-----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, TQ+Q0Pv6BWxg3pwgCLHZy6LPPR9W9Xb730ZZAdolHRD7ldbJWgEETdYiJzVBAwZc 8hE+bz618TB8StOhoNuFYg== 0000070538-97-000003.txt : 19970115 0000070538-97-000003.hdr.sgml : 19970115 ACCESSION NUMBER: 0000070538-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 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: 97505683 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 96 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 November 30, 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 - 45,339,395 shares as of December 31, 1996. Page 2 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS - NOVEMBER 30, 1996 AND AUGUST 31, 1996 3 CONSOLIDATED STATEMENTS OF INCOME - THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 4 CONSOLIDATED STATEMENTS OF CASH FLOWS - THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7-8 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 9 SIGNATURES 10 EXHIBIT INDEX 11 Page 3 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands) November 30, August 31, 1996 1996 ASSETS (Unaudited) Current Assets: Cash and cash equivalents ........................... $ 50,850 $ 58,662 Short-term investments .............................. 551 551 Receivables, less reserves for doubtful accounts of $6,891 at November 30, 1996 and $5,807 at August 31, 1996 .................... 268,328 269,971 Inventories, at the lower of cost (on a first-in, first-out basis) or market ............. 171,662 169,813 Linens in service, net of amortization ............. 96,290 97,710 Deferred income taxes ............................... 4,719 2,152 Prepayments ......................................... 11,449 7,522 Total Current Assets .............................. 603,849 606,381 Property, Plant, and Equipment, at cost: Land ................................................ 28,904 29,062 Buildings and leasehold improvements ................ 191,608 194,219 Machinery and equipment ............................. 533,716 542,056 Total Property, Plant, and Equipment ............. 754,228 765,337 Less - Accumulated depreciation and amortization ...................................... 400,701 407,941 Property, Plant, and Equipment - net ........... 353,527 357,396 Other Assets: Goodwill and other intangibles ...................... 87,888 89,427 Other ............................................... 40,462 41,442 Total Other Assets ................................ 128,350 130,869 Total Assets .................................... $1,085,726 $1,094,646 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt ................ $ 47 $ 46 Notes payable ....................................... 6,474 6,696 Accounts payable .................................... 77,159 79,851 Accrued salaries, commissions, and bonuses ......... 38,951 42,788 Current portion of self insurance reserves .......... 15,909 15,396 Other accrued liabilities ........................... 72,041 52,649 Total Current Liabilities ......................... 210,581 197,426 Long-Term Debt, less current maturities .............. 24,889 24,920 Deferred Income Taxes ................................. 62,164 63,347 Self Insurance Reserves, less current portion ........ 63,369 63,369 Other Long-Term Liabilities ........................... 28,408 27,576 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 November 30, 1996 and August 31, 1996 ..................... 57,919 57,919 Paid-in capital ..................................... 11,681 11,021 Retained earnings ................................... 803,103 791,367 872,703 860,307 Less - Treasury stock, at cost (12,391,884 shares at November 30, 1996 and 11,447,036 shares at August 31, 1996) ........................................ 176,388 142,299 Total Stockholders' Equity .................... 696,315 718,008 Total Liabilities and Stockholders' Equity .. $1,085,726 $1,094,646 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 NOVEMBER 30 1996 1995 Sales and Service Revenues: Net sales of products ........................... $ 381,763 $ 359,842 Service revenues ................................ 130,130 132,708 Total Revenues ................................ 511,893 492,550 Costs and Expenses: Cost of products sold ........................... 236,604 227,439 Cost of services ................................ 75,578 74,364 Selling and administrative expenses ............. 158,382 152,220 Interest expense ................................ 1,341 1,242 Other expense, net ............................. 648 190 Total Costs and Expenses ...................... 472,553 455,455 Income before Provision for Income Taxes .......... 39,340 37,095 Provision for (Benefit from) Income Taxes: Current ......................................... 14,506 14,227 Deferred ........................................ -- (401) 14,506 13,826 Net Income ........................................ $ 24,834 $ 23,269 Per Share: Net income ...................................... $ .54 $ .48 Cash dividends .................................. $ .29 $ .28 Weighted Average Number of Shares Outstanding (thousands) ......................... 45,957 48,343 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) THREE MONTHS ENDED NOVEMBER 30 1996 1995 Cash Provided by (Used for) Operating Activities: Net income ........................................... $ 24,834 $ 23,269 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................... 14,832 14,394 Provision for losses on accounts receivable ...... 1,254 1,161 Loss (gain) on the sale of property, plant, and equipment ................................... (222) (932) Loss (gain) on the sale of business .............. (401) 63 Change in noncurrent deferred income taxes ....... -- (401) Change in assets and liabilities net of effect of acquisitions- Receivables .................................. 888 9,518 Inventories and linens in service, net ....... (1,408) (5,824) Current deferred income taxes ................ (2,568) 896 Prepayments and other ........................ (3,985) (4,127) Accounts payable and accrued liabilities ..... 12,690 (2,694) Changes in self-insurance reserves and other long-term liabilities ........................ 832 484 Net Cash Provided by Operating Activities .. 46,746 35,807 Cash Provided by (Used for) Investing Activities: Change in short-term investments ..................... -- 1,049 Purchase of property, plant, and equipment .......... (9,830) (14,338) Sale of property, plant, and equipment .............. 1,816 1,548 Sale of business .................................... 1,989 -- Acquisitions, net of cash acquired .................. (1,876) (278) Change in other assets .............................. 687 1,154 Net Cash Used for Investing Activities ............. (7,214) (10,865) Cash Provided by (Used for) Financing Activities: Repayment of long-term debt .......................... (30) (35) Recovery of investment in tax benefits ............... 397 430 Deferred income taxes from investment in tax benefits (1,183) (1,068) Issuance (purchase) of treasury stock ................ (33,429) 1,590 Cash dividends paid .................................. (13,435) (13,538) Net Cash Used for Financing Activities ............. (47,680) (12,621) Effect of Exchange Rate Changes on Cash ................ 336 846 Net Change in Cash and Cash Equivalents ................ (7,812) 13,167 Cash and Cash Equivalents at Beginning of Year ......... 58,662 79,402 Cash and Cash Equivalents at End of Period ............. $ 50,850 $ 92,569 Supplemental Cash Flow Information: Income taxes paid during the period .................. $ 7,035 $ 12,330 Interest paid during the period ...................... 1,238 1,031 Noncash Investing and Financing Activities: Noncash aspects of sale of business - Receivables incurred .............................. $ (347) $ -- Liabilities assumed (removed) ...................... (10) Noncash Aspects of Acquisitions: Liabilities assumed or incurred ...................... $ (300) $ -- 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, 1996 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 November 30, 1996, the consolidated results of operations for the three months ended November 30, 1996 and 1995, and the consolidated cash flows for the three months ended November 30, 1996 and 1995. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996. The results of operations for the three months ended November 30, 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 November 30 Sales and Service Revenues Operating Profit 1996 1995 1996 1995 (In thousands) Lighting Equipment ........... $ 227,447 $ 208,278 $ 21,372 $ 16,378 Textile Rental ............... 130,130 132,708 8,137 9,753 Chemical ..................... 95,482 92,107 10,923 9,705 Envelopes .................... 31,351 29,483 2,113 2,116 Other ........................ 27,483 29,974 1,579 974 $ 511,893 $ 492,550 44,124 38,926 Corporate .................... (4,134) (1,573) Interest expense, net ........ (650) (258) Total ........................ $ 39,340 $ 37,095 3. INVENTORIES: Major classes of inventory as of November 30, 1996 and August 31, 1996 were as follows: November 30, August 31, 1996 1996 (In thousands) Raw Materials and Supplies ................... $ 71,799 $ 73,236 Work-in-Process .............................. 8,882 9,679 Finished Goods ............................... 90,981 86,898 Total ................................... $171,662 $169,813 4. ACCOUNTING STANDARDS ADOPTED During the first quarter of fiscal 1997, the company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-lived assets and certain intangibles be reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. During the quarter ended November 30, 1996, there were no circumstances indicating impairment of assets. Page 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and related notes. Financial Condition National Service Industries continued in strong financial condition at November 30, 1996. Net working capital was $393.3 million, compared with $409.0 million at August 31, 1996, and the current ratio was 2.9, compared with 3.1 at year end. Cash and short-term investments were $51.4 million compared with $59.2 million at August 31. For the first quarter, the company invested $11.7 million in capital expenditures and acquisitions. The percent of debt to total capitalization was 4.3 percent, up slightly from 4.2 percent at August 31. Cash provided by operating activities was $46.7 million, up from $35.8 million for the first quarter last year. Capital expenditures, exclusive of acquisition spending, were $9.8 million for the first quarter this year and $14.3 million for the same period a year ago. In both periods, the lighting equipment segment invested in facilities improvements, equipment replacements, process improvements, and tooling for new products while textile rental segment spending consisted primarily of improvement of facilities and replacement of equipment and vehicles. Current year acquisition spending of $1.9 million was primarily the result of the chemical segment's purchase of an Ohio-based chemical products company. Acquisition spending was minimal in the prior-year period. During the quarter, the textile rental segment divested several non-strategic businesses, generating cash of $2.0 million. There were no divestitures during the prior-year first quarter. Dividend payments totaled $13.4 million, or 29 cents per share, compared with $13.5 million, or 28 cents per share, for the prior-year period. Effective January, 1997, the regular quarterly dividend rate was increased 3.4 percent to 30 cents per share, or an annual rate of $1.20 per share. During the quarter, the company repurchased 1.0 million of its common shares. The Board has clarified that the standing authority is to reduce outstanding shares by 2.0 million per year. The company expects to repurchase the remaining 1.0 million shares during the second fiscal quarter. 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 $13 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 $66 million in 1996, $59 million in 1995, and $43 million in 1994. Late in fiscal 1996, the company negotiated a $250 million multi-currency committed credit facility, of which $187.5 million has been provided through domestic banks and $62.5 million through foreign banks. The company has complimentary lines of credit totaling $132 million, of which $110 million has been provided domestically and $22 million is available on a multi-currency basis primarily from a European bank. Current liquid assets, internally generated funds, and the available credit are expected to meet most of the anticipated general operating cash requirements for the next twelve months. Results of Operations National Service Industries' earnings per share for the first quarter ended November 30, 1996 increased 12.3 percent to 54 cents compared with the same quarter a year ago. Sales for the quarter increased 3.9 percent to $512 million. Net income of $24.8 million was 6.7 percent higher than the $23.3 million reported in last year's first quarter. First quarter 1997 pretax earnings included gains of $0.5 million on asset sales, compared with $0.7 million in 1996, and a $1.8 million reduction in self insurance reserves due to improved 1995 workers' compensation claims experience. Earnings per share increased at a greater rate of 12.3 percent due to 2.4 million fewer average shares outstanding compared to the first quarter a year ago. Page 8 The lighting equipment segment grew sales by 9.2 percent to $227 million from $208 million the prior year. The stronger sales increase is attributable to higher non-residential construction awards. Operating income advanced 30.5 percent to 9.4 percent of revenues, compared with 7.9 percent the year earlier, due to higher volume, favorable product mix, and lower manufacturing costs. Sales in the textile rental segment were down 1.9 percent from $133 million to $130 million as a result of previously divested plants. Operating income declined 16.6 percent to $8.1 million. Operating income included gains of $0.5 million on asset sales and a $1.1 million reduction in self insurance reserves due to improved 1995 workers' compensations claims experience. In 1996 operating income included $0.7 million in gains on asset sales. Although the performance of this segment continues to be disappointing, progress has been made in improving customer retention and pricing. Costs associated with merchandise placed in service, plant operations and customer service programs increased due to planned retention and quality initiatives. During the quarter the segment consolidated three branches, sold one facility and three idle properties, and reduced personnel at its headquarters and field operations. Chemical segment sales advanced 3.7 percent to $95 million from $92 million the prior year. Operating income grew 12.6 percent to 11.4 percent of revenues from 10.5 percent the prior-year period. The gains resulted from improved domestic volume, lower costs, and stronger international performance. The envelope segment increased sales by 6.3 percent to $31 million from $29 million the prior year. Operating profit was even at $2.1 million. A letter of intent was signed with Performance Contracting Group to sell the insulation business at slightly over its book value. Sales for this segment were $27 million and operating profits increased to $1.6 million due to lower material and operating costs. The anticipated second quarter sale is forecast to slightly reduce total year earnings per share, since the immediate returns of the reinvested proceeds will not be able to offset the operating profits of the business. Corporate expenses were up $2.6 million due to accrued long-term incentive plan costs and consulting expenses for introducing economic profit and refining strategic planning. These expenditures are intended to accelerate the company's profitable growth. Net interest increased slightly due to the share repurchase initiatives. The provision for income taxes was 36.9 percent of pretax income for the quarter, compared with 37.3 percent the prior-year period. Changes in the comparative year-to-year effective rates resulted from variations in the relative amounts of tax exempt income. From time to time, the company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the company notes that a variety of factors could cause the company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the company's business include without limitation the following: (a) the uncertainty of general business and economic conditions, particularly the potential for a slow down in nonresidential construction awards; (b) the ability to achieve strategic initiatives, including but not limited to the ability to achieve sales growth across the business segments through a combination of increased pricing, sales force, and new products and improved customer service. 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 November 30, 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 January 14, 1997 /S/ DAVID LEVY DAVID LEVY EXECUTIVE VICE PRESIDENT, ADMINISTRATION AND COUNSEL DATE January 14, 1997 /S/ BROCK HATTOX BROCK HATTOX EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Page 11 INDEX TO EXHIBITS Page No. EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements: (1) - Severance Protection Agreements between National Reference is made to Exhibit Service Industries, Inc. and 10(iii)A(c) of registrant's Form (a) James S. Balloun (February 1, 1996) 10-Q for the quarter ended February (b) Stewart A.Searle III (June 19, 1996) 29, 1996, which is incorporated (c) Brock A. Hattox (September 9, 1996) herein by reference. (2) - Bonus Letter Agreements between National Reference is made to Exhibit Service Industries, Inc. and 10(iii)A(j) of registrant's Form 10-K (a) James S. Balloun (February 1, 1996) for the fiscal year ended August 31, (b) David Levy (October 1, 1989) 1989 and to Exhibit 10(iii)A(d) of (c) Stewart A. Searle III (June 19, 1996) registrant's Form 10-Q for the (d) Brock A. Hattox (September 9, 1996) quarter ended February 29, 1996, which are incorporated herein by reference. (3) - Incentive Stock Option Agreements between Reference is made to Exhibit National Service Industries, Inc. and 10(iii)A(l) of registrant's Form (a) D. Raymond Riddle 10-K for the fiscal year ended (b) Don W. Hubble August 31, 1989, which is (c) David Levy incorporated herein by reference. (d) J. Robert Hipps (e) Stewart A. Searle III (f) Brock A. Hattox (4) - Nonqualified Stock Option Agreement for Corporate Reference is made to Exhibit Officers Effective Beginning September 21, 1994 10(iii)A(j) of registrant's Form between National Service Industries, Inc. and 10-K for the fiscal year ended (a) D. Raymond Riddle August 31, 1992, which is (b) Don W. Hubble incorporated herein by reference. (c) David Levy (d) Brock A. Hattox (5) - Incentive Stock Option Agreement Effective 13 Beginning September 17, 1996 between National Service Industries, Inc. and (a) James S. Balloun (b) David Levy (c) Stewart A. Searle III (6) - Nonqualified Stock Option Agreement for Executive 19 Officers Effective Beginning September 17, 1996 between National Service Industries, Inc. and (a) James S. Balloun (b) David Levy (c) Stewart A. Searle III (d) Brock A. Hattox Page 12 INDEX TO EXHIBITS Page No. (7) - National Service Industries, Inc. Long-Term 25 Achievement Incentive Plan Effective September 17, 1996 (8) - Aspiration Achievement Incentive Award Agreements 47 between National Service Industries, Inc. and (a) James S. Balloun (b) Brock A. Hattox (c) David Levy (d) Stewart A. Searle III [a confidential portion of which has been omitted and filed separately with the Securities and Exchange Commission] (9) - National Service Industries, Inc. 62 Supplemental Deferred Savings Plan Effective September 18, 1996 (10) - Letter Agreement Between National Service 93 Industries, Inc. and Don W. Hubble Dated October 18, 1996, amending as of that date the Incentive Stock Option Agreement Dated September 15, 1993, the Incentive Stock Option Agreement Dated September 21, 1994, the Nonqualified Stock Option Agreement Dated September 21, 1994, the Incentive Stock Option Agreement Dated September 20, 1995, and the Nonqualified Stock Option Agreement Dated September 20, 1995 EXHIBIT 11 Computation of Net Income per Share of 95 Common Stock EXHIBIT 27 Financial Data Schedules 96
EX-10 2 INCENTIVE STOCK OPTION AGREEMENT Page 13 Exhibit 10(iii)A(5) INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT, made as of the 17th day of September, 1996 (the "Grant Date"), between National Service Industries, Inc., a Delaware corporation (the "Company"), and __________________ (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 Optionee performs services for the Company or one of its Subsidiaries; and WHEREAS, the Committee responsible for administration of the Program has determined to grant the Option to the Optionee as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. 1.1 The Company hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of ________ whole Shares subject to, and in accordance with, the terms and conditions set forth in this Agreement. 1.2 The Option is intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code and shall be so construed; provided, however, that nothing in this Agreement shall be interpreted as a representation, guarantee, or other undertaking on the part of the Company that the Option is or will be determined to be an Incentive Stock Option within the meaning of Section 422 of the Code. 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 $38.00 per Share. Page 14 Exhibit 10(iii)A(5) 3. Duration of Option. The Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the "Exercise Term"); provided, however, that the Option may be earlier terminated as provided in Section 6 hereof. 4. Exercisability of Option. Unless otherwise provided in this Agreement or the Program, the Option shall entitle the Optionee to purchase, in whole at any time or in part from time to time, _____, 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 15 Exhibit 10(iii)A(5) 6. Termination of Employment. 6.1 Death, Disability, Retirement, or Change in Control. If the employment of the Optionee is terminated as a result of his death, Disability, Retirement, 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 Other Termination of Employment. If the employment of the Optionee is terminated for any reason other than the reasons set forth in Section 6.1 (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. Notwithstanding anything contained to the contrary in this Agreement, in the event of a Change in Control, (i) the Option shall become immediately and fully exercisable, and (ii) the Optionee will be permitted to surrender for cancellation, within sixty (60) days after such Change in Control, the Option or any portion of the Option to the extent not yet exercised and the Optionee shall be entitled to receive immediately a cash payment in an amount equal to the excess, if any, of (A) the Fair Market Value, at the time of surrender, of the Shares subject to the Option or portion thereof surrendered, over (B) the aggregate purchase price for such Shares under the Option; provided, however, that if the Option was granted within six (6) months prior to the Change in Control and the Optionee may be subject to liability under Section 16(b) of the Exchange Act, the Optionee shall be entitled to surrender the Option or any portion of the Option for cancellation during the sixty (60) day period following the expiration of six (6) months from the Grant Date and to receive the amount described above with respect to such surrender for cancellation. 8. Nontransferability. The Option shall not be transferable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee. Page 16 Exhibit 10(iii)A(5) 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. 11. Terminating Events. Subject to Section 7 hereof, upon the effective date of (i) the liquidation or dissolution of the Company or (ii) a merger or consolidation of the Company (a "Transaction"), the Option shall continue in effect in accordance with its terms and the Optionee shall be entitled to receive in respect of all Shares subject to the Option, upon exercise of the Option, the same number and kind of stock, securities, cash, property, or other consideration that each holder of Shares was entitled to receive in the Transaction. 12. Withholding of Taxes and Notice of Disposition. 12.1 The Company shall have the right to deduct from any distribution of cash to the Optionee an amount equal to the federal, state, and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to the Option. If the Optionee is entitled to receive Shares upon exercise of the Option, the Optionee shall pay the Withholding Taxes 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 Page 17 Exhibit 10(iii)A(5) 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. 12.2 If the Optionee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to him pursuant to his exercise of the Option within the two (2) year period commencing on the day after the Grant Date or within the one (1) year period commencing on the day after the date of transfer of such Share or Shares to the Optionee pursuant to such exercise, the Optionee shall, within ten (10) days of such disposition, notify the Company thereof, by delivery of written notice to the Company at its principal executive office, and immediately deliver to the Company the amount of Withholding Taxes. 13. Employee Bound by the 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. 15. Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 16. Governing Law. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 17. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon each successor corporation. This Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee Page 18 Exhibit 10(iii)A(5) and all rights granted to the Company under this Agreement shall be final, binding, and conclusive upon the Optionee's heirs, executors, administrators, and successors. 18. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction, or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding, and conclusive on the Optionee and the Company for all purposes. ATTEST: NATIONAL SERVICE INDUSTRIES, INC. By: /s/ James S. Balloun Secretary James S. Balloun Chairman of the Board and Chief Executive Officer /s/ Name of Optionee: EX-10 3 NONQUALIFIED STOCK OPTION AGREEMENT Page 19 Exhibit 10(iii)A(6) NONQUALIFIED STOCK OPTION AGREEMENT FOR EXECUTIVE OFFICERS AND DIVISION PRESIDENTS THIS AGREEMENT, made as of the 17th day of September, 1996 (the "Grant Date"), between National Service Industries, Inc., a Delaware corporation (the "Company"), and ___________ (the "Optionee"). WHEREAS, the Company has adopted the National Service Industries, Inc. Long-Term Incentive Program (the "Plan") in order to provide additional incentive to certain officers and key employees of the Company and its Subsidiaries; and WHEREAS, the Optionee performs services for the Company and/or one of its Subsidiaries; and WHEREAS, the Committee responsible for administration of the Plan has determined to grant the Option to the Optionee as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. 1.1 The Company hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of _________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 Plan (the provisions of which are incorporated herein by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. 2. Purchase Price. The price at which the Optionee shall be entitled to purchase Shares upon the exercise of the Option shall be $38.00 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 20 Exhibit 10(iii)A(6) 4. Exercisability of Option. Unless otherwise provided in this Agreement or the Plan, the Option shall entitle the Optionee to purchase, in whole at any time or in part from time to time, _________ , 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 Plan, the Option may be exercised by delivery of written notice to the Company, at its principal executive office. Such notice shall state that the Optionee is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. If requested by the Committee, such person or persons shall (i) deliver this Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option. 5.2 The notice of exercise described in Section 5.1 shall be accompanied by the full purchase price for the Shares in respect of which the Option is being exercised, in cash, by check or by transferring Shares to the Company having a Fair Market Value on the day preceding the date of exercise equal to the cash amount for which such Shares are substituted. 5.3 Upon receipt of notice of exercise and full payment for the Shares in respect of which the Option is being exercised, the Company shall, subject to Section 17 of the Plan, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise was effective. 5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership rights with respect to such Shares. 6. Termination of Employment. 6.1 In General. If the employment of the Optionee with the Company and its Subsidiaries shall terminate for any reason, other than for the reasons set forth in Sections 6.2 and 7.2 below, the Optionee's right to exercise any then outstanding Options (whether or not vested) shall terminate immediately upon termination of employment. Page 21 Exhibit 10(iii)A(6) 6.2 Termination of Employment Due to Death, Disability. If the Optionee's termination of employment is due to death, Disability or Retirement (termination on or after age 65), the following shall apply: (a) Termination Due To Death. In the event the Optionee dies while actively employed, all vested Options at the date of death shall remain exercisable at any time prior to the expiration of the Exercise Term by (A) a Permitted Transferee (as defined in Section 8 below), if any, or such person(s) that have acquired the Optionee's rights under such Options by will or by the laws of descent and distribution, or (B) if no such person described in (A) exists, the Optionee's estate or representative of the Optionee's estate. All Options that are not vested as of the date of death shall be immediately forfeited. (b) Termination by Disability. In the event the employment of the Optionee is terminated by reason of Disability, all vested Options as of the date the Committee determines the Optionee terminated for Disability shall remain exercisable at any time prior to the expiration of the Exercise Term. All Options that are not vested as of the date of termination for Disability shall be immediately forfeited. (c) Termination by Retirement. In the event the employment of the Optionee is terminated by reason of Retirement, the Optionee's Options shall continue to vest in accordance with the original schedule (just as if the Optionee had remained employed) and shall remain exercisable at any time prior to the expiration of the Exercise Term. In the event of the Optionee's death after Retirement, the Options shall continue to vest and be exercisable in accordance with this subsection (c) as if the Optionee had lived and the Options shall be exercisable by the persons described in (a) above. 7. Effect of Change in Control. 7.1 Notwithstanding anything contained to the contrary in this Agreement, in the event of a Change in Control, (i) the Option shall become immediately and fully exercisable, and (ii) the Optionee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control, the Option or any portion of the Option to the extent not yet exercised, and the Optionee shall be entitled to receive immediately a cash payment in an amount equal to the excess, if any, of (A) the greater of (x) the Fair Market Value on the date preceding the date of 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 portion thereof surrendered, over (B) the aggregate purchase price for such Shares under the Option; provided, however, that if the Option was granted within six (6) months prior to the Change in Control and the Optionee may be subject to liability under Section 16(b) of the Exchange Act, the Optionee shall be entitled to surrender the Option, or any portion of the Option, for cancellation during the sixty (60) day period following the expiration of six (6) months from the Grant Date and to receive the amount described above with respect to such surrender for cancellation. Page 22 Exhibit 10(iii)A(6) 7.2 If the employment of the Optionee is terminated within two (2) years following a Change in Control, all vested Options shall continue to be exercisable at any time within three (3) years after the date of such termination of employment, but in no event after expiration of the Exercise Term. 8. Nontransferability. The Option shall not be transferable other than by will or by the laws of descent and distribution. 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 the 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. If all or part of the Option is transferred to a Permitted Transferee, the Permitted Transferee's rights hereunder shall be subject to the same restrictions and limitations with respect to the Option as the Optionee. 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 Plan shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment by the Company or a Subsidiary, nor shall this Agreement or the Plan interfere in any way with the right of the Company or a Subsidiary to terminate the Optionee's employment at any time. 10. Adjustments. In the event of a Change in Capitalization, the Committee may make appropriate adjustments to the number and class of Shares or other stock or securities subject to the Option and the purchase price for such Shares or other stock or securities. The Committee's adjustment shall be made in accordance with the provisions of Section 11 of the Plan and shall be effective and final, binding and conclusive for all purposes of the Plan and this Agreement. 11. Terminating Events. Subject to Section 7 hereof, upon the effective date of (i) the liquidation or dissolution of the Company or (ii) a merger or consolidation of the Company (a "Transaction"), the Option shall continue in effect in accordance with its terms and the Optionee shall be entitled to receive in respect of all Shares subject to the Option, upon exercise of the Option, the same number and kind of stock, securities, cash, property or other consideration that each holder of Shares was entitled to receive in the Transaction. Page 23 Exhibit 10(iii)A(6) 12. Withholding of Taxes. 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 equal to the withholding Taxes, provided that, if the Optionee may be subject to liability under Section 16(b) of the Exchange Act, the election must comply with the requirements applicable to Share transactions by such Optionees. 13. Employee Bound by the Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 14. Modification of Agreement. This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 15. Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 16. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 17. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon each successor corporation. This Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Optionee's heirs, executors, Permitted Transferees, administrators and successors. Page 24 Exhibit 10(iii)A(6) 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. By: /s/ James S. Balloun Secretary James S. Balloun Chairman of the Board and Chief Executive Officer /s/ Name of Optionee EX-10 4 LONG-TERM ACHIEVEMENT INCENTIVE PLAN Page 25 Exhibit 10(iii)A(7) NATIONAL SERVICE INDUSTRIES, INC. LONG-TERM ACHIEVEMENT INCENTIVE PLAN 1. Purpose. The purposes of the National Service Industries, Inc. Long-Term Achievement Incentive Plan (the "Plan") are to provide additional incentives to those officers and key executives of National Service Industries, Inc. (the "Company") and its Subsidiaries (as hereinafter defined) whose substantial contributions are essential to the continued growth and profitability of the Company's businesses, to strengthen their commitment to the Company and its Subsidiaries, to motivate those officers and other executives to perform their assigned responsibilities diligently and skillfully, and to attract and retain competent and dedicated individuals whose efforts will result in the long term growth and profitability of the Company. To accomplish these purposes, the Program provides that the Company may grant Incentive Stock Options, Nonqualified Stock Options, Aspiration Achievement Incentive Awards, Restricted Stock, Performance Units and Performance Shares (as each term is hereinafter defined). 2. Definitions. For purposes of the Program: (a) "Adjusted Fair Market Value" means in the event of a Change in Control, the greater of (i) the highest price per share paid to holders of the Shares in any transaction (or series of transactions) constituting or resulting in a Change in Control or (ii) the highest Fair Market Value of a Share during the ninety (90) day period ending on the date of a Change in Control. (b) "Agreement" means the written agreement between the Company and an Optionee or Grantee evidencing the grant of an Option or Award and setting forth the terms and conditions thereof. (c) "Aspiration Achievement Incentive Award" or "Aspiration Award" means an Award granted to an Eligible Employee, as described in Section 7 of the Plan. (d) "Award" means a grant of an Aspiration Award, Restricted Stock, Performance Awards, or any or all of them. (e) "Board" means the Board of Directors of the Company. (f) "Change in Capitalization" means any increase or reduction in the number of Shares, or any change (including, but not limited to, a change in value) or exchange of Shares for a different number or kind of shares or other securities of the Company, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants or rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend, combination or exchange of shares, repurchase of shares, public offering, private placement, change in corporate structure or otherwise, which in the judgment of the Committee is material or significant. Page 26 Exhibit 10(iii)A(7) (g) "Change in Control" means any of the following events: (i) The acquisition (other than from the Company) by any "Person" (as the term is used for purposes of Sections 13(d) or 14(d) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of the combined voting power of the Company's then outstanding voting securities; or (ii) The individuals who, as of September 18, 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 (iii) Approval by stockholders of the Company of (i) 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 (ii) 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(g)(i), 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. (h) "Code" means the Internal Revenue Code of 1986, as amended. (i) "Committee" means a committee consisting of two or more Non-Employee Directors appointed by the Board to administer the Plan and to perform the functions set forth herein. (j) "Company" means National Service Industries, Inc., a Delaware corporation, or any successor corporation. Page 27 Exhibit 10(iii)A(7) (k) "Disability" means a physical or mental infirmity which impairs the Optionee's or Grantee's ability to substantially perform his duties for a period of one hundred eighty (180) consecutive days. (l) "Division" means any of the operating units or divisions of the Company, or its Subsidiaries, designated as a Division by the Committee. (m) "Eligible Employee" means any officer or other designated employee of the Company or a Subsidiary designated by the Committee as eligible to receive Options or Awards, subject to the conditions set forth herein. (n) "Exchange Act" means the Securities Exchange Act 1934, as amended. (o) "Fair Market Value" means the fair market value of the Shares as determined in good faith by the Committee; provided, however, that (A) if the Shares are admitted to trading on a national securities exchange, Fair Market Value on any date shall be the last sale price reported for the Shares on such exchange on such date or, if no sale was reported on such date, on the last date preceding such date on which a sale was reported, (B) if the Shares are admitted to quotation on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or other comparable quotation system and have been designated as a National Market System ("NMS") security, Fair Market Value on any date shall be the last sale price reported for the Shares on such system on such date or on the last day preceding such date on which a sale was reported, or (C) if the Shares are admitted to Quotation on NASDAQ and have not been designated a NMS Security, Fair Market Value on any date shall be the average of the highest bid and lowest asked prices of the Shares on such system on such date. (p) "Grantee" means a person to whom an Award has been granted under the Plan. (q) "Incentive Stock Option" means an Option within the meaning of Section 422 of the Code. (r) "Named Executive Officer" means an Eligible Employee who as of the date of grant, vesting and/or payout of an Award or Option is deemed by the Committee to be one of the group of "covered" employees" as defined in Code Section 162(m) and the regulations thereunder. (s) "Non-Employee Director" means a director of the Company who satisfies the requirements under Rule 16b-3(b)(3) of the Exchange Act, as amended. (t) "Nonqualified Stock Option" means an Option which is not an Incentive Stock Option. (u) "Option" means an Incentive Stock Option, a Nonqualified Stock Option, or either or both of them. Page 28 Exhibit 10(iii)A(7) (v) "Optionee" means a person to whom an Option has been granted under the Plan. (w) "Participant" means an Eligible Employee who has an outstanding Award or Option under the Plan. (x) "Performance Awards" means Performance Units, Performance Shares or either or both of them. (y) "Performance Cycle" means the time period specified by the Committee at the time an Aspiration Award or a Performance Award is granted during which the performance of the Company, a Subsidiary or a Division will be measured, which period shall be at least two fiscal years. (z) "Performance Shares" means Restricted Stock granted under Section 9 of the Plan. (aa) "Performance Unit" means Performance Units granted under Section 9 of the Plan. (bb) "Restricted Stock" means Shares issued or transferred to an Eligible Employee which are subject to restrictions. Restricted Stock may be subject to restrictions which lapse over time without regard to the performance of the Company, a Subsidiary or a Division, pursuant to Section 8 hereof, or may be awarded as Performance Shares pursuant to Section 9 hereof. (cc) "Retirement" means the voluntary termination of employment by the Grantee or Optionee at any time on or after the Grantee or Optionee attains age 65. (dd) "Shares" means the common stock, par value $1.00 per share, of the Company (including any new, additional or different stock or securities resulting from a Change in Capitalization). (ee) "Subsidiary" means any corporation in an unbroken chain of corporations, beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. The term "Subsidiary" shall also include a partnership in which the Company or a Subsidiary owns 50% or more of the profits interest or capital interest in the partnership. (ff) "Successor Corporation" means a corporation, or a parent or subsidiary thereof within the meaning of Section 424(a) of the Code, which issues or assumes an Option in a transaction to which Section 424(a) of the Code applies. (gg) "Ten-Percent Stockholder" means an Eligible Employee who, at the time an Incentive Stock Option is to be granted to him, owns Page 29 Exhibit 10(iii)A(7) (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company. (hh) "Termination of Cause" means the Optionee or Grantee has terminated employment and has been found by the Committee to be guilty of theft, embezzlement, fraud or misappropriation of the Company's property or any action which, if the individual were an officer of the Company, would constitute a breach of fiduciary duty. 3. Administration. (a) The Plan shall be administered by the Committee which shall hold such meetings as may be necessary for the proper administration of the Plan. Each member of the Committee shall be a Non-Employee Director. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, Agreements, Options or Awards, and all members of the Committee shall be fully indemnified by the Company with respect to any such action, determination or interpretation. (b) Subject to the express terms and conditions set forth herein, the Committee shall have the power from time to time: (i) to determine those Eligible Employees to whom Options shall be granted under the Plan and the number of Incentive Stock Options and/or Nonqualified Stock Options to be granted to each Eligible Employee and to prescribe the terms and conditions (which need not be identical) of each Option, including the purchase price per Share subject to each Option, and to make any amendment or modification to any Agreement consistent with the terms of the Plan; (ii) to select those Eligible Employees to whom Awards shall be granted under the Plan and to determine the amount of Aspiration Award and Shares payable, the number of Performance Units, Performance Shares, and/or shares of Restricted Stock, to be granted pursuant to each Award, the terms and conditions of each Award, including the restrictions or performance criteria relating to such Award, the maximum value of each Award, and to make any amendment or modification to any Agreement consistent with the terms of the Plan; provided, however, that the Board can exercise any of the powers set forth in this Section 3(b), subject to any limitations imposed by Code Section 162(m) or Rule 16b-3. (c) Subject to the express terms and conditions set forth herein, the Committee shall have the power from time to time: (i) to construe and interpret the Plan and the Options and Awards granted thereunder and to establish, amend and revoke rules and regulations for the administration of the Plan, including, but not limited to, correcting any defect or supplying Page 30 Exhibit 10(iii)A(7) any omission, or reconciling any inconsistency in the Plan or in any Agreement, in the manner and to the extent it shall deem necessary or advisable to make the Plan fully effective, and all decisions and determinations by the Committee in the exercise of this power shall be final, binding and conclusive upon the Company, a Subsidiary, and the Optionees and Grantees, as the case may be; (ii) to determine the duration and purposes for leaves of absence which may be granted to an Optionee or Grantee on an individual basis without constituting a termination of employment or service for purposes of the Plan; (iii) to exercise its discretion with respect to the powers and rights granted to it as set forth in the Plan; (iv) generally, to exercise such powers and to perform such acts as are deemed necessary or advisable to promote the best interests of the Company with respect to the Plan. 4. Shares Subject to Program. (a) The maximum number of Shares that may be issued or transferred pursuant to Options and Awards under the Plan is 1,750,000 Shares (or the number and kind of shares of stock or other securities to which such Shares are adjusted upon a Change in Capitalization pursuant to Section 11) and the Company shall reserve for the purposes of the Plan, out of its authorized but unissued Shares or out of Shares held in the Company's treasury, or partly out of each, such numbers of shares as shall be determined by the Board. (b) Not more than fifteen percent (15%) of the Shares referred to in Section 4(a) may be issued or transferred in connection with Awards of Restricted Stock made pursuant to Section 8 (other than Awards of Performance Shares pursuant to Section 9). (c) Whenever any outstanding Option or Award or portion thereof expires, is canceled or is otherwise terminated for any reason (other than by exercise of the Option), the Shares allocable to the canceled or otherwise terminated portion of such Option or Award may again be the subject of Options and Awards hereunder. (d) Whenever any Shares subject to an Award or Option are forfeited for any reason pursuant to the terms of the Plan, such shares may again be the subject of Options and Awards hereunder. (e) With respect to Shares used to exercise an Option or for tax withholding, the Committee shall, in its discretion and in accordance with applicable law, determine whether to charge such Shares against the maximum number of Shares that may be issued under the Plan. 5. Eligibility. Subject to the provisions of the Plan, the Committee shall have full and final authority to select those Eligible Employees who will Page 31 Exhibit 10(iii)A(7) receive Options and/or Awards; provided, however, that no Eligible Employee shall receive any Incentive Stock Options unless he is an employee of the Company or a Subsidiary (other than a Subsidiary that is a partnership) at the time the Incentive Stock Option is granted. 6. Options. The Committee may grant Options in accordance with the Plan and the terms and conditions of the Option shall be set forth in an Agreement. The Committee shall have sole discretion in determining the number of Shares underlying each Option to grant a Participant; provided, however, that in the case of any Incentive Stock Option granted under the Plan, the aggregate Fair Market Value (determined at the time such Option is granted) of the Shares to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under the Plan and all other incentive stock option plans of the Company and any Subsidiary) shall not exceed $100,000. The maximum number of Shares subject to Options which can be granted under the Plan during a 12-month period to any Participant, including a Named Executive Officer, is 100,000 Shares. Each Option and Agreement shall be subject to the following conditions: (a) Purchase Price. The purchase price or the manner in which the purchase price is to be determined for Shares under each Option shall be set forth in the Agreement, provided, that the purchase price per Share under each Option shall not be less than 100% of the Fair Market Value of a Share on the date the Option is granted (110% in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder. (b) Duration. Options granted hereunder shall be for such term as the Committee shall determine, provided that no Option shall be exercisable after the expiration of ten (10) years from the date it is granted (five (5) years in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder). The Committee may, subsequent to the granting of any Option, extend the term thereof, but in no event shall the term as so extended exceed the maximum term provided for in the preceding sentence. (c) Non-transferability. Unless the Committee otherwise provides in the Agreement, no Option granted hereunder shall be transferable by the Optionee, otherwise than by will or the laws of descent and distribution, and an Option may be exercised during the lifetime of such Optionee only by the Optionee or his guardian or legal representative. The terms of such Option shall be final, binding and conclusive upon the beneficiaries, executors, administrators, heirs and successors of the Optionee. (d) Vesting. Subject to Section 6(h) hereof, each Option shall be exercisable in such installments (which need not be equal or the same for each Optionee) and at such times as may be designated by the Committee and set forth in the Agreement. To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires. The Committee may accelerate the exercisability of any Option or portion thereof at any time, subject to any limitations required by Code Section 162(m). (e) Method of Exercise. The exercise of an Option shall be made only by a written notice delivered in person or by mail to the Page 32 Exhibit 10(iii)A(7) Secretary of the Company at the Company's principal executive office, specifying the number of Shares to be purchased and accompanied by payment therefor and otherwise in accordance with the Agreement pursuant to which the Option was granted. The purchase price for any Shares purchased pursuant to the exercise of an Option shall be paid in full upon such exercise, as determined by the Committee in its discretion, in cash, by check, or by transferring Shares to the Company upon such terms and conditions as determined by the Committee. The written notice pursuant to this Section 6(e) may also provide instructions from the Optionee to the Company that upon receipt of the purchase price in cash from the Optionee's broker or dealer, designated as such on the written notice, in payment for any Shares purchased pursuant to the exercise of an Option, the Company shall issue such Shares directly to the designated broker or dealer. Any Shares transferred to the Company as payment of the purchase price under an Option shall be valued at their Fair Market Value on the day preceding the date of exercise of such Option. If requested by the Committee, the Optionee shall deliver the Agreement evidencing the Option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreement to the Optionee. No fractional Shares shall be issued upon exercise of an Option and the number of Shares that may be purchased upon exercise shall be rounded to the nearest number of whole Shares. (f) Rights of Optionees. No Optionee shall be deemed for any purpose to be the owner of any Shares subject to any Option unless and until (i) the Option shall have been exercised pursuant to the terms thereof, (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. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such Shares. (g) Termination of Employment. The Agreement shall set forth the terms and conditions of the Option upon the termination of the Optionee's employment with the Company, a Subsidiary or a Division (including a Grantee'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), as the Committee may, in its discretion, determine at the time the Option is granted or thereafter, provided, however no Option shall be exercisable beyond its maximum term as described in Section 6(b) hereof. (h) Effect of Change in Control. Notwithstanding anything contained in the Plan or an Agreement to the contrary, in the event of a Change in Control, (i) all Options outstanding on the date of such Change in Control shall become immediately and fully exercisable and (ii) an Optionee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control, any Option or portion of an Option to the extent not yet exercised and the Optionee will be entitled to receive a cash payment in the amount equal to the excess, if any, of (x) (A) in the case of a Nonqualified Stock Option, the greater of (1) the Fair Market Value, on the date preceding the date of surrender, of the Shares subject to the Option or portion thereof surrendered or (2) the Adjusted Fair Market Value of the Shares subject to the option or portion thereof surrendered or (B) in the case of an Incentive Stock Option, the Fair Market Value, at the time of surrender, of the Shares subject to the Option or portion Page 33 Exhibit 10(iii)A(7) thereof surrendered, over (y) the aggregate purchase price for such Shares under the Option; provided, however, in the case of any Optionee who may be subject to liability under Section 16(b) of the Exchange Act, such Optionee shall be entitled to surrender for cancellation his or her Option during the sixty (60) day period commencing upon the expiration of six (6) months from the date of grant of any such Option. (i) Modification or Substitution. Subject to the terms of the Plan, the Committee may, in its discretion, modify outstanding Options or accept the surrender of outstanding Options (to the extent not exercised) and grant new Options in substitution for them. Notwithstanding the foregoing, no modification of an Option shall adversely alter or impair any rights or obligations under the Agreement without the Optionee's consent. 7. Aspiration Achievement Incentive Awards. (a) Grant of Aspiration Awards. Subject to the terms of the Plan, the Committee may grant Aspiration Awards to Eligible Employees. The Committee shall have the discretion to determine the amount of each Aspiration Award and the other terms and conditions relating to the grant of such awards. (b) Terms of Aspiration Awards. The following rules shall apply to the Aspiration Awards: (i) Prior to or at the beginning of the Performance Cycle (or within such time period as is permitted by Code Section 162(m) and the regulations thereunder), the Committee shall determine, based upon the Participant's salary and level of responsibility, the Aspiration Award applicable to the Participant. The Award will contain performance levels related to the Performance Measure(s) that will determine the actual award the Participant will receive at the end of the Performance Cycle. The Committee will select one or more of the Performance Measures listed on Appendix A (which objectives may be different for different Participants or Performance Cycles) for purposes of the Aspiration Awards under the Plan. Performance Measures may be in respect of the performance of the Company and its Subsidiaries on a consolidated basis, or a Subsidiary or a Division, or some combination of the foregoing. Performance levels with respect to a Performance Measure may be absolute or relative and may be expressed in terms of a progression within a specified range. Except with respect to Named Executive Officers, the Committee may establish additional Performance Measures for purposes of Aspiration Awards under the Plan. Further, in the event that applicable tax and/or securities laws (including, but not limited to, Code Section 162(m) and Section 16 of the Exchange Act) change to permit Committee discretion to alter the governing Performance Measures for Named Executive Officers without obtaining stockholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining stockholder approval. (ii) No Participant may receive an Aspiration Award in excess of $4 million with respect to a single three-year Performance Cycle. Page 34 Exhibit 10(iii)A(7) (iii) Performance Cycles shall equal or exceed three (3) years in length. (c) Earning of Aspiration Awards. After the applicable Performance Cycle has ended, the Committee shall certify the extent to which the performance levels for the Performance Measure(s) have been achieved. The Committee may, in determining whether the performance levels have been met, adjust the financial results for a Performance Cycle to exclude the effect of unusual charges or income items, or other events (such as acquisitions or divestitures), which are distortive of financial results for the Performance Cycle; provided, that, with respect to Named Executive Officers, in determining financial results, items whose exclusion from consideration will increase the Award shall only have their effects excluded if they constitute "extraordinary items" under generally accepted accounting principles and all such items shall be excluded. The Committee shall also adjust the performance calculations to exclude the unanticipated effect on financial results of changes in the Code, or other tax laws, and the regulations thereunder. The Committee may decrease the amount of an Award otherwise payable if, in the Committee's view, the financial performance during the Performance Cycle justifies such adjustment, regardless of the extent to which the Performance Measure was achieved. The Agreement may provide the Committee with the right to revise the performance levels for the Performance Measure and the Award amounts, if unforeseen events (including, without limitation, a Change in Capitalization, an equity restructuring, an acquisition or a divestiture) occur which have a substantial effect on the financial results and which in the judgment of the Committee make the application of the performance levels unfair unless a revision is made. For Named Executive Officers, such changes shall be made in a manner consistent with Code Section 162(m). (d) Form and Timing of Payment of Aspiration Awards. The Agreement shall set forth the manner in which payment of earned Aspiration Awards will be made. Payment will be made in cash or in Shares, or in a combination of cash and Shares, as determined by the Committee in the Agreement. Payment will be made as soon as practical after the end of the Performance Cycle to which the Award relates. For purposes of the portion of the Award paid in Shares, the Shares shall be valued on their Fair Market Value as of the last day of Performance Cycle (unless the Agreement provides otherwise). (e) Termination of Employment. The Agreement shall set forth the terms and conditions of the Aspiration Award upon the termination of the Participant's employment with the Company, Subsidiary or a Division (including a Participant'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), as the Committee may, in its discretion, determine at the time the Aspiration Award is granted or thereafter. (f) Nontransferability. Unless the Agreement provides otherwise, Aspiration Awards may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than, if amounts are payable after the Participant's death, by will or by the laws of descent and distribution. Page 35 Exhibit 10(iii)A(7) (g) Effect of Change in Control. In the event of a Change in Control, the Participant shall earn and become entitled to payment of such portion of the Aspiration Award as set forth in the Agreement. The time of payment of the Aspiration Award and the form of such payment shall also be as set forth in the Agreement. 8. Restricted Stock. The Committee may grant Awards of Restricted Stock, and may issue Shares of Restricted Stock in payment in respect of Aspiration Awards or vested Performance Units (as hereinafter provided in Section 9(b)), which shall be evidenced by an Agreement between the Company and the Grantee. Each Agreement shall contain such restrictions, terms and conditions as the Committee may, in its discretion, determine and (without limiting the generality of the foregoing) such Agreements may require that an appropriate legend be placed on Share certificates. The maximum number of Shares that may be awarded under a Restricted Stock Award to a Named Executive Officer during any 12-month period is 20,000 Shares. Awards of Restricted Stock shall be subject to the following terms and provisions: (a) Rights of Grantee. Shares of Restricted Stock granted pursuant to an Award hereunder shall be issued in the name of the Grantee as soon as reasonably practicable after the Award is granted, provided that the Grantee has executed an Agreement evidencing the Award, the appropriate blank stock powers and, in the discretion of the Committee, an escrow agreement and any other documents which the Committee may require as a condition to the issuance of such Shares. If a Grantee shall fail to execute the documents which the Committee may require within the time period prescribed by the Committee at the time the Award is granted, the Award shall be null and void. At the discretion of the Committee, Shares issued in connection with a Restricted Stock Award shall be deposited together with the stock powers with an escrow agent designated by the Committee. Unless the Committee determines otherwise and as set forth in the Agreement, upon delivery of the Shares to the escrow agent, the Grantee shall have all of the rights of a stockholder with respect to such Shares, including the right to vote the Shares and to receive all dividends or other distributions paid or made with respect to the Shares. (b) Non-transferability. Unless the Agreement provides otherwise, until any restrictions upon the Shares of Restricted Stock awarded to a Grantee shall have lapsed in the manner set forth in Section 8(c), such Shares shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated, nor shall they be delivered to the Grantee. (c) Lapse of Restrictions. (i) Generally. Restrictions upon Shares of Restricted Stock awarded hereunder shall lapse at such time or times and on such terms and conditions as the Committee may provide in the Agreement. (ii) Effect of Change in Control. Notwithstanding anything contained in the Plan to the contrary, in the event of a Change Page 36 Exhibit 10(iii)A(7) in Control, all restrictions upon any Shares of Restricted Stock (other than Performance Shares) shall lapse immediately and all such Shares shall become fully vested in the Grantee. (d) Termination of Employment. The Agreement shall set forth the terms and conditions that shall apply upon the termination of the Grantee's employment with the Company, a Subsidiary or a Division (including a forfeiture of Shares for which the restrictions have not lapsed upon Grantee's ceasing to be employed) as the Committee may, in its discretion, determine at the time the Award is granted or thereafter. (e) Modification or Substitution. Subject to the terms of the Plan, the Committee may modify outstanding Awards of Restricted Stock or accept the surrender of outstanding Awards of Restricted Stock (to the extent not exercised) and grant new Awards in substitution for them. Notwithstanding the foregoing, no modification of an Award shall adversely alter or impair any rights or obligations under the Agreement without the Grantee's consent. (f) Treatment of Dividends. At the time the Award of Shares of Restricted Stock is granted, the Committee may, in its discretion, determine that the payment to the Grantee of dividends, or a specified portion thereof, declared or paid on such Shares by the Company shall be (i) deferred until the lapsing of the restrictions imposed upon such Shares and (ii) held by the Company for the account of the Grantee until such time. In the event of such deferral, there shall be credited at the end of each year (or portion thereof) interest on the amount of the account at the beginning of the year at a rate per annum as the Committee, in its discretion, may determine. Payment of deferred dividends, together with interest accrued thereon, shall be made upon the lapsing of restrictions imposed on such Shares, and any dividends deferred (together with any interest accrued thereon) in respect of any Shares of Restricted Stock shall be forfeited upon the forfeiture of such Shares pursuant to Section 8(d) or otherwise. (g) Delivery of Shares. Upon the lapse of the restrictions on Shares of Restricted Stock, the Committee shall cause a stock certificate to be delivered to the Grantee with respect to such Shares, free of all restrictions hereunder (except any restrictions under Section 17). 9. Performance Awards. (a) Performance Objectives. The Committee will select one or more of the Performance Measures listed on Appendix A attached hereto for purposes of Performance Awards under the Plan. Performance Measures may be in respect of the performance of the Company and its Subsidiaries (which may be on a consolidated basis), a Subsidiary or a Division, or any combination of the foregoing. Performance objectives may be absolute or relative and may be expressed in terms of a progression within a specified range, with the Grantee becoming vested in (i) a minimum percentage of such Performance Awards in the event the Minimum Acceptable Objective is met or, if surpassed, a greater percentage (ii) an intermediate percentage of such Performance Awards in the event the Good Objective is met or, if surpassed, a Page 37 Exhibit 10(iii)A(7) greater percentage and (iii) one hundred percent (100%) of such Performance Awards in the event the Maximum Realistic Objective is met or surpassed. The Committee may, in determining whether the performance levels have been met, adjust the financial results for a Performance Cycle to exclude the effect of unusual charges or income items, or other events (such as acquisition or divestitures), which are distortive of financial results for the Performance Cycle; provided, that, with respect to Named Executive Officers, in determining financial results, items whose exclusion from consideration will increase the Award shall only have their effects excluded if they constitute "extraordinary items" under generally accepted accounting principles and all such items shall be excluded. The Committee shall also adjust the performance calculations to exclude the unanticipated effect on financial results of changes in the Code, or other tax laws, and the regulations thereunder. The Committee may decrease the amount of an Award otherwise payable if, in the Committee's view, the financial performance during the Performance Cycle justifies such adjustment, regardless of the extent to which the Performance Measure was achieved. The Agreement may provide the Committee with the right to revise the performance levels for the Performance Measure and the Award amounts, if unforeseen events (including, without limitation, a Change in Capitalization, an equity restructuring, an acquisition or a divestiture) occur which have a substantial effect on the financial results and which in the judgment of the Committee make the application of the performance levels unfair unless a revision is made. For Named Executive Officers, such changes shall be made in a manner consistent with Code Section 162(m). The maximum number of Performance Units and Performance Shares a Named Executive Officer may earn for any Performance Cycle shall not exceed an aggregate of 60,000 Units and Shares. (b) Performance Units. The Committee may grant Performance Units, the terms and conditions of which shall be set forth in an Agreement between the Company and the Grantee. Each Performance Unit shall, contingent upon the attainment of specified performance objectives within the Performance Cycle, represent one (1) Share. Each Agreement shall specify the number of the Performance Units to which it relates, the performance objectives which must be satisfied in order for the Performance Units to vest, the Performance Cycle within which such objectives must be satisfied, and the form of payment in respect of vested Performance Units. (i) Vesting and Forfeiture. A Grantee shall become vested with respect to the Performance Units to the extent that the performance objectives set forth in the Agreement are satisfied for the Performance Cycle. Subject to Section 9(d) hereof, if the Minimum Acceptable Objective specified in the Agreement is not satisfied for the applicable Performance Cycle, the Grantee's rights with respect to the Performance Shares shall be forfeited. (ii) Payment of Awards. Payment of Performance Units to Grantees in respect of vested Performance Units shall be made within sixty (60) days after the last day of the Performance Cycle to which such Award relates. Subject to Page 38 Exhibit 10(iii)A(7) Section 9(d), such payments may be made entirely in Shares, entirely in cash, or in such combination of Shares and cash as the Committee in its discretion, shall determine at any time prior to such payment, provided, however, that if the Committee in its discretion determines to make such payment entirely or partially in Shares of Restricted Stock, the Committee must determine the extent to which such payment will be in Shares of Restricted Stock at the time the Award is granted. Except as provided in Section 9(d), if payment is made in the form of cash, the amount payable in respect of any Share shall be equal to the Fair Market Value of such Share on the last day of the Performance Cycle. (iii) Termination of Employment. The Agreement shall set forth the terms and conditions of the Award of Performance Units upon the termination of the Grantee's employment with the Company, a Subsidiary, or a Division (including a Grantee'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) as the Committee may, in its discretion, determine at the time the Award is granted or thereafter. (c) Performance Shares. The Committee, in its discretion, may grant Awards of Performance Shares and shall be evidenced by an Agreement between the Company and the Grantee. Each Agreement shall contain such restrictions, if any, and the terms and conditions as the Committee may, in its discretion, require, and (without limiting the generality of the foregoing) such Agreements may require that an appropriate legend be placed on Share certificates. Awards of Performance Shares shall be subject to the following terms and provisions: (i) Rights of Grantee. The Committee shall provide at the time an Award of Performance Shares is made, the time or times at which the Performance Shares granted pursuant to such Award hereunder shall be issued in the name of the Grantee; provided, however, that no Performance Shares shall be issued until the Grantee has executed an Agreement evidencing the Award, the appropriate blank stock powers and, in the discretion of the Committee, an escrow agreement and any other documents which the Committee may require as a condition to the issuance of such Performance Shares. If a Grantee shall fail to execute the documents which the Committee may require within the time period prescribed by the Committee at the time the Award is granted, the award shall be null and void. At the discretion of the Committee, Shares issued in connection with an Award of Performance Shares shall be deposited together with the stock powers with an escrow agent designated by the Committee. Except as restricted by the terms of the Agreement, upon delivery of the Shares to the escrow agent, the Grantee shall have, in the discretion of the Committee, all of the rights of a stockholder with respect to such Shares, including the right to vote the shares and to receive all dividends or other distributions paid or made with respect to the shares. (ii) Non-transferability. Unless the Agreement provides otherwise, until any restrictions upon the Performance Shares awarded to a Grantee shall have lapsed in the manner Page 39 Exhibit 10(iii)A(7) set forth in Sections 9(c)(3) or 9(d), such Performance Shares shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated, nor shall they be delivered to the Grantee. The Committee may also impose such other restrictions and conditions on the Performance Shares, if any, as it deems appropriate. (iii) Lapse of Restrictions. Subject to Section 9(d), restrictions upon Performance Shares awarded hereunder shall lapse and such Performance Shares shall become vested at such time or times and on such terms, conditions and satisfaction of performance objectives as the Committee may, in its discretion, determine at the time an Award is granted. (iv) Termination of Employment. The Agreement shall set forth the terms and conditions of the Award of Performance Shares upon the termination of the Grantee's employment with the Company, a Subsidiary or a Division (including a Grantee'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) as the Committee may, in its discretion, determine at the time the Award is granted or thereafter. (v) Treatment of Dividends. At the time the Award of Performance Shares is granted, the Committee may, in its discretion, determine that the payment to the Grantee of dividends, or a specified portion thereof, declared or paid on Performance Shares issued by the Company to the Grantee shall be (i) deferred until the lapsing of the restrictions imposed upon such Performance Shares and (ii) held by the Company for the account of the Grantee until such time. In the event of such deferral, there shall be credited at the end of each year (or portion thereof) interest on the amount of the account at the beginning of the year at a rate per annum as the Committee, in its discretion, may determine. Payments of deferred dividends, together with interest accrued thereon as aforesaid, shall be made upon the lapsing of restrictions imposed on such Performance Shares, except that any dividends deferred (together with any interest accrued thereon) in respect of any Performance Shares shall be forfeited upon the forfeiture of such Performance Shares pursuant to Section 9(c)(4) or otherwise. (vi) Delivery of Shares. Upon the lapse of the restrictions on Performance Shares awarded hereunder, the Committee shall cause a stock certificate to be delivered to the Grantee with respect to such Shares, free of all restrictions hereunder. (d) Effect of Change in Control. Notwithstanding anything contained in the Plan to the contrary, in the event of a Change in Control: (i) With respect to the Performance Units, the Grantee shall (i) become vested in a percentage of Performance Unit as determined by the Committee at the time of the Award of Page 40 Exhibit 10(iii)A(7) such Performance Units and as set forth in the Agreement and (ii) be entitled to receive in respect of all Performance Units which become vested as a result of a Change in Control, a cash payment within ten (10) days after such Change in Control equal to the product of the Adjusted Fair Market Value of a Share multiplied by the number of Performance Units which become vested in accordance with this Section 9(d); and (ii) With respect to the Performance Shares, all restrictions shall lapse immediately on all or a portion of the Performance Shares as determined by the Committee at the time of the Award of such Performance Shares and as set forth in the Agreement. (e) Non-transferability. Unless the Agreement provides otherwise, no Performance Awards shall be transferable by the Grantee otherwise than by will or the laws of descent and distribution. (f) Modification or Substitution. Subject to the terms of the Plan, the Committee may modify outstanding Performance Awards or accept the surrender of outstanding Performance Awards and grant new Performance Awards in substitution for them. Notwithstanding the foregoing, no modification of a Performance Award shall adversely alter or impair any rights or obligations under the Agreement without the Grantee's consent. (g) Definitions. For purposes of Performance Awards, the following definitions shall apply: (i) "Good Objective" means a challenging and above average level of performance of the Company, a Subsidiary or a Division during a Performance Cycle for which a performance Award is granted, as determined by the Committee at the time such Performance Award is granted. (ii) "Maximum Realistic Objective" means an excellent level of performance of the Company, a Subsidiary or a Division during a Performance Cycle for which a Performance Award is granted, as determined by the Committee at the time such Performance Award is granted. (iii) "Minimum Acceptable Objective" means a minimum level of performance of the Company, a Subsidiary or a Division during a Performance Cycle for which a Performance Award is granted, as determined by the Committee at the time such Performance Award is granted. 10. Loans. (a) The Company or any Subsidiary may make loans to a Grantee or Optionee in connection with the exercise of an Option, subject to the following terms and conditions and such other terms and conditions not inconsistent with the Program including the rate of interest, if any, as the Committee shall impose from time to time. Page 41 Exhibit 10(iii)A(7) (b) No loan made under the Program shall exceed the sum of (i) the aggregate purchase price payable pursuant to the Option with respect to which the loan is made, plus (ii) the amount of the reasonably estimated income taxes payable by the Optionee or Grantee with respect to the Option or Award. In no event may any such loan exceed the Fair Market Value, at the date of exercise, of any such Shares. (c) No loan shall have an initial term exceeding ten (10) years; provided, however, that loans under the Program shall be renewable at the discretion of the Committee. (d) Loans under the Program may be satisfied by an Optionee or Grantee, as determined by the Committee, in cash or, with the consent of the Committee, in whole or in part by the transfer to the Company of Shares whose Fair Market Value on the date preceding the date of such payment is equal to the cash amount for which such Shares are transferred. (e) A loan shall be secured by a pledge of Shares with a Fair Market Value of not less than the principal amount of the loan. After partial repayment of a loan, pledged Shares no longer required as security may be released into escrow or pursuant to the terms of the Option, Award or escrow agreement to the Optionee or Grantee. 11. Adjustment Upon Changes in Capitalization. (a) In the event of a Change in Capitalization, the Committee shall conclusively determine the appropriate adjustments, if any, to the maximum number and class of Shares or other stock or securities with respect to which Options or Awards may be granted under the Program, the number and class of Shares or other stock or securities which are subject to outstanding Options or Awards granted under the Program, and the purchase price therefor, if applicable. (b) Any such adjustment in the Shares or other stock or securities subject to outstanding Incentive Stock Options (including any adjustments in the purchase price) shall be made in such manner as not to constitute a modification as defined by Section 424(h)(3) of the Code and only to the extent otherwise permitted by Sections 422 and 424 of the Code. (c) If, by reason of a Change in Capitalization, a Grantee of an Award shall be entitled to, or an Optionee shall be entitled to exercise an Option with respect to, new, additional or different shares of stock, securities, Aspiration Awards, Performance Units or Performance Shares (other than rights or warrants to purchase securities), such new, additional or different shares shall thereupon be subject to all of the conditions, restrictions and performance criteria which were applicable to the Aspiration Awards, Performance Units or Performance Shares pursuant to the Award or Shares subject to the Option, as the case may be, prior to such Change in Capitalization. 12. Effect of Certain Transactions. Subject to Sections 6(h), 7(g), 8(c)(ii) and 9(d), in the event of (i) the liquidation or dissolution of the Page 42 Exhibit 10(iii)A(7) Company or (ii) a merger or consolidation of the Company (a "Transaction"), the Plan and the Options and Awards issued hereunder shall continue in effect in accordance with their respective terms and each Optionee and Grantee shall be entitled to receive in respect of each Share subject to any outstanding Options or Awards, as the case may be, upon exercise of any Option or Award or payment or transfer in respect of any Award, the same number and kind of stock, securities, cash, property, or other consideration that each holder of a Share was entitled to receive in the Transaction in respect of a Share. 13. Release of Financial Information. A copy of the Company's annual report to stockholders shall be delivered to each Optionee and Grantee at the time such report is distributed to the Company's stockholders. Upon reasonable request the Company shall furnish as soon as reasonably practicable, to each Optionee and Grantee a copy of its most recent annual report and each quarterly report and current report filed under the Exchange Act since the end of the Company's prior fiscal year. 14. Termination and Amendment of the Plan. (a) The Plan shall terminate on the day preceding the tenth anniversary of its effective date and no Option or Award may be granted thereafter. The Board may sooner terminate or amend the Plan (other than to reduce the rights of Optionees and Grantees, as the case may be, under Sections 6(h), 7(g), 8(c)(ii) and 9(d), at any time and from time to time; provided, however, that to the extent necessary under Section 16(b) of the Exchange Act and the rules and regulations promulgated thereunder or as may otherwise be legally required, no amendment shall be effective unless approved by the stockholders of the Company in accordance with applicable law and regulations at an annual or special meeting. (b) Except as provided in Sections 11 and 12 hereof, rights and obligations under any Option or Award granted before any amendment of the Plan shall not be adversely altered or impaired by such amendment, except with the consent of the Optionee or Grantee, as the case may be. 15. Non-Exclusivity of the Plan. The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. 16. Limitation of Liability. As illustrative of the limitations of liability of the Company, but not intended to be exhaustive thereof, nothing in the Plan shall be construed to: (a) give any person any right to be granted an Option or Award other than at the sole discretion of the Committee; (b) give any person any rights whatsoever with respect to Shares except as specifically provided in the Program; Page 43 Exhibit 10(iii)A(7) (c) limit in any way the right of the Company to terminate the employment of any person at any time (with or without Cause); or (d) be evidence of any agreement or understanding, expressed or implied, that the Company will employ any person in any particular position at any particular rate of compensation or for any particular period of time. 17. Regulation and Other Approvals; Governing Law. (a) This Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof, except to the extent that such law is preempted by federal law. (b) The obligation of the Company to sell or deliver Shares with respect to Options and Awards granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee. (c) The Plan is intended to comply with Rule 16b-3 promulgated under the Exchange Act and the Committee shall interpret and administer the provisions of the Plan or any Agreement in a manner consistent therewith. Any provisions inconsistent with such Rule shall be inoperative and shall not affect the validity of the Plan. (d) The Board may make such changes as may be necessary or appropriate to comply with the rules and regulations of any government authority, or to obtain for Eligible Employees granted Incentive Stock Options the tax benefits under the applicable provisions of the code and regulations promulgated thereunder. (e) Each Option and Award is subject to the requirement that, if at any time the Committee determines, in its discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or the issuance of Shares, no Options shall be granted or payment made or Shares issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions as acceptable to the Committee. (f) Notwithstanding anything contained in the Plan to the contrary, in the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended, and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act of 1933, as amended, and Rule 144 or other regulations thereunder. The Committee may require any individual receiving Shares pursuant to the Plan, as a condition precedent to receipt of such Shares (including upon exercise of Page 44 Exhibit 10(iii)A(7) an Option), to represent and warrant to the Company in writing that the Shares acquired by such individual are acquired without a view to any distribution thereof and will not be sold or transferred other than pursuant to an effective registration thereof under said Act or pursuant to an exemption applicable under the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder. The certificates evidencing any of such Shares shall be appropriately legended to reflect their status as restricted securities as aforesaid. (g) In the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Option under the Plan, the Committee may, subject to this Section 17, make any adjustments it deems appropriate in such Award or Option. 18. Miscellaneous. (a) Multiple Agreements. The terms of each Option or Award may differ from other Options or Awards granted under the Plan at the same time, or at some other time. The Committee may also grant more than one Option or Award to a given Eligible Employee during the term of the Plan, either in addition to, or in substitution for, one or more Options or Awards previously granted to that Eligible Employee. The grant of multiple Options and/or Awards may be evidenced by a single Agreement or multiple Agreements, as determined by the Committee. (b) Withholding of Taxes. (1) The Company shall have the right to deduct from any distribution of cash to any Optionee or Grantee, an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to any Option or Award. If an Optionee or Grantee is entitled to receive Shares upon exercise of an Option or pursuant to an Award, the Optionee or Grantee shall pay the Withholding Taxes to the Company prior to the issuance, or release from escrow, of such Shares. In satisfaction of the Withholding Taxes to the Company, the Optionee or Grantee may make an irrevocable 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 or pursuant to an Award having an aggregate Fair Market Value equal to the Withholding Taxes, provided that in respect of an Optionee or Grantee who may be subject to Section 16(b) of the Exchange Act, the election complies with the requirements applicable to Share transactions by such Participants. (2) If an Optionee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to him pursuant to his exercise of the Option within the two-year period commencing on the day after the date of the grant or within the one-year period commencing on the day after the date of transfer of such Share or Shares to the Optionee pursuant to such exercise, the Optionee shall, within ten (10) days of such disposition, notify the Company thereof, by delivery of written notice to the Company at its principal executive office, and immediately deliver to the Company the amount of Withholding Taxes. Page 45 Exhibit 10(iii)A(7) (c) Designation of Beneficiary. To the extent applicable to the type of Award, each Grantee (other than an Optionee) may designate a person or persons to receive in the event of his or her death, any Award or any amount payable pursuant thereto, to which he or she would then be entitled under the terms of the Plan. Such designation will be made upon forms supplied by and delivered to the Company and may be revoked in writing. (d) Deferral. The Committee may permit a Participant to defer to another plan or program such Participant's receipt of Shares or cash that would otherwise be due to such Participant by virtue of the exercise of an Option, earning of an Aspiration Award, the vesting of Restricted Stock or the earning of Performance Awards. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. 19. Effective Date. The effective date of the Plan shall be the date of its adoption by the Board, subject only to the approval by the affirmative votes of the holders of a majority of the securities of the Company present, or represented, and entitled to vote at a meeting of stockholders duly held in accordance with the applicable laws of the State of Delaware within twelve (12) months of such adoption. Page 46 Exhibit 10(iii)A(7) APPENDIX A TO NATIONAL SERVICE INDUSTRIES, INC. LONG-TERM ACHIEVEMENT INCENTIVE PLAN PERFORMANCE MEASURE DEFINITION Capitalized Equity Value Capitalized Entity Value minus total debt Capitalized Entity Value Sum of Average Invested Capital in the business and the Capitalized Economic Profit Capitalized Economic Profit Economic Profit divided by the Weighted Average Cost of Capital (WACC) Economic Profit Adjusted After-Tax Profits (AATP) minus Average Invested Capital times the WACC Average Invested Capital Average of beginning and ending Invested Capital (i.e. total assets including cash and capitalized operating leases minus non-interest-bearing liabilities other than self-insurance reserves) Weighted Average Cost of Capital (WACC) A percentage cost established for the Performance Cycle Adjusted After-Tax Profit (AATP) Sales minus operating costs (including depreciation, amortization and an operating lease adjustment) minus book income taxes Return on Invested Capital AATP divided by Average Invested Capital AATP Margin AATP divided by Sales Sales Growth Change in Sales from year to year Total Return to Shareholders Change in stock price plus reinvested dividends Cashflow Return on Capital Cashflow divided by Average Invested Capital Cashflow Return on Capitalized Entity/Equity Value Cashflow divided by Capitalized Entity/Equity Value Net Income Return on Capital Net Income divided by Average Invested Capital Sales Earnings Per Share Net Income Cashflow
EX-10 5 ASPIRATION ACHIEVEMENT INCENTIVE AWARD AGREEMENTS Page 47 Exhibit 10(iii)A(8) ASPIRATION ACHIEVEMENT INCENTIVE AWARD AGREEMENT FOR EXECUTIVE OFFICERS THIS AGREEMENT, made as of the 17th day of September, 1996 (the "Grant Date"), between NATIONAL SERVICE INDUSTRIES, INC., a Delaware corporation ("NSI") and___________, a Subsidiary of NSI (together, the "Company"), and ____________ (the "Grantee"). WHEREAS, NSI has adopted the National Service Industries, Inc. Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional incentives to certain officers and key employees of NSI and its Subsidiaries; and WHEREAS, the Committee responsible for administration of the Plan has determined to grant to the Grantee an Aspiration Achievement Incentive Award as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Aspiration Award. 1.1 The Company hereby grants to the Grantee an Aspiration Achievement Incentive Award (the "Award"), which has a value determined as provided in Section 2 below based upon the performance of NSI during the Performance Cycle from September 1, 1996 to August 31, 1999. As provided in the Plan, Grantee's right to payment of this Award is dependent upon Grantee's continued employment in Grantee's current position with the Company, or in a position with responsibilities of substantially similar value to the Company during the Performance Cycle. Under certain circumstances as described below, Grantee may be entitled to receive payment for some portion of the Award if Grantee's employment terminates prior to the end of the Performance Cycle. 1.2 The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. This Agreement shall be construed in accordance with, and subject to, the provisions of the Plan (the provisions of which are hereby incorporated by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. 2. Performance Measure and Performance Levels The Committee has established the performance measure (the "Performance Measure"), and award and performance levels set forth in Appendix A attached hereto. The chart in Appendix A specifies a Commitment performance level, at which the Commitment Level Award will be paid; an Aspiration Page 48 Exhibit 10(iii)A(8) performance level, at or above which an Aspiration Level Award will be paid; and a threshold performance level, at which a minimum incentive award will be paid and below which no award will be paid. For each level of performance at or above the threshold performance level through the Aspiration performance level, Grantee will receive an award determined in accordance with the chart and formulae set forth in Appendix A. The terms used in determining the Performance Measure are defined in Appendix B. 3. Determination of Aspiration Award. 3.1 Determination Notice. Subject to Section 3.2, as soon as practical following the last day of the Performance Cycle, the Committee will determine, in accordance with Section 7(c) of the Plan, the performance level of NSI with respect to the Performance Measure for the Performance Cycle. The Committee may in determining the performance level with respect to the Performance Measure adjust NSI's financial results for the Performance Cycle to exclude the effect of unusual charges or income items which are distortive of financial results for the Performance Cycle; provided, that, in determining financial results, items whose exclusion from consideration will increase the Grantee's Award shall only have their effects excluded if they constitute "extraordinary items" under generally accepted accounting principles and all such items shall be excluded. The Committee shall also adjust the performance calculations to exclude the unanticipated effect on financial results of changes in the Code, or other tax laws, and the regulations thereunder. The Committee may decrease the amount of the Award otherwise payable to Grantee if, in the Committee's view, the financial performance of NSI during the Performance Cycle justifies such adjustment, regardless of the extent to which the Performance Measure has been achieved. The Company will notify the Grantee (or the executors or administrators of the Grantee's estate, if applicable) of the Committee's determination (the "Determination Notice"). The Determination Notice shall specify the performance level of NSI with respect to the Performance Measure for the Performance Cycle and the amount of Award (if any) Grantee will be entitled to receive. The amount Grantee is entitled to receive will be paid one-half in cash and one-half in Shares, with the Shares being valued at their Fair Market Value as of the last day of the Performance Cycle. 3.2 Significant Corporate Events. If, during a Performance Cycle, NSI consummates an acquisition or disposition that involves assets whose value equals or exceeds 30% of the total value of NSI's assets, the following rules shall apply: (a) If the transaction is consummated during the first year of the Performance Cycle, the Performance Cycle and the Grantee's outstanding Award will be terminated with no payout and a new Performance Cycle will be started. (b) If the transaction is consummated after the first year of the Performance Cycle, the Performance Cycle will end and the outstanding Award will be determined and paid at NSI's actual performance level to such date (using, for such purpose, prorated performance levels of the Performance Measure to reflect the portion of the Performance Cycle that had elapsed as of the date of consummation of the acquisition or disposition). Payment of the Award will be Page 49 Exhibit 10(iii)A(8) made as soon as practical after it is determined. A new Performance Cycle will be started to cover the period remaining in the initial Performance Cycle or, if that result is not practical, the Committee will make an appropriate adjustment to reflect the premature termination of the initial Performance Cycle. If, during a Performance Cycle, NSI consummates an acquisition or disposition that involves assets whose value is less than 30% of the total value of NSI's assets, the effects of such acquisition or disposition shall be disregarded in determining NSI's financial results and performance level for the Performance Cycle. Any actions under this Section 3.2 shall be taken in accordance with the requirements of Code Section 162(m) and the regulations thereunder. 4. Termination of Employment 4.1 In General. Except as provided in Sections 4.2, 4.3 and 4.4 below, in the event that a Grante's employment terminates during a Performance Cycle, all unearned Aspiration Awards shall be immediately forfeited by the Grantee. 4.2 Termination of Employment Due to Death, Disability, or Retirement. In the event the employment of a Grantee is terminated by reason of death or Disability during a Performance Cycle, the Grantee shall be entitled to a prorated payout with respect to the unearned Award. The prorated payout shall be determined by the Committee based upon the length of time that the Grantee was actively employed during the Performance Cycle relative to the full length of the Performance Cycle; provided that payment shall only be made to the extent at the end of the Performance Cycle the Award would have been earned based upon the performance level achieved for the Performance Cycle; and provided, further, that the performance level used to determine the prorated award cannot exceed 200% of the Commitment performance level. In the event of Grantee's Retirement (on or after age 65), the full Award shall continue to be eligible for payout at the end of the Performance Cycle, just as if Grantee had remained employed for the remainder of the Performance Cycle (including if the Grantee dies after Retirement but before the end of the Performance Cycle). At the end of the Performance Cycle, the Committee shall make its determination in the same manner as provided in Section 3. Payment of earned Awards to Grantee in the event of termination due to death, Disability, or Retirement shall be made at the same time payments would be made to Grantee if Grantee did not terminate employment during the Performance Cycle. 4.3 Change In Control. Notwithstanding anything in this Agreement to the contrary, if a Change in Control occurs during the Performance Cycle, then the Grantees Page 50 Exhibit 10(iii)A(8) Award shall be determined for the Performance Cycle then in progress as though the Performance Cycle had ended as of the date of the Change in Control and the outstanding Award will be paid at the Commitment Level Award or the actual performance level to such date (using, for such purpose, prorated performance levels of the Performance Measure to reflect the portion of the Performance Cycle that had elapsed as of the date of the Change in Control), whichever provides the greater payment. The Award determined in accordance with the preceding sentence shall be fully vested and payable immediately to the Grantee. The Committee shall determine the amount of the Award under this Section 5.3, subject to the terms of this section and no downward adjustment of the Award shall be permitted. The Award will be paid in full in cash, unless the Grantee elects to receive one-half of the Award in Shares. For purposes of determining the number of Shares to be paid to a Grantee under this Section 4.3, the Fair Market Value of a Share shall be determined by taking the average closing price per share for the last twenty (20) trading days prior to the commencement of the offer, transaction or other event which resulted in a Change in Control. 4.4 Termination Without Cause. In the event Grantee's employment is terminated by the Company without Cause more than one (1) year after the commencement of the Performance Cycle and prior to the end of the Performance Cycle, the Grantee shall be entitled to a prorated payout of the Award based upon the length of time that the Grantee was actively employed during the Performance Cycle relative to the full length of the Performance Cycle; provided, that payment shall only be made to the extent at the end of the Performance Cycle the Award would have been earned based upon the performance level achieved for the Performance Cycle; and provided, further, that the performance level used to determine the prorated award cannot exceed 200% of the Commitment performance level. Payment shall be made to Grantee at the same time as if Grantee had not terminated employment during the Performance Cycle. 5. No Right to Continued Employment. Nothing in this Agreement or the Plan shall be interpreted to confer upon the Grantee any rights with respect to continuance of employment by the Company, nor shall this Agreement or the Plan interfere in any way with the right of the Company to terminate the Grantee's employment at any time. 6. Nonassignment. The Grantee shall not have the right to assign, alienate, pledge, transfer or encumber any amounts due Grantee hereunder, and any attempt to assign, alienate, pledge, transfer, or encumber Grantee's rights or benefits shall be null and void and not recognized by the Plan or the Company. Page 51 Exhibit 10(iii)A(8) 7. Modification of Agreement. This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 8. Severability; Governing Law. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 9. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon any successor to the Company. All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall be binding upon the Grantee's heirs, executors, and administrators. 10. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Grantee and the Company for all purposes. 11. Withholding of Taxes. The Company shall have the right to deduct from any amount payable under this Agreement, an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to any such amount. In satisfaction of all or part of the Withholding Taxes, the Grantee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Company, to have withheld a portion of the Shares issuable to him or her pursuant to an Award, having an aggregate Fair Market Value equal to the Withholding Taxes. Page 52 Exhibit 10(iii)A(8) 12. Shareholder Approval. The effectiveness of this Agreement and of the grant of the Award pursuant hereto is subject to the approval of the Plan by the stockholders of NSI in accordance with the terms of the Plan. NATIONAL SERVICE INDUSTRIES, INC. By: /s/ James S. Balloun Chairman of the Board and Chief Executive Officer ___________, Subsidiary By: /s/ James S. Balloun JAMES S. BALLOUN Chairman of the Board and Chief Executive Officer /s/ Name of Grantee: _____________ Page 53 Exhibit 10(iii)A(8) Exhibit A(1) YOUR AWARD OPPORTUNITY Name: : Jim Balloun Position : CEO, Chairman Division : NSI Performance Period : 1997-1999 Award at Commitment : $480,000 YOUR POTENTIAL PAYOUT The following graph depicts the potential incentive award that would be paid out at different levels of NSI cumulative economic profit, including: a Threshold performance level; a Commitment performance level; and an Aspiration performance level.
NSI Cumulative Economic Profit Payout* ($ Millions) ($ 000s) Threshold** $ 120 Commitment** $ 480 Aspiration** $2,400
*Amounts between performance benchmarks will be interpolated. **Confidential information has been omitted and filed separately with the Securities and Exchange Commission. Page 54 Exhibit 10(iii)A(8) Exhibit A(1) (continued) ASPIRATION ACHIEVEMENT INCENTIVE AWARD FOR 1997 - 1999 PERFORMANCE PERIOD NSI Formula: Payout as a Percent of Commitment Award = a x EP + b Below Commitment Level EP: a = 0.02799 b = -0.83302 Above Commitment Level EP: a = 0.05755 b = -2.76978 Notes: 1. EP = Cumulative Economic Profit for performance period, which will be expressed in millions, rounded to one decimal place. 2. Values for "a" and "b" will be rounded to five decimal places. 3. Payout percentages will be rounded to a tenth of a percent. 4. No award is payable below the Threshold Level EP, notwithstanding the formula set forth above. 5. The maximum award payable is 500% of the Commitment Level award, notwithstanding the formula set forth above. Page 55 Exhibit 10(iii)A(8) Exhibit A(2) YOUR AWARD OPPORTUNITY Name: : Brock Hattox Position : AVP, CFO Division : NSI Performance Period : 1997-1999 Award at Commitment : $224,000 YOUR POTENTIAL PAYOUT The following graph depicts the potential incentive award that would be paid out at different levels of NSI cumulative economic profit, including: a Threshold performance level; a Commitment performance level; and an Aspiration performance level.
NSI Cumulative Economic Profit Payout* ($ Millions) ($ 000s) Threshold** $ 56 Commitment** $ 224 Aspiration** $1,120
*Amounts between performance benchmarks will be interpolated. **Confidential information has been omitted and filed separately with the Securities and Exchange Commission. Page 56 Exhibit 10(iii)A(8) Exhibit A(2) (continued) ASPIRATION ACHIEVEMENT INCENTIVE AWARD FOR 1997 - 1999 PERFORMANCE PERIOD NSI Formula: Payout as a Percent of Commitment Award = a x EP + b Below Commitment Level EP: a = 0.02799 b = -0.83302 Above Commitment Level EP: a = 0.05755 b = -2.76978 Notes: 1. EP = Cumulative Economic Profit for performance period, which will be expressed in millions, rounded to one decimal place. 2. Values for "a" and "b" will be rounded to five decimal places. 3. Payout percentages will be rounded to a tenth of a percent. 4. No award is payable below the Threshold Level EP, notwithstanding the formula set forth above. 5. The maximum award payable is 500% of the Commitment Level award, notwithstanding the formula set forth above. Page 57 Exhibit 10(iii)A(8) Exhibit A(3) YOUR AWARD OPPORTUNITY Name: : David Levy Position : EVP, Administration & Counsel Division : NSI Performance Period : 1997-1999 Award at Commitment : $214,000 YOUR POTENTIAL PAYOUT The following graph depicts the potential incentive award that would be paid out at different levels of NSI cumulative economic profit, including: a Threshold performance level; a Commitment performance level; and an Aspiration performance level.
NSI Cumulative Economic Profit Payout* ($ Millions) ($ 000s) Threshold** $ 54 Commitment** $ 214 Aspiration** $1,070
*Amounts between performance benchmarks will be interpolated. **Confidential information has been omitted and filed separately with the Securities and Exchange Commission. Page 58 Exhibit 10(iii)A(8) Exhibit A(3) (continued) ASPIRATION ACHIEVEMENT INCENTIVE AWARD FOR 1997 - 1999 PERFORMANCE PERIOD NSI Formula: Payout as a Percent of Commitment Award = a x EP + b Below Commitment Level EP: a = 0.02799 b = -0.83302 Above Commitment Level EP: a = 0.05755 b = -2.76978 Notes: 1. EP = Cumulative Economic Profit for performance period, which will be expressed in millions, rounded to one decimal place. 2. Values for "a" and "b" will be rounded to five decimal places. 3. Payout percentages will be rounded to a tenth of a percent. 4. No award is payable below the Threshold Level EP, notwithstanding the formula set forth above. 5. The maximum award payable is 500% of the Commitment Level award, notwithstanding the formula set forth above. Page 59 Exhibit 10(iii)A(8) Exhibit A(4) YOUR AWARD OPPORTUNITY Name: : Stewart Searle Position : SVP, Planning Development Division : NSI Performance Period : 1997-1999 Award at Commitment : $128,000 YOUR POTENTIAL PAYOUT The following graph depicts the potential incentive award that would be paid out at different levels of NSI cumulative economic profit, including: a Threshold performance level; a Commitment performance level; and an Aspiration performance level.
NSI Cumulative Economic Profit Payout* ($ Millions) ($ 000s) Threshold** $ 32 Commitment** $128 Aspiration** $640
*Amounts between performance benchmarks will be interpolated **Confidential information has been omitted and filed separately with the Securities and Exchange Commission. Page 60 Exhibit 10(iii)A(8) Exhibit A(4) (continued) ASPIRATION ACHIEVEMENT INCENTIVE AWARD FOR 1997 - 1999 PERFORMANCE PERIOD NSI Formula: Payout as a Percent of Commitment Award = a x EP + b Below Commitment Level EP: a = 0.02799 b = -0.83302 Above Commitment Level EP: a = 0.05755 b = -2.76978 Notes: 1. EP = Cumulative Economic Profit for performance period, which will be expressed in millions, rounded to one decimal place. 2. Values for "a" and "b" will be rounded to five decimal places. 3. Payout percentages will be rounded to a tenth of a percent. 4. No award is payable below the Threshold Level EP, notwithstanding the formula set forth above. 5. The maximum award payable is 500% of the Commitment Level award, notwithstanding the formula set forth above. Page 61 Exhibit 10(iii)A(8) APPENDIX B ASPIRATION ACHIEVEMENT INCENTIVE AWARD PERFORMANCE MEASURE PERFORMANCE MEASURE DEFINITION Economic Profit Sum of the annual economic profits for the performance cycle. Annual economic profit shall be determined as follows: Adjusted After-Tax Profits (AATP) minus [Average Invested Capital times the Weighted Average Cost of Capital (WACC)] RELATED TERMS DEFINITION Average Invested Capital Average of the average beginning and ending Invested Capital balances each month. Adjusted After-Tax Profit (AATP) Adjusted Pre-Tax Profit minus Book Income Taxes. Adjusted Pre-Tax Profit (APTP) Income before provision for income taxes plus interest expense plus implied interest on capitalized operating leases. Book Income Taxes Reported tax rate (determined by dividing the provision for income taxes by the income before the provision for income taxes, as reported in NSI's annual financial statements) applied to APTP. Invested Capital [Total assets plus capitalized operating leases, less short and long-term investment in tax benefits] less [non-interest bearing liabilities except for self insurance reserves and deferred tax credits relating to the safe harbor lease]. Weighted Average Cost of Capital (WACC) Ten percent (10%) will be the WACC for the Performance Cycle ending August 31, _____.
EX-10 6 SUPPLEMENTAL DEFERRED SAVINGS PLAN Page 62 Exhibit 10(iii)A(9) NATIONAL SERVICE INDUSTRIES, INC. SUPPLEMENTAL DEFERRED SAVINGS PLAN (Effective As of September 18, 1996) Page 63 Exhibit 10(iii)A(9) NATIONAL SERVICE INDUSTRIES, INC. SUPPLEMENTAL DEFERRED SAVINGS PLAN TABLE OF CONTENTS ARTICLE I INTRODUCTION AND ESTABLISHMENT.........................................................................1 ARTICLE II DEFINITIONS...........................................................................................1 2.1 Account 1 2.2 Annual Valuation Date...............................................................................1 2.3 Beneficiary.........................................................................................1 2.4 Change in Capitalization............................................................................1 2.5 Change in Control...................................................................................2 2.6 Class Year Subaccount...............................................................................3 2.7 Code 3 2.8 Company 3 2.9 Compensation........................................................................................3 2.10 Division...........................................................................................4 2.11 Deferral Subaccount................................................................................4 2.12 Election Form......................................................................................4 2.13 Employer...........................................................................................4 2.14 ERISA 4 2.15 Executive..........................................................................................4 2.16 Executive Savings Plan.............................................................................4 2.17 Fair Market Value..................................................................................4 2.18 Fiscal Year........................................................................................5 2.19 Matching Subaccount................................................................................5 2.20 Participant........................................................................................5 2.21 Plan 5 2.22 Plan Administrator.................................................................................5 2.23 Plan Year..........................................................................................5 2.24 Prime Rate.........................................................................................6 2.25 Retirement.........................................................................................6 2.26 Shares 6 2.27 Subsidiary.........................................................................................6 2.28 Supplemental Subaccount............................................................................6 2.29 Termination for Cause..............................................................................6 2.30 Termination of Service.............................................................................6 2.31 Total and Permanent Disability.....................................................................7 2.32 Valuation Date.....................................................................................7 2.33 Year of Service....................................................................................7 ARTICLE III PARTICIPATION; DEFERRAL ELECTION.....................................................................1 3.1 Eligibility to Participate..........................................................................1 3.2 Deferral Election...................................................................................1 3.3 Executive Savings Plan..............................................................................2 ARTICLE IV PARTICIPANTS' ACCOUNTS; EMPLOYER CONTRIBUTION CREDITS.................................................1 4.1 Accounting for Participants' Interests..............................................................1 Page 64 Exhibit 10(iii)A(9) 4.2 Vesting of a Participant's Account..................................................................2 4.3 Distribution of a Participant's Account.............................................................3 4.4 Hardship............................................................................................6 4.5 Transfer of Executive Savings Plan Account..........................................................6 ARTICLE V PLAN ADMINISTRATOR.....................................................................................1 5.1 Committee...........................................................................................1 5.2 Right and Duties....................................................................................1 5.3 Compensation, Indemnity and Liability...............................................................2 5.4 Taxes 2 ARTICLE VI CLAIMS PROCEDURE......................................................................................1 6.1 Claims for Benefits.................................................................................1 6.2 Appeals 1 ARTICLE VII AMENDMENT AND TERMINATION; CHANGE IN CONTROL.......................................................... 1 7.1 Amendments..........................................................................................1 7.2 Termination of Plan.................................................................................1 7.3 Change In Control Provisions........................................................................1 ARTICLE VIII MISCELLANEOUS.......................................................................................1 8.1 Limitation on Participant's Rights..................................................................1 8.2 Benefits Unfunded...................................................................................1 8.3 Other Plans.........................................................................................1 8.4 Receipt or Release..................................................................................2 8.5 Governing Law.......................................................................................2 8.6 Gender, Tense, and Headings.........................................................................2 8.7 Successors and Assigns; Nonalienation of Benefits...................................................2 8.8 Combination With Other Plan..........................................................................3 APPENDIX A DEFERRAL AND PAYMENT ELECTIONS AND DESIGNATION OF BENEFICIARY.............................................................................A-1 APPENDIX B ELECTION TO DEFER DISTRIBUTION.............................................................B-1
Page 65 Exhibit 10(iii)A(9) ARTICLE I INTRODUCTION AND ESTABLISHMENT National Service Industries, Inc. ("Company") hereby establishes the National Service Industries, Inc. Supplemental Deferred Savings Plan ("Plan") for the benefit of eligible management and highly compensated employees of the Company and its Subsidiaries and Divisions. The Plan is designed to assist and encourage eligible employees to accumulate capital and to supplement their retirement income and to align their interests more closely with those of shareholders. The Plan provides for elective deferrals of an employee's compensation, Company matching contributions and supplemental Company contributions. The terms of this Plan are applicable only to eligible employees who are actively employed on or after December 1, 1996. Any employee who terminates his employment relationship prior to that date shall not be covered by this Plan. Page 66 Exhibit 10(iii)A(9) ARTICLE II DEFINITIONS When used in this Plan, the following terms shall have the meanings set forth below unless a different meaning is plainly required by the context: 2.1 "Account" means the records maintained by the Plan Administrator to determine each Participant's interest under this Plan. Such Account may be reflected as an entry in the Company's (or Employer's) records, or as a separate account under a trust, or as a combination of both. Each Participant's Account shall consist of at least three subaccounts: a Deferral Subaccount to reflect his deferrals of Compensation; a Matching Subaccount for Employer's matching contribution credits; a Supplemental Subaccount for any supplemental Employer contribution credits. The Plan Administrator may establish such additional subaccounts as it deems necessary for the proper administration of the Plan. 2.2 "Annual Valuation Date" means December 31 of each year while the Plan is in effect. 2.3 "Beneficiary" means the person or persons last designated in writing by the Participant to receive the vested amount in his Account in the event of such Participant's death; or if no designation shall be in effect at the time of a Participant's death or if all designated Beneficiaries shall have predeceased the Participant, then the Beneficiary shall be the Participant's estate or his personal representative. 2.4 "Change in Capitalization" means any increase or reduction in the number of Shares, or any change (including, but not limited to, a change in value) or exchange of Shares for a different number or kind of shares or other securities of the Company, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants or rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend, combination or exchange of shares, repurchase of shares, public offering, private placement, change in corporate structure or otherwise, which in the judgment of the Plan Administrator is material or significant. 2.5 "Change in Control" means any of the following events: (i) 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 Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Page 67 Exhibit 10(iii)A(9) 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 (ii) The individuals who, as of September 18, 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 Plan, be considered as a member of the Incumbent Board; or (iii) 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 subsection (i) above, 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. 2.6 "Class Year Subaccount" means the subaccount set up under the Deferral Subaccount to reflect the Participant's deferrals for each Plan Year and any earnings thereon. Page 68 Exhibit 10(iii)A(9) 2.7 "Code" means the Internal Revenue Code of 1986, as amended. 2.8 "Company" means National Service Industries, Inc., a Delaware corporation, or its successor or successors. 2.9 "Compensation" means the annual cash compensation (salary plus annual bonus) paid by the Employer to the Participant for the Plan Year, provided that a bonus actually paid during a subsequent Plan year based upon performance during the preceding Plan Year shall be treated as Compensation for such preceding Plan Year. The Participant's Compensation shall include amounts deferred by the Participant to this Plan and any other deferred compensation plan of the Employer (whether or not qualified), and any salary reduction amounts contributed to a welfare plan. The term "Compensation" shall not include long-term incentive payments, car allowances and non-cash remuneration, such as health benefits, life insurance, and other fringe benefits. 2.10 "Division" means any of the operating units or divisions of the Company, or its Subsidiaries, designated as a Division by the Plan Administrator. 2.11 "Deferral Subaccount" means the subaccount maintained to reflect the Participant's deferral of Compensation and any earnings thereon. 2.12 "Election Form" means the form prescribed by the Plan Administrator on which a Participant may specify the amount of his Compensation that is to be deferred pursuant to the provisions of Article III, and the manner of payment of his benefits. 2.13 "Employer" means the Company and any Subsidiary or related employer designated by the Company to participate in the Plan. 2.14 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.15 "Executive" means an officer of the Company, a Subsidiary or one of the Company's Divisions, and other key employees designated as eligible pursuant to Section 3.1. Any dispute regarding any individual's classification shall be determined by the Plan Administrator in its sole discretion. 2.16 "Executive Savings Plan" means the National Service Industries, Inc. Executive Savings Plan which was established effective September 1, 1994. 2.17 "Fair Market Value" means the fair market value of the Shares as determined in good faith by the Plan Administrator; provided, however, that (A) Page 69 Exhibit 10(iii)A(9) if the Shares are admitted to trading on a national securities exchange, Fair Market Value on any date shall be the closing price reported for the Shares on such exchange on such date or, if no sale was reported on such date, on the last date preceding such date on which a sale was reported, (B) if the Shares are admitted to quotation on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or other comparable quotation system and have been designated as a National Market System ("CMS") security, Fair Market Value on any date shall be the last sale price reported for the Shares on such system on such date or on the last day preceding such date on which a sale was reported, or (C) if the Shares are admitted to Quotation on NASDAQ and have not been designated a CMS Security, Fair Market Value on any date shall be the average of the highest bid and lowest asked prices of the Shares on such system on such date. 2.18 "Fiscal " means the year commencing on September 1 and ending on August 31 of the following calendar year, or such other 12-month period used by the Company for financial reporting purposes. 2.19 "Matching Subaccount" means the subaccount maintained to reflect the Employer's matching contribution credits and any earnings thereon. 2.20 "Participant" means an Eligible Executive as defined in Section 3.1 (or an individual who was an Eligible Executive), a portion of whose Compensation for any Plan Year has been deferred pursuant to the Plan or who has received Employer Supplemental Subaccount credits, and whose interest in the Plan has not been wholly distributed. 2.21 "Plan" means the National Service Industries, Inc. Supplemental Deferred Savings Plan, as set forth herein and as it may be amended from time to time. 2.22 "Plan Administrator" means the Company or, if applicable, a committee appointed pursuant to Article V to administer the Plan. 2.23 "Plan Year" means January 1 through the next following December 31, except that the initial Plan Year shall be the period commencing December 1, 1996 and ending December 31, 1997. 2.24 "Prime Rate" means the prime rate of interest on a particular date of Wachovia Bank of Georgia, N.A. (or its successor), as determined by the Plan Administrator, or the prime rate interest of of such other bank as may be selected by the Company. Page 70 Exhibit 10(iii)A(9) 2.25 "Retirement" means termination of the Participant's employment with all Employers on or after attaining age 60, other than a Termination for Cause. 2.26 "Shares" means the common stock, par value $1.00 per share, of the Company (including any new, additional or different stock or securities resulting from a Change in Capitalization). 2.27 "Subsidiary" means any corporation in an unbroken chain of corporations, beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. The term "Subsidiary" shall also include a partnership in which the Company or a Subsidiary owns 50% or more of the profits interest or capital interest in the partnership. 2.28 "Supplemental Subaccount" means the subaccount established to reflect the Employer's supplemental contribution credits and any earnings thereon. 2.29 "Termination for Cause" means the Executive has terminated employment and has been found by the Plan Administrator to be guilty of theft, embezzlement, fraud or misappropriation of the Company's property or of any action which, if the individual were an officer of the Company, would constitute a breach of fiduciary duty. The final determination of whether a Participant has incurred a Termination for Cause shall be made by the Plan Administrator. 2.30 "Termination of Service" or similar expression means the termination of the Participant's employment as an Executive. A Participant who is granted a temporary leave of absence, whether with or without pay, shall not be deemed to have terminated his service. In the event of a transfer of an Executive to a position in which he would no longer be eligible to continue in this Plan, or in the event of the disability of a Participant, the Plan Administrator in its sole discretion, shall determine whether a Termination of Service has occurred. 2.31 "Total and Permanent Disability" means the permanent and lasting inability of a Participant due to illness, accident, or other physical or mental incapacity, to perform his usual duties and services for the Employer. The determination as to whether Total and Permanent Disability exists shall be made by the Plan Administrator based upon the information provided to it. 2.32 "Valuation Date" means the Annual Valuation Date, and any other date(s) selected by the Plan Administrator as of which the Accounts of Participants are valued. Page 71 Exhibit 10(iii)A(9) 2.33 "Year of Service" means, subject to such Break in Service rules as the Plan Administrator may establish, each Plan Year in which the Eligible Employee is credited with 1,000 or more Hours of Service with the Employer, including years commencing prior to the date of adoption of the Plan. Hours of Service shall be determined hereunder in accordance with the Company's general rules for determining such hours under its tax-qualified plans. Page 72 Exhibit 10(iii)A(9) ARTICLE III PARTICIPATION; DEFERRAL ELECTION 3.1 Eligibility to Participate. Prior to, or at the beginning of, each Plan Year, the Company (or its designee) shall specify the Executives who are eligible to make deferral elections under the Plan for the following Plan Year and to receive Matching Subaccount and Supplemental Subaccount credits (an "Eligible Executive"). Such eligibility designation may be made by establishing a minimum compensation level for participation or by the use of such other criteria as the Company (or its designee) deems appropriate from time to time. 3.2 Deferral Election. Each Eligible Executive may elect on an Election Form to have a portion of the salary to be received by the Executive for the period December 1, 1996 through December 31, 1997 and the annual bonus for the fiscal year ending August 31, 1997 ("Initial Election Period"), deferred in accordance with the terms and conditions of the Plan. The Eligible Executive's election for the Initial Election Period shall be effective December 1, 1996, or such later date as may be determined by the Plan Administrator for administrative reasons. The election with respect to the bonus for the Initial Election Period shall be coordinated with the Eligible Executive's election (if any) under the Executive Savings Plan in the manner provided in Section 4.5. For any Plan Year thereafter in which he is eligible to participate, the Eligible Executive may elect to defer a portion of his Compensation in accordance with the terms of the Plan. The Plan Administrator may provide for a separate election with respect to salary and annual bonus. The amount that may be deferred for any Plan Year shall not be less than $1,000, nor an aggregate of more than fifty percent (50%) of his Compensation for such Plan Year. An Executive desiring to exercise such election shall, prior to the beginning of the Initial Election Period and each Plan Year thereafter (or prior to or coincident with the beginning of the Eligible Executive's initial employment or eligibility, if such employment or eligibility commences other than at the beginning of a Plan Year), complete an Election Form indicating the percentage of his Compensation for such Plan Year that he elects to have deferred. If the Eligible Executive's election would result in a deferral greater than the maximum provided herein, any deferred amount shall be reduced to the maximum limit. An election to defer Compensation must be filed with the Plan Administrator within the time period prescribed by the Plan Administrator. If a Participant fails to file a properly completed and duly executed Election Form with the Plan Administrator by the prescribed time, he will be deemed to have Page 73 Exhibit 10(iii)A(9) elected not to defer any Compensation under this Plan for the Plan Year, except to the extent the Plan Administrator in its sole discretion permits an extension of the election period. An Eligible Executive may not, after the applicable election date change (increase or decrease) the percentage of Compensation he has elected to defer for a Plan Year. A Participant may at any time during the Plan Year terminate an election to defer salary (but not the bonus) and discontinue future salary deferrals of Compensation under this Plan by providing written notice to the Plan Administrator prior to the start of the next payroll period for which Compensation will be payable. In such event, Compensation earned for services subsequent to such termination notice will be paid directly to the Participant and will not be subject to his prior deferral election. A Participant who elects to discontinue participation in the Plan for a Plan Year may not recommence participation in the Plan until the next following Plan Year (or such later Plan Year in which he is again eligible to participate), provided the Participant completes and executes the required Election Form. Increases or decreases in the amount a Participant elects to defer (other than a suspension of deferrals) shall not be permitted during the Plan Year. The Eligible Executive may designate on the Election Form (or on a separate form provided by the Plan Administrator) a Beneficiary (or Beneficiaries) to receive payment of amounts in his Account in the event of his death. 3.3 Executive Savings Plan. If the Plan is otherwise terminated by the Company before it becomes fully effective, the deferrals elected under Section 3.1 shall be made to the Executive Savings Plan and shall be held and distributed in accordance with the provisions of such plan. In such event, no Employer matching contribution credits or supplemental contribution credits will be made to the Plan or the Executive Savings Plan. Page 74 Exhibit 10(iii)A(9) ARTICLE IV PARTICIPANTS' ACCOUNTS; EMPLOYER CONTRIBUTION CREDITS 4.1 Accounting for Participants' Interests. (a) Deferral Subaccount. Each Participant's Deferral Subaccount shall be credited with the amounts of Compensation deferred by the Participant under this Plan. The timing and manner in which amounts are credited to a Participant's Deferral Subaccount under this Plan shall be determined by the Plan Administrator in its discretion, but the deferral election shall be applied to each pay period in which the Participant has Compensation during his period of participation in the Plan. The Participant's Deferral Subaccount shall be credited with interest at the Prime Rate on each Annual Valuation Date based upon the amount credited to such Subaccount as of the preceding Annual Valuation Date, and at such other times, if any, as may be determined by the Plan Administrator. (b) Matching Subaccount. As of the end of each Plan Year, unless the Board otherwise determines, an amount shall be credited to the Participant's Matching Subaccount equal to 25% of the amount of the Participant's deferrals for such Plan Year, provided that the maximum amount credited to a Participant's Matching Subaccount for a Plan Year shall not exceed five percent (5%) of the Participant's Compensation for such Plan Year. An Eligible Executive who is covered by a defined benefit supplemental executive retirement plan maintained by the Employer shall not be eligible to receive Employer matching contribution credits under the Plan. Unless the Company otherwise determines for the Plan Year, the amount credited to a Participant's Matching Subaccount for the year shall be deemed to be in the form of cash, Shares, or a combination of cash and Shares, as elected by the Participant on the Election Form for such year. To the extent the amount is deemed to be credited in cash, the Matching Subaccount will be credited with interest at the Prime Rate on each Annual Valuation Date (and at such other dates, if any, as may be determined by the Plan Administrator); if Shares are deemed to be credited, the Matching Subaccount will be adjusted on each Annual Valuation Date (and at such other dates ,if any, as may be determined by the Plan Administrator) as if it were invested in Shares to reflect any dividends (including reinvestment of such dividends in Shares), distributions, stock dividends, stock splits or similar actions with respect to the Shares since the preceding Annual Valuation Date (or such other date). (c) Supplemental Subaccount. As of the end of each Plan Year, unless the Board otherwise determines, there shall be credited to the Supplemental Subaccount of each Eligible Employee who is employed on the last day of the Plan Year and who has a Year of Service for such Plan Year an amount equal to three Page 75 Exhibit 10(iii)A(9) percent (3%) of the Eligible Employee's Compensation for such Plan Year. An Eligible Executive who is covered by a defined benefit supplemental executive retirement plan maintained by the Employer shall not be eligible to receive Employer supplemental contribution credits under the Plan. Unless the Company otherwise determines, the amount credited to an Eligible Employee's Supplemental Subaccount shall be deemed to be in the form of Shares. If Shares are deemed to be credited, the Supplemental Subaccount will be adjusted on each Annual Valuation Date (and at such other dates, if any, as may be determined by the Plan Administrator) as if it were invested in Shares to reflect any dividends (including reinvestment of such dividends in Shares), distributions, stock dividends, stock splits or similar action with respect to the Shares since the preceding Annual Valuation Date (or such other date). (d) Crediting of Shares. The number of Shares to credit to a Participant's Matching Subaccount or Supplemental Subaccount as of an Annual Valuation Date (or other date, as provided above) shall be determined by converting the cash credit otherwise required to Shares using the Fair Market Value of a Share on such date. 4.2 Vesting of a Participant's Account. (a) Deferral Subaccount. Except as provided in the next sentence, a Participant's interest in the amount credited to his Deferral Subaccount shall at all times be 100% vested and nonforfeitable. If a Participant incurs a Termination for Cause, he shall forfeit all earnings credited on all amounts deferred to his Deferral Subaccount that have not yet been fully distributed to him under Section 4.3. (b) Matching and Supplemental Subaccounts. Except in the event of a Termination For Cause, a Participant's interest in the amount credited to his Matching Subaccount and Supplemental Subaccount shall become (i) 100% vested and nonforfeitable upon his death, Total and Permanent Disability, Retirement or completion of 10 or more Years of Service and attainment of age 55 while actively employed, and (ii) 50% vested upon completion of 5 Years of Service and attainment of age 55 while actively employed, with such vesting increasing 10% per year for each additional Year of Service up to 10 years. Subject to Article VII, if the Participant incurs a Termination for Cause (regardless of whether he is otherwise vested) or if the Participant's employment is terminated prior to the time specified for vesting in the preceding sentence, his entire Matching and Supplemental Subaccounts shall be forfeited. 4.3 Distribution of a Participant's Account. Subject to Article VII, a Participant's Account shall be distributed as follows: Page 76 Exhibit 10(iii)A(9) (a) Deferral Subaccount. (i) Except as provided in (ii) and (iii) below, distribution of each Class Year Subaccount of a Participant shall be made in a single lump sum payment as soon as practicable after the January 1 next following five (5) full Plan Years after the Class Year. For example, the distribution of the 1997 Class Year Subaccount (the Participant's deferrals credited to him for the year ended December 31, 1997) shall be made on or about January 1, 2003, and for the 1998 Class Year Subaccount on or about January 1, 2004, and so on. (ii) Election to Defer Distribution. A Participant who will become eligible to receive distribution of a Class Year Subaccount under (i) above may elect to defer to the January 1 of a later year (subject to the limitations provided below) the distribution of such Class Year Subaccount. The election to defer distribution of a Class Year Subaccount must be filed prior to the end of the fourth Plan Year immediately following the Class Year for such Class Year Subaccount. For example, for the 1997 Class Year Subaccount, the election must be filed prior to January 1, 2002. The Participant's deferral election for a Class Year Subaccount must indicate (A) the January 1 when he desires his benefit to be paid or to commence, which date must be at least two (2) years after the date he could initially have received a distribution, and (B) whether the distribution should be made in a lump sum or in annual installments over a period of up to ten (10) years; provided, that the lump sum payment shall be made not later than the year in which he attains age 70 and the last installment payment shall be made later than the year in which the Participant attains age 75. A Participant's Class Year Subaccount for which a deferral election is made under this subsection (b) shall continue to be credited with earnings under Section 4.1(a) until the amount is fully distributed (except as limited in the case of a Termination for Cause). (iii) Death, Disability or Termination of Service Prior to Vesting. (A) Notwithstanding the existence of a deferral election under Section 4.3(a)(ii), in the event of a Participant's death, Total and Permanent Disability, or a Termination of Service prior to the Participant's completion of 5 Years of Service and attainment of age 55, distribution of the vested balance credited to a Participant's Deferral Subaccount shall be made to the Participant (or his Beneficiary in the event of death) as soon as practical. Payment of the Participant's Deferral Subaccount shall be made in a lump sum. In the event payments are made pursuant to this subsection (a)(iii), earnings shall be credited under Section 4.1(a) until all amounts have been distributed (except as limited in the case of Termination for Cause). (B) In the event a Participant terminates after completing 5 years of Service and attaining age 55 (except for death and Total and Permanent Disability), the vested balance credited to a Participant's Deferral Subaccount shall be distributed to him in a lump sum as soon as practical; provided, that Page 77 Exhibit 10(iii)A(9) any Class Year Subaccounts as to which he has properly elected under subsection (ii) above a delayed distribution and/or payment in installments shall be distributed in accordance with such elections; provided, further, that any such Participant may elect prior to termination to make the deferral election in (ii) above with respect to any Class Year Subaccounts as to which the five-year period has not yet passed and that would otherwise be payable more than one (1) year in the future. (b) Matching and Supplemental Subaccounts. (i) The vested amounts (determined in accordance with Section 4.2(b)) credited to a Participant's Matching Subaccount and Supplemental Subaccount shall be payable in a lump sum as soon as practical after the Participant's death, Total and Permanent Disability or Termination of Service, unless, in the case of a termination other than for death or Total and Permanent Disability, the Participant has elected a delayed payment date and/or payment in installments on the Election Form; provided that the lump sum payment shall be made not later than the year in which he attains age 70 and the last installment payment shall be made not later than the year in which the Participant attains age 75. The Plan Administrator may establish rules to permit Participants to change the form and timing of their payment election, provided that no such change shall be effective unless it is made at least two (2) years prior to the Participant's Termination of Service. In the event of death after Termination of Service, distribution of the remaining amount credited to the Participant's Matching Subaccount and Supplemental Subaccount shall be made to a Beneficiary in a lump sum as soon as practical after the Participant's death. (ii) In the event all or any portion of the Participant's Matching Subaccount and Supplemental Subaccount is deemed to be invested in Shares, the Company may at its discretion permit the Participant to elect to receive a distribution of all or any portion of the amount credited to the Subaccounts in Shares in full satisfaction of the Company's obligations hereunder. Any fractional Share shall be paid in cash. The obligation of the Company to deliver Shares under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Company. Notwithstanding anything contained in the Plan to the contrary, in the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended, and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act of 1933, as amended, and Rule 144 or other regulations thereunder. The Company may require any individual receiving Shares pursuant to Page 78 Exhibit 10(iii)A(9) the Plan, as a condition precedent to receipt of Shares to represent and warrant to the Company in writing that the Shares acquired by such individual are acquired without a view to any distribution thereof and will not be sold or transferred other than pursuant to an effective registration thereof under said Act or pursuant to an exemption applicable under the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder. The certificates evidencing any of such Shares shall be appropriately legended to reflect their status as restricted securities. 4.4 Hardship. A Participant who is suffering an unforeseen and severe financial hardship as a result of (i) an illness or accident of the Participant or his immediately family, (ii) loss of Participant's property due to casualty, or (iii) for such other reasons as the Plan Administrator may establish, may file a written request with the Plan Administrator for distribution of all or a portion of the amount credited to his Deferral Subaccount. The Plan Administrator shall have the sole discretion to determine whether to grant a Participant's hardship request and the amount to distribute to the Participant. The Plan Administrator shall have authority in connection with such hardship request to accelerate the payment of any Class Year Subaccounts which have been deferred pursuant to Section 4.3(a). 4.5 Transfer of Executive Savings Plan Account. A Participant in the Plan who is also a participant in the Executive Savings Plan shall have the amount credited to his "Account" (as defined in the Executive Savings Plan) transferred to the Plan as soon as practical after the Plan has been fully implemented by the Company, or at such earlier or later date as may be selected by the Company. The amount credited to the Participant's Account in the Executive Savings Plan shall be credited to his Deferral Subaccount hereunder and shall thereafter be held and distributed in accordance with the rules of the Plan applicable to the Deferral Subaccount. In the event the Plan is fully implemented prior to the date the bonuses for the Fiscal Year ending August 31, 1997 are paid, the deferral of bonuses for such year to the Executive Savings Plan shall be made to the Plan and shall be treated in the same manner as a deferral for the Initial Election Period. Page 79 Exhibit 10(iii)A(9) ARTICLE V PLAN ADMINISTRATOR 5.1 Committee. The Plan Administrator shall be the Company or such committee as may be designated by the Company to administer and manage the Plan. Members of any committee shall not be required to be employees of the Company or Participants. Action of the Plan Administrator may be taken with or without a meeting of committee members. If a member of the committee is a Participant in the Plan, he shall not participate in any decision which solely affects his own Account. 5.2 Right and Duties. The Plan Administrator shall have the discretionary authority to administer and manage the Plan and shall have all powers necessary to accomplish that purpose, including (but not limited to) the following: (a) To construe, interpret, and administer this Plan; (b) To make allocations and determinations required by this Plan, and to maintain records relating to Participants' Accounts; (c) To compute and certify to the Company the amount and kinds of benefits payable to Participants or their beneficiaries, and to determine the time and manner in which such benefits are to be paid; (d) To authorize all disbursements by the Company pursuant to this Plan; (e) To maintain (or cause to be maintained) all the necessary records of the administration of this Plan; (f) To make and publish such rules for the regulation of this Plan as are not inconsistent with the terms hereof; (g) To delegate to other individuals or entities from time to time the performance of any of its duties or responsibilities hereunder; and (h) To hire agents, accountants, actuaries, consultants and legal counsel to assist in operating and administering the Plan. The Plan Administrator shall have the exclusive discretionary authority to construe and to interpret the Plan, to decide all questions of eligibility for benefits and to determine the amount and manner of payment of such benefits, and its decisions on such matters shall be final and conclusive on all parties. 5.3 Compensation, Indemnity and Liability. The Plan Administrator shall serve as such without bond and without compensation for services Page 80 Exhibit 10(iii)A(9) hereunder. All expenses of the Plan and the Plan Administrator shall be paid by the Company. If the Plan Administrator is a committee, no member of the committee shall be liable for any act or omission of any other member of the committee, nor for any act or omission on his own part, excepting his own willful misconduct. The Company shall indemnify and hold harmless the Plan Administrator and each member of the committee against any and all expenses and liabilities, including reasonable legal fees and expenses, arising out of his membership on the committee, excepting only expenses and liabilities arising out of his own willful misconduct. 5.4 Taxes. If the whole or any part of any Participant's Account shall become liable for the payment of any estate, inheritance, income, or other tax which the Company shall be required to pay or withhold, the Company shall have the full power and authority to withhold and pay such tax out of any monies or other property in its hand for the account of the Participant whose interests hereunder are so liable. The Company shall provide notice of any such withholding. Prior to making any payment, the Company may require such releases or other documents from any lawful taxing authority as it shall deem necessary. Page 81 Exhibit 10(iii)A(9) ARTICLE VI CLAIMS PROCEDURE 6.1 Claims for Benefits. If a Participant or beneficiary (hereafter, "Claimant") does not receive timely payment of any benefits which he believes are due and payable under the Plan, he may make a claim for benefits to the Plan Administrator. The claim for benefits must be in writing and addressed to the Plan Administrator or to the Company. If the claim for benefits is denied, the Plan Administrator shall notify the Claimant in writing within 90 days after the Plan Administrator initially received the benefit claim. However, if special circumstances require an extension of time for processing the claim, the Plan Administrator shall furnish notice of the extension to the Claimant prior to the termination of the initial 90-day period and such extension shall not exceed one additional, consecutive 90-day period. Any notice of a denial of benefits shall advise the Claimant of the basis for the denial, any additional material or information necessary for the Claimant to perfect his claim, and the steps which the Claimant must take to have his claim for benefits reviewed. 6.2 Appeals. Each Claimant whose claim for benefits has been denied may file a written request for a review of his claim by the Plan Administrator. The request for review must be filed by the Claimant within 60 days after he received the written notice denying his claim. The decision of the Plan Administrator will be made within 60 days after receipt of a request for review and shall be communicated in writing to the Claimant. Such written notice shall set forth the basis for the Plan Administrator's decision. If there are special circumstances which require an extension of time for completing the review, the Plan Administrator's decision shall be rendered not later than 120 days after receipt of a request for review. Page 82 Exhibit 10(iii)A(9) ARTICLE VII AMENDMENT AND TERMINATION; CHANGE IN CONTROL 7.1 Amendments. Subject to Section 7.3, the Company (or its designee) shall have the right in its sole discretion to amend this Plan in any manner at any time; provided, however, that no such amendment shall reduce the Participant's vested interest in his Account under Section 4.2 at that time. Any amendment shall be in writing and executed by a duly authorized officer of the Company. All Participants shall be bound by such amendment. 7.2 Termination of Plan. The Company expects to continue this Plan, but does not obligate itself to do so. Subject to Section 7.3, the Company reserves the right to discontinue and terminate the Plan at any time, in whole or in part, for any reason (including a change, or an impending change, in the tax laws of the United States or any State). If the Plan is terminated, the Plan Administrator shall be notified of such action in a writing executed by a duly authorized officer of the Company, and the Plan shall be terminated at the time therein set forth. Termination of the Plan shall be binding on all Participants, but in no event may such termination reduce the amounts credited at that time to any Participant's Account. If this Plan is terminated, amounts theretofore credited to Participant's Deferral Subaccount, Matching Subaccount and Supplemental Subaccount, including interest and earnings from the last Valuation Date to the termination date, shall either be paid in a lump sum immediately, or distributed in some other manner consistent with this Plan, as determined by the Plan Administrator in its sole discretion. 7.3 Change In Control Provisions. (a) Amendment or Termination. Notwithstanding anything contained in this Plan to the contrary, for a period of two (2) years following a Change in Control this Plan shall not be terminated or amended to reduce, suspend or eliminate any Eligible Executive's or Participant's benefits or participation (or right to participate) provided under this Plan, including, without limitation, the benefits provided in Articles III and IV. Any amendment or termination of this Plan which a Participant reasonably demonstrates (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or in anticipation of a Change in Control, and which was not consented to in writing by the Participant shall be null and void, and shall have no effect whatsoever with respect to the Participant. (b) Termination of Employment. Notwithstanding anything contained in this Plan to the contrary, if a Participant's employment is terminated by the Company (other than for "Cause" as defined in (c) below) or by the Participant Page 83 Exhibit 10(iii)A(9) for any reason within two (2) years following a Change in Control, the Participant's Account shall become fully vested and the Company shall, within five (5) days, pay to the Participant a lump sum cash payment of the full amount credited to his Account (including any Class Year Subaccounts subject to a deferral election under Section 4.3(b), Matching Subaccount and Supplemental Subaccount) with earnings determined under Section 4.1 credited thereto to the date of payment. If a Participant's employment is terminated (i) for Cause (as defined in (c) below) within two (2) years following a Change in Control or (ii) for any reason more than two (2) years after a Change in Control, the provisions of Article IV shall apply to the distribution of the Participant's Account. (c) Cause. For purposes of Section 7.3(b), a termination for "Cause" is a termination of the Executive evidenced by a resolution adopted in good faith by two-thirds of the Board of Directors of the Company that the Participant (i) intentionally and continually failed to substantially perform his duties with the Company (other than a failure resulting from the Participant'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 Participant specifying the manner in which the Participant has failed to substantially perform, or (ii) intentionally engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; provided, however, that no termination of the Participant's employment shall be for Cause as set forth in clause (ii) above until (x) there shall have been delivered to the Participant a copy of a written notice setting forth that the Participant was guilty of the conduct set forth in clause (ii) and specifying the particulars thereof in detail, and (y) the Participant shall have been provided an opportunity to be heard by the Board (with the assistance of the Participant's counsel if the Participant so desires). No act, nor failure to act, on the Participant'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, in the case of any Participant who is a party to a Severance Protection Agreement, no failure to perform by the Participant after a Notice of Termination (as defined in the Participant's Severance Protection Agreement) is given by the Participant shall constitute Cause for purposes of this Plan. Page 84 Exhibit 10(iii)A(9) ARTICLE VIII MISCELLANEOUS 8.1 Limitation on Participant's Rights. Participation in this Plan shall not give any Participant the right to be retained in the Company's employ or the employ of any Employer, or any right or interest in this Plan or any assets of the Company other than as herein provided. The Company reserves the right to terminate the employment of any Participant without any liability for any claim against the Company under this Plan, except to the extent provided herein. 8.2 Benefits Unfunded. The benefits provided by this Plan shall be unfunded. All amounts payable under this Plan to Participants shall be paid from the general assets of the Company, and nothing contained in this Plan shall require the Company to set aside or hold in trust any amounts or assets for the purpose of paying benefits to Participants. This Plan shall create only a contractual obligation on the part of the Company, and Participants shall have the status of general unsecured creditors of the Company under the Plan with respect to amounts of Compensation they defer hereunder or any other obligation of the Company to pay benefits pursuant hereto. Any funds of the Company available to pay benefits pursuant to the Plan shall be subject to the claims of general creditors of the Company, and may be used for any purpose by the Company. Notwithstanding the preceding paragraph, the Company may at any time transfer assets, including Shares, to a trust for purposes of paying all or any part of its obligations under this Plan. However, to the extent provided in the trust only, such transferred amounts shall remain subject to the claims of general creditors of the Company. To the extent that assets are held in a trust when a Participant's benefits under the Plan become payable, the Plan Administrator shall direct the trustee to pay such benefits to the Participant from the assets of the trust. 8.3 Other Plans. This Plan shall not affect the right of any Executive or Participant to participate in and receive benefits under and in accordance with the provisions of any other employee benefit plans which are now or hereafter maintained by the Company, unless the terms of such other employee benefit plan or plans specifically provide otherwise. 8.4 Receipt or Release. Any payment to a Participant in accordance with the provisions of this Plan shall, to the extent thereof, be in full satisfaction of all claims against the Plan Administrator, the Company and any Employer, and the Plan Administrator may require such Participant, as a condition precedent to such payment, to execute a receipt and release to such effect. 8.5 Governing Law. This Plan shall be construed, administered, and governed in all respects in accordance with applicable federal law and, to the Page 85 Exhibit 10(iii)A(9) extent not preempted by federal law, in accordance with the laws of the State of Georgia. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 8.6 Gender, Tense, and Headings. In this Plan, whenever the context so indicates, the singular or plural number and the masculine, feminine, or neuter gender shall be deemed to include the other. Headings and subheadings in this Plan are inserted for convenience of reference only and are not considered in the construction of the provisions hereof. 8.7 Successors and Assigns; Nonalienation of Benefits. This Plan shall inure to the benefit of and be binding upon the parties hereto and their successors and assigns; provided, however, that the amounts credited to the Account of a Participant shall not (except as provided in Section 5.4) be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to any benefits payable hereunder, including, without limitation, any assignment or alienation in connection with a separation, divorce, child support or similar arrangement, shall be null and void and not binding on the Plan or the Company. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to substantially all of the business or assets of the Company to expressly agree to assume and perform this Agreement in the same manner that the Company would be required to perform it. 8.8 Combination With Other Plan. The Plan may be combined or merged with other deferred compensation plans of the Company and the Plan Administrator shall establish the terms and conditions relating to any such merger. Page 86 Exhibit 10(iii)A(9) IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officers as of the date and year first written above. NATIONAL SERVICE INDUSTRIES, INC. By:________________________ Page 87 Exhibit 10(iii)A(9) NATIONAL SERVICE INDUSTRIES, INC. SUPPLEMENTAL DEFERRED SAVINGS PLAN DEFERRAL AND PAYMENT ELECTIONS AND DESIGNATION OF BENEFICIARY To the Plan Administrator: I hereby agree to participate in the NATIONAL SERVICE INDUSTRIES, INC. SUPPLEMENTAL DEFERRED SAVINGS PLAN (the "Plan") pursuant to the terms and conditions of such Plan contained in the Plan document adopted by NATIONAL SERVICE INDUSTRIES, INC. ("Company"), all of which terms and conditions are incorporated herein by reference. I. DEFERRAL ELECTIONS a. Salary Deferral: I hereby elect to defer the amount of my Salary indicated below for the period December 1, 1996 to December 31, 1997: _____% of my Salary $_____ of my Salary (amounts will be deducted equally over the pay periods) Other _________________________________ b. Annual Bonus Deferral: I hereby elect to defer the amount of my Annual Bonus indicated below for the Company's Fiscal Year commencing September 1, 1996 and ending August 31, 1997: _____% of my Annual Bonus $_____ of my Annual Bonus (if my Annual Bonus is less than this amount, 100% of my Annual Bonus will be deferred). _____% of my Annual Bonus above $________ (specify dollar level above which percentage of Annual Bonus will be deferred). Page 88 Exhibit 10(iii)A(9) Other _________________________________ NOTE:If you have already elected to defer a portion of your fiscal 1997 bonus to the Executive Savings Plan, that election will be recognized first before any bonus amounts are deferred to this Plan. However, the Company intends to merge the Executive Savings Plan with this Plan and, in such event, your deferrals under the Executive Savings Plan will be transferred to this Plan. c. Deferral Limitation: Notwithstanding my election in this Section I, I understand that my annual deferral cannot be less than $1,000 nor exceed 50% of my Compensation (Salary and Annual Bonus) for the Plan Year and, that in the event my election does not satisfy these limitations, the Plan Administrator will adjust my election in an appropriate manner. If, for any reason, this Plan is not finally implemented, any deferrals under this Plan will be made to the Executive Savings Plan. II. ELECTION FOR MATCHING SUBACCOUNT CREDITS I hereby elect to have the Employer's credits to my Matching Subaccount for the period covered by this election treated as if they were invested as follows: 100% in cash, with interest credited at the Prime Rate 100% in Shares of the Company, with earnings credited as if invested in such Shares Page 89 Exhibit 10(iii)A(9) 50%in cash and 50% in Shares NOTE:This deemed investment election must be made each year with respect to Matching Subaccount credits for such year and the Company may elect not to allow the election for any year. III. BENEFIT PAYMENT ELECTION Subject to the provisions of the Plan, I hereby elect to receive payment of the vested portion of the Employer's credits to my Matching Subaccount and Supplemental Subaccount on the date(s) and in the manner specified below: Based on Termination of Service Based on Designated Age Year Amount or % Age Amount or % Termination of Service Termination +1 Termination +2 Termination +3 Termination +4 Termination +5 Termination +6 Termination +7 Termination +8 Termination +9 NOTE: (1) Except for the year in which you terminate or attain the designated age, all payments will be made on or about January 1 of the year indicated. If you elect installment payments, it must be in 10% increments. (2) Your Subaccounts will not be vested unless you terminate on or after age 55 with at least 5 Years of Service. (3) If you wish payments to start at a specified age, enter the age at which you want payments to start (which must be at least age 60), but payments will not start until after Termination of Service (at which time all back payments will also be made). Page 90 Exhibit 10(iii)A(9) (4) If you elect a lump sum, it must be made no later than the year in which you attain age 70. If you elect installments, your last installment payment must be made no later than the year in which you attain age 75. IV. BENEFICIARY DESIGNATION I designate the following person(s) as Primary and Contingent Beneficiaries under the Plan with respect to all vested amounts credited to my Account: Primary Beneficiary(ies): ______________________ __________________ __________________ Name % Benefit Relationship ______________________ __________________ __________________ Name % Benefit Relationship ______________________ __________________ __________________ Name % Benefit Relationship Page 91 Exhibit 10(iii)A(9) Contingent Beneficiary(ies): (will only receive benefits if none of the Primary Beneficiary(ies) survives the Participant) ______________________ __________________ __________________ Name % Benefit Relationship ______________________ __________________ __________________ Name % Benefit Relationship ______________________ __________________ __________________ Name % Benefit Relationship V. SIGNATURE I retain the right, at any time, to change the Beneficiary designation in Section IV above by giving written notice of such change to the Plan Administrator and to make such other changes to this Election Form as may be permitted by the Plan. I hereby agree to be bound by all of the terms and conditions of the Plan, as it may be amended from time to time. Dated: ____________________ S.S.N. Received By Company: _______________________ Signature Date Page 92 Exhibit 10(iii)A(9) ELECTION TO DEFER DISTRIBUTION EX-10 7 LETTER AGREEMENT DATED 10/18/96 Page 93 Exhibit 10(iii)A(10) Don W. Hubble October 18, 1996 October 18, 1996 Don W. Hubble 2621 Winslow Drive Atlanta, Georgia 30305 Re: Amendment of Stock Option Agreements Dear Don: In connection with your termination of employment, and as confirmed and evidenced by this letter agreement, the terms of certain stock options previously granted to you were amended by action taken by the Executive Resource and Nominating Committee of NSI's Board of Directors (the "Committee") on August 2, 1996, and ratified by the Board of Directors on September 18, 1996. The following installments of employee stock options, which had previously been granted to you and which would otherwise have vested and become exercisable after this date, have been accelerated so that they are immediately exercisable on this date: Number of Option Grant Date Shares In Installments September 15, 1993 3,750 September 21, 1994 4,011 September 21, 1994 8,489 September 20, 1995 3,252 September 20, 1995 15,498 35,000 In addition, the Committee amended the expiration provisions of those options for 35,000 shares and options for 42,756 shares which were previously granted to you and were already exercisable according to their original vesting schedules. Pursuant to the amendment, said options for 77,756 shares remain exercisable through October 31, 1998, notwithstanding your resignation effective today. Page 94 Exhibit 10(iii)A(10) Your Incentive Stock Option Agreement dated September 15, 1993, Incentive Stock Option Agreement dated September 21, 1994, Nonqualified Stock Option Agreement dated September 21, 1994, Incentive Stock Option Agreement dated September 20, 1995 and Nonqualified Stock Option Agreement dated September 20, 1995 (the "Stock Option Agreements") are each hereby amended in accordance with this letter. Please acknowledge your acceptance of this letter by signing in the space provided below and returning the executed letter to me. A duplicate is enclosed for you to retain with your copies of the Stock Option Agreements. Very truly yours, /s/ James S. Balloun James S. Balloun Chairman and Chief Executive Officer JSB:sdh Enclosures Accepted and agreed to as of the 18th day of October, 1996: /s/ Don W. Hubble Don W. Hubble EX-11 8 COMPUTATION OF NET INCOME PER SHARE Page 95 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 NOVEMBER 30 1996 1995 Primary: Weighted Average Number of Shares (determined on a monthly basis) ................ 45,957 48,343 Net Income ....................................... $ 24,834 $ 23,269 Primary Earnings per Share ....................... $ .54 $ .48 Fully Diluted: Weighted Average Number of Shares Outstanding .................................... 45,957 48,343 Additional Shares Assuming Exercise of Options: Options exercised ............................ 1,204 1,233 Treasury stock purchased with proceeds ....... (947) (979) Average Common Shares Outstanding (as adjusted) ................................. 46,214 48,597 Net Income ....................................... $ 24,834 $ 23,269 Fully Diluted Earnings per Share ................. $ .54 $ .48 EX-27 9 FDS --
5 Page 96 Exhibit 27 Financial Data Schedules Quarter Ended November 30, 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 November 30, 1996 and the consolidated statement of income for the three months ended November 30, 1996, and is qualified in its entirety by reference to such financial statements. 3-MOS AUG-31-1997 SEP-01-1996 NOV-30-1996 50,850 551 275,219 6,891 171,662 603,849 754,228 400,701 1,085,726 210,581 24,889 0 0 57,919 638,396 1,085,726 381,763 511,893 236,604 312,182 159,030 0 1,341 39,340 14,506 24,834 0 0 0 24,834 0.54 0.54
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