-----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, IelZbkU4b5kQXDjU65NkFD1gy+OGClzFaSgaN6U8JkPI3vD5O0IBVmBqRmcfro34 tVjNDfX74bwImSt76eRPQQ== /in/edgar/work/0000070538-00-000034/0000070538-00-000034.txt : 20000717 0000070538-00-000034.hdr.sgml : 20000717 ACCESSION NUMBER: 0000070538-00-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL SERVICE INDUSTRIES INC CENTRAL INDEX KEY: 0000070538 STANDARD INDUSTRIAL CLASSIFICATION: [3640 ] IRS NUMBER: 580364900 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03208 FILM NUMBER: 672936 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 0001.txt NATIONAL SERVICE INDUSTRIES, INC. 10-Q Page 1 of 53 Index to Exhibits on Page 15 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2000. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ____________________. 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) (ZipCode) (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. Common Stock - $1.00 Par Value - 40,778,623 shares as of June 30, 2000 Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page No. ----------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS - MAY 31, 2000 AND AUGUST 31, 1999 3 CONSOLIDATED STATEMENTS OF INCOME - THREE MONTHS AND NINE MONTHS ENDED MAY 31, 2000 AND 1999 4 CONSOLIDATED STATEMENTS OF CASH FLOWS - NINE MONTHS ENDED MAY 31, 2000 AND 1999 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13 SIGNATURES 14 EXHIBIT INDEX 15
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NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and per-share data) May 31, August 31, 2000 1999 ------------------ --------------- Assets Current Assets: Cash and cash equivalents $ 1,489 $ 2,254 Receivables, less reserves for doubtful accounts of $7,867 at May 31, 2000 and $6,306 at August 31, 1999 385,139 382,188 Inventories, at the lower of cost (on a first-in, first-out basis) or market 264,417 218,191 Linens in service, net of amortization 57,130 58,875 Deferred income taxes 8,095 10,271 Prepayments 12,961 8,634 ------------------ --------------- Total Current Assets 729,231 680,413 ------------------ --------------- Property, Plant, and Equipment, at cost: Land 28,216 25,764 Buildings and leasehold improvements 202,032 186,776 Machinery and equipment 632,337 587,719 ------------------ --------------- Total Property, Plant, and Equipment 862,585 800,259 Less-Accumulated depreciation and amortization 450,876 417,946 ------------------ --------------- Property, Plant, and Equipment-net 411,709 382,313 ------------------ --------------- Other Assets: Goodwill and other intangibles 539,932 551,995 Other 81,924 81,068 ------------------ --------------- Total Other Assets 621,856 633,063 ------------------ --------------- Total Assets $1,762,796 $1,695,789 ================== =============== Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt $ 262 $ 368 Commercial paper, short-term 200,178 102,539 Notes payable 11,242 11,471 Accounts payable 119,428 128,122 Accrued salaries, commissions, and bonuses 48,277 65,458 Current portion of self-insurance reserves 7,956 8,785 Accrued taxes payable - 12,203 Other accrued liabilities 80,919 94,939 ------------------ --------------- Total Current Liabilities 468,262 423,885 ------------------ --------------- Long-Term Debt, less current maturities 433,778 435,199 ------------------ --------------- Deferred Income Taxes 92,353 95,557 ------------------ --------------- Self-Insurance Reserves, less current portion 37,540 38,828 ------------------ --------------- Other Long-Term Liabilities 83,098 86,446 ------------------ --------------- 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, 120,000,000 shares authorized, 57,918,978 shares issued 57,919 57,919 Paid-in capital 30,083 29,055 Retained earnings 1,002,021 976,461 Accumulated other comprehensive income items (11,701) (9,326) ------------------ --------------- 1,078,322 1,054,109 Less-Treasury stock, at cost (17,140,355 shares at May 31, 2000 and 17,449,752 shares at August 31, 1999) 430,557 438,235 ------------------ --------------- Total Stockholders' Equity 647,765 615,874 ------------------ --------------- Total Liabilities and Stockholders' Equity $1,762,796 $1,695,789 ================== ===============
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 4
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per-share data) THREE MONTHS ENDED NINE MONTHS ENDED MAY 31 MAY 31 ------------------------------ ----------------------------- 2000 1999 2000 1999 -------------- --------------- -------------- -------------- Sales and Service Revenues: Net sales of products $ 562,000 $ 489,787 $1,632,288 $1,369,808 Service revenues 83,040 80,051 238,175 229,315 -------------- --------------- -------------- -------------- Total Revenues 645,040 569,838 1,870,463 1,599,123 -------------- --------------- -------------- -------------- Costs and Expenses: Cost of products sold 340,788 301,328 987,925 836,864 Cost of services 46,070 39,661 136,009 118,565 Selling and administrative expenses 208,175 178,706 594,889 514,656 Interest expense, net 11,678 3,340 32,191 8,219 Gain on sale of businesses - (2,303) (356) (5,814) Restructuring expense, asset impairments, and other charges - - - (2,216) Other expense (income), net 4,379 471 12,873 (143) -------------- --------------- -------------- -------------- Total Costs and Expenses 611,090 521,203 1,763,531 1,470,131 -------------- --------------- -------------- -------------- Income before Provision for Income Taxes 33,950 48,635 106,932 128,992 Provision for Income Taxes 13,174 18,094 41,490 47,985 -------------- --------------- -------------- -------------- Net Income $ 20,776 $ 30,541 $ 65,442 $ 81,007 ============== =============== ============== ============== Per Share: Basic Earnings per Share $ .51 $ .75 $ 1.61 $ 1.97 ============== =============== ============== ============== Basic Weighted Average Number of Shares Outstanding 40,752 40,654 40,677 41,030 ============== =============== ============== ============== Diluted Earnings per Share $ .51 $ .75 $ 1.61 $ 1.97 ============== =============== ============== ============== Diluted Weighted Average Number of Shares Outstanding 40,756 40,851 40,711 41,221 ============== =============== ============== ==============
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 5
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONCOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) NINE MONTHS ENDED ------------------------------- MAY 31 ------------------------------- 2000 1999 -------------- -------------- Cash Provided by (Used for) Operating Activities Net income $ 65,442 $ 81,007 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 63,875 44,033 Provision for losses on accounts receivable 3,520 2,762 Gain on the sale of property, plant, and equipment (1,198) (1,164) Gain on the sale of business (356) (5,814) Restructuring expense, asset impairments, and other charges - (2,216) Change in noncurrent deferred income taxes (914) 727 Change in assets and liabilities net of effect of acquisitions and divestitures- Receivables (4,021) (15,781) Inventories and linens in service, net (44,493) 6,085 Deferred income taxes 2,732 6,998 Prepayments and other (2,883) (1,552) Accounts payable and accrued liabilities (37,070) (8,141) Self-insurance reserves and other long-term liabilities (2,883) 8,087 -------------- ------------- Net Cash Provided by Operating Activities 41,751 115,031 -------------- ------------- Cash Provided by (Used for) Investing Activities Purchases of property, plant, and equipment (78,793) (48,298) Sale of property, plant, and equipment 3,287 3,487 Sale of businesses - 3,767 Acquisitions (21,550) (62,881) Change in other assets (3,660) (1,299) -------------- ------------- Net Cash Used for Investing Activities (100,716) (105,224) -------------- ------------- Cash Provided by (Used for) Financing Activities Borrowings (repayments) of notes payable, net (229) 3,343 Issuances of commercial paper, net (less than 90 days) 93,699 - Issuances of commercial paper (greater than 90 days) 186,024 - Repayments of commercial paper (greater than 90 days) (182,750) - Borrowings of long-term debt - 187,582 Repayments of long-term debt (861) (80,044) Treasury stock transactions, net 3,039 (38,293) Cash dividends paid (39,884) (38,913) -------------- ------------- Net Cash Provided by Financing Activities 59,038 33,675 -------------- ------------- Effect of Exchange Rate Changes on Cash (838) 265 -------------- ------------- Net Change in Cash and Cash Equivalents (765) 43,747 Cash and Cash Equivalents at Beginning of Period 2,254 19,146 -------------- ------------- Cash and Cash Equivalents at End of Period $ 1,489 $ 62,893 ============== ============= Supplemental Cash Flow Information: Income taxes paid during the period $ 53,801 $ 37,888 Interest paid during the period 28,309 9,940 Noncash Investing and Financing Activities: Treasury shares issued under long-term incentive plan $ 5,667 - Noncash aspects of sale of businesses-- Receivables recorded - $ 396 Liabilities assumed - 326 Noncash aspects of acquisitions-- Liabilities assumed or incurred $ 1,219 $ 15,574 Treasury stock issued - 845
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) (In thousands, except share and per-share data) 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, 1999 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, 2000, the consolidated results of operations for the three and nine months ended May 31, 2000 and 1999, and the consolidated cash flows for the nine months ended May 31, 2000 and 1999. Certain reclassifications have been made to the prior year's financial statements to conform to the current year's presentation. 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, 1999. The results of operations for the three and nine months ended May 31, 2000 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. ACCOUNTING STANDARDS YET TO BE ADOPTED Statement of Financial Accounting Standards ("SFAS") No. 133 (as amended by SFAS No. 138), "Accounting for Derivative Instruments and Hedging Activities," was issued in June of 1998 and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The company will adopt SFAS 133 in the first quarter of fiscal 2001 and is in the process of evaluating the impact of adoption on the Consolidated Balance Sheets and Consolidated Statements of Income. 3. BUSINESS SEGMENT INFORMATION
Depreciation Capital Sales and Operating and Expenditures Service Profit Amortization Including Nine Months Ended May 31, 2000 Revenues (Loss) Expense Acquisitions ------------- ------------- --------------- -------------- Lighting Equipment $1,093,469 $ 92,187 $36,630 $ 58,279 Chemical 373,153 34,644 8,290 4,254 Textile Rental 238,175 19,410 11,525 20,526 Envelope 165,666 6,185 5,714 15,240 ------------- ------------- --------------- -------------- 1,870,463 152,426 62,159 98,299 Corporate (13,303) 1,716 2,044 Interest expense, net (32,191) ------------- ------------- --------------- -------------- Total $1,870,463 $ 106,932 $63,875 $100,343 ============= ============= =============== ==============
Depreciation Capital Sales and Operating and Expenditures Service Profit Amortization Including Nine Months Ended May 31, 1999 Revenues (Loss) Expense Acquisitions ------------- ------------- --------------- -------------- Lighting Equipment $ 862,857 $ 82,270 $19,553 $ 67,076 Chemical 360,670 29,756 7,562 8,160 Textile Rental 229,315 26,146 10,862 11,955 Envelope 146,281 11,054 4,535 23,592 ------------- ------------- --------------- -------------- 1,599,123 149,226 42,512 110,783 Corporate (12,015) 1,521 396 Interest expense, net (8,219) ------------- ------------- --------------- -------------- Total $1,599,123 $ 128,992 $44,033 $111,179 ============= ============= =============== ==============
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Depreciation Capital Sales and Operating and Expenditures Service Profit Amortization Including Three Months Ended May 31, 2000 Revenues (Loss) Expense Acquisitions ------------- ------------- --------------- -------------- Lighting Equipment $ 371,778 $ 27,887 $11,984 $ 17,669 Chemical 133,645 14,550 2,780 2,003 Textile Rental 83,040 7,976 3,969 5,502 Envelope 56,577 662 2,066 6,026 ------------- ------------- --------------- -------------- 645,040 51,075 20,799 31,200 Corporate (5,447) 583 167 Interest expense, net (11,678) ------------- ------------- --------------- -------------- Total $ 645,040 $ 33,950 $21,382 $ 31,367 ============= ============= =============== ==============
Depreciation Capital Sales and Operating and Expenditures Service Profit Amortization Including Three Months Ended May 31, 1999 Revenues (Loss) Expense Acquisitions ------------- ------------- --------------- -------------- Lighting Equipment $ 306,192 $ 28,957 $ 6,642 $ 27,335 Chemical 127,230 11,495 2,586 3,837 Textile Rental 80,051 10,212 3,597 2,659 Envelope 56,365 4,400 1,713 6,081 ------------- ------------- --------------- -------------- 569,838 55,064 14,538 39,912 Corporate (3,089) 507 60 Interest expense, net (3,340) ------------- ------------- --------------- -------------- Total $ 569,838 $ 48,635 $15,045 $ 39,972 ============= ============= =============== ==============
Identifiable Assets May 31, 2000 August 31, 1999 --------------- ----------------- Lighting Equipment $1,093,127 $1,073,936 Chemical 245,159 233,461 Textile Rental 219,972 203,509 Envelope 150,714 139,755 --------------- ----------------- Subtotal 1,708,972 1,650,661 Corporate 53,824 45,128 --------------- ----------------- Total $1,762,796 $1,695,789 =============== ================= 4. INVENTORIES Major classes of inventory as of May 31, 2000 and August 31, 1999 were as follows: May 31, August 31, 2000 1999 ---------- ---------- Raw Materials and Supplies $107,371 $99,249 Work-in-Process 19,426 16,718 Finished Goods 137,620 102,224 ---------- ---------- Total $264,417 $218,191 ========== ========== 5. EARNINGS PER SHARE The company accounts for earnings per share using Statement of Financial Accounting Standards No. 128, "Earnings per Share." Under this statement, basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed similarly but reflects the potential dilution that would occur if dilutive options were exercised. The following table calculates basic earnings per common share and diluted earnings per common share at May 31: Page 8
Three Months Ended Nine Months Ended May 31 May 31 -------------------------------- ------------------------------- 2000 1999 2000 1999 --------------- -------------- -------------- -------------- Basic earnings per common share: Net income $20,776 $30,541 $65,442 $81,007 Basic weighted average shares outstanding (in thousands) 40,752 40,654 40,677 41,030 --------------- -------------- -------------- -------------- Basic earnings per common share $ .51 $ .75 $ 1.61 $ 1.97 =============== ============== ============== ============== Diluted earnings per common share: Net income $20,776 $30,541 $65,442 $81,007 Basic weighted average shares outstanding (in thousands) 40,752 40,654 40,677 41,030 Add - Shares of common stock issuable upon assumed exercise of dilutive stock options (in thousands) 4 197 34 191 --------------- -------------- -------------- -------------- Diluted weighted average shares outstanding (in thousands) 40,756 40,851 40,711 41,221 --------------- -------------- -------------- --------------- Diluted earnings per common share $ .51 $ .75 $ 1.61 $ 1.97 =============== ============== ============== ===============
6. COMPREHENSIVE INCOME The company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," in the first quarter of fiscal 1999. SFAS No. 130 requires the reporting of a measure of all changes in equity of an entity that result from recognized transactions and other economic events other than transactions with owners in their capacity as owners. Other comprehensive income (loss) for the three and nine months ended May 31, 2000 and 1999 includes only foreign currency translation adjustments. The calculation of comprehensive income is as follows:
Three Months Ended Nine Months Ended May 31 May 31 --------------------------------- --------------------------------- 2000 1999 2000 1999 --------------- -------------- -------------- --------------- Net income $20,776 $30,541 $65,442 $81,007 Other comprehensive income (loss) (2,615) 824 (2,375) 2,490 --------------- -------------- -------------- --------------- Comprehensive Income $18,161 $31,365 $63,067 $83,497 =============== ============== ============== ===============
7. ENVIRONMENTAL MATTERS The company's operations, as well as similar operations of other companies, are subject to comprehensive laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances and solid and hazardous wastes and to the remediation of contaminated sites. Permits and environmental controls are required for certain of the company's operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. The company believes that it is in substantial compliance with all material environmental laws, regulations, and permits. On an ongoing basis, the company incurs capital and operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be substantial. The company's environmental reserves, which are included in current liabilities, totaled $10,849 and $11,000 at May 31, 2000 and August 31, 1999, respectively. The actual cost of environmental issues may be substantially lower or higher than that reserved due to the difficulty in estimating such costs, potential changes in the status of government regulations, and the inability to determine the extent to which contributions will be available from other parties. The company does not believe that any amount of such costs below or in excess of that accrued is reasonably estimable. Certain environmental laws, such as Superfund, can impose liability for the entire cost of site remediation upon each of the current or former owners or operators of a site or parties who sent waste to a site where a release of a hazardous substance has occurred regardless of fault or the lawfulness of the original disposal activity. Generally, where there are a number of potentially responsible parties ("PRPs") that are financially viable, liability has been apportioned based on the type and amount of waste disposed of by each party at such disposal site and the number of financially viable PRPs, although no assurance as to the method of apportioning the liability can be given as to any particular site. Page 9 The company is currently a party to, or otherwise involved in, legal proceedings in connection with state and federal Superfund sites, two of which are located on property owned by the company. Except for the Crymes Landfill and M&J Solvents matters in Georgia, the company believes its liability is de minimis at each of the sites which it does not own where it has been named as a PRP. At the Crymes Landfill and M&J Solvents sites in Georgia, since the matters are currently in the investigative phase, the company does not know whether its liability is de minimis but believes that its exposure at each of the sites is not likely to result in a material adverse effect on the company due to its limited involvement at the sites and the number of viable PRPs. For property which the company owns on Seaboard Industrial Boulevard in Atlanta, Georgia, the company has conducted an investigation on its and adjoining properties and submitted a Compliance Status Report ("CSR") to the State of Georgia Environmental Protection Division ("EPD") pursuant to the Georgia Hazardous Site Response Act. The company is currently responding to EPD's comments regarding the CSR. Until the CSR is completed, the company will not be able to determine if remediation will be required, if the company will be solely responsible for the cost of such remediation, or whether such cost is likely to result in a material adverse effect on the company. For property which the company owns on East Paris Street in Tampa, Florida, the company has been requested by the State of Florida to clean up chlorinated solvent contamination in the groundwater on the property and on surrounding property known as Seminole Heights Solvent Site and to reimburse approximately $430 of costs already incurred by the State of Florida in connection with such contamination. The company believes that it has a strong defense due to likely off-site sources of the contamination and because contamination from the property, if any, was due to prior owners and not the company's operations. At this time, it is too early to quantify the company's potential exposure or the likelihood of an adverse result. The company is currently evaluating emissions of volatile organic compounds from its manufacturing operations in the Atlanta, Georgia area to determine whether it will need to install pollution control equipment or modify its operations to comply with federal and state air pollution regulations. Until the current evaluations are completed, the company is not able to quantify the possible cost of compliance. However, based upon currently available information, the company does not expect that any material expenditures will be required to achieve compliance. In connection with the sale of the North Bros. business and 29 of the company's textile rental plants in 1997, the company has retained environmental liabilities arising from events occurring prior to the closing, subject to certain exceptions. The company has received notice from the buyer of the textile rental plants of the alleged presence of perchloroethylene contamination on one of the properties involved in the sale. The company has since asserted an indemnification claim against the company from which it bought the property. The prior owner is currently conducting an investigation of the contamination at its expense, subject to a reservation of rights. At this time, it is too early to quantify the company's potential exposure in this matter, the likelihood of an adverse result, or the possibility that the company may be fully or partially indemnified. The State of New York has filed a lawsuit against the company alleging that the company is responsible as a successor to Serv-All Uniform Rental Corp. for past and future response costs in connection with the release or threatened release of hazardous substances at and from the Blydenburgh Landfill in Islip, New York. The company believes that it is not a successor to Serv-All Uniform Rental Corp. and therefore has no liability with respect to the Blydenburgh Landfill, and it has responded to the lawsuit accordingly. At this stage of the litigation, it is too early to quantify the company's potential exposure or the likelihood of an adverse result. 8. INCREASE IN SHARES AUTHORIZED UNDER LONG-TERM ACHIEVEMENT INCENTIVE PLAN On January 5, 2000, the stockholders approved an amendment to the National Service Industries, Inc. Long-Term Achievement Incentive Plan for the benefit of officers and other key employees of the company. In addition to other modifications, the amendment increases the number of shares authorized for issuance under the plan from 1,750,000 to 5,750,000. Page 10 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. National Service Industries is a diversified service and manufacturing company operating in four segments: lighting equipment, chemicals, textile rental, and envelopes. The company remained in solid financial condition at May 31, 2000. Net working capital was $261.0 million, up from $256.5 million at August 31, 1999, and the current ratio remained constant at 1.6. At May 31, 2000, the company's percentage of debt to total capitalization increased to 49.9 percent from 47.2 percent at August 31, 1999. Results of Operations National Service Industries generated revenue of $645.0 million and $1.9 billion in the three and nine months ended May 31, 2000, respectively, compared to revenue of $569.8 million and $1.6 billion in the respective periods last year. The increases were primarily due to acquired revenue in the lighting equipment and envelope segments. The lighting equipment segment purchased Holophane Corporation ("Holophane") in July 1999 and certain assets of Peerless Corporation ("Peerless") in April 1999. In addition, the envelope segment purchased substantially all of Gilmore Envelope in February 1999. These acquisitions generated combined revenue of $63.7 million and $218.0 million for the three and nine months ended May 31, 2000, respectively, that was not included in prior-year results. Excluding acquisitions, revenue during the first nine months increased in each of the company's core businesses. Net income totaled $20.8 million and $65.4 million, or $.51 and $1.61 per diluted share, for the three and nine months ended May 31, 2000, respectively, compared to net income of $30.5 million and $81.0 million, or $.75 and $1.97 per diluted share, for the respective prior year periods. Increased interest expense on borrowings and amortization expense related to recent acquisitions more than offset income from acquisitions not included in prior-year results for the three and nine months ended May 31, 2000. Additionally, lower operating profits in the lighting equipment, textile rental, and envelope segments negatively impacted third quarter net income. The decrease in third quarter operating profit in the lighting equipment segment related to lower-than-planned sales volumes and production timing problems at the segment's Monterrey, Mexico and Cochran, Georgia manufacturing facilities. Operating profits decreased in the textile rental segment primarily due to unusual gains included in last year's results that were not repeated in the current year. Envelope segment operating profits were negatively impacted by lower volumes in the direct mail market, increased paper prices, and production delays associated with start-up inefficiencies of new equipment and the relocation of two plants. In addition to the items discussed above, year-to-date operating profits were also positively impacted by core business growth, primarily in the chemical segment, partially offset by a charge for closing a manufacturing facility in the lighting equipment segment. The lighting equipment segment reported revenue of $371.8 million for the third quarter and $1.1 billion for the nine months representing increases of 21.4 percent and 26.7 percent over the respective periods of the prior year. The increase in revenue resulted primarily from the acquisitions of Holophane and Peerless. Operating profit decreased 3.7 percent for the quarter primarily as a result of lower-than-planned sales volumes and production timing problems. The production timing problems were encountered during the expansion of the segment's Monterrey, Mexico facility and at the segment's Cochran, Georgia plant. The problems encountered with the expansion of the Monterrey facility restrained production rates and resulted in an under-absorption of costs. Inefficiencies experienced at the Cochran, Georgia facility resulted primarily from shifting production from the California plant that was closed during the first quarter. Although the production issues were primarily resolved by the end of the third quarter, increased operating costs at the Cochran facility associated with the absorption of production from the California plant may continue into the fourth quarter. Year-to-date operating profit increased 12.1 percent driven by contributions from Holophane and Peerless, offset somewhat by a $1.0 million pretax charge during the first quarter of fiscal 2000 for closing a manufacturing facility in California and due to the aforementioned lower-than-planned sales volumes and production timing problems. Chemical segment revenue increased 5.0 percent to $133.6 million for the third quarter and 3.5 percent to $373.2 million for the nine months due to continued growth in the retail channel and higher revenue from the institutional and industrial channels. Operating profit of $14.6 million and $34.6 million during the three and nine months ended May 31, 2000, respectively, was higher than last year's results primarily due to higher revenue and a reduction in general and administrative expenses. Textile rental segment revenue, representing all of the company's service revenues, increased 3.7 percent to $83.0 million for the quarter and 3.9 percent to $238.2 million for the nine months. The current year revenue increase was primarily related to acquisitions. Operating profit was $8.0 million for the third quarter and $19.4 million for the nine months down from $10.2 million and $26.1 million for the same periods last year. Excluding a $2.3 million pretax gain on the sale of industrial contracts included in the prior year third quarter, operating profit remained flat for the quarter. Year-to-date operating profit was lower primarily because last year's results included $2.3 million pretax gain on the sale of industrial contracts and $5.7 million of unusual gains related to the 1997 uniform plants divestiture and restructuring activities, offset by a $2.2 million write-off for merchandise inventory used by Page 11 unprofitable accounts. Excluding unusual items in both years, year-to-date operating margins were slightly lower. Envelope segment revenue remained flat for the quarter and increased 13.3 percent to $165.7 million for the nine months ended May 31, 2000. The year-to-date revenue increase primarily related to additional sales resulting from the Gilmore Envelope acquisition and growth in the segment's base business, offset somewhat by the prior year divestiture of Techno-Aide/Stumb Metal Products in June 1999. Operating profit decreased $3.7 million and $4.9 million for the three and nine months ended May 31, 2000, respectively, compared to the same periods last year. Operating margins decreased during the three and nine month periods as a result of lower average margins from prior-year acquisitions, lower volumes in the segment's higher-margin direct mail market, recent paper price increases which have not been effectively passed on to customers, pre-production costs associated with newly acquired manufacturing equipment, the relocation of two manufacturing facilities, and depreciation from a new enterprise resource planning system. Corporate expenses increased to $5.4 million and $13.3 million during the three and nine months ended May 31, 2000, respectively, due to costs related to strategic initiatives. Net interest expense increased $8.3 million to $11.7 million and $24.0 million to $32.2 million for the three and nine months ended May 31, 2000, respectively, as a result of increased borrowings to finance recent acquisitions and higher working capital requirements related to production and start-up issues primarily in the lighting equipment and envelope segments. Additionally, the provision for income taxes was 38.8 percent of pretax income for the quarter compared with 37.2 percent in the prior-year period, primarily due to goodwill recorded in the Holophane acquisition, which is not deductible for tax purposes. Liquidity and Capital Resources Operating Activities Operations provided cash of $41.8 million during the first three quarters of fiscal 2000 compared with $115.0 million during the respective period of the prior year. The 2000 cash flow was lower because of an increase in inventory, primarily in the lighting equipment and chemical segments, a decrease in current liabilities related to incentive compensation plan payments, an increase in income tax payments, and a decrease in accounts payable. Investing Activities Investing activities used cash of $100.7 million for the nine months ended May 31, 2000 compared with cash used of $105.2 million in the nine months ended May 31, 1999. The change in investing cash flows related primarily to a decrease in acquisition spending, offset by an increase in purchases of property, plant, and equipment. Acquisition spending during the first nine months of fiscal 2000 was $21.6 million and related primarily to Holophane. The company purchased Holophane in July 1999 for approximately $470.8 million, including approximately $20 million for the payoff of Holophane's existing debt. Of the total purchase price, $454.6 million was paid during fiscal 1999 and $14.5 million was paid during the first nine months of the current year, primarily for the cash-out of remaining Holophane shares. Other acquisition spending during the first nine months of fiscal 2000 related to several minor purchases in the textile rental segment. Prior-year acquisition spending of $62.9 million was primarily due to the lighting equipment segment's purchase of certain assets of GTY Industries (d/b/a "Hydrel"), a manufacturer of architectural-grade lighting fixtures for landscape, in-grade, and underwater applications, and the purchase of Peerless Corporation ("Peerless"), a manufacturer of high performance indirect/direct suspended lighting products. In addition, the envelope segment purchased substantially all of Gilmore Envelope, an envelope manufacturer headquartered in Los Angeles, California, in February 1999. Capital expenditures were $78.8 million in the first nine months of fiscal 2000, compared with $48.3 million in the first nine months of fiscal 1999. Capital spending during the first three quarters of fiscal 2000 was primarily attributable to the lighting equipment, envelope, and textile rental segments. The lighting equipment segment invested in land, buildings, and equipment for a new plant and in manufacturing upgrades and improvements. Capital expenditures in the envelope segment related primarily to manufacturing process improvements, new folding capacity, and information systems. The textile rental segment's expenditures related to replacing old equipment and to delivery truck purchases and refurbishments. The lighting equipment segment's capital expenditures in the respective prior-year period related to the purchase of land and buildings for a new plant, manufacturing improvements and upgrades for capacity expansion, and implementation of new technology. Expenditures in the textile rental segment in fiscal 1999 were for implementation of new technology, production enhancements, and delivery truck purchases and refurbishments. The envelope segment's expenditures in the prior year related primarily to manufacturing process improvements, information systems, facility expansion, and new folding capacity. Page 12 Management believes current cash balances, anticipated cash flows from operations, available funds from the commercial paper program or the committed credit facilities, and the complimentary lines of credit are sufficient to meet the company's planned level of capital spending and general operating cash requirements for the next twelve months. Financing Activities Cash provided by financing activities increased $25.4 million to $59.0 million in the first three quarters of fiscal 2000 primarily as a result of the suspension of the company's share repurchase program in the third quarter of fiscal 1999, offset somewhat by a decrease in cash provided by debt. Although the company has a standing annual authorization to repurchase 2.0 million shares plus the number of shares issued or reissued in any one year for acquisitions and under benefit plans, the company does not plan to purchase additional shares until its ratio of total debt to capitalization is within the company's stated objective of 30 to 40 percent. For the nine months ended May 31, 2000, net borrowings provided cash of $95.9 million compared with cash provided by net borrowings of $110.9 million during the same period of the prior year. Current-year borrowings were used for general corporate purposes, including working capital requirements, capital expenditures, and acquisitions. At May 31, 2000 and August 31, 1999, approximately $250 million in commercial paper was classified as long-term, as the company had the ability to refinance the commercial paper on a long-term basis. Funds borrowed during the first three quarters of fiscal 1999 were used primarily to finance acquisitions, share repurchases, and internal growth. Year-to-date dividend payments totaled $39.9 million, or 98 cents per share, compared with $38.9 million, or 95 cents per share, for the prior-year period. On January 5, 2000, the regular quarterly dividend rate was increased 3.1 percent to 33 cents per share, or an annual calendar year rate of $1.32 per share. Environmental Matters See Note 7: Environmental Matters for a discussion of the company's environmental issues. Impact of the Year 2000 Issue The company did not experience, nor does it expect to experience, significant disruptions to its mission critical systems related to the Year 2000 Issue. As of July 14, 2000, all of the company's mission critical systems have been tested and are fully operational. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks that may impact the Consolidated Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash Flows due to changing interest rates and foreign exchange rates. The company does not currently participate in any significant hedging activities, nor does it currently utilize any significant derivative financial instruments. The following discussion provides additional information regarding the company's market risks. Interest Rates- Interest rate fluctuations expose the company's variable-rate debt to changes in interest expense and cash flows. The company's variable-rate debt, primarily commercial paper, amounted to $483.1 million at May 31, 2000. Based on outstanding borrowings at quarter end, a 10 percent adverse change in effective market interest rates at May 31, 2000 would result in additional annual after-tax interest expense of approximately $2.0 million. Although a fluctuation in interest rates would not affect interest expense or cash flows related to the $160 million publicly traded notes, the company's primary fixed-rate debt, a 10 percent increase in effective market interest rates at May 31, 2000 would decrease the fair value of these notes to approximately $133.3 million. Foreign Exchange Rates-The majority of the company's revenue, expense, and capital purchases are transacted in U.S. dollars. International operations during the first nine months of fiscal 2000, primarily in the lighting equipment and chemical segments, represented less than 10 percent of revenue, operating profit, and identifiable assets. The company does not believe a 10 percent fluctuation in average foreign currency rates would have a material effect on its consolidated financial statements or results of operations. Page 13 Cautionary Statement Regarding Forward-Looking Information From time to time, information provided by the company may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties. Consequently, actual results may differ materially from those indicated by the forward-looking statements. Statements herein which may be considered forward-looking include those regarding: (a) the company's current expectations or beliefs with respect to the outcome and impact on the company's business, financial condition, or results of operations of the Year 2000 Issue and environmental issues; (b) the resolution and possible future impact of production issues in the lighting equipment segment; and (c) management's intentions or expectations with regard to debt-to-capitalization objectives, future earnings, projected capital expenditures, future cash flows, debt refinancing, and share repurchases. A variety of risks and uncertainties could cause the company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the company's forward-looking statements. The risks and uncertainties include without limitation the following: (a) the uncertainty of general business and economic conditions, including the potential for a slowdown in non-residential construction awards, fluctuations in commodity and raw material prices, market demand for public debt, interest rate changes, and foreign currency fluctuations; (b) the ability to realize the anticipated benefits of strategic initiatives, including but not limited to the achievement of synergies related to acquisitions and the achievement of sales growth across the business segments through a combination of increased pricing, enhanced sales force, new products, improved customer service, and acquisitions; (c) the successful completion of changes to manufacturing operations; (d) unexpected outcomes in the company's future legal proceedings; and (e) the ability of the company to pass raw material price increases on to its customers. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits are listed on the Index to Exhibits (page 15). (b) A Form 8-K was filed on May 24, 2000 in regards to the company's revised third quarter earnings outlook. Page 14 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 14, 2000 /s/ KEN MURPHY KEN MURPHY SENIOR VICE PRESIDENT AND GENERAL COUNSEL DATE July 14, 2000 /s/ BROCK HATTOX BROCK HATTOX EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Page 15
INDEX TO EXHIBITS Page No. EXHIBIT 10(iii)A (1) (a) Amendment No. 3 to Restated and Amended Supplemental Retirement 16 Plan for Executives of National Service Industries, Inc., Dated September 18, 1996 (b) Amendment No. 4 to Restated and Amended Supplemental Retirement 18 Plan for Executives of National Service Industries, Inc., Dated December 1, 1996 (c) Appendix D to Restated and Amended Supplemental Retirement Plan 20 for Executives of National Service Industries, Inc., Effective October 18, 1996 (d) Appendix G to Restated and Amended Supplemental Retirement Plan 21 for Executives of National Service Industries, Inc., Effective May 15, 2000 (2) Employment Letter Agreement between National Service Industries, 22 Inc. and Joseph G. Parham, Jr., Dated May 3, 2000 (3) Severance Protection Agreement between National Service Industries, Reference is made to Inc. and Joseph G. Parham, Jr., Effective May 15, 2000 Exhibit 10(iii)A(34) of registrant's Form 10-K for the fiscal year ended August 31, 1999, which is incorporated herein by reference. (4) Bonus Letter Agreement between National Service Industries, Inc. and Reference is made to Joseph G. Parham, Jr., Effective May 15, 2000 Exhibit 10(iii)A(35) of registrant's Form 10-K for the fiscal year ended August 31, 1999, which is incorporated herein by reference. (5) Incentive Stock Option Agreement for Executive Officers Effective 26 beginning May 15, 2000 between National Service Industries, Inc. and Joseph G. Parham, Jr. (6) Aspiration Achievement Incentive Award Agreement for the Performance 33 Cycle beginning September 1, 1998 between National Service Industries, Inc. and Joseph G. Parham, Jr., Dated May 15, 2000 [a confidential portion of which has been omitted and filed separately with the Securities and Exchange Commission] (7) Aspiration Achievement Incentive Award Agreement for the Performance 42 Cycle beginning September 1, 1999 between National Service Industries, Inc. and Joseph G. Parham, Jr., Dated May 15, 2000 [a confidential portion of which has been omitted and filed separately with the Securities and Exchange Commission] EXHIBIT 12 Ratio of Earnings to Fixed Charges 52 EXHIBIT 27 Financial Data Schedule 53
EX-10 2 0002.txt EXHIBIT 10(III)A(1)(A) Page 16 Exhibit 10(iii)A(1)(a) AMENDMENT NO. 3 TO THE SUPPLEMENTAL RETIREMENT PLAN FOR EXECUTIVES OF NATIONAL SERVICE INDUSTRIES, INC. THIS AMENDMENT made as of the 18th day of September, 1996, by National Service Industries, Inc., a Delaware corporation ("NSI"); WITNESSETH: WHEREAS, NSI has previously established the Supplemental Retirement Plan for Executives of National Service Industries, Inc. ("Plan") for the exclusive benefit of its eligible employees and their beneficiaries; and WHEREAS, NSI desires to amend the Plan in accordance with the power of amendment contained therein; NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section 1.1(a)(2) is hereby amended by deleting the first sentence of the present section and substituting the following in lieu thereof: "A Participant's Accrued Pension as of any given date that is after the date he has attained both at least age 55 and completed at least 10 years of service from his Service Date to his Early Retirement Date, and before his Normal Retirement Date, shall be an amount equal to 45% of his Average Monthly Compensation, minus 50% of his Primary Social Security Benefit." 2. Section 3.3 is hereby amended by deleting the first sentence of the present section and substituting the following in lieu thereof: Page 17 Exhibit 10(iii)A(1)(a) "A Participant may retire after his 55th birthday and the date of completion of at least 10 years of service from his Service Date to his Early Retirement Date and be entitled to an Early Retirement Accrued Pension." 3. This Amendment shall be effective September 18, 1996. Except as hereby amended, the Plan shall remain in full force and effect. NATIONAL SERVICE INDUSTRIES, INC. ATTEST: By: /S/ DAVID LEVY /S/ KEN MURPHY (CORPORATE SEAL) EX-10 3 0003.txt EXHIBIT 10(III)A(1)(B) Page 18 Exhibit 10(iii)A(1)(b) AMENDMENT NO. 4 TO THE SUPPLEMENTAL RETIREMENT PLAN FOR EXECUTIVES OF NATIONAL SERVICE INDUSTRIES, INC. THIS AMENDMENT made as of the 1st day of December, 1996 by NATIONAL SERVICE INDUSTRIES, INC., a Delaware corporation ("NSI"); WITNESSETH WHEREAS, NSI previously established the Supplemental Retirement Plan for Executives of National Service Industries, Inc. ("Plan") for the exclusive benefit of its eligible executives and their beneficiaries; and WHEREAS, NSI desires to amend the Plan to clarify the benefits payable upon the death of a participating executive; NOW, THEREFORE, the Plan is hereby amended as follows: 1. Article IV is hereby amended by deleting the present provision in its entirety and substituting the following in lieu thereof: "ARTICLE IV DEATH BENEFITS The Death Benefits payable following the death of a Participant shall be determined as follows: (a) Death Prior to Eligibility for Early Retirement or Normal Retirement: No death benefit is provided under this Plan for Participants who die prior to completing the eligibility requirements for Early Retirement or Normal Retirement. (b) Death After Attaining Eligibility for Early Retirement or Normal Retirement: If a Participant dies while employed by the Company or an Adopting Employer after completing the eligibility requirements for Early Retirement or Normal Retirement, the Participant's designated beneficiary shall be paid the amount which would have been payable to the Participant under this Plan had the Participant retired immediately prior to the moment of his death, with such Page 19 Exhibit 10(iii)A(1)(b) payments commencing on the first day of the month following the date of death of the Participant. The Participant's beneficiary shall receive the 120 monthly payments under the normal form of pension payment (as described in Section 3.7) and the payments shall cease after such 120 monthly payments have been made. In computing the amount payable under this Plan, the Actuarial Equivalent of any Group Term Life Insurance benefits (Policy No. 8800-1(52) or its replacement) payable as a result of the Participant's death while covered under Pension Plan C shall be deemed to have been paid as a death benefit from Pension Plan C. If the Participant terminates employment after satisfying the requirements for Early Retirement but delays commencement of his Pension, he shall be covered by the death benefit provisions of this subsection (b) until his Pension payments commence." 2. This Amendment No. 4 shall be effective as of the date hereof. Except as hereby modified, the Plan shall remain in full force and effect. IN WITNESS WHEREOF, NSI has caused this Amendment No. 4 to be executed by its duly authorized corporate officers as of the date and year first above written. NATIONAL SERVICE INDUSTRIES, INC. By: /S/ DAVID LEVY ATTEST: By:/S/ KEN MURPHY EX-10 4 0004.txt EXHIBIT 10(III)A(1)(C) Page 20 Exhibit 10(iii)A(1)(c) APPENDIX D D.1 Eligible Individual Don W. Hubble D.2 Effective Date October 18, 1996 D.3 Special Provisions The following special provision 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 twenty (20) years of Credited Service for benefit accrual and vesting purposes under the Plan. EX-10 5 0005.txt EXHIBIT 10(III)A(1)(D) Page 21 Exhibit 10(iii)A(1)(d) APPENDIX G E.1 Eligible Individual Joseph G. Parham, Jr. E.2 Effective Date Pursuant to the Eligible Individual's employment agreement letter, dated May 3, 2000 ("Employment Letter") and Section 2.1(b) of the Plan, for purposes of the Plan the Eligible Individual's date of participation shall be May 15, 2000. E.3 Special Provisions The following special provision shall apply to the Eligible Individual's participation in the Plan. (a) The Eligible Individual will qualify as a Vested Terminee if he completes 5 years of employment with NSI from May 15, 2000 to his Termination Date. (b) The Eligible Individual will be eligible for Early Retirement under Sections 1.1(a)(2) and 3.3 upon attainment of age 60 while actively employed by NSI (at which time he will have more than 9 years of service), provided that his Early Retirement Accrued Pension shall be calculated based upon his Credited Service and Eligible Service at his date of Early Retirement. (C) In the event prior to the Eligible Individual's completion of 5 years of employment with NSI, James S. Balloun retires or terminates employment as Chairman, President and Chief Executive Officer of NSI, and thereafter the Eligible Individual's employment is terminated for any reason other than voluntary termination, termination upon death or Disability (as defined in the Employment Letter) or termination by NSI for Cause (as defined in the Employment Letter), the Eligible Individual will be eligible to receive Early Retirement Benefits commencing at the time of termination, calculated by treating the Eligible Individual as if he were age 55 at the date of termination and had completed 5 years of Credited Service as of such date. Except as expressly provided herein, the Eligible Individual's Early Retirement Pension shall be calculated and payable in accordance with the usual provisions of the Plan. Except as otherwise specifically provided in this Appendix G, the Eligible Individual's benefits under the Plan shall be determined in the same manner as for other participants. EX-10 6 0006.txt EXHIBIT 10(III)A(2) Page 22 Exhibit 10(iii)A(2) May 3, 2000 Joseph G. Parham, Jr. 27 Whitney Street Chestnut Hill, Massachusetts 02467-2936 Dear Joe: This letter will confirm the terms of your employment by National Service Industries, Inc. ("NSI"), effective May 15, 2000 (the "Effective Date"). We are enthusiastic about your decision to join NSI and look forward to working with you to build a bigger, stronger NSI. The terms of your employment, which are subject, of course, to approval by our Executive Resource and Nominating Committee and the Board of Directors (or its Executive Committee) and satisfactory completion of NSI's normal pre-employment screening procedures, will be as follows: 1. Title and Duties - As Senior Vice President, Human Resources , you will be an executive officer of NSI reporting to the Chairman, President, and Chief Executive Officer of NSI. You will have responsibility for the Human Resources function of NSI and its businesses and any other duties consistent with your position which may be assigned to you by the Chairman, President, and Chief Executive Officer of NSI. You will devote substantially all of your working time and attention to the business and affairs of NSI. 2. Base Salary - Your base salary will be Twenty-five Thousand Dollars ($25,000) per month or the equivalent annual rate of Three Hundred Thousand Dollars ($300,000), subject to annual review. Executive officer reviews at NSI are normally conducted for the April Board meeting effective March 1. In addition, you will receive a signing bonus of Ten Thousand Dollars ($10,000) payable within thirty (30) days after the Effective Date. 3. Annual Incentive Compensation - You will participate in the NSI Management Compensation and Incentive Plan (the "MCIP") for the fiscal year beginning September 1, 2000 with a target bonus equal to 45% of your base salary. For the fiscal year ending August 31, 2000, you will receive a bonus equal to $39,945. Page 23 Exhibit 10(iii)A(2) 4. Long-Term Achievement Incentive Plan - You will receive a grant of employee stock options for ten thousand (10,000) shares of stock under our current long-term incentive plan upon your arrival at NSI. You will also be entitled to participate in the aspiration award portion of the current long-term incentive plan on a prorated basis for the number of months you are employed with NSI during the remainder of the three-year cycle ending August 31, 2001 and the remainder of the three-year cycle ending August 31, 2002. In addition, you will participate in the Plan for the three-year cycle beginning September 1, 2000 on a comparable basis with other executive officers of NSI who report to me. This Plan currently provides for annual grants of stock options and annual "aspiration awards" having a total value equal to 160% of salary at commitment (or target) level performance. Stock options represent 70% of total value (or 112% of salary) and aspiration awards represent 30% of total value (or 48% of salary) at commitment level performance. The payout for aspiration awards for aspiration level performance is equal to five times the value of the payout for commitment level performance (or 240% of salary). Failure to achieve threshold level performance will result in no payout. 5. Retirement Plans - Upon satisfying the eligibility requirements, you will be eligible to participate in NSI's tax-qualified retirement plans, NSI Pension Plan C and the NSI 401(k) Plan for Corporate Office Employees. In addition, upon employment, you will become a participant in the Supplemental Retirement Plan for Executives of NSI (the "SERP"). Your benefits under the SERP will be determined pursuant to the standard terms of the SERP, except that you will be credited with service under the SERP for each year of actual service, you will become vested in your SERP benefit after completing five (5) years of employment with NSI, and you will be eligible for early retirement at age sixty (60). If, after the retirement or earlier termination of James S. Balloun as Chairman, President, and Chief Executive Officer of NSI, but prior to your completion of five (5) years of service with NSI, your employment is terminated for any reason other than voluntary termination, termination upon death or Disability (as defined below), or termination by NSI for Cause (as defined below), you will be eligible for early retirement benefits at the time of termination as if you were 55 and based on five (5) years of service. 6. Deferred Compensation Plans - You will be eligible to participate immediately in the NSI Executives' Deferred Compensation Plan (the "EDCP") and the NSI Supplemental Deferred Savings Plan (the "SDSP"). Under the EDCP, you will initially be able to defer up to $2500 from your annual bonus; the deferred amount is matched by NSI and bears interest at a variable rate, currently the prime rate less two percentage points. Under the SDSP, you may defer up to 50% of your annual cash compensation, and your deferral earns interest at the prime rate. (As an executive officer with eligibility for the SERP, you will not be eligible to receive the company contribution or match under the SDSP.) Page 24 Exhibit 10(iii)A(2) 7. Medical, Life Insurance, and Other Employee Benefits - You will be eligible to participate in the medical, dental, life insurance, disability, and other benefit programs generally made available by NSI to its executive officers and their families, including a car allowance of Four Hundred Dollars ($400) per month. We will reimburse you for your COBRA expenses until you are covered under our program. You will also be eligible to participate in NSI's financial planning program. In addition, you will be entitled to four (4) weeks vacation per calendar year. 8. Relocation Expenses - NSI will pay the following relocation expenses: (a) your expenses for moving your household effects to Atlanta; (b) brokerage and closing costs (up to two points) you incur in connection with the sale of your home in Chestnut Hill, Massachusetts and the purchase of a home in Atlanta; (c) reasonable travel expenses to and from Chestnut Hill, Massachusetts until you have moved your residence to Atlanta; and (d) a one-time payment of one month's salary for your assistance in the relocation. In addition to the foregoing, we will assist you in obtaining a bridge loan should you purchase a home in Atlanta before selling your home in Chestnut Hill. 9. Employment at Will/Severance Payment/Change in Control - Your employment will be at will and may be terminated by either NSI or you at any time for any reason, with or without notice. Except in the event of termination in connection with a Change in Control of NSI (as defined in the Severance Protection Agreement that will cover you), you will be entitled to the following severance payment: If your employment is terminated for any reason other than voluntary termination, termination upon death or Disability (as defined below), or termination by NSI for Cause (as defined below), you will receive a severance payment (payable in semi-monthly installments) equal to your then current salary for a period of twelve (12) months, subject to your execution of a release and severance agreement in a form acceptable to both parties. For purposes of entitlement to a severance benefit, "Cause" shall mean any act(s) on your part that constitutes fraud, a felony involving dishonesty, a breach of fiduciary duty, insubordination, or gross malfeasance or habitual neglect of your duties for NSI, and "Disability" shall mean a physical or mental infirmity which impairs your ability to substantially perform your duties as Senior Vice President, Human Resources with or without reasonable accommodation for a period of one hundred eighty (180) consecutive days. Page 25 Exhibit 10(iii)A(2) With respect to Change in Control situations, you will be covered by a Severance Protection Agreement with the same provisions as are applicable to NSI's executive officers. In the event of your termination in connection with a Change in Control that entitles you to benefits under the Severance Protection Agreement, you will receive the greater of the payments and benefits provided under the Severance Protection Agreement or the severance payments described above. The base salary, annual incentive, long-term incentives, nonqualified retirement benefits, and any severance payments will be structured to ensure the tax deductibility to NSI of the payments and benefits under the Internal Revenue Code of 1986. We will prepare a SERP provision and Severance Protection Agreement to evidence the arrangements set forth in this letter. We are delighted you are joining NSI and we look forward to a long and mutually satisfactory relationship. This letter outlines your employment relationship with NSI; if you agree with the employment terms as outlined above, please sign and date both copies of this letter agreement and return one copy to me at your earliest convenience. Sincerely, /S/ James S. Balloun James S. Balloun ACCEPTED AND AGREED TO THIS 15th DAY OF MAY , 2000 /S/ Joseph G. Parham, Jr. Joseph G. Parham, Jr. EX-10 7 0007.txt EXHIBIT 10(III)A(5) Page 26 Exhibit 10(iii)A(5) INCENTIVE STOCK OPTION AGREEMENT FOR EXECUTIVE OFFICERS AND OPERATING UNIT PRESIDENTS THIS AGREEMENT, made as of the 15th day of May, 2000(the "Grant Date"), between National Service Industries, Inc., a Delaware corporation (the "Company"), and Joseph G. Parham, Jr. (the "Optionee"). WHEREAS, the Company has adopted the National Service Industries, Inc. Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional incentive to certain officers and key employees of the Company and its Subsidiaries; and WHEREAS, the Optionee performs services for the Company or one of its Subsidiaries; and WHEREAS, the Committee responsible for administration of the Plan has determined to grant the Option to the Optionee as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. 1.1 The Company hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of 10,000 whole Shares subject to, and in accordance with, the terms and conditions set forth in this Agreement. 1.2 The Option is intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code and shall be so construed; provided, however, that nothing in this Agreement shall be interpreted as a representation, guarantee, or other undertaking on the part of the Company that the Option is or will be determined to be an Incentive Stock Option within the meaning of Section 422 of the Code. To the extent this Option is not treated as an Incentive Stock Option, it will be treated as a Nonqualified Stock Option. 1.3 This Agreement shall be construed in accordance and consistent with, and subject to, the provisions of the Plan (the provisions of which are incorporated herein by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. 2. Purchase Price. The price at which the Optionee shall be entitled to purchase Shares upon the exercise of the Option shall be $23.125 per Share. Page 27 Exhibit 10(iii)A(5) 3. Duration of Option. The Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the "Exercise Term"); provided, however, that the Option may be earlier terminated as provided in Section 6 hereof. 4. Exercisability of Option. Unless otherwise provided in this Agreement or the Plan, the Option shall entitle the Optionee to purchase, in whole at any time or in part from time to time, 25% of the total number of Shares covered by the Option after the expiration of one (1) year from the Grant Date and an additional 25% of the total number of Shares covered by the Option on each of the second, third, and fourth anniversaries of the Grant Date. Each such right of purchase shall be cumulative and shall continue, unless sooner exercised or terminated as herein provided during the remaining period of the Exercise Term. 5. Manner of Exercise and Payment. 5.1 Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by delivery of written notice to the Company, at its principal executive office. Such notice shall state that the Optionee is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. If requested by the Committee, such person or persons shall (i) deliver this Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option. 5.2 The notice of exercise described in Section 5.1 shall be accompanied by the full purchase price for the Shares in respect of which the Option is being exercised, in cash, by check, or by transferring Shares to the Company having a Fair Market Value on the day preceding the date of exercise equal to the cash amount for which such Shares are substituted. 5.3 Upon receipt of notice of exercise and full payment for the Shares in respect of which the Option is being exercised, the Company shall, subject to Section 17 of the Plan, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise was effective. 5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership rights with respect to such Shares. Page 28 Exhibit 10(iii)A(5) 6. Termination of Employment. 6.1 In General. If the employment of the Optionee with the Company and its Subsidiaries shall terminate for any reason, other than for the reasons set forth in Sections 6.2 and 7.2 below, the Option shall continue to be exercisable (to the extent the Option was vested and exercisable on the date of the Optionee's termination of employment) at any time within three (3) months after the date of such termination of employment, but in no event after the expiration of the Exercise Term. 6.2 Termination of Employment Due to Death, Disability, or Retirement. If the Optionee's termination of employment is due to death, Disability, or Retirement (termination on or after age 65), or if Optionee terminates employment after age 55, the following shall apply: (a) Termination Due To Death. In the event the Optionee dies while actively employed, the Option shall become immediately and fully exercisable, and shall remain exercisable at any time prior to the expiration of the lesser of one (1) year from the date of death or the remaining Exercise Term, by (A) such person(s) that have acquired the Optionee's rights under such Options by will or by the laws of descent and distribution, or (B) if no such person described in (A) exists, the Optionee's estate or representative of the Optionee's estate. (b) Termination by Disability. In the event the employment of the Optionee is terminated by reason of Disability, the Option shall become immediately and fully exercisable as of the date the Committee determines the Optionee terminated for Disability and shall remain exercisable at any time prior to the expiration of the lesser of one (1) year from the date of termination or the remaining Exercise Term. (c) Termination by Retirement. In the event the employment of the Optionee is terminated by reason of Retirement, the Option shall continue to vest in accordance with the original schedule (just as if the Optionee had remained employed) and shall remain exercisable at any time prior to the expiration of the lesser of five (5) years from the date of termination or the remaining Exercise Term. In the event of the Optionee's death after Retirement, the Option shall continue to vest and be exercisable in accordance with this subsection (c) as if the Page 29 Exhibit 10(iii)A(5) Optionee had lived and the Option shall be exercisable by the persons described in (a) above. (d) Termination After Attaining Age 55. If the Optionee terminates employment (other than as a result of death or Disability) after attaining age 55 but prior to age 65, unless the Committee determines otherwise at the time of such termination, the Option shall continue to vest in accordance with the original schedule (just as if the Optionee had remained employed) and shall remain exercisable at any time prior to the expiration of the lesser of five (5) years or the remaining Exercise Term. In the event of the Optionee's death after Retirement, the Option shall continue to vest and be exercisable in accordance with this subsection (d) as if the Optionee had lived and the Option shall be exercisable by the persons described in (a) above. 7. Effect of Change in Control. 7.1 Notwithstanding anything contained to the contrary in this Agreement, in the event of a Change in Control, (i) the Option shall become immediately and fully exercisable, and (ii) the Optionee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control, the Option or any portion of the Option to the extent not yet exercised, and the Optionee shall be entitled to receive immediately a cash payment in an amount equal to the excess, if any, of (A) the Fair Market Value, at the time of surrender, of the Shares subject to the Option or portion thereof surrendered, over (B) the aggregate purchase price for such Shares under the Option; provided, however, that if the Option was granted within six (6) months prior to the Change in Control and the Optionee may be subject to liability under Section 16(b) of the Exchange Act, the Optionee shall be entitled to surrender the Option, or any portion of the Option, for cancellation during the sixty (60) day period following the expiration of six (6) months from the Grant Date and to receive the amount described above with respect to such surrender for cancellation. 7.2 If the employment of the Optionee is terminated within two (2) years following a Change in Control, all vested Options shall continue to be exercisable at any time within three (3) years after the date of such termination of employment, but in no event after expiration of the Exercise Term. 8. Nontransferability. The Option shall not be transferable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee. Page 30 Exhibit 10(iii)A(5) 9. No Right to Continued Employment. Nothing in this Agreement or the Plan shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment by the Company or a Subsidiary, nor shall this Agreement or the Plan interfere in any way with the right of the Company or a Subsidiary to terminate the Optionee's employment at any time. 10. Adjustments. In the event of a Change in Capitalization, the Committee may make appropriate adjustments to the number and class of Shares or other stock or securities subject to the Option and the purchase price for such Shares or other stock or securities. The Committee's adjustment shall be made in accordance with the provisions of Section 11 of the Plan and shall be effective and final, binding, and conclusive for all purposes of the Plan and this Agreement. 11. Terminating Events. Subject to Section 7 hereof, upon the effective date of (i) the liquidation or dissolution of the Company or (ii) a merger or consolidation of the Company (a "Transaction"), the Option shall continue in effect in accordance with its terms and the Optionee shall be entitled to receive in respect of all Shares subject to the Option, upon exercise of the Option, the same number and kind of stock, securities, cash, property, or other consideration that each holder of Shares was entitled to receive in the Transaction. 12. Withholding of Taxes and Notice of Disposition. 12.1 The Company shall have the right to deduct from any distribution of cash to the Optionee an amount equal to the federal, state, and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to the Option. If the Optionee is entitled to receive Shares upon exercise of the Option, the Optionee shall pay the Withholding Taxes (if any) to the Company in cash prior to the issuance of such Shares. In satisfaction of the Withholding Taxes, the Optionee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Committee, to have withheld a portion of the Shares issuable to him or her upon exercise of the Option, having an aggregate Fair Market Value equal to the withholding Taxes, provided that, if the Optionee may be subject to liability under Section 16(b) of the Exchange Act, the election must comply with the requirements applicable to Share transactions by such Optionees. 12.2 If the Optionee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to him pursuant to his exercise of the Option within the two-year period commencing on the day after the Grant Date or within the one-year period commencing on the day after the date of transfer of such Share Page 31 Exhibit 10(iii)A(5) or Shares to the Optionee pursuant to such exercise, the Optionee shall, within ten (10) days of such disposition, notify the Company thereof, by delivery of written notice to the Company at its principal executive office, and immediately deliver to the Company the amount of Withholding Taxes. 13. Employee Bound by the Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 14. Modification of Agreement. This Agreement may be modified, amended, suspended, or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 15. Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 16. Governing Law. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 17. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon each successor corporation. This Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding, and conclusive upon the Optionee's heirs, executors, administrators, and successors. 18. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction, or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding, and conclusive on the Optionee and the Company for all purposes. Page 32 Exhibit 10(iii)A(5) ATTEST: NATIONAL SERVICE INDUSTRIES, INC. /s/ Helen Haines By: /s/ James S. Balloun Secretary James S. Balloun Chairman, President, and Chief Executive Officer /s/ Joseph G. Parham, Jr. Name of Optionee: Joseph G. Parham, Jr. EX-10 8 0008.txt EXHIBIT 10(III)A(6) Page 33 Exhibit 10(iii)A(6) ASPIRATION ACHIEVEMENT INCENTIVE AWARD AGREEMENT FOR EXECUTIVE OFFICERS THIS AGREEMENT, made as of the 15th day of May, 2000 (the "Grant Date"), between NATIONAL SERVICE INDUSTRIES, INC., a Delaware corporation ("NSI"), and National Service Industries, Inc. (GA), a Subsidiary of NSI (together, the "Company"), and joseph g. parham, jr. (the "Grantee"). WHEREAS, NSI has adopted the National Service Industries, Inc. Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional incentives to certain officers and key employees of NSI and its Subsidiaries; and WHEREAS, the Committee responsible for administration of the Plan has determined to grant to the Grantee an Aspiration Achievement Incentive Award as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Aspiration Award. 1.1 The Company hereby grants to the Grantee an Aspiration Achievement Incentive Award (the "Award"), which has a value determined as provided in Section 2 below based upon the performance of NSI during the Performance Cycle from September 1, 1998 to August 31, 2001. As provided in the Plan, Grantee's right to payment of this Award is dependent upon Grantee's continued employment in Grantee's current position with the Company, or in a position with responsibilities of substantially similar value to the Company during the Performance Cycle. Under certain circumstances as described below, Grantee may be entitled to receive payment for some portion of the Award if Grantee's employment terminates prior to the end of the Performance Cycle. 1.2 The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. This Agreement shall be construed in accordance with, and subject to, the provisions of the Plan (the provisions of which are hereby incorporated by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. 2. Performance Measure and Performance Levels. The Committee has established the performance measure (the "Performance Measure"), and award and performance levels set forth in Appendix A attached hereto. The chart in Appendix A specifies a Commitment performance Page 34 Exhibit 10(iii)A(6) level, at which the Commitment Level Award will be paid, an Aspiration performance level, at or above which an Aspiration Level Award will be paid, and a threshold performance level, at which a minimum incentive award will be paid and below which no award will be paid. For each level of performance at or above the threshold performance level through the Aspiration performance level, Grantee will receive an award determined in accordance with the chart and formulae set forth in Appendix A. The terms used in determining the Performance Measure are defined in Appendix B. 3. Determination of Aspiration Award. 3.1 Determination Notice. Subject to Section 3.2, as soon as practical following the last day of the Performance Cycle, the Committee will determine, in accordance with Section 7(c) of the Plan, the performance level of NSI with respect to the Performance Measure for the Performance Cycle. The Committee may in determining the performance level with respect to the Performance Measure adjust NSI's financial results for the Performance Cycle to exclude the effect of unusual charges or income items which are distortive of financial results for the Performance Cycle; provided, that, in determining financial results, items whose exclusion from consideration will increase the performance level of NSI shall only have their effects excluded if they constitute "extraordinary items" under generally accepted accounting principles and all such items shall be excluded. The Committee shall also adjust the performance calculations to exclude the unanticipated effect on financial results of changes in the Code, or other tax laws, and the regulations thereunder. The Committee shall also exclude from consideration the effect on financial performance of each of the following events or items where the result of excluding the particular event or item is to increase the performance level of NSI: (i) an acquisition or a divestiture involving more than $10 million in net worth or $25 million in business revenues; (ii) an equity restructuring involving more than $1 million; (iii) asset impairment charges involving more than $1 million and restructuring costs involving more than $1 million associated with facility closings or reduction in employment levels; (iv) changes in accounting treatment or rules involving more than $1 million. The Committee may decrease the amount of the Award otherwise payable to Grantee if, in the Committee's view, such adjustment is necessary or desirable, regardless of the extent to which the Performance Measure has been achieved. The Committee may establish such guidelines and procedures for reducing the amount of an Award as it deems appropriate. The Company will notify the Grantee (or the executors or administrators of the Grantee's estate, if applicable) of the Committee's determination (the "Determination Notice"). The Determination Notice shall specify the performance level of NSI with respect to the Performance Measure for the Performance Cycle and the amount of Award (if any) Grantee will be entitled to receive. Unless the Committee determines otherwise at the time the Award is paid and except as otherwise provided in the event of a Change in Control, the amount Grantee is entitled to receive will be paid one-half in cash and one-half in Shares. The Shares will be valued at their Fair Market Value Page 35 Exhibit 10(iii)A(6) as of the last day of the Performance Cycle. Except in the case of a Change in Control, the Committee may, in its discretion, attach restrictions, terms, and conditions to the Shares issued as part of the Award. 3.2 Significant Corporate Events. If, during a Performance Cycle, NSI consummates an acquisition or disposition that (i) involves assets whose value equals or exceeds 20% of the total value of NSI's assets, (ii) represents a part of the business whose revenues equal or exceed 20% of the total of NSI's revenues, or (iii) causes a material restructuring of NSI, the following rules shall apply: (a) If the transaction is consummated during the first year of the Performance Cycle, the Performance Cycle and the Grantee's outstanding Award will be terminated with no payout and a new Performance Cycle containing a new Award will be started. (b) If the transaction is consummated after the first year of the Performance Cycle, the Performance Cycle will end and the outstanding Award will be determined and paid at NSI's actual performance level to such date, taking into account the adjustments provided for in Section 3.1 above and using prorated performance levels of the Performance Measure to reflect the portion of the Performance Cycle that had elapsed as of the date of consummation of the acquisition or disposition. Payment of the Award will be made as soon as practical after it is determined. A new Performance Cycle will be started to cover the period remaining in the initial Performance Cycle or, if that result is not practical, the Committee will make an appropriate adjustment to reflect the premature termination of the initial Performance Cycle If, during a Performance Cycle, NSI consummates an acquisition or disposition that is not covered by the special provisions of this Section 3.2, the financial effects of such acquisition or disposition shall be handled as provided in Section 3.1. Any actions under this Section 3.2 shall be taken in accordance with the requirements of Code Section 162(m) and the regulations thereunder. 4. Termination of Employment. 4.1 In General. Except as provided in Sections 4.2, 4.3, and 4.4 below, in the event that the Grantee's employment terminates during a Performance Cycle, all unearned Aspiration Awards shall be immediately forfeited by the Grantee. 4.2 Termination of Employment Due to Death, Disability, or Retirement. In the event the employment of the Grantee is terminated by reason of death or Disability during a Performance Cycle, the Grantee shall be entitled to a prorated payout with respect to the unearned Award. The prorated payout shall be determined by the Committee based upon the length of time that the Page 36 Exhibit 10(iii)A(6) Grantee was actively employed during the Performance Cycle relative to the full length of the Performance Cycle; provided, that payment shall only be made to the extent at the end of the Performance Cycle the Award would have been earned based upon the performance level achieved for the Performance Cycle (taking into account the adjustment provisions and other rules in Section 3 above); and provided, further, that the performance level used to determine the prorated award cannot exceed 200% of the Commitment performance level. In the event of Grantee's Retirement (on or after age 65), the full Award shall continue to be eligible for payout at the end of the Performance Cycle, just as if Grantee had remained employed for the remainder of the Performance Cycle (including if the Grantee dies after Retirement but before the end of the Performance Cycle). At the end of the Performance Cycle, the Committee shall make its determination in the same manner as provided in Section 3. Payment of earned Awards to Grantee in the event of termination due to death, Disability, or Retirement shall be made at the same time payments would be made to Grantee if Grantee did not terminate employment during the Performance Cycle. 4.3 Change In Control. Notwithstanding anything in this Agreement to the contrary, if a Change in Control occurs during the Performance Cycle, then the Grantee's Award shall be determined for the Performance Cycle then in progress as though the Performance Cycle had ended as of the date of the Change in Control and the outstanding Award will be paid at the Commitment Level Award or the actual performance level to such date (using, for such purpose, prorated performance levels of the Performance Measure to reflect the portion of the Performance Cycle that has elapsed as of the date of the Change in Control), whichever provides the greater payment. The Award determined in accordance with the preceding sentence shall be fully vested and payable immediately to the Grantee. The Committee shall determine the amount of the Award under this Section 4.3, subject to the terms of this section, and no downward adjustment of the Award which would result in reduction of the Award by more than 50% shall be permitted. The Award will be paid in full in cash, unless the Grantee elects to receive one-half of the Award in Shares. For purposes of determining the number of Shares to be paid to the Grantee under this Section 4.3, the Fair Market Value of a Share shall be determined by taking the average closing price per share for the last twenty (20) trading days prior to the commencement of the offer, transaction, or other event which resulted in a Change in Control. 4.4 Termination Without Cause. In the event Grantee's employment is terminated by the Company without Cause more than one (1) year after the commencement of the Performance Cycle and prior to the end of the Performance Cycle, the Grantee shall be entitled to a prorated payout of the Award based upon the length of time that the Grantee was actively employed during the Performance Cycle relative to the full length of the Performance Cycle; provided, that payment shall be made only to the extent at the end of the Performance Cycle the Award would have been earned based upon the performance Page 37 Exhibit 10(iii)A(6) level achieved during the Performance Cycle (taking into account the adjustment provisions and other rules in Section 3 above); and provided, further, that the performance level used to determine the prorated award cannot exceed 200% of the Commitment performance level. Payment shall be made to Grantee at the same time as if Grantee had not terminated employment during the Performance Cycle. 5. No Right to Continued Employment. Nothing in this Agreement or the Plan shall be interpreted to confer upon the Grantee any rights with respect to continuance of employment by the Company, nor shall this Agreement or the Plan interfere in any way with the right of the Company to terminate the Grantee's employment at any time. 6. Nonassignment. The Grantee shall not have the right to assign, alienate, pledge, transfer, or encumber any amounts due Grantee hereunder, and any attempt to assign, alienate, pledge, transfer, or encumber Grantee's rights or benefits shall be null and void and not recognized by the Plan or the Company. 7. Modification of Agreement. This Agreement may be modified, amended, suspended, or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 8. Severability; Governing Law. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 9. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon any successor to the Company. All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall be binding upon the Grantee's heirs, executors, and administrators. Page 38 Exhibit 10(iii)A(6) 10. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction, or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding, and conclusive on the Grantee and the Company for all purposes. 11. Withholding of Taxes. The Company shall have the right to deduct from any amount payable under this Agreement, an amount equal to the federal, state, and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to any such amount. In satisfaction of all or part of the Withholding Taxes, the Grantee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Company, to have withheld a portion of the Shares issuable to him or her pursuant to an Award, having an aggregate Fair Market Value equal to the Withholding Taxes. 12. Shareholder Approval. The effectiveness of this Agreement and of the grant of the Award pursuant hereto is subject to the approval of the Plan by the stockholders of NSI in accordance with the terms of the Plan. NATIONAL SERVICE INDUSTRIES, INC. By: /s/ JAMES S. BALLOUN JAMES S. BALLOUN Chairman, President and Chief Executive Officer National Service Industries, Inc. (GA), Subsidiary By: /S/ JAMES S. BALLOUN JAMES S. BALLOUN Chairman, President and Chief Executive Officer /S/ JOSEPH G. PARHAM, JR. Name of Grantee: JOSEPH G. PARHAM, JR. Page 39 Exhibit 10(iii)A(6) APPENDIX A Aspiration Award Program Illustration - FY 1999-2001 Name: Joseph G. Parham, Jr. Division: Corporate Position: Senior Vice President, Human Resources Salary: $300,000 Achievement Level Threshold Commitment Aspiration FY99-01 Economic Profit ($000,000) ** ** ** Individual AAI Opportunity $16,000 $64,000 $320,000
** Confidential information has been omitted and filed separately with the Securities and Exchange Commission. Page 40 Exhibit 10(iii)A(6) Joseph G. Parham, Jr. Appendix A (continued) ASPIRATION ACHIEVEMENT INCENTIVE AWARD FOR 1999 - 2001 PERFORMANCE PERIOD NSI CORPORATE Formula: Payout as a Percent of Commitment Award = a x EP + b Below Commitment Level EP: a = 0.06466 b = -1.46336 Above Commitment Level EP: a = 0.13746 b = -4.23711 Notes: 1. EP = Cumulative Economic Profit for performance period, which will be expressed in millions, rounded to one decimal place. 2. Values for "a" and "b" will be rounded to five decimal places. 3. Payout percentages will be rounded to a tenth of a percent. 4. No award is payable below the Threshold Level EP, notwithstanding the formula set forth above. 5. The maximum award payable is 500% of the Commitment Level award, notwithstanding the formula set forth above. Page 41 Exhibit 10(iii)A(6) APPENDIX B ASPIRATION ACHIEVEMENT INCENTIVE AWARD PERFORMANCE MEASURE PERFORMANCE MEASURE DEFINITION Economic Profit Sum of the annual economic profits for the performance cycle. Annual economic profit shall be determined as follows: Adjusted After- Tax Profits (AATP) minus [Average Invested Capital times the Weighted Average Cost of Capital(WACC)] RELATED TERMS DEFINITION Average Invested Capital Average of the average beginning and ending Invested Capital balances each month. Adjusted After-Tax Profit (AATP) Adjusted Pre-Tax Profit minus Book Income Taxes. Adjusted Pre-Tax Profit(APTP) Income before provision for income taxes plus interest expense plus implied interest on capitalized operating leases. Book Income Taxes Reported tax rate(determined by dividing the provision for income taxes by the income before the provision for income taxes, as reported in NSI's annual financial statements) applied to APTP. Invested Capital [Total assets plus capitalized operating leases less short and long-term investment in tax benefits] less [non-interest bearing liabilities except for self insurance reserves and deferred tax credits relating to the safe harbor lease]. Weighted Average Cost of Capital (WACC) Ten percent (10%) will be the WACC for the Performance Cycle ending August 31, 2001 EX-10 9 0009.txt EXHIBIT 10(III)A(7) Page 42 Exhibit 10(iii)A(7) ASPIRATION ACHIEVEMENT INCENTIVE AWARD AGREEMENT FOR EXECUTIVE OFFICERS THIS AGREEMENT, made as of the 15th day of May, 2000 (the "Grant Date"), between NATIONAL SERVICE INDUSTRIES, INC., a Delaware corporation ("NSI"), and NATIONAL SERVICE INDUSTRIES, INC. (GA), a Subsidiary of NSI (together, the "Company"), and Joseph G. Parham, Jr. ("Grantee"). WHEREAS, NSI has adopted the National Service Industries, Inc. Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional incentives to certain officers and key employees of NSI and its Subsidiaries; and WHEREAS, the Committee responsible for administration of the Plan has determined to grant to Grantee an Aspiration Achievement Incentive Award as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Aspiration Award. 1.1 The Company hereby grants to Grantee an Aspiration Achievement Incentive Award (the "Award"), which has a value determined as provided in Section 2 below based upon the performance of NSI during the Performance Cycle from September 1, 1999 to August 31, 2002. As provided in the Plan, Grantee's right to payment of this Award is dependent upon Grantee's continued employment in Grantee's current position with the Company, or in a position with responsibilities of substantially similar value to the Company during the Performance Cycle. Under certain circumstances as described below, Grantee may be entitled to receive payment for some portion of the Award if Grantee's employment terminates prior to the end of the Performance Cycle. 1.2 Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. This Agreement shall be construed in accordance with, and subject to, the provisions of the Plan (the provisions of which are hereby incorporated by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. 2. Performance Measure and Performance Levels. The Committee has established the performance measure (the "Performance Measure"), and award and performance levels set forth in Appendix A attached hereto. The chart in Appendix A specifies a Commitment performance level, at which the Commitment Level Award will be paid, an Aspiration Page 43 Exhibit 10(iii)A(7) performance level, at or above which an Aspiration Level Award will be paid, and a threshold performance level, at which a minimum incentive award will be paid and below which no award will be paid. For each level of performance at or above the threshold performance level through the Aspiration performance level, Grantee will receive an award determined in accordance with the chart and formulae set forth in Appendix A. The terms used in determining the Performance Measure are defined in Appendix B. 3. Determination of Aspiration Award. 3.1 Determination Notice. Subject to Section 3.2, as soon as practical following the last day of the Performance Cycle, the Committee will determine, in accordance with Section 7(c) of the Plan, the performance level of NSI with respect to the Performance Measure for the Performance Cycle. The Committee may in determining the performance level with respect to the Performance Measure adjust NSI's financial results for the Performance Cycle to exclude the effect of unusual charges or income items which are distortive of financial results for the Performance Cycle; provided, that in determining financial results, items whose exclusion from consideration will increase the performance level of NSI shall only have their effects excluded if they constitute "extraordinary items" under generally accepted accounting principles and all such items shall be excluded. The Committee shall also adjust the performance calculations to exclude the unanticipated effect on financial results of changes in the Code, or other tax laws, and the regulations thereunder. The Committee shall also exclude from consideration the effect on financial performance of each of the following events or items where the result of excluding the particular event or item is to increase the performance level of NSI: (i) an acquisition or a divestiture involving more than $10 million in net worth or $25 million in business revenues; (ii) an equity restructuring involving more than $1 million; (iii) asset impairment charges involving more than $1 million and restructuring costs involving more than $1 million associated with facility closings or reduction in employment levels; (iv) changes in accounting treatment or rules involving more than $1 million. The Committee may decrease the amount of the Award otherwise payable to Grantee if, in the Committee's view, such adjustment is necessary or desirable, regardless of the extent to which the Performance Measure has been achieved. The Committee may establish such guidelines and procedures for reducing the amount of an Award as it deems appropriate. The Company will notify Grantee (or the executors or administrators of Grantee's estate, if applicable) of the Committee's determination (the "Determination Notice"). The Determination Notice shall specify the performance level of NSI with respect to the Performance Measure for the Performance Cycle and the amount of Award (if any) Grantee will be entitled to receive. 3.2 Significant Corporate Events. If, during a Performance Cycle, NSI consummates an acquisition or disposition that (i) involves assets whose value equals or exceeds twenty percent (20%) of the total value of NSI's assets, (ii) represents a part of the business whose revenues equal or exceed Page 44 Exhibit 10(iii)A(7) twenty percent (20%) of the total of NSI's revenues, or (iii) causes a material restructuring of NSI, the following rules shall apply: (a) If the transaction is consummated during the first year of the Performance Cycle, the Performance Cycle and Grantee's outstanding Award will be terminated with no payout and a new Performance Cycle containing a new Award will be started. (b) If the transaction is consummated after the first year of the Performance Cycle, the Performance Cycle will end and the outstanding Award will be determined and paid at NSI's actual performance level to such date, taking into account the adjustments provided for in Section 3.1 above and using prorated performance levels of the Performance Measure to reflect the portion of the Performance Cycle that had elapsed as of the date of consummation of the acquisition or disposition. Payment of the Award will be made as soon as practical after it is determined. A new Performance Cycle will be started to cover the period remaining in the initial Performance Cycle or, if that result is not practical, the Committee will make an appropriate adjustment to reflect the premature termination of the initial Performance Cycle. If, during a Performance Cycle, NSI consummates an acquisition or disposition that is not covered by the special provisions of this Section 3.2, the financial effects of such acquisition or disposition shall be handled as provided in Section 3.1. Any actions under this Section 3.2 shall be taken in accordance with the requirements of Code Section 162(m) and the regulations thereunder. Payment of Aspiration Award. 4.1 Unless the Committee determines otherwise at the time the Award is paid, and except as otherwise provided in the event of a Change in Control, the amount Grantee is entitled to receive will be paid as follows: (a) for a payment level up to and including twice the Commitment Level Award, the Award will be paid one-half in cash and one-half in Shares, payable as soon as administratively practicable following the determination of the performance level pursuant to Section 3.1 above, and (b) to the extent the payment level is more than twice the Commitment Level Award, that portion of the Award will be paid one-half in Restricted Stock and one-half in cash, to be paid out upon vesting of the Restricted Stock as described in Section 4.4 below. The Shares and Restricted Stock issued upon payment of an Award shall be valued at the average of the Fair Market Value of the shares for the last ten (10) trading days of the Performance Cycle. Except in the case of a Change in Control, the Committee may, in its discretion, attach restrictions, terms, and conditions to the Shares issued as part of the Award. 4.2 Prior to vesting, the Restricted Stock shall not be transferable by Grantee by means of sale, assignment, exchange, pledge, or otherwise; provided, however, that with NSI's consent Grantee shall have the right to tender for sale or exchange any such shares in the event of any tender Page 45 Exhibit 10(iii)A(7) offer within the meaning of Section 14(d) of the Securities Exchange Act of 1934. Any attempt to convey any interest in the Restricted Stock in violation of this paragraph shall not be recognized by the Company and shall be null and void. Grantee shall otherwise be entitled with respect to the Restricted Stock to the rights of a stockholder of NSI, including the right to vote the shares and receive dividends and any other distributions declared on NSI's stock. Grantee's rights with respect to the Restricted Stock shall remain forfeitable at all times prior to the dates on which such rights become vested, as set forth in Section 4.4 below. 4.3 The stock certificate(s) evidencing the Restricted Stock shall be registered on NSI's books in the name of Grantee as soon as practicable following the Determination Notice. NSI or the Company may retain physical possession and custody of the certificate(s) until vesting of the Restricted Stock as set forth in Section 4.4 below, and the certificate(s) shall bear a legend referring to the restrictions on transfer set forth in this Agreement. Grantee shall sign a power of attorney enabling the certificate(s) to be transferred to the Company in the event and to the extent the Restricted Stock is forfeited as set forth in Section 4.4 below. Upon vesting of the Restricted Stock as set forth in Section 4.4 below, NSI shall cause a stock certificate for the requisite number of shares to be delivered to Grantee, free of any restrictive legend. 4.4 Fifty percent (50%) of the shares of Restricted Stock shall vest one (1) year following the end of the Performance Cycle and the other fifty percent (50%) shall vest two (2) years following the end of the Performance Cycle. In the event of Grantee's termination of employment within two (2) years after the end of the Performance Cycle, by death, Disability, Retirement (termination at or after age 65), or by the Company without Cause, the Restricted Stock, to the extent not already vested, shall vest in full as of the date of termination. Except as the Committee may otherwise determine, in the event of Grantee's termination of employment for any other reason, including voluntary termination or termination for Cause, the Restricted Stock shall be forfeited to the extent not already vested and Grantee's rights as a stockholder with respect to that forfeited Restricted Stock will thereupon cease. Notwithstanding the foregoing, the Restricted Stock will fully vest in the event of a Change in Control during Grantee's employment. The cash portion of the Award corresponding to the Restricted Stock will be paid to Grantee when and as the Restricted Stock vests; that cash portion shall be subject to the same vesting and forfeiture provisions as are set forth above for the Restricted Stock. 5. Termination of Employment. 5.1 In General. Except as provided in Sections 5.2, 5.3, and 5.4 below, in the event that Grantee's employment terminates during a Performance Cycle, all unearned Aspiration Awards shall be immediately forfeited by Grantee. 5.2 Termination of Employment Due to Death, Disability, or Retirement. In the event the employment of Grantee is terminated by reason of Page 46 Exhibit 10(iii)A(7) death or Disability during a Performance Cycle, Grantee shall be entitled to a prorated payout with respect to the unearned Award. The prorated payout shall be determined by the Committee based upon the length of time that Grantee was actively employed during the Performance Cycle relative to the full length of the Performance Cycle; provided, that payment shall only be made to the extent at the end of the Performance Cycle the Award would have been earned based upon the performance level achieved for the Performance Cycle (taking into account the adjustment provisions and other rules in Section 3 above; and provided, further, that the performance level used to determine the prorated award cannot exceed two hundred percent (200%) of the Commitment performance level. In the event of Grantee's Retirement (on or after age 65), the full Award shall continue to be eligible for payout at the end of the Performance Cycle, just as if Grantee had remained employed for the remainder of the Performance Cycle (including if Grantee dies after Retirement but before the end of the Performance Cycle). At the end of the Performance Cycle, the Committee shall make its determination in the same manner as provided in Section 3. Payment of earned Awards to Grantee in the event of termination due to death, Disability, or Retirement shall be made at the same time payments would be made to Grantee if Grantee did not terminate employment during the Performance Cycle. 5.3 Change In Control. Notwithstanding anything in this Agreement to the contrary, if a Change in Control occurs during the Performance Cycle, then Grantee's Award shall be determined for the Performance Cycle then in progress as though the Performance Cycle had ended as of the date of the Change in Control and the outstanding Award will be paid at the Commitment Level Award or the actual performance level to such date (using, for such purpose, prorated performance levels of the Performance Measure to reflect the portion of the Performance Cycle that has elapsed as of the date of the Change in Control), whichever provides the greater payment. The Award determined in accordance with the preceding sentence shall be fully vested and payable immediately to Grantee. The Committee shall determine the amount of the Award under this Section 5.3, subject to the terms of this section, and no downward adjustment of the Award which would result in reduction of the Award by more than fifty percent (50%) shall be permitted. The Award will be paid in full in cash, unless Grantee elects to receive one-half of the Award in Shares. For purposes of determining the number of Shares to be paid to Grantee under this Section 5.3, the Fair Market Value of a Share shall be determined by taking the average closing price per share for the last twenty (20) trading days prior to the commencement of the offer, transaction, or other event which resulted in a Change in Control. 5.4 Termination Without Cause. In the event Grantee's employment is terminated by the Company without Cause more than one (1) year after the commencement of the Performance Cycle and prior to the end of the Performance Cycle, Grantee shall be entitled to a prorated payout of the Award based upon the length of time that Grantee was actively employed during the Page 47 Exhibit 10(iii)A(7) Performance Cycle relative to the full length of the Performance Cycle; provided, that payment shall be made only to the extent at the end of the Performance Cycle the Award would have been earned based upon the performance level achieved during the Performance Cycle (taking into account the adjustment provisions and other rules in Section 3 above); and provided, further, that the performance level used to determine the prorated award cannot exceed two hundred percent (200%) of the Commitment performance level. Payment shall be made to Grantee at the same time as if Grantee had not terminated employment during the Performance Cycle. 6. No Right to Continued Employment. Nothing in this Agreement or the Plan shall be interpreted to confer upon Grantee any rights with respect to continuance of employment by the Company, nor shall this Agreement or the Plan interfere in any way with the right of the Company to terminate Grantee's employment at any time. 7. Nonassignment. Grantee shall not have the right to assign, alienate, pledge, transfer, or encumber any amounts due Grantee hereunder, and any attempt to assign, alienate, pledge, transfer, or encumber Grantee's rights or benefits shall be null and void and not recognized by the Plan or the Company. 8. Modification of Agreement. This Agreement may be modified, amended, suspended, or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 9. Severability; Governing Law. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 10. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon any successor to the Company. All obligations imposed upon Grantee and all rights granted to the Company under this Agreement shall be binding upon Grantee's heirs, executors, and administrators. Page 48 Exhibit 10(iii)A(7) 11. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction, or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding, and conclusive on Grantee and the Company for all purposes. 12. Withholding of Taxes. The Company shall have the right to deduct from any amount payable under this Agreement, an amount equal to the federal, state, and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to any such amount. In satisfaction of all or part of the Withholding Taxes, Grantee may make a written election, which may be accepted or rejected in the discretion of the Company, to have withheld a portion of the Shares issuable to him or her pursuant to an Award, having an aggregate Fair Market Value equal to the Withholding Taxes. NATIONAL SERVICE INDUSTRIES, INC. By: /S/ JAMES S. BALLOUN JAMES S. BALLOUN Chairman, President, and Chief Executive Officer NATIONAL SERVICE INDUSTRIES, INC. (GA), Subsidiary By: /S/ JAMES S. BALLOUN JAMES S. BALLOUN Chairman, President, and Chief Executive Officer /S/ Joseph G. Parham, Jr. Name of Grantee: Joseph G. Parham, Jr. Page 49 Exhibit 10(iii)A(7) APPENDIX A Aspiration Award Program Illustration - FY 2000-2002 Name: Joseph G. Parham, Jr. Division: Corporate Position: Senior Vice President, Human Resources Salary: $300,000 Achievement Level Threshold Commitment Aspiration FY00-02 Economic Profit (in millions) ** ** ** Individual AAI Opportunity $28,000 $112,000 $560,000
** Confidential information has been omitted and filed separately with the Securities and Exchange Commission. Page 50 Exhibit 10(iii)A(7) Joseph G. Parham, Jr. Appendix A (continued) ASPIRATION ACHIEVEMENT INCENTIVE AWARD FOR 2000 - 2002 PERFORMANCE PERIOD NSI CORPORATE Formula: Payout as a Percent of Commitment Award = a x EP + b Below Commitment Level EP: a = 0.02885 b = -0.29808 Above Commitment Level EP: a = 0.0303 b = -0.36364 Notes: 1. EP = Cumulative Economic Profit for performance period, which will be expressed in millions, rounded to one decimal place. 2. Values for "a" and "b" will be rounded to five decimal places. 3. Payout percentages will be rounded to a tenth of a percent. 4. No award is payable below the Threshold Level EP, notwithstanding the formula set forth above. 5. The maximum award payable is 500% of the Commitment Level award, notwithstanding the formula set forth above. Page 51 Exhibit 10(iii)A(7) APPENDIX B ASPIRATION ACHIEVEMENT INCENTIVE AWARD PERFORMANCE MEASURE PERFORMANCE MEASURE DEFINITION Economic Profit Sum of the annual economic profits for the performance cycle. Annual economic profit shall be determined as follows: Adjusted After- Tax Profits (AATP) minus [Average Invested Capital times the Weighted Average Cost of Capital(WACC)] RELATED TERMS DEFINITION Average Invested Capital Average of the average beginning and ending Invested Capital balances each month. Adjusted After-Tax Profit (AATP) Adjusted Pre-Tax Profit minus Book Income Taxes. Adjusted Pre-Tax Profit(APTP) Income before provision for income taxes plus interest expense plus implied interest on capitalized operating leases. Book Income Taxes Reported tax rate(determined by dividing the provision for income taxes by the income before the provision for income taxes, as reported in NSI's annual financial statements) applied to APTP. Invested Capital [Total assets plus capitalized operating leases less short and long-term investment in tax benefits] less [non-interest bearing liabilities except for self insurance reserves and deferred tax credits relating to the safe harbor lease]. Weighted Average Cost of Capital (WACC) Ten percent (10%) will be the WACC for the Performance Cycle ending August 31, 2002 EX-12 10 0010.txt RATIO OF EARNINGS TO FIXED CHARGES Page 52 Exhibit 12 National Service Industries, Inc. Ratio of Earnings to Fixed Charges
Three Months Ended Nine Months Ended Year Ended May 31 May 31 August 31 -------------------- -------------------- ----------- 2000 1999 2000 1999 1999 -------------------- -------------------- ----------- Earnings: Income before taxes on income 33,950 48,635 106,932 128,992 198,322 Fixed charges 13,273 5,562 37,134 14,386 22,407 -------------------- --------------------- ----------- Total earnings 47,223 54,197 144,066 143,378 220,729 Fixed Charges: Interest expense 11,723 4,184 32,474 10,252 16,895 Interest factor related to rentals 1,550 1,378 4,660 4,134 5,512 -------------------- --------------------- ----------- Total fixed charges 13,273 5,562 37,134 14,386 22,407 Ratio of Earnings to Fixed Charges 3.6 9.7 3.9 10.0 9.9 ==================== ===================== ===========
EX-27 11 0011.txt FDS --
5 Page 53 Exhibit 27 Financial Data Schedule Quarter Ended May 31, 2000 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, 2000 and the consolidated statement of income for the nine months ended May 31, 2000, and is qualified in its entirety by reference to such financial statements. 9-mos AUG-31-2000 SEP-1-1999 MAY-31-2000 1,489 0 393,006 7,867 264,417 729,231 862,585 450,876 1,762,796 468,262 433,778 0 0 57,919 589,846 1,762,796 1,632,288 1,870,463 987,925 1,123,934 603,603 3,520 32,474 106,932 41,490 65,442 0 0 0 65,442 1.61 1.61
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