-----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, Jc6hM+gnQw7zJ7bREJFsRKNEbKHia9fWV2cJotRJoE9J+j9IXFq17foei0Dap0K9 FujHvTzNJC8z7Oc0MQ/GVg== 0000070538-96-000004.txt : 19960416 0000070538-96-000004.hdr.sgml : 19960416 ACCESSION NUMBER: 0000070538-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960412 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL SERVICE INDUSTRIES INC CENTRAL INDEX KEY: 0000070538 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 580364900 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03208 FILM NUMBER: 96546421 BUSINESS ADDRESS: STREET 1: 1420 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30309 BUSINESS PHONE: 4048531000 MAIL ADDRESS: STREET 1: 1420 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30309 10-Q 1 NATIONAL SERVICE INDUSTRIES, INC. 10-Q Page 1 of 42 Exhibit Index on Page 11 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarter ended February 29, 1996 Commission file number 1-3208 NATIONAL SERVICE INDUSTRIES, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 58-0364900 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 1420 Peachtree Street, N. E., Atlanta, Georgia 30309-3002 (Address of Principal Executive Offices) (Zip Code) (404) 853-1000 (Registrant's Telephone Number, Including Area Code) None (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (applicable only to corporate issuers). Common Stock - $1.00 Par Value - 48,111,450 shares as of April 5, 1996. Page 2 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS - FEBRUARY 29, 1996 AND AUGUST 31, 1995 ........................ 3 CONSOLIDATED STATEMENTS OF INCOME - THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 29, ............... 4 1996 AND FEBRUARY 28, 1995 CONSOLIDATED STATEMENTS OF CASH FLOWS - ............................ 5 SIX MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ......................... 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ................ 7-8 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................... 9 SIGNATURES ............................................................... 10 EXHIBIT INDEX ............................................................ 11 Page 3 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands) February 29 August 31, 1996 1995 ASSETS (Unaudited) Current Assets: Cash and cash equivalents .......................... $ 73,431 $ 79,402 Short-term investments ............................. 2,550 3,598 Receivables, less reserves for doubtful accounts of $8,256 at February 29, 1996 and $6,467 at August 31, 1995 .................... 252,097 266,056 Inventories, at the lower of cost (on a first-in, first-out basis) or market ............. 182,428 185,789 Linens in service, net of amortization ............. 91,620 88,605 Deferred income taxes .............................. 15,507 10,221 Prepayments ........................................ 10,325 6,739 Total Current Assets ............................. 627,958 640,410 Property, Plant, and Equipment, at cost: Land ............................................... 29,608 31,016 Buildings and leasehold improvements ............... 192,860 192,023 Machinery and equipment ............................ 524,436 503,868 Total Property, Plant, and Equipment ............. 746,904 726,907 Less - Accumulated depreciation and amortization ..................................... 394,620 377,003 Property, Plant, and Equipment - net ........... 352,284 349,904 Other Assets: Goodwill and other intangibles ..................... 92,656 101,410 Other .............................................. 38,449 39,622 Total Other Assets ............................... 131,105 141,032 Total Assets ................................... $1,111,347 $1,131,346 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt ............... $ 72 $ 87 Notes payable ...................................... 6,630 6,399 Accounts payable ................................... 74,982 81,524 Accrued salaries, commissions, and bonuses ......... 32,509 43,944 Current portion of self insurance reserves ......... 16,825 16,276 Other accrued liabilities .......................... 45,777 54,340 Total Current Liabilities ........................ 176,795 202,570 Long-Term Debt, less current maturities .............. 26,741 26,776 Deferred Income Taxes ................................ 61,699 65,756 Self Insurance Reserves, less current portion ........ 62,986 67,830 Other Long-Term Liabilities .......................... 25,656 24,010 Stockholders' Equity: Series A participating preferred stock, $.05 stated value, 500,000 shares authorized, none issued Preferred stock, no par value, 500,000 shares authorized, none issued Common stock, $1 par value, 80,000,000 shares authorized, 57,918,978 shares issued at February 29, 1996 and August 31, 1995 ..................... 57,919 57,919 Paid-in capital .................................... 10,054 8,065 Retained earnings .................................. 761,241 746,256 829,214 812,240 Less - Treasury stock, at cost (9,631,592 shares at February 29, 1996 and 9,609,261 shares at August 31, 1995) ........................................ 71,744 67,836 Total Stockholders' Equity ................... 757,470 744,404 Total Liabilities and Stockholders' Equity $ 1,111,347 $1,131,346 The accompanying notes to consolidated financial statements are an integral part of these balance sheets. Page 4 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except per-share data)
THREE MONTHS ENDED SIX MONTHS ENDED FEB. 29, FEB. 28, FEB. 29, FEB. 28, 1996 1995 1996 1995 Sales and Service Revenues: Net sales of products .......................... $ 352,403 $ 334,059 $ 712,245 $ 678,941 Service revenues ............................... 129,803 131,751 262,511 267,853 Total Revenues ............................... 482,206 465,810 974,756 946,794 Costs and Expenses: Cost of products sold .......................... 227,098 217,036 454,537 436,223 Cost of services ............................... 74,850 73,981 149,214 149,827 Selling and administrative expenses ............ 150,660 144,221 303,043 293,916 Interest expense ............................... 1,019 960 2,098 1,790 Other expense (income), net .................... (2,141) 1,581 (1,951) 3,272 Total Costs and Expenses ..................... 451,486 437,779 906,941 885,028 Income before Provision for Income Taxes ......... 30,720 28,031 67,815 61,766 Provision for (Benefit from) Income Taxes: Current ........................................ 12,991 10,482 27,218 23,131 Deferred ....................................... (1,521) (29) (1,922) (57) 11,470 10,453 25,296 23,074 Net Income ....................................... $ 19,250 $ 17,578 $ 42,519 $ 38,692 Per Share: Net income ..................................... $ .40 $ .36 $ .88 $ .79 Cash dividends ................................. $ .29 $ .28 $ .57 $ .55 Weighted Average Number of Shares Outstanding (thousands) ........................ 48,364 48,859 48,350 49,025
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 5 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollar amounts in thousands)
SIX MONTHS ENDED FEB. 29, FEB. 28, 1996 1995 Cash Provided by (Used for) Operating Activities: Net income .......................................................... $ 42,519 $ 38,692 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................... 29,336 29,046 Provision for losses on accounts receivable ..................... 2,256 2,631 Loss (gain) on the sale of property, plant, and equipment........ (1,459) 12 Loss (gain) on the sale of business ............................. (2,946) (1,162) Change in noncurrent deferred income taxes ...................... (1,922) (57) Change in assets and liabilities net of effect of acquisitions- Receivables ................................................. 11,030 11,686 Inventories and linens in service, net ...................... (913) (11,508) Current deferred income taxes ............................... (5,286) (1,196) Prepayments and other ....................................... (3,669) (3,410) Accounts payable and accrued liabilities .................... (26,686) (17,605) Net Cash Provided by Operating Activities ................. 42,260 47,129 Cash Provided by (Used for) Investing Activities: Change in short-term investments .................................... 1,048 (2,600) Purchase of property, plant, and equipment .......................... (31,100) (22,471) Sale of property, plant, and equipment .............................. 3,695 5,634 Sale of business .................................................... 11,517 4,626 Acquisitions, net of cash acquired .................................. (600) (304) Change in other assets .............................................. 957 (409) Net Cash Used for Investing Activities ............................ (14,483) (15,524) Cash Provided by (Used for) Financing Activities: Change in notes payable ............................................. 231 1,262 Repayment of long-term debt ......................................... (50) (430) Recovery of investment in tax benefits .............................. 860 414 Deferred income taxes from investment in tax benefits ............... (2,136) (1,950) Issuance (purchase) of treasury stock ............................... (1,919) (16,694) Change in other long-term liabilities ............................... (3,198) 5,949 Cash dividends paid ................................................. (27,570) (27,030) Net Cash Used for Financing Activities ............................ (33,782) (38,479) Effect of Exchange Rate Changes on Cash ............................... 34 347 Net Change in Cash and Cash Equivalents ............................... (5,971) (6,527) Cash and Cash Equivalents at Beginning of Year ........................ 79,402 58,619 Cash and Cash Equivalents at End of Period ............................ $ 73,431 $ 52,092 Supplemental Cash Flow Information: Income taxes paid during the period ................................. $ 41,850 $ 25,369 Interest paid during the period ..................................... 2,096 1,712 Noncash Investing and Financing Activities: Noncash aspects of sale of business - Receivables incurred ............................................. $ -- $ (893) Noncash Aspects of Acquisitions: Liabilities assumed or incurred ..................................... $ 6 $ -- Treasury stock issued (returned)
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 6 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION: The interim consolidated financial statements included herein have been prepared by the company without audit and the condensed consolidated balance sheet as of August 31, 1995 has been derived from audited statements. These statements reflect all adjustments, all of which are of a normal, recurring nature, which are, in the opinion of management, necessary to present fairly the consolidated financial position as of February 29, 1996, the consolidated results of operations for the three months and six months ended February 29, 1996 and February 28, 1995, and the consolidated cash flows for the six months ended February 29, 1996 and February 28, 1995. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the company's Annual Report on Form 10-K for the fiscal year ended August 31, 1995. The results of operations for the three and six months ended February 29, 1996 are not necessarily indicative of the results to be expected for the full fiscal year because the company's revenues and income are generally higher in the second half of its fiscal year and because of the uncertainty of general business conditions. 2. BUSINESS SEGMENT INFORMATION:
Three Months Ended Feb. 29, 1996 and Feb. 28, 1995 Sales and Service Revenues Operating Profit 1996 1995 1996 1995 (In thousands) Lighting Equipment ................................................................ $ 206,454 $ 200,753 $ 13,776 $ 12,580 Textile Rental .................................................................... 129,803 131,751 9,247 7,485 Chemical .......................................................................... 84,355 80,192 6,222 6,311 Other ............................................................................. 61,594 53,114 3,052 3,691 $ 482,206 $ 465,810 32,297 30,067 Corporate and other ............................................................... (558) (1,076) Interest Expense .................................................................. (1,019) (960) Total ............................................................................. $ 30,720 $ 28,031 Six Months Ended Feb. 29, 1996 and Feb. 28, 1995 Sales and Service Revenues Operating Profit 1996 1995 1996 1995 (In thousands) Lighting Equipment ................................................................ $ 414,732 $ 404,559 $ 30,154 $ 26,270 Textile Rental .................................................................... 262,511 267,853 19,000 18,801 Chemical .......................................................................... 176,462 168,144 15,927 15,612 Other ............................................................................. 121,051 106,238 6,142 6,760 $ 974,756 $ 946,794 71,223 67,443 Corporate and other ............................................................... (1,310) (3,887) Interest Expense .................................................................. (2,098) (1,790) Total ............................................................................. $ 67,815 $ 61,766
3. INVENTORIES: Major classes of inventory as of February 29, 1996 and August 31, 1995 were as follows: February 29, August 31, 1996 1995 (In thousands) Raw Materials and Supplies ................... $ 80,493 $ 87,470 Work-in-Process .............................. 9,501 9,879 Finished Goods ............................... 92,434 88,440 Total ................................... $182,428 $185,789 Page 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and related notes. Financial Condition National Service Industries maintained a strong financial position at February 29, 1996. Net working capital was $451.1 million, compared with $437.8 million at August 31, 1995, and the current ratio was 3.6, up from 3.2 at year end. Cash and short-term investments were $76.0 million compared with $83.0 million at August 31. For the first half ended February 29, the company invested $31.7 million in capital expenditures and acquisitions. Long-term debt and other long-term liabilities were 13.2 percent of total capitalization, down from 13.7 percent at August 31. Cash provided by operating activities was $42.3 million, compared with $47.1 million for the first half last year. Capital expenditures, exclusive of acquisition spending, were $31.1 million for the first six months this year and $22.5 million for the prior-year period. The lighting equipment division continued its investment in equipment replacement and process improvements and tooling for new products. For the six months, textile rental division spending consisted primarily of replacement and improvement of facilities, equipment and vehicles. Prior-year spending included the lighting equipment division's manufacturing equipment replacements and improvements and construction of the Mexican production facility and the textile rental division's fleet upgrades and facility improvements. Acquisition spending was minimal in both periods. Dividend payments for the first half totaled $27.6 million, or 57 cents per share, compared with $27.0 million, or 55 cents per share, for the prior-year period. Effective January, 1996, the regular quarterly dividend rate was increased 3.6 percent to 29 cents per share, or an annual rate of $1.16 per share. During the second quarter, the company repurchased 125,000 of its shares under the board approved 2.0 million share standing authorization. The company announced plans to accelerate this program. For the periods presented, capital expenditures, working capital needs, dividends, acquisitions, and share repurchases were financed primarily with internally generated funds. European operations were supplemented by short-term borrowings in the European market. Contractual commitments for capital and acquisition spending during the coming twelve months total $16 million. For the current fiscal year, the company expects actual capital expenditures to be somewhat higher than levels of recent years, which, excluding acquisition spending, were $59 million in 1995, $43 million in 1994, and $36 million in 1993. Current liquid assets and internally generated funds are expected to be more than adequate to meet anticipated general operating cash requirements for the next twelve months. Some interim borrowings might be incurred to meet short-term needs. The company has complimentary lines of credit totaling $152 million, of which $110 million has been provided domestically and $42 million is available on a multi-currency basis primarily from a European bank. Results of Operations National Service Industries' earnings per share for the second quarter ended February 29, 1996 increased 10.6 percent to 40 cents. Sales for the quarter increased 3.5 percent to $482 million. Net income of $19.3 million was 9.5 percent higher than the $17.6 million reported in last year's second quarter. Since there were, on average, 495,000 fewer shares outstanding during this year's quarter, earnings per share increased at the greater rate of 10.6 percent. For the fiscal first half, sales increased $28.0 million, or 3.0 percent, to $975 million. Net income increased $3.8 million, or 9.9 percent, to $42.5 million. Earnings per share increased 11.4 percent to 88 cents. The lighting equipment division led second quarter performance and continued its growth with sales advancing 2.8 percent to $206 million from $201 million last year. For the six months, sales increased 2.5 percent to $415 million. Increases in both periods were reflective of pricing gains offset somewhat by lower unit volumes. For the quarter, operating income advanced 9.5 percent to 6.7 percent of revenues, compared with 6.3 percent the year earlier. For the first half, operating income grew 14.8 percent to 7.3 percent of revenues, compared with 6.5 percent the prior year. Better pricing, a more favorable product mix and cost reduction efforts increased profit margins in both periods. The textile rental sector experienced a 1.5 percent decrease in sales for the second quarter, from $132 million to $130 million, and a 2.0 percent decrease for the half, from $268 million to $263 million. The declines in both periods were due Page 8 to a combination of inclement weather and branches divested late last year. Income improved 23.5 percent to $9.2 million for the quarter as two non-strategic branches were sold. Operating income increased only slightly from the prior-year first half as the healthcare market remained under pressure, but the company continued to build its hospitality and uniform businesses. Chemical segment sales, benefiting from both improved pricing and unit volume gains, advanced 5.2 percent to $84 million for the quarter and 4.9 percent to $176 million for the first half. Operating income declined to 7.4 percent of revenues for the quarter and 9.0 percent for the half, from 7.9 percent and 9.3 percent the respective prior-year periods, almost entirely as a result of raw material prices. The insulation and envelope divisions combined for a sales increase of 16.0 percent for the quarter and 13.9 percent for the six months. Operating profits decreased by 17.3 percent for the quarter and 9.1 percent year-to-date largely from an unfavorable product mix in the insulation business. Corporate expense was lower in both current-year periods due to interest earned on higher average investment levels. Last year's first half was also higher due to the company's first quarter adoption of Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits." The resulting accrual related primarily to severance agreements and the liability for life insurance coverage for certain eligible disabled employees. Interest expense on European loans was higher than in the prior-year period due to increased borrowings at somewhat higher average interest rates. The provision for income taxes was 37.3 percent of pretax income for both the quarter and first half, compared with 37.3 percent and 37.4 percent for the respective periods the prior year. Changes in the comparative year-to-date effective rates resulted from variations in the relative amounts of tax exempt income. Page 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits are listed on the Index to Exhibits (page 11). (b) There were no reports on Form 8-K for the three months ended February 29, 1996. Page 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL SERVICE INDUSTRIES, INC. REGISTRANT DATE April 12, 1996 /s/ DAVID LEVY DAVID LEVY EXECUTIVE VICE PRESIDENT, ADMINISTRATION AND COUNSEL DATE April 12, 1996 /S/ J. ROBERT HIPPS J. ROBERT HIPPS SENIOR VICE PRESIDENT, FINANCE Page 11 INDEX TO EXHIBITS Page No. EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements: (a)-Employment Letter Agreement between National Service Industries, Inc. and James S. Balloun dated February 1, 1996 .................................... 12 (b)-Nonqualified Stock Option Agreement Effective January 3, 1996 between National Service Industries, Inc. and James S. Balloun ........................... 17 (c)-Severance Protection Agreement between National Service Industries, Inc. and James S. Balloun dated February 1, 1996 .................................... 23 (d)-Bonus Letter Agreement between National Service Industries, Inc. and James S. Balloun dated February 1, 1996 ................................................ 38 (e)-Appendix B to Restated and Amended Supplemental Retirement Plan for Executives of National Service Industries, Inc. (Supplemental Pension Plan) Effective February 1, 1996 .................................... 40 EXHIBIT 11 - Computation of Net Income per Share of Common Stock.. 41 EXHIBIT 27 - Financial Data Schedules ............................ 42 EX-10 2 EMPLOYMENT LETTER AGREEMENT Page 12 Exhibit 10(III)A(a) February 1, 1996 Mr. James S. Balloun National Service Industries, Inc. NSI Center 1420 Peachtree Street, N.E. Atlanta, Georgia 30309-3002 Dear Jim: This letter will confirm the terms of your employment as Chief Executive Officer of National Service Industries, Inc. ("NSI"), effective February 1, 1996 (the "Effective Date"). We are enthusiastic about your decision to join NSI and look forward to working with you to enhance the future growth of the company. The terms of your employment will be as follows: 1. Duties - You will be the Chief Executive Officer and Chairman of the Board of NSI, and will assume the duties and responsibilities commensurate with those positions. You will devote substantially all of your working time and attention to the business and affairs of NSI. 2. Base Salary - Your base salary for each of the three (3) fiscal years of NSI ending August 31, 1996, 1997, and 1998 will be at least Seven Hundred Fifty Thousand Dollars ($750,000). Thereafter, your base salary will be subject to annual review for increases at such time as NSI conducts salary reviews for executive officers generally. 3. Annual Incentive Compensation - For the three (3) fiscal years of NSI ending August 31, 1996, 1997, and 1998, you will participate in the NSI Management Compensation and Incentive Plan (the "Annual Incentive Plan") and will be eligible for the following incentive bonuses: For fiscal year 1996, an incentive bonus of Seven Hundred Fifty Thousand Dollars ($750,000) if NSI's Earnings Per Share equal or exceed $ .* for the fiscal year. NSI's Earnings Per Share will be determined in the customary manner under the Annual Incentive Plan and will be subject to adjustment for changes in capitalization and for unusual charges or income items as provided in the plan. * Confidential information has been omitted and filed separately with the Securities and Exchange Commission. Page 13 Exhibit 10(III)A(a) For fiscal years 1997 and 1998, an incentive bonus of Seven Hundred Fifty Thousand Dollars ($750,000) per year if the performance target(s) established for the Chief Executive Officer pursuant to the Annual Incentive Plan (or a similar plan) is achieved. For fiscal year 1999 and later years, you will participate in the Annual Incentive Plan (or a similar plan) and be eligible for an incentive award at a level consistent with your position as Chief Executive Officer of NSI, with performance targets consistent with those for other executive officers. 4. Stock Options - You have received, or you will be eligible for, the following stock option grants pursuant to the NSI Long-Term Incentive Program: On January 3, 1996, you received a grant of an option (the "Option") to purchase two hundred fifty thousand (250,000) shares of NSI Common Stock at a share price equal to the Common Stock's Fair Market Value on that date. The Option was granted pursuant to the Long-Term Incentive Plan and has the following specific provisions: * A ten (10) year term to exercise from date of grant. * Vesting as follows, eighty-five thousand (85,000) shares will vest on the last day of NSI's fiscal year 1996; eighty-five thousand (85,000) shares will vest on the last day of fiscal year 1997; and the remaining eighty thousand (80,000) shares will vest on the last day of fiscal year 1998. * Unvested shares will be forfeited upon your voluntary termination, termination upon death or Disability, or if you are terminated by NSI for Cause (Disability and Cause are defined in Item 7 below). * In the event of death, options for vested shares may be exercised by your personal representative or estate. * If you retire from NSI at age sixty-five (65) or later, the Option Page 14 Exhibit 10(III)A(a) will be exercisable for five (5) years or until the end of the term of the Option, whichever first occurs. You will be eligible for annual stock option grants under the Long-Term Incentive Plan in amounts at the competitive median or higher for a Chief Executive Officer of a company of NSI's revenue size and characteristics, or at such other competitive level as may be established by NSI's Board. The option terms will generally be as provided under the plan for other executive officers of NSI. 5. Retirement Plans - Upon satisfying the eligibility requirements, you will be eligible to participate in the Company's tax-qualified retirement plans, NSI Pension Plan C, and the NSI 401(k) Plan for Corporate Office Employees. In addition, on the Effective Date, you will become a participant in the Supplemental Retirement Plan for Executives of NSI (the "SERP"). Your benefits under the SERP will be determined in the same manner as for other executive officers of NSI participating in the plan, except that you will be credited with two (2) years of credited service under the SERP for each year of actual credited service. You will become vested in your SERP benefit after completing five (5) years of employment with NSI. S. Medical, Life Insurance, and Other Employee Benefits - You will be covered by, or eligible to participate in, the medical, dental, life insurance, disability, deferred compensation, and other benefit programs generally made available by NSI to its executive officers and their families. With respect to life insurance coverage, you will be provided no less than $1 million coverage (subject to coordination with the qualified retirement plans' death benefits in the same manner as for other executives). 7. Severance Payment/Change in Control - 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 on or before August 31, 1998, except for voluntary termination, termination upon death or Disability (as defined below), or termination by NSI for Cause (as defined below), you will receive a lump sum severance payment, immediately following your termination, of $4.5 million reduced by the total amount of any base salary and annual incentive bonus(es) paid to you by NSI for the period from the Effective Date to the date of your termination. Page 15 Exhibit 10(III)A(a) If your employment is terminated after August 31, 1998, except for the reasons stated in the preceding paragraph, you will receive a $1.5 million lump sum severance payment immediately following your termination. For purposes of entitlement to a severance payment, "Cause" shall mean any act(s) on your part that constitutes fraud, a felony involving dishonesty, a breach of fiduciary duty, 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 Chief Executive Officer of NSI for a period of one hundred eighty (180) consecutive days. The NSI Board, based upon the information provided to it, shall determine whether an act constituting Cause has occurred and whether you have suffered a Disability. In the case of termination for Cause, (i) you will be given written notice of the actions constituting Cause at least fifteen (15) days prior to any meeting of the Board of Directors of NSI at which your termination is to be considered; (ii) you will be given the opportunity to be heard by the Board; and (iii) your termination for Cause must be evidenced by a resolution adopted by two-thirds of the Board. 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 other 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 (after consideration of any tax penalties) or the severance payments described above. The base salary, annual incentive, option grants, 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, including Code Section 162(m). We can provide additional information on these issues if you so desire. We are preparing a SERP provision and Severance Protection Agreement to evidence the arrangements set forth in this letter. These agreements should be completed shortly. Page 16 Exhibit 10(III)A(a) Again, 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. Very truly yours, /s/ John G. Medlin, Jr. John G. Medlin, Jr. Chairman, Executive Resource, Compensation and Nominating Committee of the Board of Directors ACCEPTED AND AGREED TO THIS 5 DAY OF FEBRUARY, 1996 /s/ James S. Balloun James S. Balloun EX-10 3 NONQUALIFIED STOCK OPTION AGREEMENT Page 17 Exhibit 10(iii)A(b) NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, made as of the 3rd day of January, 1996 (the "Grant Date"), between National Service Industries, Inc., a Delaware corporation (the "Company"), and James S. Balloun (the "Optionee"). WHEREAS, the Company has adopted the National Service Industries, Inc. Long-Term Incentive Program (the "Program") in order to provide additional incentive to certain officers and employees of the Company and its Subsidiaries; and WHEREAS, the Committee responsible for administration of the Program has determined to grant an 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 250,000 whole Shares subject to, and in accordance with, the terms and conditions set forth in this Agreement. 1.2 The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. 1.3 This Agreement shall be construed in accordance and consistent with, and subject to, the provisions of the Program (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 Program. 2. Purchase Price. The price at which the Optionee shall be entitled to purchase Shares upon the exercise of the Option shall be $32.50 per Share. 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. Page 18 Exhibit 10(iii)A(b) 4. Exercisability of Option. Unless otherwise provided in this Agreement or the Program, the Option shall entitle the Optionee to purchase, in whole at any time or in part from time to time, 85,000 Shares covered by the Option on or after August 31, 1996, an additional 85,000 Shares covered by the Option on or after August 31, 1997, and an additional 80,000 Shares covered by the Option on or after August 31, 1998, and 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 Program, 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 Program, 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 19 Exhibit 10(iii)A(b) 6. Termination of Employment. 6.1 Death, Disability, or Change in Control. If the employment of the Optionee is terminated as a result of his death, Disability, or within two (2) years following a Change in Control, the Option shall continue to be exercisable in whole or in part (to the extent exercisable on the date of the Optionee's termination of employment) at any time within three (3) years after the date of such termination of employment, but in no event after the expiration of the Exercise Term. In the event of the Optionee's death, the Option shall be exercisable, to the extent provided in the Program and this Agreement, by the legatee or legatees under his will, or by his personal representatives or distributees and such person or persons shall be substituted for the Optionee each time the Optionee is referred to herein. 6.2 Retirement at Age Sixty-five (65). If the employment of the Optionee is terminated as a result of Optionee's Retirement (on or after Optionee's sixth-fifth (65th) birthday), the Option shall continue to be exercisable in whole or in part (to the extent exercisable on the date of the Optionee's termination of employment) at any time within five (5) years after the date of such termination of employment, but in no event after the expiration of the Exercise Term. 6.3 Termination Without Cause. In the event of the Company's termination of Optionee's employment without Cause, and other than as provided in Sections 6.1 and 6.2 above, the Option shall become immediately and fully exercisable. "Cause" shall mean any act(s) on Optionee's part that constitutes fraud, a felony involving dishonesty, a breach of fiduciary duty, or gross malfeasance or habitual neglect of Optionee's duties for the Company; provided that (i) Optionee has been given written notice of such actions constituting Cause at least fifteen (15) days prior to any meeting of the Board of Directors of the Company at which his termination is to be considered; (ii) Optionee has been given the opportunity to be heard by the Board; and (iii) Optionee's termination for Cause is evidenced by a resolution adopted by two-thirds of the Board. 6.4 Termination of Option. If the employment of the Optionee is terminated for any reason other than the reasons set forth in Sections 6.1 and 6.2 (including the Optionee's ceasing to be employed by a Subsidiary or Division as a result of the sale of such Subsidiary or Division or an interest in such Subsidiary or Division), the Option shall terminate on the date of the Optionee's termination of employment, whether or not exercisable. 7. Effect of Change in Control and Termination of Employment Without Cause Notwithstanding anything contained in this Agreement to the contrary, 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 Page 20 Exhibit 10(iii)A(b) 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 greater of (x) the Fair Market Value, on the date preceding the date of the surrender, of the Shares subject to the Option or portion of the Option surrendered or (y) the Adjusted Fair Market Value of the Shares subject to the Option or the portion of the Option 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 for cancellation the Option or any portion of the Option 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. 8. Nontransferability. The Option shall not be transferable other than-by will or by the laws of descent and distribution. Notwithstanding the foregoing, the Option may be transferred, in whole or in part, without consideration, by written instrument signed by the Optionee, to any members of the immediate family of Optionee (i.e., spouse, children and grandchildren), any trusts for the benefit of such family members or any partnerships whose only partners are such family members (the "Permitted Transferees"). Appropriate evidence of any such transfer to the Permitted Transferees shall be delivered to the Company at its principal executive office. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee, or, if applicable, by the Permitted Transferees. 9. No Right to Continued Employment. Nothing in this Agreement or the Program shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall this Agreement or the Program interfere in any way with the right of the Company 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 Program and shall be effective and final, binding, and conclusive for all purposes of the Program and this Agreement. Page 21 Exhibit 10(iii)A(b) 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. 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 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 on the date preceding the Tax Date (as defined below) equal to the Withholding Taxes, provided that (i) if the Optionee may be subject to liability under Section 16(b) of the Exchange Act (unless his or her employment was terminated due to Disability or death), (A) the Optionee makes the Tax Election at least six (6) months after the Grant Date and (B) the Tax Election is made either at least six (6) months prior to the date that the amount of the Withholding Taxes are determined (the "Tax Date") or during the ten (10) day period beginning on the third business day and ending on the twelfth business day following the release for publication of the Company's quarterly or annual statements of earnings, (ii) the Tax Election is made prior to the Tax Date, and (iii) the Tax Election is irrevocable; provided, however, in the event that the Tax Date occurs subsequent to the exercise of the Option, the Optionee shall tender back to the Company on the Tax Date that number of Shares having a Fair Market Value on the date preceding the Tax Date equal to the Withholding Taxes. 13. Employee Bound by the Program. The Optionee hereby acknowledges receipt of a copy of the Program 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. Page 22 Exhibit 10(iii)A(b) 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 it 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 to the Company. This Agreement shall inure to the benefit of the Optionee's legal representatives and Permitted Transferees. 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, successors, and Permitted Transferees. 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. ATTEST: NATIONAL SERVICE INDUSTRIES, INC. /s/ Carol Ellis Morgan By: /s/ John G. Medlin, Jr Assistant Secretary John G. Medlin, Jr. Chairman, Executive Resource, Compensation and Nominating Committee of The Board of Directors /s/ James S. Balloun Name of Optionee: James S. Balloun EX-10 4 SEVERANCE PROTECTION AGREEMENT Page 23 Exhibit 10(iii)A(c) SEVERANCE PROTECTION AGREEMENT THIS AGREEMENT made as of the 1st day of February, 1996, by and between National Service Industries, Inc. (the "Company") and James S. Balloun (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as hereinafter defined) exists and that the threat of or the occurrence of a Change in Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of the Executive in the event of a threat or occurrence of a Change in Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits in the event his employment is terminated as a result of, or in connection with, a Change in Control and to provide the Executive with the Gross-Up Payment (as hereinafter defined) and certain other benefits whether or not the Executive's employment is terminated. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Term of Agreement. (a) This Agreement shall commence as of February 1, 1996, and shall continue in effect until the earlier of the Executive's sixty-fifth (65th) birthday or the Executive's termination of employment prior to a Change in Control, as provided in Section 1(b) below. (b) Prior to a Change in Control and other than during a Threatened Change in Control Period, the term of this Agreement shall expire on the date the Executive ceases to serve as Chairman of the Board and Chief Executive Officer, or in another capacity as an executive officer (as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as amended (the "1934 Act") as in effect on the date hereof) of the Company, unless such cessation was at the request of a Third Party or otherwise occurred in connection with, or in anticipation of, a Change in Control. Page 24 Exhibit 10(iii)A(c) 2. Definitions. 2.1 Cause. For purposes of this Agreement, a termination for "Cause" is a termination evidenced by a resolution adopted in good faith by two-thirds of the Board that the Executive (a) intentionally and continually failed to substantially perform his duties with the Company (other than a failure resulting from the Executive's incapacity due to physical or mental illness) which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Executive specifying the manner in which the Executive has failed to substantially perform, or (b) intentionally engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; provided, however, that no termination of the Executive's employment shall be for Cause as set forth in clause (b) above until (x) there shall have been delivered to the Executive a copy of a written notice setting forth that the Executive was guilty of the conduct set forth in clause (b) and specifying the particulars thereof in detail, and (y) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, nor failure to act, on the Executive's part, shall be considered "intentional" unless he has acted, or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after a Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. 2.2 Change in Control. For purposes of this Agreement, a "Change in Control" shall mean any of the following events: (a) The acquisition (other than from the Company) by any "Person" (as the term person is used for purposes of Sections 13(d) or 14(d) of the 1934 Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the Company's then outstanding voting securities; or (b) The individuals who, as of February 1, 1996, are members of the Board (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; or (c) Approval by stockholders of the Company of (1) a merger or consolidation involving the Company if the stockholders of the Company, Page 25 Exhibit 10(iii)A(c) immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than seventy percent (70%) of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation, or (2) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to Section 2.2(a), solely because twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries, or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition (hereinafter referred to as "Related Persons"). (d) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to a Change in Control and the Executive reasonably demonstrates that such termination (1) was at the request of a Third Party (as hereinafter defined), or (2) otherwise occurred in connection with, or in anticipation of, a Change in Control (including, without limitation, during a Threatened Change in Control Period), then for all purposes of this Agreement, the date of a Change in Control shall mean the date immediately prior to the date of such termination of the Executive's employment. 2.3 Disability. For purposes of this Agreement, "Disability" shall mean a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties under this Agreement for a period of one hundred eighty (180) consecutive days. 2.4 (a) Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change in Control of any of the events or conditions described in Subsections (1) through (9) hereof: (1) a change in the Executive's status, title, position, or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, represents an adverse change from his status, title, position, or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with his status, title, position, or responsibilities; or any removal of the Executive from or failure Page 26 Exhibit 10(iii)A(c) to reappoint or reelect him to any of such offices or positions, except in connection with the termination of his employment for Disability, Cause, as a result of his death, or by the Executive other than for Good Reason; (2) a reduction in the Executive's base salary or any failure to pay the Executive any compensation or benefits to which he is entitled within five (5) days of the date due; (3) a failure to increase the Executive's base salary at least annually at a percentage of base salary no less than the average percentage increases (other than increases resulting from the Executive's promotion) granted to the Executive during the three (3) full years ended prior to a Change in Control (or such lesser number of full years during which the Executive was employed); (4) the Company1s requiring the Executive to be based at any place outside a thirty (30) mile radius from Atlanta, Georgia, except for reasonably required travel on the Company's business which is not greater than such travel requirements prior to the Change in Control; (5) the failure by the Company to (A) continue in effect (without reduction in benefit level, and/or reward opportunities) any compensation or employee benefit plan in which the Executive was participating immediately prior to the Change in Control, including, but not limited to, the plans listed on the Appendix, unless a substitute or replacement plan has been implemented which provides substantially identical compensation or benefits to the Executive, or (B) provide the Executive with compensation and benefits, in the aggregate, at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each other compensation or employee benefit plan, program, and practice as in effect immediately prior to the Change in Control (or as in effect following the Change in Control, if greater); (6) the insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company; (7) any material breach by the Company of any provision of this Agreement; (8) any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 2.1; or (9) the failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company to assume and agree to perform this Agreement, as contemplated in Section 9 hereof. Page 27 Exhibit 10(iii)A(c) (b) Any event or condition described in this Section 2.4(a)(1) through (9) which occurs prior to a Change in Control but which the Executive reasonably demonstrates (1) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control (a "Third Party"), or (2) otherwise arose in connection with or in anticipation of a Change in Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Change in Control. (c) The Executive's right to terminate his employment pursuant to this Section 2.4 shall not be affected by his incapacity due to physical or mental illness. 2.5 Threatened Change in Control. For purposes of this Agreement, a "Threatened Change in Control" shall mean the occurrence of any of the following events: (a) when the Company is aware of, or is contemplating, a proposal (a "Proposal") for any Person other than a Related Person (1) to acquire five percent (5%) or more of the voting power of the Company's outstanding securities, or (2) to merge or consolidate with another entity, transfer or sell assets of the Company, or liquidate or dissolve the Company, in each case described in this clause (2), in a transaction that would constitute a Change in Control; or (b) any Person other than a Related Person, (1) acquires five percent (5%) or more of the voting power of the Company's outstanding securities, other than as a holder whose investment in the Company is eligible to be reported on Schedule 13G pursuant to Rule 13d-l(b)(1) promulgated under the Exchange Act, or (2) initiates a tender or exchange offer to acquire such number of securities as would result in such Person holding twenty percent (20%) or more of the voting power of the Company's outstanding securities, or (3) solicits proxies for votes to elect members of the Board at a shareholders meeting of the Company. 2.6 Threatened Change in Control Period. For purposes of this Agreement, a "Threatened Change in Control Period" shall mean the period commencing on the date that a Threatened Change in Control has occurred and ending upon: (a) the date the Proposal referred to in Section 2.5(a) is abandoned; Page 28 Exhibit 10(iii)A(c) (b) the acquisition of five percent (5%) of the voting power of the Company's outstanding securities by the Person referred to in Section 2.5(a)(1) if such acquisition does not constitute a Threatened Change in Control under Section 2.5(b)(1); (c) the date when any Person described in Section 2.5(b), (1) shall own less than five percent (5%) of the voting power of the Company's outstanding securities, (2) shall have abandoned the tender or exchange offer, or (3) shall not have elected a member of the Board as the case may be; or (d) the date a Change in Control occurs. 3. Termination of Employment. 3.1 If, during the term of this Agreement, the Executive's employment with the Company shall be terminated within twenty-four (24) months following a Change in Control, the Executive shall be entitled to the following compensation and benefits (in addition to any compensation and benefits provided for under any of the Company's employee benefit plans, policies, and practices): (a) If the Executive's employment with the Company shall be terminated (1) by the Company for Cause or Disability, (2) by reason of the Executive's death, or (3) by the Executive other than for Good Reason or during the Window Period (as each term is defined herein), the Company shall pay the Executive all amounts earned or accrued through the Termination Date but not paid as of the Termination Date, including (i) base salary, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date, (iii) vacation pay, and (iv) sick leave (collectively, "Accrued Compensation"). In addition to the foregoing, if the Executive's employment is terminated by the Company for Disability or by reason of the Executive's death, the Company shall pay to the Executive or his beneficiaries an amount equal to the "Pro Rata Bonus" (as hereinafter defined). The "Pro Rata Bonus" is an amount equal to the Bonus Amount (as hereinafter defined) multiplied by a fraction, the numerator of which is the number of days in such fiscal year through the Termination Date and the denominator of which is three hundred sixty-five (365). The term "Bonus Amount" shall mean the greater of the (x) most recent annual bonus paid or payable to the Executive, or, if greater, the annual bonus paid or payable for the full fiscal year ended prior to the fiscal year during which a Change in Control occurred, or (y) average of the annual bonuses paid or payable during the three (3) full fiscal years ended prior to the Termination Date or, if greater, the three (3) full fiscal years ended prior to the Change in Control (or, in each case, such lesser period for which annual bonuses were paid or payable to the Executive). Executive's entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other Page 29 Exhibit 10(iii)A(c) applicable programs and practices then in effect. (b) If the Executive's employment with the Company shall be terminated (other than by reason of death), (1) by the Company other than for Cause or Disability, (2) by the Executive for Good Reason, or (3) by the Executive for any reason within the sixty (60) day period commencing on the first anniversary of the date of the occurrence of a Change in Control (the "Window Period"), the Executive shall be entitled to the following: (i) the Company shall pay the Executive all Accrued Compensation and a Pro-Rata Bonus; (ii) the Company shall pay the Executive as severance pay and in lieu of any further compensation for periods subsequent to the Termination Date, in a single payment an amount (the Severance Amount") in cash equal to two (2) times the sum of (A) the greater of the Executive's base salary in effect on the Termination Date or at any time during the ninety (90) day period prior to the Change in Control ("Base Salary"), and (B) the Bonus Amount. Notwithstanding the foregoing, if the Executive has attained at least age sixty-three (63) on the Termination Date, the Severance Amount to be paid under this Subsection (ii) shall be the amount described in the preceding sentence multiplied by a fraction (which in no event shall be less than one-half (1/2)), the numerator of which shall be the number of months (for this purpose any partial month shall be considered as a whole month) remaining until the Executive's sixty-fifth (65th) birthday (but in no event shall be less than twelve (12)) and the denominator of which shall be twenty-four (24); (iii) for a number of months equal to the lesser of (A) twenty-four (24), or (B) the number of months remaining until the Executive's sixty-fifth (65th) birthday (the "Continuation Period"), the Company shall at its expense continue on behalf of the Executive and his dependents and beneficiaries, the life insurance, disability, medical, dental, and hospitalization benefits provided (x) to the Executive at the time Notice of Termination is given, at any time during the ninety (90) day period prior to the Change in Control, or at any time thereafter, or (y) to other similarly situated executives who continue in the employ of the Company during the Continuation Period. The coverage and benefits (including deductibles and costs) provided in this Section 3.1(b)(iii) during the Continuation Period shall be no less favorable to the Executive and his dependents and beneficiaries than the most favorable of such coverages and benefits during any of the periods referred to in clauses (x) and (y) above. The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case, the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverages and benefits of the combined benefit plans is no less favorable to the Executive than the Page 30 Exhibit 10(iii)A(c) coverages and benefits required to be provided hereunder. This Subsection (iii) shall not be interpreted so as to limit any benefits to which the Executive or his dependents may be entitled under any of the Company's employee benefit plans, programs, or practices following the Executive's termination of employment, including, without limitation, retiree medical and life insurance benefits; (iv) the Company shall pay in a single payment an amount in cash equal to the excess of (A) the Supplemental Retirement Benefit (as defined below) had (w) the Executive remained employed by the Company for an additional two (2) complete years of credited service (or until his sixty-fifth (65th) birthday, if earlier), (x) his annual compensation during such period been equal to his Base Salary and the Bonus Amount, (y) the Company made employer contributions to each defined contribution plan in which the Executive was a participant at the Termination Date (in an amount equal to the amount of such contribution for the plan year immediately preceding the Termination Date), and (z) he been fully (100%) vested in his benefit under each retirement plan in which the Executive was a participant, over (B) the lump sum actuarial equivalent of the aggregate retirement benefit the Executive is actually entitled to receive under such retirement plans. For purposes of this Subsection (iv), the "Supplemental Retirement Benefit" shall mean the lump sum actuarial equivalent of the aggregate retirement benefit the Executive would have been entitled to receive under the Company's supplemental and other retirement plans, including, but not limited to, Pension Plan C (the "NSI Pension Plan"); provided, however, if the Executive has attained at least age fifty (50) and has been employed by the Company for at least fifteen (15) years as of the Termination Date, the calculation of the Supplemental Retirement Benefit shall be made pursuant to the Early Retirement Accrued Pension formula under the Supplemental Retirement Plan for Executives of the Company without regard to the Executive's attained age or year of credited service (as defined therein). For purposes of this Subsection (iv), the "actuarial equivalent" shall be determined in accordance with the actuarial assumptions used for the calculation of benefits under the NSI Pension Plan as applied prior to the Termination Date in accordance with such plan's past practices; and (v) (A) the restrictions on any outstanding incentive awards (including restricted stock and granted Performance Shares) granted to the Executive under the Long-Term Incentive Program (the "Program") or under any other incentive plan or arrangement shall lapse and such incentive award shall become one hundred percent (100%) vested, all stock options and stock appreciation rights granted to the Executive shall become immediately exercisable and shall become hundred percent (100%) vested, and all Performance Units granted to the Executive shall become hundred percent (100%) vested, and (B) the Executive shall have the right to require the Company to purchase, for cash, any shares of unrestricted stock or shares purchased upon exercise of any options, at a price equal to the fair market value of such shares on the date of Page 31 Exhibit 10(iii)A(c) purchase by the Company. (c) The amounts provided for in Sections 3.1(a) and 3.1(b)(i), (ii), (iv), and (v) shall be paid within five (5) days after the Executive's Termination Date. (d) The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment except as provided in Section 3.1(b)(iii). 3.3 The severance pay and benefits provided for in Sections 3.1(a) and 3.1(b)(i) and (ii) shall be in lieu of any other severance pay to which the Executive may be entitled under any Company severance plan, program, or arrangement. 4. Notice of Termination. During a Threatened Change in Control Period and following a Change in Control, any purported termination by the Company or by the Executive shall be communicated by written Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. 5. Termination Date. "Termination Date" shall mean in the case of the Executive's death, his date of death, and in all other cases, the date specified in the Notice of Termination subject to the following: (a) If the Executive's employment is terminated by the Company for Cause or due to Disability, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Executive, provided that in the case of Disability, the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days; and (b) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days from the date the Notice of Termination is given to the Company. 6. Excise Tax Payments. (a) Notwithstanding anything contained in this Agreement to the contrary and without regard to whether the Executive's employment with the Company has terminated, in the event that any payment or benefit (within the Page 32 Exhibit 10(iii)A(c) meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended [the "Code"]) to the Executive or for his benefit, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company or a change in ownership or effective control of the Company or of a substantial portion of its assets (a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes and the Excise Tax), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) An initial determination as to whether a Gross-Up Payment is required pursuant to this Section 6 and the amount of such Gross-Up Payment shall be made by an accounting firm selected by the Company and reasonably acceptable to the Executive which is designated one of the five (5) largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation, to the Company and the Executive within five (5) days of the Termination Date, if applicable, or such other time as requested by the Company or by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Payment or Payments, it shall furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to any such Payment or Payments. Within five (5) days of the delivery of the Determination to the Executive, the Executive shall have the right to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this Section 6(b) shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. The existence of the Dispute shall not in any way affect the right of the Executive to receive the Gross-Up Payment in accordance with the Determination. If there is no Dispute, the Determination shall be binding, final, and conclusive upon the Company and the Executive subject to the application of Section 6(c). (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Excess Payment"), or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred (1) upon notice (formal or informal) to the Executive from any governmental taxing authority that the tax liability of the Executive (whether Page 33 Exhibit 10(iii)A(c) in respect of the then current taxable year of the Executive or in respect of any prior taxable year of the Executive) may be increased by reason of the imposition of the Excise Tax on a Payment or Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment, (2) upon a determination by a court, (3) by reason of determination by the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return), or (4) upon the resolution to the satisfaction of the Executive of the Dispute. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall pay to the Executive at least five (5) days prior to the date on which the applicable government taxing authority has requested payment, an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties (other than interest and penalties imposed by reason of a failure to file timely a tax return or pay taxes shown due on a return) imposed on the Underpayment. An Excess Payment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon a Payment or Payments with respect to which the Executive had previously received a Gross-Up Payment. A Final Determination shall be deemed to have occurred when the Executive has received from the applicable government taxing authority a refund of taxes or other reduction in his tax liability by reason of the Excess Payment and upon either (i) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxable authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired, or (ii) the statute of limitations with respect to the Executive's applicable tax return has expired. If an Excess Payment is determined to have been made, the amount of the Excess Payment shall be treated as a loan by the Company to the Executive and the Executive shall pay to the Company on demand (but not less than ten (10) days after the determination of such Excess Payment) the amount of the Excess Payment plus interest at an annual rate equal to the rate provided for in Section 1274(b)(2)(B) of the Code from the date the Gross-Up Payment (to which the Excess Payment relates) was paid to the Executive until the date of repayment to the Company. (d) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Determination, an Excise Tax will be imposed on any Payment or Payments, the Company shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Payment or Payments. 7. Unauthorized Disclosure. During the period that the Executive is actively employed by the Company, the Executive shall not make any Unauthorized Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean Page 34 Exhibit 10(iii)A(c) disclosure by the Executive without the consent of the Board (other than pursuant to a court order) to any person, other than an employee or director of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company, or as may be legally required, of any material confidential information obtained by the Executive while in the employ of the Company (including any material confidential information with respect to any of the Company's customers or methods of distribution), the disclosure of which is demonstrably and materially injurious to the Company; provided; however, that such term shall not include the use or disclosure by the Executive, without consent, of any information known generally to the public (other than as a result of disclosure by him in violation of this Section 7) or any information not otherwise considered confidential and material by a reasonable person engaged in the same business as that conducted by the Company; provided further, however, that any breach of this Section 7 shall in no event subject the Executive to damages (including costs, fees, and expenses incurred by the Company) in excess of Ten Thousand Dollars ($10,000) in the aggregate. 8. Non-Compete. During the period that the Executive is actively employed by the Company, the Executive shall not, directly or indirectly, own, manage, operate, control, consult with, or be connected as an officer, employee, agent, partner, director, or consultant with, or have any financial interest in, or assist anyone in the conduct of, any business which directly competes with the businesses of the Company in the State of Georgia. Notwithstanding the foregoing, the Executive shall not be in violation of the preceding sentence due to ownership (directly or indirectly) by the Executive of not more than five percent (5%) of the issued and outstanding class of securities of a corporation whose securities are publicly traded. 9. Successors; Binding Agreement. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. The term "the Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries, or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. Page 35 Exhibit 10(iii)A(c) 10. Fees and Expenses. The Company shall pay all legal fees and related expenses (including the costs of experts, evidence, and counsel) incurred by the Executive as they become due as a result of (a) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (b) the Executive seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits, or (c) the Executive's hearing before the Board as contemplated in Section 2.1 of this Agreement; provided, however, that the circumstances set forth in clauses (a) and (b) (other than as a result of the Executive's termination of employment under circumstances described in Section 2.2(d)) occurred on or after a Change in Control. 11. Notice. For purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 12. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive, or other plan or program provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company or any of its subsidiaries. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 13. Settlement of Claims. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense, or other right which the Company may have against the Executive or others. 14. Miscellaneous. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance Page 36 Exhibit 10(iii)A(c) with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 15. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Georgia without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Fulton County in the State of Georgia. 16. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 17. Entire Agreement - Letter Agreement of February 1, 1996. This Agreement constitutes the entire agreement between the parties hereto and, except as provided hereinbelow in this Paragraph 17, supersedes all prior agreements, if any, understandings, and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. The Executive and the Company have entered into a letter agreement dated February 1, 1996, which, in Paragraph 7 thereof, provides severance payments in certain circumstances. In the event of the Executive's termination in connection with a Change in Control that entitles the Executive to benefits under this Agreement, the Executive will receive the greater of the payments and benefits provided under this Agreement (after consideration of any tax penalties) or the severance payments described in Paragraph 7 of said letter agreement. Page 37 Exhibit 10(iii)A(c) IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. ATTEST: NATIONAL SERVICE INDUSTRIES, INC. /s/ Carol Ellis Morgan By: /s/ John G. Medlin, Jr. Assistant Secretary John G. Medlin, Jr. Chairman, Executive Resource, Compensation and Nominating Committee of The Board of Directors /s/ James S. Balloun James S. Balloun EX-10 5 BONUS LETTER AGREEMENT Page 38 Exhibit 10(iii)A(d) February 1, 1996 James S. Balloun Chairman of the Board and Chief Executive Officer National Service Industries, Inc. 1420 Peachtree Street, N.E. Atlanta, Georgia 30309-3002 Dear Jim: The Board of Directors (the "Board") of National Service Industries, Inc. (the "Company") believes that the threat or occurrence of a Change in Control (as defined in the Appendix) of the Company may cause you undue concern for your financial security and distract your attention from the operations of our businesses, which would be detrimental to the Company and its shareholders. In recognition of these concerns, the Board has determined that in order to provide you with some measure of security in the event of a Change in Control of the Company, it has authorized the Company to agree as follows: The term of this letter agreement shall commence as of the date hereof and shall continue in effect until your sixty-fifth (65th) birthday. For any fiscal year during which you are in the employ of the Company on the date of occurrence of a Change in Control, you shall be guaranteed an annual bonus for that fiscal year (the "Change in Control Year") in an amount no less than the annual bonus that was paid or payable to you for the most recently ended fiscal year prior to a Change in Control (the "Bonus") provided that you are in the employ of Company (or its successor) on the last day of the Change in Control Year. The Bonus will be paid to you in cash within five (5) business days following the last day of the Change in Control Year whether or not you are in the employ of the Company on the date of payment. Very truly yours, /s/ John G. Medlin, Jr. ATTEST: John G. Medlin, Jr. Chairman, Executive Resource, Compensation and Nominating Committee /s/ Carol Ellis Morgan of the Board of Directors Assistant Secretary Page 39 Exhibit 10(iii)A(d) APPENDIX Change in Control. For purposes of this letter agreement, a "Change in Control" shall mean any of the following events: (a) The acquisition (other than from the Company) by any "Person" (as the term person is used for purposes of Sections 13(d) or 14(d) of the 1934 Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the Company's then outstanding voting securities; or (b) The individuals who, as of February 1, 1996, are members of the Board (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; or (c) Approval by stockholders of the Company of (1) a merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than seventy percent (70%) of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation, or (2) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to Section (a), solely because twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries, or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition (hereinafter referred to as "Related Persons"). EX-10 6 APPENDIX B TO SUPPLEMENTAL RETIREMENT PLAN Page 40 Exhibit 10(iii)A(e) APPENDIX B B.1. Eligible Individual: James S. Balloun B.2. Effective Date of Participation: Pursuant to Section 2.1(b), Mr. Balloun's date of participation shall be February 1, 1996. B.3. Special Provisions: The following special provisions shall apply to Mr. Balloun's participation in the Plan: (a) Except for purposes of determining whether Mr. Balloun is a Vested Terminee and entitled to a Vested Pension under the Plan, Mr. Balloun will be credited with two (2) years of Credited Service under Sections 1.1(q) and 2.3 for each year of Credited Service he would otherwise receive under the Plan. (b) Mr. Balloun will qualify as a Vested Terminee if he completes five (5) years of employment with NSI from his Service Date to his Termination Date. Except as otherwise specifically provided in this Appendix B, Mr. Balloun's benefits under the Plan shall be determined in the same manner as for other Participants. EX-11 7 COMPUTATION OF NET INCOME PER SHARE Page 41 Exhibit 11 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATIONS OF NET INCOME PER SHARE OF COMMON STOCK (In thousands, except per-share data) THREE MONTHS ENDED SIX MONTHS ENDED FEB. 29, FEB. 28, FEB. 29, FEB. 28, 1996 1995 1996 1995 Primary: Weighted Average Number of Shares (determined on a monthly basis)..... 48,364 48,859 48,350 49,025 Net Income ........................... $ 19,250 $ 17,578 $ 42,519 $ 38,692 Primary Earnings per Share ........... $ .40 $ .36 $ .88 $ .79 Fully Diluted: Weighted Average Number of Shares Outstanding ........................ 48,364 48,859 48,350 49,025 Additional Shares Assuming Exercise of Options: Options exercised ................ 1,292 982 1,292 982 Treasury stock purchased with proceeds .................. (1,007) (889) (983) (889) Average Common Shares Outstanding (as adjusted) ..................... 48,649 48,952 48,659 49,118 Net Income ........................... $ 19,250 $ 17,578 $ 42,519 $ 38,692 Fully Diluted Earnings per Share ..... $ .40 $ .36 $ .87 $ .79 EX-27 8 FDS --
5 Page 42 Exhibit 27 Financial Data Schedules Quarter Ended February 29, 1996 Pursuant to Section 601(c) of Regulation S-K This schedule contains summary financial information extracted from National Service Industries, Inc. consolidated balance sheet as of February 29, 1996 and the consolidated statement of income for the six months ended February 29, 1996, and is qualified in its entirety by reference to such financial statements. 6-MOS AUG-31-1996 SEP-01-1995 FEB-29-1996 73,431 2,550 260,353 8,256 182,428 627,958 746,904 394,620 1,111,347 176,795 26,741 0 0 57,919 771,295 757,470 712,245 974,756 454,537 603,751 301,092 0 2,098 67,815 25,296 42,519 0 0 0 42,519 0.88 0.87
-----END PRIVACY-ENHANCED MESSAGE-----