3.2 to Amendment No. 3 to the Company's Registration Statement on Form S-1, No. 33-97568 filed on November 13, 1995 10.1 Credit Agreement dated as of February 13, 1998 by and among CFR, the Company, the lenders identified therein, and NationsBank, N.A., as agent; incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 10.2 Stock Option, Securities Purchase and Stockholders Agreement, dated as of January 18, 1994, by and among the Company, CFR, Citicorp Venture Capital Ltd. and certain investors named therein; incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-8, No. 33-72724, filed on December 9, 1993 10.3 Amendment 1 to New Cort Holdings Corporation and Subsidiary Employee Stock Option and Stock Purchase Plan as adopted by the Board of Directors of the Company on December 21, 1993; incorporated by reference to Exhibit 10.11 to CFR's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 10.4 New Cort Holdings Corporation and Subsidiary Employee Stock Option and Stock Purchase Plan (1995 Plan Distribution) as adopted by the Board of Directors of the Company on December 16, 1994; incorporated by reference to Exhibit 10.13 to CFR's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995 10.5 Form of First Amendment to Stockholders Agreement, dated as of November 13, 1995, by and among the Company, Citicorp Venture Capital Ltd., and certain investors named therein; incorporated by reference to Exhibit 10.5 to Amendment No. 3 to the Company's Registration Statement on Form S-1, No. 33-97568 filed on November 13, 1995 10.6 Registration Rights Agreement for Common Stock, dated as of January 18, 1994, by and among the Company, Citicorp Venture Capital Ltd. and certain investors named therein; incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994 E-1 Exhibit Number Description Page - ------- -------------------------------------------------------------- ---- 10.7 CFR's Supplemental Executive Retirement Plan, dated October 28, 1992, as revised effective January 1, 1993, restated through the Second Amendment; incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 10.8 Agreement for Irrevocable Trust Under CORT Furniture Rental Supplemental Executive Retirement Plan, dated June 1, 1996, between CFR and Mentor Trust Company; incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 10.9 Letter Agreement, dated July 24, 1992, between CFR and Paul N. Arnold; incorporated by reference to Exhibit 10.16 to CFR's Registration Statement on Form S-1, No. 33-65094, filed on June 25, 1993 10.10 Letter Agreement, dated August 18, 1993, between CFR and Paul N. Arnold; incorporated by reference to Exhibit 10.26 to Amendment No. 5 to the Company's Registration Statement on Form S-1, No. 33-65094, filed on August 25, 1993 10.11 Employment Agreement, dated September 1, 1994, between CFR and Charles M. Egan; incorporated by reference to Exhibit 10.10 to CFR's Annual Report on Form 10-K for the year ended December 31, 1994 10.12 Amended and Restated CORT Business Services Corporation 1995 Directors Stock Option Plan adopted by the Board of Directors October 18, 1995 and amended and restated on May 14, 1997; incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 10.13 Equity Share Agreement, between CFR and Lloyd and Eileen S. Lenson, dated April 20, 1994; incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, No. 33-97568 filed on September 29, 1995 10.16 Amended and Restated CORT Business Services Corporation 1995 Stock Based Incentive Compensation Plan as adopted by the Board of Directors on July 25, 1995 and amended and restated on May 14, 1997; incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 10.17 CORT Business Services Corporation 1997 Directors Stock Option Plan, as adopted by the stockholders of the Company at the Annual Meeting of Stockholders on May 14, 1997; incorporated by reference to Appendix C to the Company's Definitive Proxy Statement on Schedule 14A, filed as of March 31, 1997 11.1 Statement re computation of per share earnings; incorporated by reference to page 25 of the Company's 1998 Annual Report to stockholders 13.1 Portions of the Annual Report of the Company for the fiscal year ended December 31, 1998 which are expressly incorporated by reference herein 21.1 List of Subsidiaries 23.1 Consent of KPMG LLP 27 Financial Data Schedules E-2 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in thousands) Condensed Balance Sheets: As of December 31, ----------------------- 1997 1998 -------- -------- Investment in CORT Furniture Rental .............. $149,332 $175,662 Other assets ..................................... -- -- -------- -------- Total assets ................................. 149,332 175,662 ======== ======== Accrued expenses ................................. -- -- Long-term debt ................................... -- -- -------- -------- Total liabilities ............................ -- -- Stockholders' equity ............................. 149,332 175,662 -------- -------- Total liabilities and equity ................. $149,332 $175,662 ======== ======== Condensed Statements of Operations: Year Ended December 31, ------------------------------- 1996 1997 1998 ------- ------- ------- Equity in earnings of CORT Furniture Rental .................................. $15,936 $22,326 $23,395 Interest expense ........................... -- -- -- ------- ------- ------- Income before income taxes ............. 15,936 22,326 23,395 Income tax benefit ......................... -- -- -- ------- ------- ------- Net income ............................. $15,936 $22,326 $23,395 ======= ======= ======= S-1 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) (in thousands)
Condensed Statements of Cash Flows: Year Ended December 31, -------------------------------- 1996 1997 1998 -------- -------- -------- Net income ....................................... $ 15,936 $ 22,326 $ 23,395 Adjustments to reconcile net income to cash flows from operating activities: Equity in earnings of CORT Furniture Rental .. (15,936) (22,326) (23,395) Discount on junior subordinated debentures ... -- -- -- Interest converted to long-term debt ......... -- -- -- Changes in assets and liabilities, net ....... -- -- -- -------- -------- -------- Cash used in operating activities ....... -- -- -- -------- -------- -------- Cash flows from investing activities: Investment in CORT Furniture Rental .......... (33,224) (677) (826) -------- -------- -------- Cash used in investing activities ....... (33,224) (677) (826) -------- -------- -------- Cash flows from financing activities: Issuance of common stock ..................... 33,224 677 826 Net proceeds from issuance of long-term debt . -- -- -- -------- -------- -------- Cash provided by financing activities ... 33,224 677 826 -------- -------- -------- Net increase in cash and cash equivalents ........ -- -- -- Cash and cash equivalents at beginning of period . -- -- -- -------- -------- -------- Cash and cash equivalents at end of period ....... $ -- $ -- $ -- ======== ======== ======== Supplemental disclosures of cash flow information: Tax benefit from exercise of stock options ... 571 1,177 2,109
Note to Condensed Financial Statements of Registrant: Basis of Presentation - --------------------- The accompanying condensed financial statements represent the accounts of CORT Business Services Corporation on a stand-alone basis. Substantially all footnote disclosures are omitted. Reference is made to the audited consolidated financial statements and footnotes of CORT Business Services Corporation and subsidiary as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, which appear in the Company's 1998 Annual Report to stockholders. S-2 CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Deductions Additions ------------- ----------------------- Write off of Allowance for Beginning Charged to Uncollectible Ending Doubtful Accounts Balance Expense Other(1) Accounts Balance - ----------------- --------- ---------- -------- ------------- ------- December 31, 1996 938 1,234 334 (600) 1,906 December 31, 1997 1,906 2,107 -- (1,122) 2,891 December 31, 1998 2,891 1,710 -- (1,422) 3,179
- ---------- (1) Other additions represent the balance of Evans Rents' allowance for doubtful accounts, which was recorded April 24, 1996 in conjunction with the acquisition. S-3 EX-21 2 EXHIBIT 21.1 EXHIBIT 21.1 LIST OF SUBSIDIARIES CORT Furniture Rental Corporation, a Delaware corporation EX-23 3 EXHIBIT 23.1 EXHIBIT 23.1 ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULES The Board of Directors and Stockholders CORT Business Services Corporation and subsidiary: The audits referred to in our report dated February 12, 1999 included the related financial statement schedules as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, included herein. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to incorporation by reference in the registration statements on Forms S-8 (Nos. 33-72724, 333-15611, 333-15613, 333-52641, 333-52643) of CORT Business Services Corporation of our report dated February 12, 1999, relating to the consolidated balance sheets of CORT Business Services Corporation and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, and all related schedules, which reports appear, or are incorporated by reference, in the December 31, 1998 annual report on form 10-K of CORT Business Services Corporation. KPMG LLP Washington, DC March 31, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 Art. 5 FDS for 1998 10-K 1,000 12-MOS Dec-31-1998 Dec-31-1998 703 0 17,764 3,179 189,059 0 64,590 20,729 332,896 0 0 0 0 131 175,531 332,896 53,093 318,964 32,354 80,217 0 1,710 7,837 44,810 18,907 25,903 0 2,508 0 23,395 1.80 1.73
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