-----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, VWDT5bu2NgKA7wEww0wQdWTuy8upmzvO26C7T3hKcZyLieOvlFdsmPFm+xwGCyeQ j0Xorq6VKvlNLKWgUZZJIA== 0000070538-96-000017.txt : 19960711 0000070538-96-000017.hdr.sgml : 19960711 ACCESSION NUMBER: 0000070538-96-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960710 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL SERVICE INDUSTRIES INC CENTRAL INDEX KEY: 0000070538 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 580364900 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03208 FILM NUMBER: 96592803 BUSINESS ADDRESS: STREET 1: 1420 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30309 BUSINESS PHONE: 4048531000 MAIL ADDRESS: STREET 1: 1420 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30309 10-Q 1 NATIONAL SERVICE INDUSTRIES, INC. 10-Q Page 1 of 21 Exhibit Index on Page 11 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarter ended May 31, 1996 Commission file number 1-3208 NATIONAL SERVICE INDUSTRIES, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 58-0364900 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 1420 Peachtree Street, N. E., Atlanta, Georgia 30309-3002 (Address of Principal Executive Offices) (Zip Code) (404) 853-1000 (Registrant's Telephone Number, Including Area Code) None (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (applicable only to corporate issuers). Common Stock - $1.00 Par Value - 47,532,030 shares as of June 30, 1996. Page 2 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS - MAY 31, 1996 AND AUGUST 31, 1995 ............................. 3 CONSOLIDATED STATEMENTS OF INCOME - THREE MONTHS AND NINE MONTHS ENDED MAY 31, ................... 4 1996 AND 1995 CONSOLIDATED STATEMENTS OF CASH FLOWS - ............................ 5 NINE MONTHS ENDED MAY 31, 1996 AND 1995 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ......................... 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 7-8 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................... 9 SIGNATURES ............................................................... 10 EXHIBIT INDEX ............................................................ 11 Page 3 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands) May 31, August 31, 1996 1995 (Unaudited) ASSETS Current Assets: Cash and cash equivalents .......................... $ 79,307 $ 79,402 Short-term investments ............................. 2,551 3,598 Receivables, less reserves for doubtful accounts of $8,981 at May 31, 1996 and $6,467 at August 31, 1995 .................... 255,564 266,056 Inventories, at the lower of cost (on a first-in, first-out basis) or market ............. 177,503 185,789 Linens in service, net of amortization ............. 94,833 88,605 Deferred income taxes .............................. 7,145 10,221 Prepayments ........................................ 8,997 6,739 Total Current Assets ............................. 625,900 640,410 Property, Plant, and Equipment, at cost: Land ............................................... 29,587 31,016 Buildings and leasehold improvements ............... 194,197 192,023 Machinery and equipment ............................ 536,071 503,868 Total Property, Plant, and Equipment ............. 759,855 726,907 Less - Accumulated depreciation and amortization ..................................... 403,873 377,003 Property, Plant, and Equipment - net ........... 355,982 349,904 Other Assets: Goodwill and other intangibles ..................... 89,905 101,410 Other .............................................. 39,324 39,622 Total Other Assets ............................... 129,229 141,032 Total Assets ................................... $1,111,111 $1,131,346 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt ............... $ 54 $ 87 Notes payable ...................................... 6,529 6,399 Accounts payable ................................... 69,801 81,524 Accrued salaries, commissions, and bonuses ......... 37,469 43,944 Current portion of self insurance reserves ......... 15,769 16,276 Other accrued liabilities........................... 49,973 54,340 Total Current Liabilities ........................ 179,595 202,570 Long-Term Debt, less current maturities .............. 26,737 26,776 Deferred Income Taxes ................................ 61,509 65,756 Self Insurance Reserves, less current portion ........ 68,515 67,830 Other Long-Term Liabilities .......................... 25,999 24,010 Stockholders' Equity: Series A participating preferred stock, $.05 stated value, 500,000 shares authorized, none issued Preferred stock, no par value, 500,000 shares authorized, none issued Common stock, $1 par value, 80,000,000 shares authorized, 57,918,978 shares issued at May 31, 1996 and August 31, 1995 ..................... 57,919 57,919 Paid-in capital .................................... 10,830 8,065 Retained earnings .................................. 773,870 746,256 842,619 812,240 Less - Treasury stock, at cost (10,204,248 shares at May 31, 1996 and 9,609,261 shares at August 31, 1995) ........................................ 93,863 67,836 Total Stockholders' Equity ................... 748,756 744,404 Total Liabilities and Stockholders ......... $1,111,111 $1,131,346 The accompanying notes to consolidated financial statements are an integral part of these balance sheets. Page 4 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except per-share data) THREE MONTHS ENDED NINE MONTHS ENDED MAY 31 MAY 31 1996 1995 1996 1995 Sales and Service Revenues: Net sales of products ......................... $ 381,114 $ 363,765 $ 1,093,359 $ 1,042,706 Service revenues .............................. 135,756 142,033 398,267 409,886 Total Revenues .............................. 516,870 505,798 1,491,626 1,452,592 Costs and Expenses: Cost of products sold ......................... 237,414 233,668 691,951 669,891 Cost of services .............................. 77,078 75,227 226,292 225,054 Selling and administrative exp ................ 157,395 153,085 460,438 447,001 Interest expense .............................. 1,082 1,002 3,180 2,792 Other expense (income), net ................... (435) 1,752 (2,386) 5,024 Total Costs and Expenses .................... 472,534 464,734 1,379,475 1,349,762 Income before Provision for Inco ................ 44,336 41,064 112,151 102,830 Provision for (Benefit from) Income Taxes: Current ....................................... 15,779 18,842 42,997 41,973 Deferred ...................................... 880 (3,405) (1,042) (3,462) 16,659 15,437 41,955 38,511 Net Income ...................................... $ 27,677 $ 25,627 $ 70,196 $ 64,319 Per Share: Net income .................................... $ .58 $ .53 $ 1.46 $ 1.32 Cash dividends ................................ $ .29 $ .28 $ .86 $ .83 Weighted Average Number of Shares Outstanding (thousands) ....................... 48,059 48,382 48,240 48,813
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 5 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollar amounts in thousands) NINE MONTHS ENDED MAY 31 1996 1995 Cash Provided by (Used for) Operating Activities: Net income ................................................. $ 70,196 $ 64,319 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .......................... 44,184 43,467 Provision for losses on accounts receivable ............ 3,509 3,698 Loss (gain) on the sale of property, plant and equipment (1,718) 137 Loss (gain) on the sale of business .................... (2,946) (1,161) Change in noncurrent deferred income taxes ............. (1,042) (3,462) Change in assets and liabilities net of effect of acquisitions- Receivables ........................................ 6,311 (1,547) Inventories and linens in service, net ............. 799 (19,178) Current deferred income taxes ...................... 3,076 6,657 Prepayments and other .............................. (2,375) (1,970) Accounts payable and accrued liabilities ........... (23,771) 9,132 Net Cash Provided by Operating Activities ........ 96,223 100,092 Cash Provided by (Used for) Investing Activities: Change in short-term investments ........................... 1,047 (6,807) Purchase of property, plant, and equipment ................. (48,367) (39,180) Sale of property, plant, and equipment ..................... 5,177 6,435 Sale of business ........................................... 11,517 4,626 Acquisitions, net of cash acquired ......................... (600) (2,668) Change in other assets ..................................... (65) (2,487) Net Cash Used for Investing Activities ................... (31,291) (40,081) Cash Provided by (Used for) Financing Activities: Change in notes payable .................................... 130 1,425 Repayment of long-term debt ................................ (72) (638) Recovery of investment in tax benefits ..................... 1,290 872 Deferred income taxes from investment in tax benefits ...... (3,205) (2,925) Issuance (purchase) of treasury stock ...................... (23,262) (23,758) Change in other long-term liabilities ...................... 2,674 5,121 Cash dividends paid ........................................ (41,458) (40,630) Net Cash Used for Financing Activities ................... (63,903) (60,533) Effect of Exchange Rate Changes on Cash ...................... (1,124) 721 Net Change in Cash and Cash Equivalents ...................... (95) 199 Cash and Cash Equivalents at Beginning of Year ............... 79,402 58,619 Cash and Cash Equivalents at End of Period ................... $ 79,307 $ 58,818 Supplemental Cash Flow Information: Income taxes paid during the period ........................ $ 44,791 $ 34,620 Interest paid during the period ............................ 3,026 2,681 Noncash Investing and Financing Activities: Noncash aspects of sale of business - Receivables incurred .................................... $ -- $ (893) Noncash Aspects of Acquisitions: Liabilities assumed or incurred ............................ $ 6 $ 468 Treasury stock issued (returned)
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 6 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION: The interim consolidated financial statements included herein have been prepared by the company without audit and the condensed consolidated balance sheet as of August 31, 1995 has been derived from audited statements. These statements reflect all adjustments, all of which are of a normal, recurring nature, which are, in the opinion of management, necessary to present fairly the consolidated financial position as of May 31, 1996, the consolidated results of operations for the three months and nine months ended May 31, 1996 and 1995, and the consolidated cash flows for the nine months ended May 31, 1996 and 1995. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the company's Annual Report on Form 10-K for the fiscal year ended August 31, 1995. The results of operations for the three and nine months ended May 31, 1996 are not necessarily indicative of the results to be expected for the full fiscal year because the company's revenues and income are generally higher in the second half of its fiscal year and because of the uncertainty of general business conditions. 2. BUSINESS SEGMENT INFORMATION: Three Months Ended May 31 Sales and Service Revenues Operating Profit 1996 1995 1996 1995 (In thousands) Lighting Equipment ......... $ 219,904 $ 215,987 $ 21,596 $ 16,155 Textile Rental ............. 135,756 142,033 11,519 16,005 Chemical ................... 95,657 91,129 9,394 7,407 Other ...................... 65,553 56,649 4,532 3,837 $ 516,870 $ 505,798 47,041 43,404 Corporate and other ........ (1,623) (1,338) Interest Expense ........... (1,082) (1,002) Total ...................... $ 44,336 $ 41,064 Nine Months Ended May 31 Sales and Service Revenues Operating Profit 1996 1995 1996 1995 (In thousands) Lighting Equipment ......... $ 634,636 $ 620,546 $ 51,750 $ 42,425 Textile Rental ............. 398,267 409,886 30,519 34,806 Chemical ................... 272,119 259,273 25,321 23,019 Other ...................... 186,604 162,887 10,674 10,597 $ 1,491,626 $ 1,452,592 118,264 110,847 Corporate and other ........ (2,933) (5,225) Interest Expense ........... (3,180) (2,792) Total ...................... $112,151 $102,830 3. INVENTORIES: Major classes of inventory as of May 31, 1996 and August 31, 1995 were as follows: May 31, August 31, 1996 1995 (In thousands) Raw Materials and Supplies ................... $ 77,675 $ 87,470 Work-in-Process .............................. 9,140 9,879 Finished Goods ............................... 90,688 88,440 Total ................................... $177,503 $185,789 Page 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and related notes. Financial Condition National Service Industries continued in solid financial condition at May 31, 1996. Net working capital was $446.3 million, up from $437.8 million at August 31, 1995, and the current ratio was 3.5, compared with 3.2 at year end. Cash and short-term investments were $81.9 million compared with $83.0 million at August 31. For the nine months ended May 31, the company invested $49.0 million in capital expenditures and acquisitions. Long-term debt and other long-term liabilities were 13.9 percent of total capitalization, up slightly from 13.7 percent at August 31. Cash provided by operating activities was $96.2 million, compared with $100.1 million through the third quarter last year. Capital expenditures, exclusive of acquisition spending, were $48.4 million for the first nine months this year and $39.2 million for the nine months last year. Lighting equipment segment spending included expansion of the Mexican production facility as well as continued investment in equipment replacements, process improvements, and tooling for new products. Through the third quarter, textile rental segment spending consisted primarily of replacement and improvement of facilities, equipment and vehicles. Prior-year spending included the lighting equipment segment's manufacturing equipment replacements and improvements and construction of the Mexican production facility and the textile rental segment's fleet upgrades, facility improvements, and information systems enhancements. Acquisition spending in the current year has been minimal. Prior-year spending of $2.7 million was mainly due to the lighting equipment segment's acquisition of the assets of Infranor Canada, Inc., a small outdoor lighting products company. Dividend payments for the three quarters totaled $41.5 million, or 86 cents per share, compared with $40.6 million, or 83 cents per share, for the prior-year period. Effective January, 1996, the regular quarterly dividend rate was increased 3.6 percent to 29 cents per share, or an annual rate of $1.16 per share. For the year to date, the company has repurchased 745,400 of its shares under the board approved 2.0 million share per year standing authorization. For the periods presented, capital expenditures, working capital needs, dividends, acquisitions, and share repurchases were financed primarily with internally generated funds. European operations were supplemented by short-term borrowings in the European market. Contractual commitments for capital and acquisition spending during the coming twelve months total $23 million. For the current fiscal year, the company expects actual capital expenditures to be somewhat higher than levels of recent years, which, excluding acquisition spending, were $59 million in 1995, $43 million in 1994, and $36 million in 1993. Current liquid assets and internally generated funds are expected to be more than adequate to meet anticipated general operating cash requirements for the next twelve months. Some interim borrowings might be incurred to meet short-term needs. The company has complimentary lines of credit totaling $152 million, of which $110 million has been provided domestically and $42 million is available on a multi-currency basis primarily from a European bank. During the third quarter, the company has negotiated a $250 million committed credit facility which is scheduled to close during the fourth quarter. The facility will enhance the company's financial flexibility and provide resources to fund future growth. Results of Operations National Service Industries' earnings per share for the third quarter ended May 31, 1996 increased 8.7 percent to 58 cents compared with the same quarter a year ago. Sales for the quarter increased 2.2 percent to $517 million. Net income of $27.7 million was 8.0 percent higher than the $25.6 million reported in last year's third quarter. Earnings per share increased at the greater rate of 8.7 percent due to a reduction of 323,000 in average shares outstanding. The increased third quarter profit was driven by the lighting equipment and chemical segments. The performance of all four segments was enhanced by improved workers compensation claims experience. For the nine months of NSI's fiscal year, sales increased $39.0 million, or 2.7 percent, to $1.49 billion. Net income increased $5.9 million, or 9.1 percent, to $70.2 million. Earnings per share increased 10.4 percent to $1.46. Page 8 The lighting equipment segment continued its growth with sales for the third quarter advancing 1.8 percent to $220 million from $216 million last year. For the nine months, sales increased 2.3 percent to $635 million from $621 million. The increases in both periods resulted from pricing gains, which were offset somewhat by lower unit volumes. For the third quarter, operating income advanced 33.7 percent to 9.8 percent of revenues, compared with 7.5 percent the year earlier. For the nine months, operating income grew 22.0 percent to 8.2 percent of revenues, compared with 6.8 percent the prior year. Better pricing, a more favorable product mix and cost reduction efforts, in addition to the reduction in workers compensation costs, continued to benefit profit margins in both current-year periods. Sales of the textile rental segment declined 4.4 percent from $142 million to $136 million for the quarter and 2.8 percent from $410 million to $398 million for the nine months. The declines in both periods were due largely to lost sales from previously divested branches. Operating income decreased 28.0 percent to $11.5 million for the quarter and 12.3 percent to $30.5 million year to date primarily as a result of lower prices and additional labor, maintenance, and merchandise costs. Results for both current-year periods benefited from the reduction in workers compensation costs and year-to-date results included the sale of two non-strategic branches. The healthcare business continued to remain under pressure. Chemical segment sales advanced 5.0 percent to $96 million for the quarter and $272 million for the nine months due largely to higher unit volumes with some improvement in pricing. Operating income increased 26.8 percent to 9.8 percent of revenues for the quarter and 10.0 percent to 9.3 percent of revenues for the nine months, from 8.1 percent and 8.9 percent the respective prior-year periods. The improvement resulted almost entirely from volume increases and lower raw material prices. Combined sales of the insulation and envelope businesses increased 15.7 percent for the quarter and 14.6 percent for the year to date. Operating profits improved by 18.1 percent for the quarter and .7 percent year-to-date. The quarter's improvement was largely a result of the reduced workers compensation costs. An unfavorable product mix in the insulation business and higher envelope manufacturing costs offset the year-to-date workers compensation benefit. Corporate expense was higher for the third quarter this year due to increased administrative expenses. Year-to-date expense was lower and benefited from interest earned on higher average investment levels. Last year's nine-month expense was also higher due to the company's first quarter adoption of Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits." Last year's resulting accrual related primarily to severance agreements and the liability for life insurance coverage for certain eligible disabled employees. Interest expense on European loans was higher than in the prior-year period due to increased borrowings at somewhat higher average interest rates. The provision for income taxes was 37.6 percent of pretax income for the quarter and 37.4 percent for the year to date, compared with 37.6 percent and 37.5 percent for the respective prior-year periods. Changes in the comparative year-to-date effective rates resulted from variations in the relative amounts of tax exempt income. Page 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits are listed on the Index to Exhibits (page 11). (b) There were no reports on Form 8-K for the three months ended May 31, 1996. Page 10 SIGNATURES Pursuant to the requirements 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. NATIONAL SERVICE INDUSTRIES, INC. REGISTRANT DATE July 10, 1996 /s/ David Levy DAVID LEVY EXECUTIVE VICE PRESIDENT, ADMINISTRATION AND COUNSEL DATE July 10, 1996 /s/ Mark R. Bachmann MARK R. BACHMANN VICE PRESIDENT, CONTROLLER Page 11 INDEX TO EXHIBITS Page No. EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements: (a)-Letter Agreement dated March 21, 1996 amending the Consulting Agreement betweeen National Service Industries, Inc. and Erwin Zaban dated December 31, 1991 12 (b)-Severance Agreement between National Service Industries, Inc. and J. Robert Hipps dated May 14, 1996 13 (c)-Letter Agreement between National Service Industries Inc. and J. Robert Hipps dated May 24, 1996, amending as of that date the Incentive Stock Option Agreement dated September 19, 1990; the Incentive Stock Option Agreement dated December 18, 1991; the Incentive Stock Option Agreement dated September 16, 1992; the Nonqualified Stock Option Agreement dated September 16, 1992; the Incentive Stock Option Agreement dated September 15, 1993; the Nonqualified Stock Option Agreement dated September 15, 1993; the Nonqualified Stock Option Agreement dated September 21, 1994; and the Nonqualified Stock Option Agreement dated September 20, 1995 17 (d)-Appendix C to Restated and Amended Supplemental Retirement Plan for Executives of National Service Industries, Inc. (Supplemental Pension Plan) Effective May 31, 1996 19 EXHIBIT 11 - Computations of Net Income per Share of Common Stock 20 EXHIBIT 27 - Financial Data Schedules 21 EX-10 2 AMENDMENT TO CONSULTING AGREEMENT Page 12 Exhibit 10(iii)A(a) March 21, 1996 Erwin Zaban 3374 Old Plantation Road, N.W. Atlanta, Georgia 30327 Dear Erwin: This letter amends your consulting agreement with National Service Industries, Inc. dated December 30, 1991, in accordance with action taken by the Board of Directors at its meeting yesterday. The original term of the consulting agreement was three years. Because the agreement was suspended while you served as an officer of the Corporation from October, 1992 until September, 1994, the original term was scheduled to expire in October, 1996. The term of the consulting agreement is hereby extended through December 30, 1996. The consulting fees and other terms of the agreement remain unchanged. Sincerely, /s/ James S. Balloun James S. Balloun AGREED TO AND ACCEPTED AS OF MARCH 21, 1996: /s/ Erwin Zaban ERWIN ZABAN EX-10 3 SEVERANCE AGREEMENT Page 13 Exhibit 10(iii)A(b) May 14, 1996 J. Robert Hipps 5021 Northside Drive, N.W. Atlanta, Georgia 30327-4421 Dear Bob: This letter will confirm our agreement with respect to your termination of employment with National Service Industries, Inc. ("NSI"). 1. Effective Date. Your termination of employment will be effective on May 31, 1996 (the "Effective Date"). Our expectation is that you will continue to work until the Effective Date, unless I advise you otherwise, in which case you will be placed on a paid leave of absence until the Effective Date. 2. Severance Pay. NSI will pay you, as severance pay, an amount equal to your salary at the current monthly rate for a twelve (12) month period commencing on June 1, 1996 and continuing until May 31, 1997. Payment of your severance pay will be made on a semi-monthly basis. You will also be entitled to a pro rata share of your bonus for fiscal year 1996 payable in September, 1996. 3. Additional Benefits. If you elect COBRA coverage following your termination of employment, you will continue to pay the portion of the health insurance premium cost which you currently pay to NSI, and NSI will pay the remaining amount of your monthly premiums for COBRA coverage (including coverage for your wife) until the sooner of (a) your qualification under a medical plan offered by your employer, or (b) May 31, 1997. NSI will amend your Stock Option Agreements in two respects: (1) stock options that would otherwise vest in September, 1996 will vest on or before May 31, 1996; and (2) the time for exercising all vested stock options will be extended until May 31, 1997. You will receive a pension annuity commencing on June 1, 1996 or on such other date as you elect prior to your 65th birthday. The amount of the pension annuity will be determined based upon the pension annuity you would have received under the Supplemental Retirement Plan for Executives of NSI (effective as of January 1, 1994) if you had had four additional years of credit and had been eligible for early retirement under the Supplemental Retirement Plan for Executives of NSI on the Effective Date. An Page 14 Exhibit 10(iii)A(b) Page 2 J.R. Hipps May 14, 1996 appendix to such plan will be added in the form attached to this letter. In lieu of the annuity, you may elect to receive a lump sum equivalent as of May 31, 1996 (calculated using a discount rate of 8%). You will also receive a lump sum payment on June 15, 1996 in the amount of $41,877 to compensate you for the difference between the Interest Earnings Rate and the Termination Interest Earnings Rate under the Senior Management Benefit Plan, assuming an Interest Earnings Rate of eleven percent (11%) going forward and a discount rate of eight percent (8%), and for the unvested portion of your 40l(k) plan account. Further, we confirm that the Company Contribution Amount for you under the Executives' Deferred Compensaton Plan will vest on the Effective Date. In addition, NSI will pay for out-placement services in accordance with the executive placement program offered by Right Associates. 4. Other Terms of Payment. You acknowledge that the foregoing severance pay and benefits exceed those which you would otherwise receive upon your termination of employment. Your severance pay and benefits will be subject to appropriate tax withholdings and will satisfy all sums which might otherwise be due you from NSI, including, without limitation, vacation pay and bonuses, but excluding any payments due you under the Executive Deferred Compensation Plan for Senior Officers, the Senior Management Benefit Plan, the Executive Savings Plan, NSI's Pension Plan C, the Supplemental Retirement Plan for Executives of NSI (effective as of January 1, 1994), and NSI's 40l(k) Plan, which payments will be made in accordance with the terms of such plans. You will not be eligible to participate in any employee benefit plans following your termination on the Effective Date, except as provided above and as provided for under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), as amended. 5. Conditions to Payment. You understand that the severance pay and benefits provided for hereunder are conditioned upon (a) your not disparaging NSI or any officer, director or employee of NSI in any material respect; (b) your not disclosing to any person or using for your own benefit, directly or indirectly, any trade secrets or confidential information of NSI, unless directed to do so by court order; (c) your not soliciting, either directly or indirectly, any current employees of NSI to terminate their employment with NSI and become employed by you or any person or entity with whom you are associated; (d) your compliance with the provisions of paragraph 6 below, and (e) the approval of the Executive Resource and Nominating Committee of the Board of Directors of NSI. In the event you violate any of the foregoing conditions (other than the condition set forth in subparagraph (d) above) within a period of five (5) years after the date hereof, NSI may suspend all further severance pay and benefits provided hereunder. In the event you violate the condition set forth in subparagraph (d) above at any time prior to the expiration of the applicable statutes of limitations, NSI may suspend all further Page 15 Exhibit 10(iii)A(b) Page 3 J.R. Hipps May 14, 1996 severance pay and benefits provided hereunder. In addition, NSI may at any time pursue any other remedies to which it may be entitled at law or in equity. 6. Release. In consideration of enhanced severance pay and benefits, and subject to the fulfillment of the condition provided in subparagraph 5(e) hereof, as described above, you hereby release and forever discharge NSI and its divisions, subsidiaries, and affiliates and their respective shareholders, officers, directors, employees, agents or others acting on their behalf, and each of them, from any and all claims, losses or expenses (including attorneys' fees) which you now have or have had or may later claim to have had as of the date hereof against them arising out of your employment with NSI or the termination of your employment. You understand and agree that as a result of this release and discharge, you will not, for example, be entitled to pursue any claims arising out of any alleged violation of your rights while employed by NSI, including, but not limited to, (a) claims for back pay, reinstatement or recovery of any losses or compensatory, punitive, or other damages to you or your property resulting from any alleged violation of state or federal law, such as (but not limited to), claims arising under Title VII of the Civil Rights Act of 1964, 42 U.S.C. SS 2000e, et. seq. (prohibiting discrimination on account of race, color, sex, national origin or religion); the Age Discrimination in Employment Act of 1967, 29 U.S.C. SS 621, et. seq. (prohibiting discrimination on account of age); the Americans with Disabilities Act of 1990, 42 U.S.C SS 12101, et. seq. (prohibiting discrimination on account of disability); the Family and Medical Leave Act of 1993 (relating to leaves of absence for family and medical reasons); and any similar federal or state law claim relating to your employment; and (b) claims resulting or arising from or in connection with any alleged tortious conduct or other wrongdoing by NSI. 7. Acceptance Period. You have a period of twenty-one (21) days from the date hereof to consider whether or not you will accept the terms and conditions set forth herein. You are advised to consult with an attorney and anyone else of your choosing to obtain advice and information concerning such terms and conditions. In order to receive the severance pay and benefits, it will be necessary for you to accept such terms and conditions by signing both copies of this letter agreement and returning one (1) copy to me within twenty-one (21) days from the date hereof. 8. Revocation Period. You understand that for a period of up to and including seven (7) days after the date you sign this letter agreement, you may revoke it entirely. No rights or obligations contained in this agreement shall become enforceable before the end of this seven (7) day revocation period. If you decide to revoke this letter agreement, you will deliver a signed notice of revocation to me on or before the end of this seven (7) day period. Upon delivery of a timely notice of revocation, this letter agreement shall be canceled and void, and neither party to this letter agreement shall have Page 16 Exhibit 10(iii)A(b) Page 4 J.R. Hipps May 14, 1996 any rights or obligations arising under it. 9. Nondisclosure Covenant. You agree to hold this agreement and the contents hereof in strict confidence and not to disclose such contents to any third party, other than your family members and financial and legal advisors, without the prior written approval of NSI. 10. Nondisparagement by NSI. NSI agrees to take appropriate steps to ensure that the officers of NSI will not disparage you. 11. Miscellaneous. This letter agreement constitutes the entire agreement of the parties and supersedes any prior agreements, whether oral or written, between the parties, including any prior employment agreements. This letter agreement shall be binding upon and inure to the benefit of the successors and assigns of NSI and your heirs, administrators, executors and personal representatives. If any provision of this letter agreement is determined to be unenforceable by a court of appropriate jurisdiction, the remaining provisions of this letter agreement will continue in effect at the discretion of NSI. 12. Statement of Understanding. YOU STATE THAT YOU HAVE CAREFULLY READ THIS LETTER AGREEMENT, UNDERSTAND ITS MEANING AND INTENT, AND VOLUNTARILY AGREE TO ABIDE BY ITS TERMS. YOU FURTHER STATE THAT THE ONLY PROMISES MADE TO YOU TO SIGN THIS LETTER AGREEMENT ARE SET FORTH HEREIN. Sincerely, /s/ James S. Balloun James S. Balloun AGREED TO AND ACCEPTED THIS 17th DAY OF May , 1996. /s/ J. Robert Hipps J. Robert Hipps EX-10 4 AMENDMENT OF STOCK OPTION AGREEMENTS Page 17 Exhibit 10(iii)A(c) May 24, 1996 J. Robert Hipps 5021 Northside Drive, N.W. Atlanta, Georgia 30327-4421 Re: Amendment of Stock Option Agreements Dear Bob: In connection with your termination of employment, and as confirmed and evidenced by this letter agreement, the terms of certain stock options previously granted to you were amended by action taken by the Executive Resource and Nominating Committee of NSI's Board of Directors (the "Committee") on March 20, 1996, and ratified by the Board of Directors on that same date. The following installments of employee stock options, which had previously been granted to you and which would otherwise have vested and become exercisable in September 1996, have been accelerated so that they are immediately exercisable on this date: Number of Option Grant Date Shares In Installment September 16, 1992 2,529 September 16, 1992 471 September 15, 1993 2,671 September 15, 1993 1,079 September 21, 1994 5,000 September 20, 1995 5,000 16,750 In addition, the Committee amended the expiration provisions of those options for 16,750 shares and options for 32,364 shares which were previously granted to you and were already exercisable according to their original vesting schedules. Pursuant to the amendment, said options for 49,114 shares remain exercisable through May 31, 1997, notwithstanding your resignation effective May 31, 1996. Page 18 Exhibit 10(iii)A(c) Page 2 J. Robert Hipps May 24, 1996 Your Incentive Stock Option Agreement dated September 19, 1990, Incentive Stock Option Agreement dated December 18, 1991, Incentive Stock Option Agreement dated September 16, 1992, Nonqualified Stock Option Agreement dated September 16, 1992, Incentive Stock Option Agreement dated September 15, 1993, Nonqualified Stock Option Agreement dated September 15, 1993, Nonqualified Stock Option Agreement dated September 21, 1994, and Nonqualified Stock Option Agreement dated September 20, 1995 (the "Stock Option Agreements") are each hereby amended in accordance with this letter. Please acknowledge your acceptance of this letter by signing in the space provided below and returning the executed letter to me. A duplicate is enclosed for you to retain with your copies of the Stock Option Agreements. Very truly yours, /s/ James S. Balloun James S. Balloun Chairman and Chief Executive Officer JSB:sdh Enclosures Accepted and agreed to as of the 24th day of May, 1996: /s/ J. Robert Hipps J. Robert Hipps EX-10 5 APPENDIX C TO RESTATED SUPPLEMENTAL RET PLAN Page 19 Exhibit 10(iii)A(d) APPENDIX C C.1. Eligible Individual: J. Robert Hipps C.2. Effective Date: May 31, 1996 C.3. Special Provisions: The following special provisions shall apply to the Eligible Individual's participation in the Plan. (a) As of the Effective Date, the Eligible Individual shall have his benefits determined as if he had ten (10) years of Credited Service for benefit accrual and vesting purposes under the Plan. (b) As of the Effective Date, the Eligible Individual shall be treated as if he had fifteen (15) years of service for purposes of qualifying for an Early Retirement Accrual Pension under Section 3.3 of the Plan, but only for purposes of qualifying for such benefit. EX-11 6 COMPUTATIONS OF NET INCOME PER SHARE Page 20 Exhibit 11 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATIONS OF NET INCOME PER SHARE OF COMMON STOCK (In thousands, except per-share data) THREE MONTHS ENDED NINE MONTHS ENDED MAY 31 MAY 31 1996 1995 1996 1995 Primary: Weighted Average Number of Shares (determined on a monthly basis).. 48,059 48,382 48,240 48,813 Net Income ........................ $ 27,677 $ 25,627 $ 70,196 $ 64,319 Primary Earnings per Share ........ $ .58 $ .53 $ 1.46 $ 1.32 Fully Diluted: Weighted Average Number of Shares Outstanding ..................... 48,059 48,382 48,240 48,813 Additional Shares Assuming Exercise of Options: Options exercised ............. 1,293 1,031 1,293 1,037 Treasury stock purchased with proceeds ............... (919) (874) (919) (878) Average Common Shares Outstanding (as adjusted) .................. 48,433 48,539 48,614 48,972 Net Income ........................ $ 27,677 $ 25,627 $ 70,196 $ 64,319 Fully Diluted Earnings per Share .. $ .57 $ .53 $ 1.44 $ 1.31 EX-27 7 FDS --
5 Page 21 Exhibit 27 Financial Data Schedules Quarter Ended May 31, 1996 Pursuant to Section 601(c) of Regulation S-K This schedule contains summary financial information extracted from National Service Industries, Inc. consolidated balance sheet as of May 31, 1996 and the consolidated statement of income for the nine months ended May 31, 1996, and is qualified in its entirety by reference to such financial statements. 9-MOS AUG-31-1996 SEP-01-1995 MAY-31-1996 79,307 2,551 264,545 8,981 177,503 625,900 759,855 403,873 1,111,111 179,595 26,737 0 0 57,919 784,700 748,756 1,093,359 1,491,626 691,951 918,243 458,052 0 3,180 112,151 41,955 70,196 0 0 0 70,196 1.46 1.44
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