-----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, KI3y2KlWYutw4PxGNGba1u+4ExHYx7CdIlHyhp7C2VR6O7kv016fA1o8yd94d4uc Rsg2422kh/fyUrxfWrtUsQ== 0000070538-98-000033.txt : 19981119 0000070538-98-000033.hdr.sgml : 19981119 ACCESSION NUMBER: 0000070538-98-000033 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981118 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-K SEC ACT: SEC FILE NUMBER: 001-03208 FILM NUMBER: 98754896 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-K 1 NATIONAL SERVICE INDUSTRIES, INC. 10-K Page 1 of 87 Index to Exhibits on Page 16 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended August 31,1998 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) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered Common Stock ($1.00 Par Value) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based upon the closing price as quoted on the New York Stock Exchange October 31, 1998 the aggregate market value of the voting stock held by nonaffiliates of the registrant was $ 1,483,569,010. The number of shares outstanding of the registrant's common stock, $1.00 par value, was 41,426,705 shares as of October 31, 1998. DOCUMENTS INCORPORATED BY REFERENCE Location in Form 10-K Incorporated Document Part I, Item 1 1998 Annual Report Part II, Items 5, 6, 7, and 8 1998 Annual Report Part III, Items 10, 11, 12, and 13 1998 Proxy Statement Part IV, Item 14 1998 Annual Report Page 2 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES Table of Contents Page No. Part I Item 1. Business 3-4 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 Part II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters 6 Item 6. Selected Financial Data 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 8. Financial Statements and Supplementary Data 6 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 6 Part III Item 10. Directors and Executive Officers of the Registrant 7 Item 11. Executive Compensation 7 Item 12. Security Ownership of Certain Beneficial Owners and Management 7 Item 13. Certain Relationships and Related Transactions 7 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 8-12 Signatures 13 Financial Statement Schedules 14-15 Index to Exhibits 16 Page 3 PART I ITEM 1. BUSINESS The registrant, incorporated in Delaware in 1928, provides a wide variety of products and services through its operating segments, as follows: Divisions Principal Products or Services Marketing Area Products and services for industrial, commercial, institutional, and healthcare customers TEXTILE RENTAL National Linen Service Rented napkins and table Principally the southern, National Healthcare Linen Service linens, bed linens, bath southwestern, and central National Facility Services towels, bar and shop towels, United States. National Direct Source sterilized products, mats, and mops CHEMICAL Zep Manufacturing Company Chemical cleaners Throughout the United Zep Manufacturing Company of Canada including sanitizers, States, Canada, Zep Europe disinfectants, polishes, floor Puerto Rico, Western Selig Chemical Industries finishes, degreasers, water Europe, and Australia. National Chemical treatments, pesticides, insecticides, and herbicides ENVELOPE Atlantic Envelope Company Custom business envelopes and South, Southwest, and Northeast. Allen Envelope Corporation courier packages and specialty ATENCO Filing Systems filing products. Lyon Folder Company Techno-Aide/Stumb Metal Products Company Products for the construction industry LIGHTING EQUIPMENT Lithonia Lighting Fluorescent fixtures for Throughout the United commercial, industrial, and States, Canada, institutional applications; Mexico and overseas. high-intensity discharge fixtures for industrial and commercial use; architectural outdoor lighting; downlighting; sportslighting; track lighting; vandal-resistant fixtures; emergency lighting; lighting and dimming controls; and manufactured wiring systems
Page 4 Divisions Principal Products or Services Marketing Area Products and services for the consumer CHEMICAL Enforcer Products, Inc. Pesticides, insecticides, rodenticides, Throughout the United States. herbicides, cleaners, plumbing pipe and sewer drain cleaners and clog removers. LIGHTING EQUIPMENT Lithonia Lighting Residential fluorescent, recessed Throughout North America. Home-Vue Lighting and track lighting, and Light Concepts decorative fluorescent fixtures.
Competition While each of the registrant's businesses is highly competitive, the competitive conditions and the registrant's relative position and market share vary widely from business to business. A limited number of the competitors of each division are large diversified companies, but most of the competitors of the divisions are smaller companies than the registrant. Such smaller companies frequently specialize in one industry or one geographic area, which in many instances increases the intensity of competition. Management believes that its Lighting Equipment segment is the largest manufacturer of lighting fixtures in the world and its Textile Rental segment is one of the largest such companies in the United States. Research and Development Company-sponsored research and development expenses related to present and future products are expensed as incurred. Research and development expenses were $13.6 million, $8.6 million, and $8.7 million in 1998, 1997, and 1996, respectively. Raw Materials There were no significant shortages of materials or components during the years ended August 31, 1998, 1997, and 1996. No one commodity or supplier provided a significant portion of the company's material requirements. Total Employment The registrant employs approximately 16,700 people. Financial Information about Industry Segments The financial information required by this item is included on page 40 of the company's annual report for the year ended August 31, 1998, under the caption "Business Segment Information" and is incorporated herein by reference. Page 5 ITEM 2. PROPERTIES The general offices of the company are located in Atlanta, Georgia. Because of the diverse nature of the operations and the large number of individual locations, it is neither practical nor significant to describe all of the operating facilities owned or leased by the company. The following listing summarizes the significant facility categories by business: Number of Facilities Division Owned Leased Nature of Facilities Lighting Equipment 7 5 Manufacturing plants 1 7 Distribution centers - 10 Field warehouses Textile Rental 33 8 Linen plants - 23 Linen service centers - 1 Distribution centers Chemical 10 2 Manufacturing plants 20 51 Distribution centers - 3 Sales offices Envelope 7 5 Manufacturing plants - 2 Warehouses Corporate Office 1 - Corporate headquarters ITEM 3. LEGAL PROCEEDINGS The registrant is neither a party to nor is its property subject to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the three months ended August 31, 1998. Page 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is included on the inside back cover of the company's annual report for the year ended August 31, 1998, under the captions "Listing," "Shareholders of Record," and "Common Share Prices and Dividends per Share" and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included on pages 46 and 47 of the company's annual report for the year ended August 31, 1998, under the caption "Ten-Year Financial Summary" and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included on pages 42 through 45 of the company's annual report for the year ended August 31, 1998, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. From time to time, the company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, capital expenditures, 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 non-residential construction awards; and (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, enhanced sales force, new products, and improved customer service, as well as share repurchases and acquisitions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included on pages 26 through 41 of the company's annual report for the year ended August 31, 1998, under the captions "Consolidated Balance Sheets," "Consolidated Statements of Income," Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Report of Independent Public Accountants" and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page 7 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item, with respect to directors, is included on pages 2 through 4 under the caption "Information Concerning Nominees" of the company's proxy statement for the annual meeting of stockholders to be held January 6, 1999, filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers of the company are elected at the organization meeting of the Board of Directors in January. Name and age of each executive officer Business experience of executive officers during the five years and positions held with the company ended August 31, 1998 and term in office. James S. Balloun, age 60 Mr. Balloun was elected Chairman and Chief Executive Officer Chairman, President, and effective February, 1996 and assumed the role of President in Chief Executive Officer October, 1996. Previously, he served McKinsey & Company as a and Director Director. David Levy, age 61 Mr. Levy was elected Executive Vice President, Administration in Executive Vice President, October, 1992. He served as Senior Vice President, Secretary and Administration and Counsel Counsel from 1982 through September, 1992. and Director Brock A. Hattox, age 50 Mr. Hattox was elected Executive Vice President and Chief Financial Executive Vice President and Officer effective September, 1996. Previously, he served McDermott Chief Financial Officer International, Inc., as Chief Financial Officer since 1991 and President of the Engineering and Construction Group since 1995. Stewart A. Searle III, age 47 Mr. Searle was elected Senior Vice President, Planning and Senior Vice President, Development effective June, 1996. Previously, he served four years Planning and Development with Equifax as Senior Vice President of Development.
ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included on pages 4 through 13 under the captions "Compensation of Directors," "Other Information Concerning the Board and its Committees," "Compensation Committee Interlocks and Insider Participation," "Summary Compensation Table," "Aggregated Option Exercises and Fiscal Year-End Option Values," "Option Grants in Last Fiscal Year," "Long-Term Incentive Plans - Awards in Last Fiscal Year," "Employment Contracts, Severance Arrangements, and Other Agreements," and "Pension and Supplemental Retirement Benefits" of the company's proxy statement for the annual meeting of stockholders to be held January 6, 1999, filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included on page 6 under the caption "Beneficial Ownership of the Corporation's Securities" of the company's proxy statement for the annual meeting of stockholders to be held January 6, 1999, filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included on page 5 under the caption "Certain Relationships and Transactions" of the company's proxy statement for the annual meeting of stockholders to be held January 6, 1999, filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. Page 8 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) Financial Statements The company's 1998 Annual Report contains the consolidated balance sheets as of August 31, 1998 and 1997, the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1998, and the related report of Arthur Andersen LLP. The financial statements, incorporated herein by reference, include the following: Consolidated Balance Sheets - August 31, 1998 and 1997 Consolidated Statements of Income for the years ended August 31, 1998, 1997, and 1996 Consolidated Statements of Stockholders' Equity for the years ended August 31, 1998, 1997, and 1996 Consolidated Statements of Cash Flows for the years ended August 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Report of Independent Public Accountants on Schedule Schedule Number II Valuation and Qualifying Accounts Any of schedules I through V not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits filed with this report Reference No. from Reg. 229.601 Item 601 Description of Exhibit 3 Amended and Restated Certificate of Incorporation and By-Laws 4 Amended and Restated Rights Agreement dated as of December 17, 1997 between National Service Industries, Inc. and Wachovia Bank, N.A. and Amendment (replacing Wachovia Bank, N.A. with First Chicago Trust Company) 10(i)A US$250,000,000 Credit Agreement dated as of July 23, 1996 among National Service Industries, Inc., Certain of its Subsidiaries, Certain Listed Banks, Wachovia Bank of Georgia, N.A., as Agent, and Nationsbank, N.A. (South) and Suntrust Bank, Atlanta, as Co-Agents 10(iii)A Management Contracts and Compensatory Arrangements: (1) Executives' Deferred Compensation Plan and Amendments Page 9 ITEM 14. (Continued) Reference No. from Reg. 229.601 Item 601 Description of Exhibit (2) Restated and Amended Supplemental Retirement Plan for Executives of National Service Industries, Inc. , Amendments and Appendices (3) The National Service Industries, Inc. Senior Management Benefit Plan and Amendments (4) Severance Protection Agreement between National Service Industries, Inc. and David Levy and Amendment (5) Severance Protection Agreements between National Service Industries, Inc. and (a) James S. Balloun (b) Stewart A. Searle III (c) Brock A. Hattox and Amendments (6) Bonus Letter Agreements between National Service Industries, Inc. and (a) James S. Balloun (b) David Levy (c) Stewart A. Searle III (d) Brock A. Hattox and Supplemental Letter Agreement (7) Long-Term Incentive Program and Amendment (8) Incentive Stock Option Agreements between National Service Industries, Inc. and (a) David Levy (b) Stewart A. Searle III (c) Brock A. Hattox (9) Nonqualified Stock Option Agreement for Corporate Officers between National Service Industries, Inc. and (a) David Levy (b) Brock A. Hattox (10) Nonqualified Stock Option Agreement for Corporate Officers Effective Beginning September 21, 1994 between National Service Industries, Inc. and David Levy (11) Benefits Protection Trust Agreement and Amendments (12) Executive Benefits Trust Agreement and Amendments (13) 1992 Nonemployee Directors' Stock Option Plan Effective September 16, 1992 and Amendment Page 10 ITEM 14. (Continued) Reference No. from Reg. 229.601 Item 601 Description of Exhibit (14) Nonemployee Directors' Stock Option Agreement between National Service Industries, Inc. and (a) John L.Clendenin (b) Robert M. Holder, Jr. (c) F. Ross Johnson (d) James C. Kennedy (e) Donald R. Keough (f) Bryan D. Langton (g) Bernard Marcus (h) John G. Medlin, Jr. (i) Dr. Betty L. Siegel (j) Barrie A. Wigmore (15) National Service Industries, Inc. Executive Savings Plan Effective September 1, 1994 and Amendment (16) Split-Dollar Agreement among National Service Industries, Inc., D. Raymond Riddle, and Wachovia Bank of Georgia, N.A. Dated January 4, 1993 and Amendment (17) Consulting Agreement between National Service Industries, Inc. and D. Raymond Riddle (18) Nonqualified Stock Option Agreement Effective January 3, 1996 between National Service Industries, Inc. and James S. Balloun (19) National Service Industries, Inc. Nonemployee Director Deferred Stock Unit Plan, Effective June 1, 1996 and Amendments (20) Employment Letter Agreement between National Service Industries, Inc. and Brock A. Hattox, Dated August 26, 1996 (21) Incentive Stock Option Agreement Effective Beginning September 17, 1996 between National Service Industries, Inc. and (a) James S. Balloun (b) David Levy (c) Stewart A. Searle III (22) Nonqualified Stock Option Agreement for Executive 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 (23) National Service Industries, Inc. Long-Term Achievement Incentive Plan Effective September 17, 1996 Page 11 ITEM 14. (Continued) Reference No. from Reg. 229.601 Item 601 Description of Exhibit (24) Aspiration Achievement Incentive Award Agreements 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] (25) National Service Industries, Inc. Supplemental Deferred Savings Plan Effective September 18, 1996 (26) Stock Option Agreement for Nonemployee Directors Dated March 19, 1997 between National Service Industries, Inc. and (a) John L. Clendenin (b) Samuel A. Nunn (27) Employment Letter Agreement between National Service Industries, Inc. and James S. Balloun, Dated February 1, 1996 [refiled to disclose confidential information previously omitted and filed separately with the Securities and Exchange Commission] (28) Incentive Stock Option Agreement Effective Beginning September 23, 1997 between National Service Industries, Inc. and (a) James S. Balloun (b) Brock A. Hattox (c) David Levy (d) Stewart A. Searle III (29) Nonqualified Stock Option Agreement For Executive Officers Effective Beginning September 23, 1997 between National Service Industries, Inc. and (a) James S.Balloun (b) Brock A. Hattox (c) David Levy (d) Stewart A. Searle III (30) Aspiration Achievement Incentive Award Agreements 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] (31) National Service Industries, Inc. Management Compensation and Incentive Plan as Amended and Restated, Effective as of September 1, 1998, Subject to Approval by Shareholders at the Annual Meeting to be held on January 6, 1999 Page 12 ITEM 14. (Continued) Reference No. from Reg. 229.601 Item 601 Description of Exhibit 13 Information Incorporated by Reference from Annual Report for the Year Ended August 31, 1998 21 List of Subsidiaries 23 Consent of Independent Public Accountants 24 Powers of Attorney 27 Financial Data Schedule for the Year Ended August 31, 1998 (b) No reports on Form 8-K were filed for the three months ended August 31, 1998. (c) Exhibits 2, 9, 11, 12, 18, 22, and 28 have been omitted because they are not applicable. (d) Not applicable. Page 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL SERVICE INDUSTRIES, INC. Date: November 18, 1998 By: /s/ Helen D. Haines Helen D. Haines Vice President and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title James S. Balloun* Chairman, President, and Chief Executive Officer and Director Brock Hattox* Executive Vice President and Chief Financial Officer Mark R. Bachmann* Vice President and Controller John L. Clendenin* Director Thomas C. Gallagher* Director Robert M. Holder, Jr.* Director James C. Kennedy* Director November 18, 1998 David Levy* Director Bernard Marcus* Director Charles W. McCall Director John G. Medlin, Jr.* Director Samuel A. Nunn* Director Herman J. Russell* Director Betty L. Siegel* Director Barrie A. Wigmore* Director *By /s/ David Levy Attorney-in-Fact David Levy Page 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To National Service Industries, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in NATIONAL SERVICE INDUSTRIES, INC. and subsidiaries' annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated October 9,1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 in this Form 10-K is the responsibility of the company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia October 9, 1998 Page 15 SCHEDULE II NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED AUGUST 31, 1998, 1997, AND 1996 (In thousands) Balance at Additions Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts (1) Deductions (2) of Period YEAR ENDED AUGUST 31, 1998: Deducted in the balance sheet from the asset to which it applies- Reserve for doubtful accounts $ 4,302 $ 3,558 $ 214 $ 3,443 $ 4,631 YEAR ENDED AUGUST 31, 1997: Deducted in the balance sheet from the asset to which it applies- Reserve for doubtful accounts $ 5,807 $ 2,276 $ (745) $ 3,036 $ 4,302 YEAR ENDED AUGUST 31, 1996: Deducted in the balance sheet from the asset to which it applies- Reserve for doubtful accounts $ 6,467 $ 2,708 $ (964) $ 2,404 $ 5,807
(1) Recoveries credited to reserve, reserves recorded in acquisitions, and reserves removed in sale of businesses. (2) Uncollectible accounts written off. Page 16 INDEX TO EXHIBITS Page No. EXHIBIT 3 (a)Amended and Restated Certificate of Reference is made to Exhibit 3 of Incorporation registrant's Form 10-Q for the quarter ended February 28, 1998, which is incorporated herein by reference. (b)By-Laws as Amended and Restated June 21, 1989 25 and Amended March 24, 1998 EXHIBIT 4 (a) Amended and Restated Rights Agreement dated Reference is made to Exhibit 4.1 of as of December 17, 1997 between National Service registrant's Form 8-A/A as filed with the Industries, Inc. and Wachovia Bank, N.A. Commission on December 17, 1997, which is (replacing Wachovia Bank, N.A. with First Chicago incorporated herein by reference. Trust Company) (b) First Amendment dated as of April 30, 1998 Reference is made to Exhibit 1 of between National Service Industries, Inc. and registrant's Form 8-A/A-3 as filed First Chicago Trust Company of New York, to the with the Commission on June 22, 1998, Amended and Restated Rights Agreement, dated as which is incorporated herein by reference. of December 17, 1997 between National Service Industries, Inc. and Wachovia Bank, N.A EXHIBIT 10(i)A US$250,000,000 Credit Agreement dated as of July Reference is made to Exhibit 10(i)A of 23, 1996 among National Service Industries, Inc., registrant's Form 10-Q for the quarter Certain of its Subsidiaries, Certain Listed ended May 31, 1998, which is incorporated Banks, Wachovia Bank of Georgia, N.A., as Agent, herein by reference. and Nationsbank, N.A. (South) and Suntrust Bank, Atlanta, as Co-Agents EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements: (1) (a)Executives' Deferred Compensation Plan Reference is made to Exhibit 19 of registrant's Form 10-K for the fiscal year ended August 31, 1982, which is incorporated herein by reference. (b)First Amendment To Executives' Deferred Reference is made to Exhibit Compensation Plan, Dated September 21, 1989 10(iii)A(b)-(ii) of registrant's Form 10-K for the fiscal year ended August 31, 1989, which is incorporated herein by reference. (c)Second Amendment to Executives' Reference is made to Exhibit Deferred Compensation Plan, Effective as 10(iii)A(a) of registrant's Form 10-Q of September 1, 1994. for the quarter ended November 30, 1994, which is incorporated herein by reference. (d)Amendment No. 3 to Executives' Deferred Reference is made to Exhibit Compensation Plan, Dated August 31, 1996 10(iii)A(2)(d) of registrant's Form 10-K for the fiscal year ended August 31, 1996, which is incorporated herein by reference. Page 17 INDEX TO EXHIBITS Page No. (2) (a)Restated and Amended Supplemental Reference is made to Exhibit Retirement Plan for Executives of National 10(iii)A(c)-(i) of registrant's Form Service Industries, Inc. 10-K for the fiscal year ended August 31, 1993, which is incorporated herein by reference. (b)Amendment to Restated and Amended Reference is made to Exhibit Supplemental Retirement Plan for 10(iii)A(a) of registrant's Form 10-Q Executives of National Service Industries, for the quarter ended February 28, Inc. 1994, which is incorporated herein by reference. (c)Appendix B to Restated and Amended Reference is made to Exhibit Supplemental Retirement Plan for 10(iii)A(e) of registrant's Form 10-Q Executives of National Service Industries, for the quarter ended February 29, Inc., Effective February 1, 1996 1996, which is incorporated herein by reference. (d)Appendix C to Restated and Amended Reference is made to Exhibit Supplemental Retirement Plan for 10(iii)A(d) of registrant's Form 10-Q Executives of National Service Industries, for the quarter ended May 31, 1996, Inc., Effective May 31, 1996 which is incorporated herein by reference. (e)Amendment No. 2 to Restated and Amended Reference is made to Exhibit Supplemental Retirement Plan for 10(iii)A(3)(e) of registrant's Form Executives of National Service Industries, 10-K for the fiscal year ended August Inc., Dated August 31, 1996 31, 1996, which is incorporated herein by reference. (3) (a)The National Service Industries, Inc. Reference is made to Exhibit Senior Management Benefit Plan, Dated 10(iii)A(f) of registrant's Form 10-K August 15, 1985 for the fiscal year ended August 31, 1985, which is incorporated herein by reference. (b)First Amendment to National Service Reference is made to Exhibit Industries, Inc. Senior Management Benefit 10(iii)A(e)-(ii) of registrant's Form Plan, Dated September 21, 1989 10-K for the fiscal year ended August 31, 1989, which is incorporated herein by reference. (c)Amendment No. 2 to National Service Reference is made to Exhibit Industries, Inc. Senior Management Benefit 10(iii)A(d)(iii) of registrant's Form Plan, Dated September 16, 1994 10-K for the fiscal year ended August 31, 1994, which is incorporated herein by reference. (d)Amendment No. 3 to National Service Reference is made to Exhibit Industries, Inc. Senior Management 10(iii)A(4)(d) of registrant's Form Benefit Plan, Dated August 31, 1996 10-K for the fiscal year ended August 31, 1996, which is incorporated herein by reference. Page 18 INDEX TO EXHIBITS Page No. (4) (a)Severance Protection Agreement between Reference is made to Exhibit National Service Industries, Inc. and 10(iii)A(h) of registrant's Form 10-K David Levy for the fiscal year ended August 31, 1989, which is incorporated herein by reference. (b)Amendment to Severance Protection Reference is made to Exhibit Agreement between National Service 10(iii)A(5)(b) of registrant's Form Industries, Inc. and David Levy, Dated 10-K for the fiscal year ended August August 31, 1996 31, 1996, which is incorporated herein by reference. (5) (a)Severance Protection Agreements between Reference is made to Exhibit National Service Industries, Inc. and 10(iii)A(c) of registrant's Form 10-Q (i) James S. Balloun (February 1, 1996) for the quarter ended February 29, (ii) Stewart A. Searle III (June 19, 1996, which is incorporated herein by 1996) reference. (iii) Brock A. Hattox (September 9, 1996) (b)Amendment to Severance Protection Reference is made to Exhibit Agreements, Dated August 31, 1996 10(iii)A(6)(b) of registrant's Form 10-K for the fiscal year ended August 31, 1996, which is incorporated herein by reference. (6) (a)Bonus Letter Agreements between Reference is made to Exhibit National Service Industries, Inc. and 10(iii)A(j) of registrant's Form 10-K (i) James S. Balloun (February 1, 1996) for the fiscal year ended August 31, (ii) David Levy (October 1, 1989) 1989, and to Exhibit 10(iii)A(d) of the (iii) Stewart A. Searle III (June 19, 1996) registrant's Form 10-Q for the quarter (iv) Brock A. Hattox (September 9, 1996) ended February 29, 1996, which are incorporated herein by reference. (b)Supplemental Letter Agreement, Dated Reference is made to Exhibit August 31 1996 10(iii)A(7) (b) of registrant's Form 10-K for the fiscal year ended August 31, 1996, which is incorporated herein by reference. (7) (a)Long-Term Incentive Program, Dated Reference is made to Exhibit September 20, 1989 10(iii)A(k) of registrant's Form 10-K for the fiscal year ended August 31, 1989, which is incorporated herein by reference. (b)Amendment No. 1 to Long-Term Incentive Reference is made to Exhibit Program, Dated September 21, 1994 10(iii)A(h)(ii) of registrant's Form 10-K for the fiscal year ended August 31, 1994, which is incorporated herein by reference. Page 19 INDEX TO EXHIBITS Page No. (8) Incentive Stock Option Agreements between Reference is made to Exhibit National Service Industries, Inc. and 10(iii)A(1) of registrant's Form 10-K (a) David Levy for the fiscal year ended August 31, (b) Stewart A. Searle III 1989, which is incorporated herein by (c) Brock A. Hattox reference. (9) Nonqualified Stock Option Agreement for Reference is made to Exhibit Corporate Officers between National 10(iii)A(j) of registrant's Form 10-K Service Industries, Inc. and for the fiscal year ended August 31, (a) David Levy 1992, which is incorporated herein by (b) Brock A. Hattox reference. (10) Nonqualified Stock Option agreement for Reference is made to Exhibit Corporate Officers Effective Beginning 10(iii)A(k) of registrant's Form 10-K September 21, 1994 between National for the fiscal year ended August 31, Service Industries, Inc. and David Levy 1994, which is incorporated herein by reference. (11) (a)Benefits Protection Trust Agreement Reference is made to Exhibit Dated July 5, 1990, between National 10(iii)A(n) of registrant's Form 10-K Service Industries, Inc. and Wachovia Bank for the fiscal year ended August 31, and Trust Company 1990, which is incorporated herein by reference. (b)Amendment to Benefits Protection Trust Reference is made to Exhibit Agreement between National Service 10(iii)A(12)(c) of registrant's Form Industries, Inc. and Wachovia Bank and 10-K for the fiscal year ended August Trust Company and Adoption, Dated August 31, 1996, which is incorporated herein 31, 1996 by reference. (c)Amendment No. 2 to Benefits Protection Reference is made to Exhibit Trust Agreement between National Service 10(iii)A(3) of registrant's Form 10-Q Industries, Inc. and Wachovia Bank and for the quarter ended November 30, Trust Company, Dated September 23, 1997 1997, which is incorporated herein by reference. (d)Amended Schedule 1 of Benefits Reference is made to Exhibit Protection Trust Agreement between 10(iii)A(4) of registrant's Form 10-Q National Service Industries, Inc. and for the quarter ended November 30, Wachovia Bank and Trust Company, Dated 1997, which is incorporated herein by September 23, 1997 reference. (12) (a)Executive Benefits Trust Agreement Reference is made to Exhibit Dated July 5, 1990, between National 10(iii)A(o) of registrant's Form 10-K Service Industries, Inc. and Wachovia Bank for the fiscal year ended August 31, and Trust Company 1990, which is incorporated herein by reference. Page 20 INDEX TO EXHIBITS Page No. (b)Amendment to Executive Benefits Trust Reference is made to Exhibit Agreement between National Service 10(iii)A(13) of registrant's Form 10-K Industries, Inc. and Wachovia Bank and for the fiscal year ended August 31, Trust Company and Adoption, Dated August 1996, which is incorporated herein by 31, 1996 reference. (c)Amended Schedule 1 of Executive Reference is made to Exhibit Benefits Trust Agreement between National 10(iii)A(5) of registrant's Form 10-Q Service Industries, Inc. and Wachovia for the quarter ended November 30, Bank, N.A. (formerly Wachovia Bank and 1997, which is incorporated herein by Trust Company), Dated September 23, 1997 reference. (13) (a)National Service Industries, Inc. 1992 Reference is made to Exhibit Nonemployee Directors' Stock Option Plan, 10(iii)A(o) of registrant's Form 10-K Effective September 16, 1992 for the fiscal year ended August 31, 1992, which is incorporated herein by reference. (b)First Amendment to the National Service 41 Industries, Inc. 1992 Nonemployee Directors' Stock Option Plan, Dated March 24, 1998 (14) Nonemployee Directors' Stock Option Reference is made to Exhibit Agreement between National Service 10(iii)A(q) of registrant's Form 10-K Industries, Inc. and for the fiscal year ended August 31, (a) John L. Clendenin 1994, which is incorporated herein by (b) Robert M. Holder, Jr. reference. (c) F. Ross Johnson (d) James C. Kennedy (e) Donald R. Keough (f) Bryan D. Langton (g) Bernard Marcus (h) John G. Medlin, Jr. (i) Dr. Betty L. Siegel (j) Barrie A. Wigmore (15) (a)National Service Industries, Inc. Reference is made to Exhibit Executive Savings Plan, Effective 10(iii)A(s) of registrant's Form 10-K September 1, 1994 for the fiscal year ended August 31, 1994, which is incorporated herein by reference. (b)Amendment No. 1 to National Service Reference is made to Exhibit Industries, Inc. Executive Savings Plan, 10(iii)A(17)(b) of registrant's Form Dated August 31, 1996 10-K for the fiscal year ended August 31, 1996, which is incorporated herein by reference. Page 21 INDEX TO EXHIBITS Page No. (16) (a)Split-Dollar Agreement among National Reference is made to Exhibit Service Industries, Inc., D. Raymond 10(iii)A(a)(i) of registrant's Form Riddle, and Wachovia Bank of Georgia, 10-Q for the quarter ended February 28, N.A., Dated January 4, 1993 1995, which is incorporated herein by reference. (b)First Amendment to Split-Dollar Reference is made to Exhibit Agreement among National Service 10(iii)A(a)(ii) of registrant's Form Industries, Inc., D. Raymond Riddle, and 10-Q for the quarter ended February 28, Wachovia Bank of Georgia, N.A., Effective 1995, which is incorporated herein by March 30, 1995 reference. (17) Consulting Agreement between National Reference is made to Exhibit Service Industries, Inc. and D. Raymond 10(iii)A(c) of registrant's Form 10-Q Riddle, Dated March 30, 1995 for the quarter ended February 28, 1995, which is incorporated herein by reference. (18) Nonqualified Stock Option Agreement Reference is made to Exhibit Effective January 3, 1996 between National 10(iii)A(b) of registrant's Form 10-Q Service Industries, Inc. and James S. for the quarter ended February 28, Balloun 1996, which is incorporated herein by reference. (19) (a)National Service Industries, Inc. Reference is made to Exhibit Nonemployee Director Deferred Stock Unit 10(iii)A(26) of registrant's Form 10-K Plan, Effective June 1, 1996 for the fiscal year ended August 31, 1996, which is incorporated herein by reference. (b)Amendment No. 1 to National Service Reference is made to Exhibit Industries, Inc. Nonemployee Director 10(iii)A(6) of registrant's Form 10-Q Deferred Stock Unit Plan, Effective for the quarter ended November 30, December 1, 1997 1997, which is incorporated herein by reference. (c)Amendment No. 2 to National Service 43 Industries, Inc. Nonemployee Director Deferred Stock Unit Plan, Effective December 31, 1997 (20) Employment Letter Agreement between Reference is made to Exhibit National Service Industries, Inc. and 10(iii)A(28) of registrant's Form 10-K Brock A. Hattox, Dated August 26, 1996 for the fiscal year ended August 31, 1996, which is incorporated herein by reference. Page 22 INDEX TO EXHIBITS Page No. (21) Incentive Stock Option Agreement Effective Reference is made to Exhibit Beginning September 17, 1996 between 10(iii)A(5) of registrant's Form 10-Q National Service Industries, Inc. and for the quarter ended November 30, (a) James S. Balloun 1996, which is incorporated herein by (b) David Levy reference. (c) Stewart A. Searle III (22) Nonqualified Stock Option Agreement for Reference is made to Exhibit Executive Officers Effective Beginning 10(iii)A(6) of registrant's Form 10-Q September 17, 1996 between National for the quarter ended November 30, Service Industries, Inc. and 1996, which is incorporated herein by (a) James S. Balloun reference. (b) David Levy (c) Stewart A. Searle III (d) Brock A. Hattox (23) National Service Industries, Inc. Reference is made to Exhibit Long-Term Achievement Incentive Plan, 10(iii)A(7) of registran's Form 10-Q Effective September 17, 1996 for the quarter ended November 30, 1996, which is incorporated herein by reference. (24) Aspiration Achievement Incentive Award Reference is made to Exhibit Agreements between National Service 10(iii)A(8) of registrant's Form 10-Q Industries, Inc. and for the quarter ended November 30, (a) James S. Balloun 1996, which is incorporated herein by (b) Brock A. Hattox reference. (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] (25) National Service Industries, Inc. Reference is made to Exhibit Supplemental Deferred Savings Plan, 10(iii)A(9) of registrant's Form 10-Q Effective September 18, 1996 for the quarter ended November 30, 1996, which is incorporated herein by reference. (26) Stock Option Agreement for Nonemployee Reference is made to Exhibit 10(iii)A Directors Dated March 19, 1997 between of registrant's Form 10-Q for the National Service Industries, Inc. and quarter ended May 31, 1997, which is (a) John L. Clendenin incorporated herein by reference. (b) Samuel A. Nunn Page 23 INDEX TO EXHIBITS Page No. (27) Employment Letter Agreement between Reference is made to Exhibit National Service Industries, Inc. and 10(iii)A(2) of registrant's Form 10-Q James S. Balloun, Dated February 1, 1996 for the quarter ended November 30, 1997, which is incorporated herein by [refiled to disclose confidential reference. information previously omitted and filed separately with the Securities and Exchange Commission] (28) Incentive Stock Option Agreement Effective Reference is made to Exhibit Beginning September 23, 1997 between 10(iii)A(7) of registrant's Form 10-Q National Service Industries, Inc. and for the quarter ended November 30, (a) James S. Balloun 1997, which is incorporated herein by (b) Brock A. Hattox reference. (c) David Levy (d) Stewart A. Searle III (29) Nonqualified Stock Option Agreement For Reference is made to Exhibit Executive Officers Effective Beginning 10(iii)A(8) of registrant's Form 10-Q September 23, 1997 between National for the quarter ended November 30, Service Industries, Inc. and 1997, which is incorporated herein by (a) James S. Balloun reference. (b) Brock A. Hattox (c) David Levy (d) Stewart A. Searle III (30) Aspiration Achievement Incentive Award Reference is made to Exhibit Agreements between National Service 10(iii)A(9) of registrant's Form 10-Q Industries, Inc. and for the quarter ended November 30, (a) James S. Balloun 1997, which is incorporated herein by (b) Brock A. Hattox reference. (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] (31) National Service Industries, Inc. 44 Management Compensation and Incentive Plan as Amended and Restated, Effective as of September 1, 1998, Subject to Approval by Shareholders at the Annual Meeting to be held on January 6, 1999 EXHIBIT 13 Information Incorporated by Reference from 51 Annual Report for the Year Ended August 31, 1998 EXHIBIT 21 List of Subsidiaries 73 EXHIBIT 23 Consent of Independent Public Accountants 74 Page 24 INDEX TO EXHIBITS Page No. EXHIBIT 24 Powers of Attorney 75 EXHIBIT 27 Financial Data Schedule for the Year Ended 87 August 31, 1998
EX-3.(II) 2 BY-LAWS Page 25 EXHIBIT 3(b) NATIONAL SERVICE INDUSTRIES, INC. BY - LAWS (as amended and restated June 21, 1989 and amended March 24, 1998) (A Delaware Corporation) ARTICLE ONE OFFICES AND AGENT 1.1 Registered Office and Agent. The registered office of the Corporation within the State of Delaware shall be in the City of Wilmington, County of New Castle, and the name of the registered agent in charge thereof is The Corporation Trust Company. 1.2 Other Offices. In addition to its registered office within the State of Delaware, the Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may, from time to time determine or the business of the Corporation may require or make desirable. ARTICLE TWO STOCKHOLDERS' MEETINGS 2.1 Place of Meetings. All meetings of the stockholders for the election of directors or for any other purpose shall be held at any place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors or, if it fails to act, the Chairman of the Board, or if he fails to act, the President, and shall be stated in the notice of meeting or a duly executed waiver thereof. 2.2 Quorum, Adjournment. The holders of one-third of the voting power of the stock of the Corporation issued and outstanding and entitled to vote at a meeting of stockholders, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by the Delaware General Corporation Law or by the Corporation's Restated Certificate of Incorporation, as amended from time to time ("Certificate of Incorporation"). If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than thirty days, or, if after adjournment a new record date is set, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Page 26 EXHIBIT 3(b) 2.3 Conduct of Meetings. At each meeting of stockholders, the Chairman of the Board shall act as chairman of the meeting. In the absence or inability or refusal to act of the Chairman of the Board, the Vice Chairman of the Board, or if a Vice Chairman has not been elected, the President, shall act as chairman of the meeting. The Secretary or, in his absence, inability or refusal to act, such person as the chairman of the meeting shall appoint shall act as secretary of the meeting and keep the minutes thereof. 2.4 Order of Business. The order of business at all meetings of the stockholders shall be as determined by the chairman of the meeting. 2.5 Voting. Except as otherwise provided by statute or the Corporation's Certificate of Incorporation, each stockholder of the Corporation shall be entitled at each meeting of stockholders to one vote for each share of capital stock of the Corporation standing in his name on the list of stockholders of the Corporation on the record date fixed as provided in these By-Laws, as amended from time to time ("By-Laws"). Each stockholder entitled to vote at any meeting of stockholders may authorize another person or persons to act for him by a proxy signed by such stockholder or his attorney-in-fact bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period. Any such proxy shall be delivered to the secretary of the meeting at or prior to the time designated in the order of business for so delivering such proxies. At all meetings of stockholders for the election of directors a plurality of the votes cast shall be sufficient to elect. All other elections and questions shall, unless otherwise provided by law or in the Corporation's Certificate of Incorporation or these By-Laws, be decided by the vote of the holders of a majority of the outstanding shares of stock entitled to vote thereon present in person or by proxy at the meeting. Unless required by statute, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. 2.6 List of Stockholders. A complete list of the stockholders entitled to vote at each meeting of stockholders, arranged in alphabetical order, with the address of each, and the number of voting shares held by each, shall be prepared by the Secretary at least ten days before every meeting. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Page 27 EXHIBIT 3(b) 2.7 Inspectors. The Board of Directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the chairman of the meeting shall, or if inspectors shall not have been appointed, the chairman of the meeting may, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. 2.8 Annual meeting. The Annual Meeting of the Stockholders of the Corporation ("Annual Meeting") shall be held at such time and on such date as shall be designated by the Board of Directors and stated in the notice of meeting. At such meeting, the stockholders shall elect directors as provided in the Corporation's Certificate of Incorporation and By-Laws and shall transact such other business as may properly come before the meeting. 2.9 Notice of Annual Meeting. Except as otherwise expressly required by statute, written notice of the Annual Meeting stating the date, place and time of the meeting shall be given to each stockholder entitled to vote thereat, not less than ten nor more than sixty days prior to the date of the meeting. Notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Notice of any meeting shall not be required to be given to any person (i) who attends such meeting, except when such person attends the meeting in person or by proxy for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, or (ii) who, either before or after the meeting, shall submit a signed written waiver of notice, in person or by proxy. Neither the business to be transacted at, nor the purpose of, an Annual Meeting need be specified in any written waiver of notice. Page 28 EXHIBIT 3(b) 2.10 Notice of Stockholder Proposals. (a) At an Annual Meeting, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been brought before the Annual Meeting (i) by, or at the direction of, the Board of Directors or (ii) by any stockholder of the Corporation who complies with the notice procedures set forth in this Section of these By-Laws. For a proposal to be properly brought before an Annual Meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the scheduled Annual Meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if less than seventy (70) days' notice or prior public disclosure of the date of the scheduled Annual Meeting is given or made, notice by the stockholder to be timely must be so delivered or received not later than the close of business on the tenth (10th) day following the earlier of the day on which such notice of the date of the scheduled Annual Meeting was mailed or the day on which such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the Annual Meeting (i) a brief description of the proposal desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting, (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business and any other stockholders known by such stockholder to be supporting such proposal, (iii) the class and number of shares of the Corporation's stock which are beneficially owned by the stockholder on the date of such stockholder notice and by any other stockholders known by such stockholder to be supporting such proposal on the date of such stockholder notice, and (iv) any financial interest of the stockholder in such proposal. (b) If the presiding officer of the Annual Meeting determines that a stockholder proposal was not made in accordance with the terms of this Section, he shall so declare at the Annual Meeting and any, such proposal shall not be acted upon at the Annual Meeting. (c) This provision shall not prevent the consideration and approval or disapproval at the Annual Meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no business shall be acted upon at such Annual Meeting unless stated, filed and received as herein provided. 2.11 Special Meetings. Special meetings of the stockholders ("Special Meetings"), for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chief Executive Officer, and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at all Special Meetings shall be confined to the purposes stated in the notice of meeting. 2.12 Notice of Special Meetings. Except as otherwise expressly required by statute, written notice of a special meeting, stating the date, time, place, and purpose or purposes thereof, shall be given to each stockholder entitled to vote thereat not less than ten nor more than sixty days prior to the date of the meeting. Notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Notice of any meeting shall not be required to be given to any person who attends such meeting, except when such person attends the meeting in person or by proxy for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, or who, either before or after the meeting, shall submit a signed written waiver of notice, in person or by proxy. Neither the business to be transacted at, nor the purpose of, a Special Meeting need be specified in any written waiver of notice. Page 29 EXHIBIT 3(b) ARTICLE THREE BOARD OF DIRECTORS 3.1 General Powers. The business and affairs of the Corporation shall be managed by or be under the direction of the Board of Directors. The Board of Directors may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by statute or the Corporation's Certificate of Incorporation directed or required to be done by the stockholders. 3.2 Number, Qualification, Term of Office. The number of directors which constitute the entire Board of Directors of the Corporation shall be fixed by resolution of the Board of Directors from time to time, but shall in any event be not less than seven nor more than fifteen. Any decrease in the number of directors shall be effective at the time of the next succeeding Annual Meeting unless there shall be vacancies in the Board of Directors at the time the Board effects such decrease, in which case such decrease may become effective at any time prior to the next succeeding Annual Meeting to the extent of the number of vacancies. Directors need not be stockholders. Except as provided in these By-Laws, directors shall be elected at the Annual Meeting or at a Special Meeting called for such purpose, and each director shall be elected to hold office until a successor shall be elected and qualify. 3.3 Election of Directors. Nominations for the election of directors may be made by the Board of Directors or a nominating committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than (i) with respect to an election to be held at an Annual Meeting, ninety (90) days prior to the anniversary date of the immediately preceding Annual Meeting; and (ii) with respect to an election to be held at a Special Meeting for the election of directors, the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (A) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (B) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (C) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (D) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission as then in effect; and (E) the consent of each nominee to serve as a director of the Corporation if so elected. The presiding officer of the meeting shall refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. The vote necessary to elect directors shall be as set forth in these By-Laws including, without limitation, Section 2.5 hereof, unless otherwise required by the Delaware General Corporation Law. Page 30 EXHIBIT 3(b) 3.4 Vacancies. Unless otherwise provided in the Corporation's Certificate of Incorporation (or by resolution of the Board of Directors, any vacancy in the Board of Directors, whether arising from death, resignation, removal, or any other cause, and any newly created directorship resulting from an increase in the number of directors, shall be filled exclusively by a majority of the directors then in office, although less than a quorum, or by the sole remaining director, and shall not be filled by the stockholders. Each director so elected shall hold office until his successor shall have been elected and qualified. 3.5 Resignations. Any director of the Corporation may resign at any time by giving written notice of his resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 3.6 Committees. (a) The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, including an executive committee, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In addition, in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (b) Except to the extent restricted by the Delaware General Corporation Law or the Corporation's Certificate of Incorporation, each such committee, to the extent provided in the resolution creating it, shall have and may exercise all the powers and authority of the Board of Directors and may authorize the seal of the Corporation to be affixed to all papers which require it. Each such committee shall serve at the pleasure of the Board of Directors and have such name as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors. (c) Except to the extent restricted by the Delaware General Corporation Law or the Corporation's Certificate of Incorporation, the Executive Committee, if any, shall, when the Board of Directors is not in session, have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, including, without limitation, the power and authority to declare a dividend, to authorize the issuance of stock, and to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law. Page 31 EXHIBIT 3(b) 3.7 Compensation. The Board of Directors shall have authority to fix the compensation, including fees and reimbursement of expenses, of directors for services to the Corporation in any capacity. ARTICLE FOUR MEETINGS OF THE BOARD 4.1 Annual Meeting. The newly elected Board shall meet, immediately after the Annual Meeting at which they were elected, for the purpose of organization or otherwise, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a majority of the whole Board shall be present. 4.2 Regular Meetings. Regular meetings of the Board shall be held on the third Wednesday of March, June, September, and December, at 1:00 p.m. at the office of the Corporation in the City of Atlanta, Georgia, unless the Secretary or any Assistant Secretary shall have given notice to each director of some other date, time or place for the meeting. Notice of regular meetings of the Board of Directors need not be given. 4.3 Special Meetings. Special meetings of the Board may be called by the Chairman of the Board or the President. Notice of any special meeting shall be given to each director at least twelve (12) hours before the meeting by telephone or by being personally delivered or sent by telex, telecopier, or telegraph, or at least three (3) days before the meeting if delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage prepaid, or when transmitted if sent by telex, telecopier or telegraph. Any director may waive notice of any meeting by a writing signed by the director entitled to the notice and filed with the minutes or corporate records. The attendance at or participation of the director at a meeting shall constitute waiver of notice of such meeting, unless the director at the beginning of the meeting or promptly upon his arrival objects to holding the meeting or transacting business at the meeting. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Special meetings shall be called by the Chairman of the Board, President or Secretary in like manner and on like notice on the written request of two directors. 4.4 Place of Meetings. Unless otherwise specified in the notice of any meeting, meetings of the Board of Directors shall be held at such place or places, within or without the State of Delaware, as the Board of Directors may from time to time determine. 4.5 Quorum and Manner of Acting. At all meetings of the Board, one-third of the total number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by the Delaware General Corporation Law or by the Certificate of Incorporation or by these By-Laws. However, directors attending a meeting at which less than a quorum is present shall have the power to adjourn the meeting. Notice of the time and place of any such adjourned meeting shall be given to all of the directors unless such time and place were announced at the meeting at which the adjournment was taken, in which case such notice shall only be given to the directors who were not present thereat. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Page 32 EXHIBIT 3(b) 4.6 Conduct of Meetings. At each meeting of the Board of Directors, the Chairman of the Board shall act as chairman of the meeting and preside thereat. The Secretary or, in his absence, inability or refusal to act, such person as the chairman of the meeting shall appoint shall act as secretary of the meeting and keep the minutes thereof. 4.7 Action by Consent. Unless restricted by the Corporation's Certificate of Incorporation, any action required or permitted to be taken by the Board of Directors or committee may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the Board of Directors or committee, as the case may be. 4.8 Telephonic Meeting. Unless restricted by the Corporation's Certificate of Incorporation, any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting. ARTICLE FIVE OFFICERS 5.1 Offices. The Board of Directors, at its first meeting after each Annual Meeting of Stockholders, shall elect the officers of the Corporation, which shall include the following: Chairman of the Board; President; one or more Vice Presidents, as the Board of Directors shall designate; Secretary; and Treasurer. The Secretary and the Treasurer may be the same person, and any Vice President may hold at the same time the office of Secretary and/or Treasurer. The Board may elect one or more Assistant Secretaries and one or more Assistant Treasurers as may be necessary or desirable for the business of the Corporation. The Board may also elect from among its members a Vice Chairman of the Board, and from among its members or former members, a Chairman Emeritus. The Board may elect such other officers as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Page 33 EXHIBIT 3(b) 5.2 Designation of Chief Executive Officer. The Board of Directors shall designate either the Chairman of the Board or the President of the Corporation as the Chief Executive officer of the Corporation. The Chief Executive Officer shall have authority over the business and affairs of the Corporation and over all other officers, agents and employees of the Corporation, subject to the control and direction of the Board of Directors. 5.3 Designation of Chief Operating Officer. The Board of Directors may designate an officer of the Corporation as the Chief Operating Officer of the Corporation. The Chief Operating Officer, if designated, shall manage and operate the business and affairs of the Corporation, subject to the control and direction of the Board of Directors, and shall report to the Chief Executive Officer. 5.4 Compensation. The salaries of all officers shall be fixed by or pursuant to the direction of the Board of Directors. 5.5 Tenure and Removal. Each officer of the Corporation shall hold office until his successor is chosen and qualifies in his stead, or until his death, or until he shall have resigned or been removed, as hereinafter provided in these By-Laws. Any officer elected or appointed by the Board of Directors may be removed at any time with or without cause by the affirmative vote of a majority of the Board of Directors. 5.6 Resignations. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon receipt. Unless otherwise specified therein, the acceptance of any such resignation shall not be necessary to make it effective. 5.7 Vacancies. If the office of any officer becomes vacant by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, the Board of Directors may fill each such vacancy for the unexpired term in respect of which such vacancy occurred. 5.8 Chairman of the Board. (a) The Chairman of the Board shall be elected from among the members of the Board of Directors and shall be an officer of the Corporation. The Chairman shall preside at all meetings of the Board of Directors and of the stockholders. The Chairman shall have such powers and duties as an officer of the Corporation as provided by these By-Laws and as the Board of Directors may from time to time prescribe. (b) The Chairman may sign, execute, acknowledge and deliver, in the name and on behalf of the Corporation, all stock certificates, deeds, mortgages, bonds, contracts, documents and instruments, except where the signing thereof shall be expressly and exclusively delegated to some other officer or agent by the Board of Directors or by these By-Laws, or required by law to be otherwise signed or executed. 5.9 Chairman Emeritus. The Board of Directors may elect a former Chairman of the Board as Chairman Emeritus. The Chairman Emeritus shall be an honorary position, reflecting outstanding service and devotion to the Corporation. The Chairman Emeritus shall advise and consult with the Board of Directors, committees of the Board of Directors, and the President, on matters of interest to the Corporation, and shall perform such other duties as the Board of Directors may from time to time prescribe. Page 34 EXHIBIT 3(b) 5.10 Vice Chairman of the Board. The Vice Chairman of the Board, if one shall have been elected from among the members of the Board, shall, in the absence of the Chairman or in the event of the Chairman's refusal or inability to act, preside at all meetings of the Board of Directors and stockholders, and shall perform such other duties as the Board of Directors may from time to time prescribe. 5.11 President. (a) The President shall have such powers and shall perform such duties as are provided by these By-Laws and as the Board of Directors may from time to time prescribe. The President shall, in the Chairman's absence, inability or refusal to act, perform the duties of the Chairman, other than duties to be performed by the Vice Chairman (if one shall have been elected) as prescribed under or pursuant to these By-Laws. When so acting, the President shall have all of the powers of and be subject to all the restrictions upon the Chairman, including the powers and restrictions applicable to the Chief Executive Officer if the Chairman serves in that capacity. (b) The President may sign, execute, acknowledge and deliver, in the name and on behalf of the Corporation, all stock certificates, deeds, mortgages, bonds, contracts, documents and instruments, except where the signing thereof shall be expressly and exclusively delegated to some other officer or agent by the Board of Directors or by these By-Laws or required by law to be otherwise signed or executed. 5.12 Vice President. (a) Each Vice President shall have such powers and be required to perform such duties as the Board of Directors or the Chief Executive Officer may from time to time prescribe. *(b) The Board of Directors may designate one or more of the Vice Presidents as Executive Vice President. The Executive Vice President (or, if more than one Executive Vice President has been designated, the Executive Vice President specified by the Board of Directors) shall, in the President's absence, inability or refusal to act, perform all of the duties of the President. When so acting, the Executive Vice President shall have all of the powers of and be subject to all of the restrictions upon the President, including the powers and restrictions applicable to the Chief Executive Officer if the President serves in that capacity. 5.13 Secretary. (a) The Secretary shall attend all sessions of the Board and all meetings of the stockholders and shall record all votes and the minutes of all such proceedings in a book to be kept for that purpose. The Secretary shall perform like duties for the Committees of the Board upon requested. He shall be custodian of the records and the seal of the Corporation and shall affix and attest the seal to all documents to be executed on behalf of the Corporation under its seal. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, in accordance with the provisions of these By-Laws and as required by the Delaware General Corporation Law, and shall perform such other duties as the Board of Directors or the Chief Executive Officer may from time to time prescribe. Page 35 EXHIBIT 3(b) (b) The Assistant Secretary shall, in the Secretary's absence, inability or refusal to act, perform the duties of the Secretary, and shall perform such other duties as the Board of Directors or the Chief Executive Officer may from time to time prescribe. 5.14 Treasurer. (a) The Treasurer shall have charge and custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements, in books belonging to the Corporation, and shall deposit all corporate monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors or pursuant to its direction. (b) The Treasurer shall receive and give receipts for monies due and payable to the Corporation from any source whatsoever and shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers therefor, and shall render to the President and directors, at the regular meetings of the Board, or whenever they may require it, an account of all of his transactions as Treasurer and of the financial condition of the Corporation and in general, perform all duties incident to the office of the Treasurer and such other duties as the Board of Directors or the Chief Executive Officer may from time to time prescribe. (c) The Assistant Treasurer shall, in the Treasurer's absence, inability or refusal to act, perform the duties of the Treasurer and shall also perform such other duties as the Board of Directors or the Chief Executive Officer may from time to time prescribe. ARTICLE SIX STOCK CERTIFICATES AND TRANSFER THEREOF 6.1 Stock Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chairman of the Board or the President or the Executive Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the Delaware General Corporation Law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Page 36 EXHIBIT 3(b) 6.2 Transfers of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its record; provided, however, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. Whenever any transfer of stock shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer if, when the certificates are presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. 6.3 Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, and accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 6.4 Record Date. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment or rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. (b) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 6.5 Lost Certificates. Any person claiming a certificate of stock to be lost, stolen or destroyed shall make an affidavit or affirmation of that fact, in such manner and form as the Board of Directors may from time to time require, in order to obtain issuance of a new certificate in place thereof. The Board of Directors may, at its discretion and as a condition precedent to any such issuance, require any such person to give the Corporation a bond in such sum as it may direct to indemnify it against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Upon compliance with all requirements established by the Board of Directors for any such issuance, a new certificate may be issued. Page 37 EXHIBIT 3(b) 6.6 Facsimile Signatures. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may, be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 6.7 Transfer Agents and Registrars. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. 6.8 Regulations. The Board of Directors may make such additional rules and regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. ARTICLE SEVEN GENERAL PROVISIONS 7.1 Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation and the words "CORPORATE SEAL" and "DELAWARE." 7.2 Fiscal Year. The fiscal year shall begin the first day of September in each year. 7.3 Checks, Notes, Drafts, Etc. All checks, drafts or other demands for the payment of money and notes of the Corporation shall be signed, endorsed, or accepted in the name of the Corporation by such officer or officers from time to time designated by the Board of Directors or by an officer or officers authorized by the Board of Directors to make such designation. 7.4 Execution of Instruments. The Board of Directors may authorize any officer or officers, agent or agents, in the name of and on behalf of the Corporation to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances. 7.5 Dividends and Reserves. Subject to the provisions of statute and the Corporation's Certificate of Incorporation dividends upon the shares of capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property or in shares of stock of the Corporation. Page 38 EXHIBIT 3(b) 7.6 Notice. Whenever under the provisions of these By-Laws written notice is required to be given to any director, officer, or stockholder, it shall not be construed to require personal notice, but unless otherwise provided by these By-Laws, such notice shall be deemed to have been given in writing when deposited in the United States mail, postage prepaid, directed to such stockholder, officer or director at his address as it appears on the records of the Corporation. 7.7 Voting of Stock in Other Corporations. Unless otherwise provided by resolution of the Board of Directors, the Chief Executive Officer, from time to time, may (or may appoint one or more attorneys or agents to) cast the votes which the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation, any of whose shares or securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation. In the event one or more; attorneys or agents are appointed, the Chief Executive Officer may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent. The Chief Executive Officer may, or may instruct the attorneys or agents appointed to, execute or cause to be executed in the name and on behalf of the Corporation and under its seal or otherwise, such written proxies, consents, waivers or other instruments as may be necessary or proper in the circumstances. 7.8 Indemnification. (a) Each director or officer or former director or officer of the Corporation or any person who may have served at its request as a director or officer of another corporation in which it owns shares of capital stock or of which it is a creditor, shall be indemnified and held harmless by the Corporation, as hereinafter provided, against any and all liabilities and counsel fees, costs and legal and other expenses (including, without limitation, fines, penalties, judgments and amounts paid in settlement) reasonably incurred by or imposed on him in connection with or resulting from any claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, or any appeal therein, in which he may be or become involved or with which he may be threatened, as a party or otherwise, by reason of his now or hereafter being or having heretofore been a director or officer of the Corporation or of such other corporation, or by reason of his alleged acts or omissions as a director or officer as aforesaid, whether or not he continues to be such at the time such liabilities, fees, costs or expenses shall have been incurred, provided such director or officer shall be indemnified and held harmless against such liabilities, fees, costs and expenses, only if he acted in relation to such matters in good faith for a purpose which he reasonably believed to be in the best interests of the Corporation. (b) In discharging his duty to the Corporation, a director or officer, when acting in good faith, may rely upon financial statements of the Corporation represented to him to be correct by, the officer of the Corporation having charge of its books of accounts, or stated in a written report by an independent public or certified public accountant or firm of such accountants fairly to reflect the financial condition of such corporation. (c) Termination of a claim, action or proceeding by judgment, order, settlement (whether with or without court approval), conviction or upon a plea of guilty or of nolo contendere, or its equivalent, shall not of itself create a presumption that a director or officer did not meet the standard of conduct set forth above. Page 39 EXHIBIT 3(b) (d) The grant of an indemnification provided herein, unless approved by a court in a final adjudication of a claim, action, suit, or proceeding or in connection with a court approved settlement thereof, shall be made pursuant to a direction of the Board of Directors of the Corporation, but may be granted only (i) if the Board of Directors, acting by a quorum consisting of directors not parties to such claim, action, suit or proceeding, shall have determined that in its opinion the director or officer has met the standard of conduct set forth above or (ii) in the event such a quorum is not obtainable with due diligence, then alternatively if the Board of Directors shall have received the written advice of independent legal counsel selected by it, that in the latter's judgment such applicable standard of conduct has been met. If several claims, issues, matters or actions are involved in the grant of indemnification provided herein, a director or officer may be granted indemnification by the Board of Directors to the extent of that portion of the liabilities, fees, costs and expenses which are allocable to such claims, issues, matters or actions in respect of which it is determined that such director or officer has met the standard of conduct set forth above. (e) Expenses incurred with respect to any claim, action, suit or proceeding may be advanced by the Corporation prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to indemnification hereunder. (f) The rights to the indemnification provided herein shall inure to the benefit of the heirs, executors, administrators, or legal representatives of the persons covered hereby; shall be in addition to any rights to which any such person may otherwise be entitled by any provision of law, articles of incorporation, by-law, contract, vote of stockholders or otherwise; and shall be in addition to and not in restriction or limitation of any other privilege or power which the Corporation may lawfully exercise with respect to the indemnification or reimbursement of directors, officers and others. (g) If any part of this Section shall be found, in any action, suit or proceeding, to be invalid or ineffective, the validity and the effect of the remaining parts shall not be affected. (h) The rights of indemnification provided herein shall not arise with respect to conduct subsequent to January 5, 1987, which conduct shall be subject to the indemnification provisions set forth in Article Fifteenth of the Corporation's Certificate of Incorporation. Page 40 EXHIBIT 3(b) 7.9 Amendments. These By-Laws may be adopted, amended or repealed (i) by the affirmative vote of a majority of the directors present at a meeting at which a quorum is present unless the Certificate of Incorporation or these By-Laws shall require a vote of a greater number, or (ii) by the affirmative vote of the holders of two-thirds of the voting power of all of the outstanding shares of capital stock of the Corporation at any regular or special meeting of stockholders if notice of the proposed amendment is contained in the notice of the meeting or waived by all of the stockholders entitled to vote. * Paragraph 5.12(b), as amended March 24, 1998. EX-10 3 1ST AMEND TO NON-EMP DIRECTOR STOCK OPTION PLAN Page 41 Exhibit 10(iii)A(13)(b) FIRST AMENDMENT TO THE NATIONAL SERVICE INDUSTRIES, INC. 1992 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN THIS AMENDMENT made as of March 24, 1998, by National Service Industries, Inc. ("NSI"); W I T N E S S E T H: WHEREAS, the 1992 Nonemployee Directors' Stock Option Plan (the "Plan") was approved by the Board of Directors of NSI on September 16, 1992, and by the stockholders of NSI on January 6, 1993; and WHEREAS, pursuant to the power of amendment set forth in Section 9 of the Plan and action of the Board of Directors of NSI on March 24, 1998; NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section 5.1 of the Plan is amended by deleting the "and" before "(ii)", by replacing "that the Plan remains in effect pursuant to its terms" with "through the fiscal year ending August 31, 1998," and inserting "and (iii) beginning with the fiscal year that commences September 1, 1998, on the date of the Annual Meeting each year that the Plan remains in effect pursuant to its terms", so that Section 5.1 now reads in its entirety as follows: 5.1 Grant. An Option shall be granted to each Nonemployee Director on (i) the first business day after the date of the first annual meeting of the stockholders of the Company following adoption of the Plan by the Board, (ii) the third (3rd) Wednesday occurring in September of each year through the fiscal year ending August 31, 1998, and (iii) beginning with the fiscal year that commences September 1, 1998, on the date of the Annual Meeting each year that the Plan remains in effect pursuant to its terms. The number of Shares and the purchase price therefor of each Option shall be as provided in this Section 5 and such Options shall be evidenced by an Agreement containing such other terms and conditions not inconsistent with the provisions of this Plan as determined by the Board. Page 42 Exhibit 10(iii)A(13)(b) 2. Except as hereby modified, the Plan shall remain in full force and effect pursuant to its original terms. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first written above. ATTEST: NATIONAL SERVICE INDUSTRIES, INC. /s/ Carol Ellis Morgan By: /s/ James S. Balloun Assistant Secretary James S. Balloun Chairman of the Board, President and Chief Executive Officer (CORPORATE SEAL) EX-10 4 2ND AMEND TO NON-EMP DIRECTOR DEF STOCK UNIT PLAN Page 43 Exhibit 10(iii)A(19)(c) AMENDMENT NO. 2 TO NATIONAL SERVICE INDUSTRIES, INC. NONEMPLOYEE DIRECTOR DEFERRED STOCK UNIT PLAN This Amendment is made as of the 31st day of December, 1997, by National Service Industries, Inc. (the "Corporation"). W I T N E S S E T H: WHEREAS, the Corporation previously established and amended the National Service Industries, Inc. Nonemployee Director Deferred Stock Unit Plan (the "Plan") for the benefit of directors of the Corporation who are not employees of the Corporation or any Subsidiary (as defined in the Plan); and WHEREAS, pursuant to the power of amendment contained in Section 7.1 of the Plan, by action of the Board of Directors of the Corporation taken December 17, 1997 and effective on the date hereof, the Plan is hereby amended as follows: 1. Article 5 of the Plan is hereby amended, effective December 31, 1997, by renumbering Section 5.5 as 5.6 and inserting the following as Section 5.5: 5.5 Merger with Deferred Compensation Plan. The account of each Eligible Director who participates in the Directors' Deferred Compensation Plan shall be credited as of the close of business on December 31, 1997, with the number of Deferred Stock Units (rounded to the nearest hundredth) equal to such Eligible Director's account balance in the Directors' Deferred Compensation Plan as of that date divided by the Fair Market Value. 2. Except as provided herein, the provisions of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2 as of the day and year first written above. ATTEST: NATIONAL SERVICE INDUSTRIES, INC. /s/ Carol Ellis Morgan By: /s/ James S. Balloun Assistant Secretary James S. Balloun Chairman of the Board, President and Chief Executive Officer EX-10 5 MANAGEMENT COMPENSATION & INCENTIVE PLAN Page 44 Exhibit 10(iii)A(31) NATIONAL SERVICE INDUSTRIES, INC. MANAGEMENT COMPENSATION AND INCENTIVE PLAN As Amended and Restated, Effective As Of September 1, 1998 1. ESTABLISHMENT AND EFFECTIVE DATE OF PLAN National Service Industries, Inc. (the "Corporation") hereby amends and restates the National Service Industries, Inc. Management Compensation and Incentive Plan (the "Plan") for its executive officers and certain other executives of the Corporation, its Operating Units and affiliates who are in management positions designated as eligible for participation by the Executive Resource and Compensation Committee (the "Committee") of the Board of Directors of the Corporation or its designee. The amended and restated Plan shall be effective on September 1, 1998 and shall remain in effect, subject to the rights of amendment and termination in Section 13, until the Incentive Awards are paid for the Corporation's fiscal year ending in 2004. Payments under the Plan shall only be made to Named Executive Officers after the Plan is approved by the stockholders of the Corporation. 2. PURPOSE OF THE PLAN The purpose of the Plan is to further the growth and financial success of the Corporation by offering performance incentives to designated executives who have significant responsibility for such success. 3. DEFINITIONS () "Base Annual Salary" means the actual salary paid to a Participant during the applicable Plan Year, increased by the amount of any pre-tax deferrals or other pre-tax payments made by the Participant to the Corporation's deferred compensation or welfare plans (whether qualified or non-qualified). () "Board of Directors" means the Board of Directors of the Corporation. () "Change in Control" means any of the following events: (i) The acquisition (other than from the Corporation) 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 Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding voting securities; or Page 45 Exhibit 10(iii)A(31) (ii) The individuals who, as of September 22, 1998, are members of the Board of Directors (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board of Directors; provided, however, that if the election, or nomination for election by the Corporation'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 Corporation of (1) a merger or consolidation involving the Corporation if the stockholders of the Corporation, 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 Corporation outstanding immediately before such merger or consolidation or (2) a complete liquidation or dissolution of the Corporation or an agreement for the sale or other disposition of all or substantially all of the assets of the Corporation. 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 Corporation'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 Corporation 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 Corporation in the same proportion as their ownership of stock in the Corporation immediately prior to such acquisition. () "Chief Executive Officer" means the chief executive officer of the Corporation, unless otherwise specified. () "Code" means the Internal Revenue Code of 1986, as amended. () "Committee" means the Executive Resource and Compensation Committee of the Board of Directors or any other committee designated by the Board of Directors which is responsible for administering the Plan. () "Corporation" means National Service Industries, Inc., a Delaware corporation, and its successors. () "Incentive Award" or "Award" means the bonus awarded to a Participant under the terms of the Plan. Page 46 Exhibit 10(iii)A(31) () "Maximum Award" means the maximum percentage of Base Annual Salary which may be paid based upon the Relative Performance during the Plan Year. () "Named Executive Officer" means a Participant who as of the date of payment of an Incentive Award is one of the group of "covered employees" under Code Section 162(m) and the regulations thereunder. () "Operating Unit" means a separate business operating unit of the Corporation with respect to which separate performance goals may be established hereunder. () "Participant" means an employee of the Corporation, an Operating Unit or an affiliate who is designated by the Committee to participate in the Plan. () "Personal Performance Goals" means the goals that may be established for a Participant each year to improve the effectiveness of the Participant's area of responsibility as well as the Corporation as a whole. () "Plan Rules" means the guidelines established annually by the Committee pursuant to Section 4, subject, where applicable, to ratification by the Board of Directors. () "Plan Year" means the twelve month period which is the same as the Corporation's fiscal year. The initial Plan Year for the amended and restated Plan shall be September 1, 1998 through August 31, 1999. () "Relative Performance" means the extent to which the Corporation, and/or designated Operating Unit, as applicable, achieves the performance measurement criteria set forth in the Plan Rules. () "Target Award" means the percentage (which may vary among Participants and from Plan Year to Plan Year) of Base Annual Salary which will be paid to a Participant as an Incentive Award if the performance measurement criteria applicable to the Participant for the Plan Year is achieved, as reflected in the Plan Rules for such Plan Year. () "Threshold Award" means the percentage of Base Annual Salary which may be paid based on the minimum acceptable Relative Performance during the Plan Year. 4. ADMINISTRATION OF THE PLAN The Plan will be administered by the Committee, subject to its right to delegate responsibility for administration of the Plan as it applies to Participants other than Named Executive Officers pursuant to Section 7. The Committee will have authority to establish Plan Rules with respect to the following matters for the Plan Year, subject to the right of the Board of Directors to ratify such Plan Rules as provided in this Section 4: (a) the employees who are Participants in the Plan; Page 47 Exhibit 10(iii)A(31) (b) the Target Award, Maximum Award and Threshold Award that can be granted to each Participant and the method for determining such award, which the Committee may amend from time to time; (c) the performance targets and the measurement criteria to be used in determining the Corporation's or an Operating Unit's Relative Performance, which will include one or more of the following, as determined by the Committee each year: sales, net income, earnings per share, return on equity, return on assets (or net assets), after-tax or pre-tax profit, market value of the Corporation's stock, total shareholder return, return on investment, economic profit, capitalized economic profit, cash flow and cash flow return; and (d) the time or times and the conditions subject to which any Incentive Award may become payable. The Plan Rules will be adopted by the Committee prior to, or as soon as practical after, the commencement of each Plan Year. Subject to the provisions of the Plan and the Committee's right to delegate its responsibilities, the Committee will also have the discretionary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations deemed necessary or advisable in administering the Plan. The determinations of the Committee on the matters referred to in paragraphs (a) through (d) of this Section 4 with respect to Named Executive Officers (and such other Participants as the Committee may determine) shall be submitted at least annually to the Board of Directors for its consideration and ratification. For Participants who are not Named Executive Officers, the Committee may in its discretion establish performance measures not listed in this Section 4 without obtaining shareholder approval. 5. PARTICIPATION Eligibility for participation in the Plan is limited to executive officers of the Corporation and certain other executives of the Corporation and its Operating Units or affiliates who hold key management and staff positions. From among those eligible and based upon the recommendations of the Chief Executive Officer and other designees, the Committee will designate by name or position the Participants each Plan Year. Any employee who is a Participant in one Plan Year may be excluded from participation in any other Plan Year. If, during the Plan Year, a Participant other than a Named Executive Officer changes employment positions to a new position which corresponds to a different award level, the Committee may, in its discretion, adjust the Participant's award level for such Plan Year. The Committee may, in its discretion, designate employees who are hired after the beginning of the Plan Year as Participants for such Plan Year and as eligible to receive full or partial Incentive Awards for such year. Page 48 Exhibit 10(iii)A(31) 6. INCENTIVE AWARDS 6.1 Determination of the Amount of Incentive Awards At the end of each Plan Year, the Committee shall certify the extent to which the performance targets and measurement criteria established pursuant to Section 4 have been achieved for such Plan Year based upon financial information provided by the Corporation. Subject to the right to decrease an award as described in the next paragraph, the Participant's Incentive Award shall be computed by the Committee based upon the achievement of the established performance targets, measurement criteria and the requirements of the Plan. The Committee may in determining whether performance targets have been met adjust the Corporation's financial results to exclude the effect of unusual charges or income items or other events, including acquisitions or dispositions of businesses or assets, recapitalizations, reorganizations, restructurings, reductions in force, currency fluctuations or changes in accounting, which are distortive of results for the year (either on a segment or consolidated basis); provided, that for purposes of determining the Incentive Awards of Named Executive Officers, the Committee shall exclude unusual items whose exclusion has the effect of increasing Relative Performance if such items constitute "extraordinary items" under generally accepted accounting principles or are significant unusual items. In addition, the Committee will adjust its calculations to exclude the unanticipated effect on financial results of changes in the Code or other tax laws, or the regulations relating thereto. The Committee may, in its discretion, decrease the amount of a Participant's Incentive Award for a Plan Year based upon such factors as it may determine, including the failure of the Corporation or an Operating Unit to meet certain performance goals or of a Participant to meet his Personal Performance Goals. The factors to be used in reducing an Incentive Award may be established at the beginning of a Plan Year and may vary among Participants. In the event that the Corporation's or an Operating Unit's performance is below the anticipated performance thresholds for the Plan Year and the Incentive Awards are below expectations or not earned at all, the Committee may in its discretion grant Incentive Awards (or increase the otherwise earned Incentive Awards) to deserving Participants, except for Participants who are Named Executive Officers. The Plan Rules and Incentive Awards under the Plan shall be administered in a manner to qualify payments under the Plan to the Named Executive Officers for the performance-based exception under Code Section 162(m) and the regulations thereunder, except where the Board of Directors determines such compliance is not necessary. The maximum Incentive Award that may be paid to an individual Participant for a Plan Year shall be the amount which when added to the Participant's Base Annual Salary for such Plan Year totals an aggregate of $2.5 million. Page 49 Exhibit 10(iii)A(31) 6.2 Eligibility for Payment of Incentive Award No Participant will have any vested right to receive any Incentive Award until such date as the Board of Directors has ratified the Committee's determination with respect to the payment of individual Incentive Awards, except where the Committee determines such ratification is not necessary. No Incentive Award will be paid to any Participant who is not an active employee of the Corporation, an Operating Unit or an affiliate at the end of the Plan Year to which the Incentive Award relates; provided, however, at the discretion of the Committee or its designee (subject to ratification by the Board of Directors, where required, and the limitations of Code Section 162(m)), partial Incentive Awards may be paid to Participants (or their beneficiaries) who are terminated without cause (as determined by the Committee or its designee) or who retire, die or become permanently and totally disabled during the Plan Year. No Participant entitled to receive an Incentive Award shall have any interest in any specific asset of the Corporation, and such Participant's rights shall be equivalent to that of a general unsecured creditor of the Corporation. 6.3 Payment of Awards Payment of the Incentive Awards will be made as soon as practicable after their determination pursuant to Sections 6.1 and 6.2, subject to a Participant's right to defer payment pursuant to any applicable deferred compensation plans of the Corporation. Payment will generally be made in a lump sum in cash, unless the Committee otherwise determines at the beginning of the Plan Year. 7. DELEGATION OF AUTHORITY BY THE COMMITTEE Notwithstanding the responsibilities of the Committee set forth herein, the Committee may delegate to the Chief Executive Officer or others all or any portion of its responsibility for administration of the Plan as it relates to Participants other than Named Executive Officers. Such delegation may include, without limitation, the authority to designate employees who can participate in the Plan, to establish Plan Rules, to interpret the Plan, to determine the extent to which performance criteria have been achieved, and to adjust any Incentive Awards that are payable. In the case of each such delegation, the administrative actions of the delegate shall be subject to the approval of the person within the Corporation to whom the delegate reports (or, in the case of a delegation to the Chief Executive Officer, to the approval of the Committee). 8. CHANGE IN CONTROL Upon the occurrence of a Change in Control, unless the Participant otherwise elects in writing, the Participant's Incentive Award for the Plan Year, determined at the Target Award level (without any reductions under Section 6.1) shall be deemed to have been fully earned for the Plan Year, provided that` the Participant shall only be entitled to a pro rata portion of the Incentive Award based upon the number of days within the Plan Year that had elapsed as of the effective date of the Change in Control. The Incentive Award amount shall be paid in cash within thirty (30) days of the effective date of the Change in Control. The Incentive Award payable upon a Change in Control to a Participant for the Plan Year during which a Change in Control occurs shall be the greater of the amount provided for under this Section 8 or the amount of the Incentive Award payable to such Participant for the Plan Year under the terms of any employment agreement or severance agreement with the Corporation, its Operating Units or affiliates. Page 50 Exhibit 10(iii)A(31) 9. BENEFICIARY To the extent provided by the Committee or its designee each Participant will designate a person or persons to receive, in the event of death, any Incentive Award to which the Participant would then be entitled under Section 6.2. Such designation will be made in the manner determined by the Committee and may be revoked by the Participant in writing. If the Committee does not provide for a designation of beneficiary or if a Participant fails effectively to designate a beneficiary, then the estate of the Participant will be deemed to be the beneficiary. 10. WITHHOLDING OF TAXES The Corporation shall deduct from each Incentive Award the amount of any taxes required to be withheld by any governmental authority. 11. EMPLOYMENT Nothing in the Plan or in any Incentive Award shall confer (or be deemed to confer) upon any Participant the right to continue in the employ of the Corporation, a Division or an affiliate, or interfere with or restrict in any way the rights of the Corporation, a Division or an affiliate to discharge any Participant at any time for any reason whatsoever, with or without cause. 12. SUCCESSORS All obligations of the Corporation under the Plan with respect to Incentive Awards granted hereunder shall be binding upon any successor to the Corporation, whether such successor is the result of an acquisition of stock or assets of the Corporation, a merger, a consolidation or otherwise. 13. TERMINATION AND AMENDMENT OF THE PLAN; GOVERNING LAW The Committee, subject to the ratification rights of the Board of Directors, has the right to suspend or terminate the Plan at any time, or to amend the Plan in any respect, provided that no such action will, without the consent of a Participant, adversely affect the Participant's rights under an Incentive Award approved under Section 6.2. The Plan shall be interpreted and construed under the laws of the State of Georgia. AS APPROVED BY THE BOARD OF DIRECTORS OF THE CORPORATION ON THE 22nd DAY OF SEPTEMBER, 1998. EX-13 6 ANNUAL REPORT Page 51 Exhibit 13 CONSOLIDATED BALANCE SHEETS National Service Industries, Inc. August 31 In thousands, except share and per share data) 1998 1997 Assets Current Assets: Cash and cash equivalents $ 19,146 $ 57,123 Short-term investments - 205,302 Receivables, less reserves for doubtful accounts of $4,631 in 1998 and $4,302 in 1997 307,140 258,689 Inventories, at the lower of cost (on a first-in, first-out basis) or market 197,950 179,046 Linens in service, net of amortization 58,826 60,805 Deferred income taxes 17,542 13,077 Prepayments 6,447 6,716 Total Current Assets 607,051 780,758 Property, Plant, and Equipment, at cost: Land 21,450 19,911 Buildings and leasehold improvements 150,326 138,933 Machinery and equipment 485,271 434,194 Total Property, Plant, and Equipment 657,047 593,038 Less - Accumulated depreciation and amortization 385,176 356,308 Property, Plant, and Equipment - net 271,871 236,730 Other Assets: Goodwill and other intangibles 88,280 50,166 Other 43,482 38,698 Total Other Assets 131,762 88,864 Total Assets $1,010,684 $1,106,352
Page 52 Exhibit 13 CONSOLIDATED BALANCE SHEETS (continued) National Service Industries, Inc. August 31 (In thousands, except share and per share data) 1998 1997 Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt $ 98 $ 116 Notes payable 7,883 5,773 Accounts payable 95,217 101,512 Accrued salaries, commissions, and bonuses 34,820 34,776 Current portion of self-insurance reserves 11,253 12,540 Accrued taxes payable - 38,351 Other accrued liabilities 72,724 88,932 Total Current Liabilities 221,995 282,000 Long-Term Debt, less current maturities 78,092 26,197 Deferred Income Taxes 40,404 34,093 Self-Insurance Reserves, less current portion 44,573 57,056 Other Long-Term Liabilities 46,719 35,193 Commitments and Contingencies (Note 4) 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 in 1998 and 1997 57,919 57,919 Paid-in capital 28,521 25,521 Retained earnings 892,617 841,045 979,057 924,485 Less - Treasury stock, at cost (16,457,340 shares in 1998 and 13,719,834 shares in 1997) 400,156 252,672 Total Stockholders' Equity 578,901 671,813 Total Liabilities and Stockholders' Equity $1,010,684 $1,106,352
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. Page 53 Exhibit 13 CONSOLIDATED STATEMENTS OF INCOME National Service Industries, Inc. Years Ended August 31 (In thousands, except per share data) 1998 1997 1996 Sales and Service Revenues: Net sales of products $1,718,564 $1,542,644 $1,482,937 Service revenues 312,746 493,535 530,625 Total Revenues 2,031,310 2,036,179 2,013,562 Costs and Expenses: Cost of products sold 1,044,215 945,794 933,405 Cost of services 183,470 283,024 304,381 Selling and administrative expenses 634,061 633,740 616,513 Interest expense, net 749 1,624 1,565 Gain on sale of businesses (2,449) (75,097) (7,579) Restructuring expense, asset impairments, and other charges - 63,091 - Other (income) expense, net (1,857) 4,925 3,429 Total Costs and Expenses 1,858,189 1,857,101 1,851,714 Income before Provision for Income Taxes 173,121 179,078 161,848 Provision for Income Taxes 64,401 71,800 60,700 Net Income $ 108,720 $ 107,278 $ 101,148 Basic Earnings per Share $ 2.56 $ 2.37 $ 2.11 Basic Weighted Average Number of Shares Outstanding 42,462 45,191 47,941 Diluted Earnings per Share $ 2.53 $ 2.36 $ 2.10 Diluted Weighted Average Number of Shares Outstanding 43,022 45,534 48,189
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 54 Exhibit 13 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY National Service Industries, Inc. (In thousands, except share and per share data) Common Paid-in Retained Treasury Stock Capital Earnings Stock Total Balance August 31, 1995 $57,919 $ 8,065 $746,256 $ (67,836)$ 744,404 Treasury stock purchased (1) - - - (75,223) (75,223) Stock options exercised (2) - 2,956 - 760 3,716 Net income - - 101,148 - 101,148 Cash dividends of $1.15 per share paid on common stock - - (55,272) - (55,272) Adjustment to recognize net increase in pension liability - - (23) - (23) Foreign currency translation adjustment - - (742) - (742) Balance August 31, 1996 57,919 11,021 791,367 (142,299) 718,008 Treasury stock purchased (3) - - - (121,668) (121,668) Stock options exercised (4) - 2,588 - 2,685 5,273 Treasury stock issued in connection with acquisition (5) - 11,912 - 8,610 20,522 Net income - - 107,278 - 107,278 Cash dividends of $1.19 per share paid on common stock - - (54,222) - (54,222) Foreign currency translation adjustment - - (3,378) - (3,378) Balance August 31, 1997 57,919 25,521 841,045 (252,672) 671,813 Treasury stock purchased (6) - - - (154,032) (154,032) Stock options exercised (7) - 625 - 3,305 3,930 Treasury stock issued in connection with acquisition (8) ` - 2,104 - 2,896 5,000 Employee Stock Purchase Plan issuances (9) - 271 - 347 618 Net income - - 108,720 - 108,720 Cash dividends of $1.23 per share paid on common stock - - (52,603) - (52,603) Adjustment to recognize net increase in pension liability - - (17) - (17) Foreign currency translation adjustment - - (4,528) - (4,528) Balance August 31, 1998 $57,919 $28,521 $892,617 $(400,156)$ 578,901
(1)2,000,000 shares. (2)185,044 shares. (3)3,000,000 shares. (4)190,330 shares. (5)536,872 shares. (6) 3,025,162 shares. (7) 142,568 shares. (8) 130,804 shares. (9) 14,284 shares. The accompanying notes to consolidated financial statements are an integral part of these statements. Page 55 Exhibit 13 CONSOLIDATED STATEMENTS OF CASH FLOWS National Service Industries, Inc. Years Ended August 31 (In thousands) 1998 1997 1996 Cash Provided by (Used for) Operating Activities Net income $108,720 $107,278 $ 101,148 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 48,846 57,981 58,428 Provision for losses on accounts receivable 3,558 2,276 2,708 (Gain) loss on the sale of property, plant, and equipment (3,400) 1,233 (1,652) Gain on the sale of businesses (2,449) (75,097) (7,579) Restructuring expense, asset impairments, and other charges - 63,091 - Change in non-current deferred income taxes 6,311 (25,219) 1,864 Change in assets and liabilities net of effect of acquisitions and divestitures - Receivables (46,151) (11,993) (7,343) Inventories and linens in service, net (15,647) (11,286) 5,308 Current deferred income taxes (4,383) (10,926) 8,069 Prepayments 578 47 (940) Accounts payable and accrued liabilities (65,696) 30,941 (6,117) Self-insurance reserves and other long-term liabilities (957) (758) (895) Net Cash Provided by Operating Activities 29,330 127,568 152,999 Cash Provided by (Used for) Investing Activities Change in short-term investments 205,302 (204,751) 3,047 Purchases of property, plant, and equipment (82,034) (48,806 (65,499) Sale of property, plant, and equipment 6,814 5,370 9,105 Sale of businesses 3,064 311,382 15,250 Acquisitions (45,305) (4,320) (600) Change in other assets (5,381) 2,972 (3,071) Net Cash Provided by (Used for) Investing Activities $ 82,460 $ 61,847 $ (41,768)
Page 56 Exhibit 13 CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) National Service Industries, Inc. Years Ended August 31 (In thousands) 1998 1997 1996 Cash Provided by (Used for) Financing Activities Borrowings (repayments) of short-term debt, net $ 805 $ (11,021)$ - Borrowings (repayments) of long-term debt, net 51,043 (4,627) (1,897) Recovery of investment in tax benefits - 661 1,720 Deferred income taxes from investment in tax benefits - (1,972) (4,273) Purchase of treasury stock, net (144,484) (116,395) (71,507) Cash dividends paid (52,603) (54,222) (55,272) Net Cash Used for Financing Activities (145,239) (187,576) (131,229) Effect of Exchange Rate Changes on Cash (4,528) (3,378) (742) Net Change in Cash and Cash Equivalents (37,977) (1,539) (20,740) Cash and Cash Equivalents at Beginning of Year 57,123 58,662 79,402 Cash and Cash Equivalents at End of Year $ 19,146 $ 57,123 $ 58,662 Supplemental Cash Flow Information: Income taxes paid during the year $ 100,270 $ 68,475 $ 58,974 Interest paid during the year 7,025 5,614 4,994 Noncash Investing and Financing Activities: Noncash aspects of sale of businesses- Receivables incurred $ - $ 391 $ 234 Liabilities assumed 166 22,637 1,009 Noncash aspects of acquisitions - Liabilities assumed or incurred $ 5,885 $ 22,440 $ 6 Treasury stock issued 5,000 20,522 -
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 57 Exhibit 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS National Service Industries, Inc. (In thousands, except share and per share data) Note 1: Summary of Accounting Policies Description of Business The company operates in four business segments - lighting equipment, chemicals, textile rental, and envelopes - which are leading competitors in their respective markets. The lighting equipment segment produces a variety of fluorescent and non-fluorescent fixtures for markets throughout the United States, Canada, Mexico, and overseas. The chemical segment produces maintenance, sanitation, and water treatment products for customers throughout the United States, Canada, Puerto Rico, Western Europe, and Australia. The textile rental segment provides linens and dust control products to healthcare, lodging, and dining customer segments in the United States. The envelope segment produces business and specialty envelopes in the Northeast, South, and Southwest. Principles of Consolidation The consolidated financial statements include the accounts of the company and all subsidiaries after elimination of significant intercompany transactions and accounts. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash, Cash Equivalents, and Short-Term Investments Cash in excess of daily requirements is invested in time deposits and marketable securities and is included in the balance sheet at market value. The company considers time deposits and marketable securities purchased with an original maturity of three months or less to be cash equivalents. Investments purchased with a maturity of more than three months and less than a year are considered short-term investments. There were no short-term investments at August 31, 1998. The carrying amount of short-term investments at August 31, 1997 approximated fair value and consisted primarily of corporate debt securities and commercial paper. In accordance with the criteria specified by Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," these investments were classified as "available for sale." Concentrations of Credit Risk Concentrations of credit risk with respect to receivables are limited due to the wide variety of customers and markets into which the company's products and services are provided, as well as their dispersion across many different geographic areas. As a result, as of August 31, 1998, the company does not consider itself to have any significant concentrations of credit risk. Inventories and Linens in Service Inventories are valued at the lower of cost (on a first-in, first-out basis) or market and consisted of the following at August 31, 1998 and 1997: 1998 1997 Raw materials and supplies $ 78,730 $ 71,266 Work in progress 10,725 10,572 Finished goods 108,495 97,208 $ 197,950 $ 179,046
Linens in service are recorded at cost and are amortized over their estimated useful lives of 15 to 50 months. Goodwill and Other Intangibles Goodwill of $3,460 was recognized in connection with a 1969 acquisition and is not being amortized. Remaining amounts of goodwill ($71,059 in 1998 and $34,974 in 1997) and other intangible assets are being amortized on a straight-line basis over various periods ranging from 10 to 40 years. The company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of goodwill and other long-lived assets or whether the remaining balance of goodwill should be evaluated for possible impairment. The company uses an estimate of related undiscounted cash flows over the remaining life of the goodwill in measuring whether the goodwill is recoverable. During fiscal 1997, goodwill and other intangibles of $8,800 were written off due to the impairment of long-lived assets (See Note 5: Restructuring Expense and Asset Impairments). Depreciation For financial reporting purposes, depreciation is determined principally on a straight-line basis using estimated useful lives of plant and equipment (25 to 45 years for buildings and 3 to 16 years for machinery and equipment) while accelerated depreciation methods are used for income tax purposes. Leasehold improvements are amortized over the life of the lease or the useful life of the improvement, whichever is shorter. Page 58 Exhibit 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) National Service Industries, Inc. Foreign Currency Translation The functional currency for the company's foreign operations is the local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses, net of applicable income taxes, resulting from the translation are included in retained earnings and are excluded from net income. Gains or losses resulting from foreign currency transactions are included in "Other (income) expense, net" in the consolidated statements of income and are not material. Postretirement Healthcare and Life Insurance Benefits The company's retiree medical plans are financed entirely by retiree contributions; therefore, the company has no liability in connection with them. Several programs provide limited retiree life insurance benefits. The liability for these plans is not material. Postemployment Benefits SFAS No. 112, "Employers' Accounting for Postemployment Benefits," requires the accrual of the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement. The company's accrual, which is not material, relates primarily to severance agreements and the liability for life insurance coverage for certain eligible employees. Pension and Profit Sharing Plans The company has several pension plans covering hourly and salaried employees. Benefits paid under these plans are based generally on employees' years of service and/or compensation during the final years of employment. The company makes annual contributions to the plans to the extent indicated by actuarial valuations. Plan assets are invested primarily in equity and fixed income securities. Net pension income for 1998, 1997, and 1996 included the following components: 1998 1997 1996 Service cost of benefits earned during the period $ 3,091 $ 3,636 $ 2,719 Interest cost on projected benefit obligation 8,509 8,505 7,438 Return on plan assets (26,435) (12,393) (28,255) Net amortization and deferral 13,459 (768) 17,383 Net pension income $ (1,376) $ (1,020) $ (715)
The following schedule reconciles the funded status of the plans as of June 1, 1998 and 1997, with amounts reported in the company's consolidated balance sheets at August 31, 1998 and 1997: 1998 1997 Plan Accumulated Plan Accumulated Assets Benefit Assets Benefit Exceed Obligation Exceed Obligation Accumulated Exceeds Accumulated Exceeds Benefit Plan Benefit Plan Obligation Assets Obligation Assets Actuarial present value of benefit obligations as of June 1: Vested $(102,101) $ (5,804) $(87,929)$ (5,123) Nonvested (8,507) (104) (10,180) (20) Accumulated benefit obligation (110,608) (5,908) (98,109) (5,143) Effect of projected salary increases (5,852) (2,177) (5,379) (1,195) Total projected benefit obligation (116,460) (8,085) (103,488) (6,338) Fair value of plan assets 150,101 - 133,214 - Plan assets greater (less) than projected benefit obligation 33,641 (8,085) 29,726 (6,338) Unrecognized transition (asset)liability (5,089) 49 (7,059) 61 Unrecognized prior service cost obligation 1,755 2,393 1,873 2,208 Unrecognized net loss (gain) 8,829 34 9,891 (896) Adjustment required to recognize minimum liability - (892) - (596) Prepaid (accrued) pension expense at August 31 $39,136 $ (6,501) $ 34,431 $ (5,561)
For all periods presented, the assumed growth rate of compensation is 5.5 percent and the expected long-term rate of return on plan assets is 9.5 percent. During 1998, the discount rate used to determine the projected benefit obligation was decreased from 8 percent to 7 percent to more closely approximate rates on high-quality, long-term obligations. The company also has profit sharing and 401(k) plans to which both employees and the company contribute. At August 31, 1998, assets of the 401(k) plans included shares of the company's common stock with a market value of approximately $14,797. The company's cost of these plans was $4,292 in 1998, $5,020 in 1997, and $4,595 in 1996. Page 59 Exhibit 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) National Service Industries, Inc. Interest Expense, Net Interest expense, net, is comprised primarily of interest expense on long-term debt, credit facility borrowings, and line of credit borrowings offset by interest income on cash, cash equivalents, and short-term investments. Other (Income) Expense, Net Other (income) expense, net, is comprised primarily of amortization of intangible assets net of gains resulting from the sale of fixed assets in 1998, 1997, and 1996. Other (income) expense, net, also included casualty loss insurance proceeds in 1996. Accounting Standards Yet to Be Adopted During fiscal 1999, the company is required to adopt SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires the reporting of a measure of all changes in equity of an entity that result from recognized transactions and other economic events other than transactions with owners in their capacity as owners. In the opinion of management, the adoption of SFAS No. 130 is not expected to have a material impact on the company's manner of reporting the components of comprehensive income. During fiscal 1999, the company is required to adopt SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 requires the reporting of financial information on the basis that it is used internally for evaluating segment performance and the allocation of resources to segments. In the opinion of management, the adoption of SFAS No. 131 is not expected to have a material impact on the company's manner of reporting information about its segments. During fiscal 1999, the company is required to adopt SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 amends SFAS Nos. 87, 88, and 106 by standardizing the disclosure requirements for pensions and other postretirement benefits, requiring additional information on changes in benefit obligations and fair values of plan assets, and eliminating certain other disclosures. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June of 1998 and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. However, the company does not currently participate in any hedging activities, nor does it utilize any other derivative financial instruments. Reclassifications Certain amounts in the financial statements and notes have been reclassified to conform with the 1998 presentation. Note 2: Long-Term Debt and Lines of Credit Long-term debt at August 31, 1998 and 1997, consisted of the following: 1998 1997 6.5% to 9.25% mortgage notes, payable in installments through 2000 (secured in part by property, plant, and equipment having a net book value of $228 at August 31, 1998) $ 45 $ 86 3.4% to 8.5% other notes, payable in installments to 2026 78,145 26,227 78,190 26,313 Less-Amounts payable within one year included in current liabilities 98 116 $78,092 $26,197
The annual principal payments of long-term debt for the five-year period ending August 31, 2003 are: 1999 - $98; 2000 - $108; 2001 - $106; 2002 - $95; 2003 - $102. In 1996, the company negotiated a $250,000 multi-currency committed credit facility (the "Credit Facility") with ten domestic and international banks. The Credit Facility has a term of five years, expiring in July 2001, with no provision for reduction in commitments. The Credit Facility contains restrictions on the incurrence of indebtedness by subsidiaries, as well as financial and other covenants, including restrictions that the company's ratio of total debt to capitalization may not exceed 60 percent at any time. The company has complimentary lines of credit totaling $122,000 for general operating purposes, of which $22,000 is available on a multi-currency basis. On August 31, 1998, the company borrowed $52,000 under the $100,000 domestic line of credit. Subsequent to the company's fiscal year end, these borrowings were repaid through borrowings on the Credit Facility. This borrowing has been classified as noncurrent because it is the company's intention to refinance this obligation on a long-term basis. In addition, $28,390 in letters of credit were outstanding at August 31, 1998 under the domestic line of credit. At August 31, 1998, the company had foreign currency short-term bank borrowings under the $22,000 line of credit equivalent to $7,883 at a weighted average interest rate of 4.91 percent. Long-term debt recorded in the accompanying consolidated balance sheets approximates fair value based on the borrowing rates currently available to the company for bank loans with similar terms and average maturities. Page 60 Exhibit 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) National Service Industries, Inc. Note 3: Common Stock and Related Matters Shareholder Rights Plan The company has a shareholder rights plan under which one preferred stock purchase right is presently attached to and trades with each outstanding share of the company's common stock. The plan, which was to have expired May 19, 1998, was amended and extended to May 19, 2008. The rights become exercisable and transferable apart from the common stock (a) on the date that a person or group announces that they have acquired 15 percent or more of the company's common stock or (b) ten days after a person or group makes an unsolicited offer to acquire beneficial ownership of, or the right to obtain beneficial ownership of, 15 percent or more of the company's common stock (unless such date is extended by the Board of Directors) or (c) 20 business days before the date on which a business combination is reasonably expected to be consummated involving a person who, if the business combination is consummated, has or would acquire beneficial ownership of, or the right to obtain beneficial ownership of, 15 percent or more of the company's common stock and that person has directly or indirectly nominated a director of the company at the time the business combination is considered. The rights are not triggered if the Board of Directors is notified that reaching the trigger threshold was inadvertent and divestiture of sufficient stock is thereafter made. Once exercisable, each right entitles the holder to purchase one one-thousandth share of Series A Participating Preferred Stock at an exercise price of $160, subject to adjustment to prevent dilution. The rights have no voting power and, until exercised, no dilutive effect on net income per common share. The rights expire on May 19, 2008, and are redeemable under certain circumstances. If a person acquires 15 percent ownership, except in an offer approved under the plan by a majority of the nonemployee directors, each right not owned by the acquirer or related parties will entitle its holder to purchase, at the right's exercise price, common stock or common stock equivalents having a market value immediately prior to the triggering of the right of twice that exercise price. In addition, after an acquirer obtains 15 percent ownership, if the company is involved in certain mergers, business combinations, or asset sales, each right not owned by the acquirer or related persons will entitle its holder to purchase, at the right's exercise price, shares of common stock of the other party to the transaction having a market value immediately prior to the triggering of the right of twice that exercise price. Rights may not be redeemed for a 365-day period following a change in the majority of the Board of Directors if the redemption would facilitate a transaction with the person who caused the change of control of the Board of Directors. Preferred Stock The company has 1,000,000 shares of preferred stock authorized, 500,000 of which have been reserved for issuance under the shareholder rights plan. No shares of preferred stock had been issued at August 31, 1998 and 1997. Earnings per Share During fiscal 1998, the company adopted SFAS No. 128, "Earnings per Share." SFAS No. 128 supersedes Accounting Principles Board ("APB") Opinion No. 15, "Earnings per Share," and promulgates new accounting standards for the computation and manner of presentation of the company's earnings per share. Upon adoption, the company was required to restate previously reported annual and interim earnings per share in accordance with the provisions of SFAS No. 128. The adoption of SFAS No. 128 did not have a material impact on the computation or manner of presentation of the company's earnings per share as previously presented under APB 15. The following table represents a reconciliation of basic and diluted earnings per share at August 31: 1998 1997 1996 Basic weighted average shares outstanding 42,462 45,191 47,941 Add: Shares of common stock assumed issued upon exercise of stock options 560 343 248 Diluted weighted average shares outstanding 43,022 45,534 48,189 Net earnings used in the computation of basic and diluted earnings per share $ 108,720 $ 107,278 $ 101,148 Earnings per Share: Basic $ 2.56 $ 2.37 $ 2.11 Diluted $ 2.53 $ 2.36 $ 2.10
Stock-based Compensation In 1990, the stockholders approved the National Service Industries, Inc. Long-Term Incentive Program for the benefit of officers and other key employees. There were 1,750,000 treasury shares reserved for issuance under the program. In 1997, the stockholders approved the National Service Industries, Inc. Long-Term Achievement Incentive Plan for the benefit of officers and other key employees. There were 1,750,000 treasury shares reserved for issuance under that plan. Page 61 Exhibit 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) National Service Industries, Inc. The stock options granted under both the incentive programs become exercisable in four equal annual installments beginning one year from the date of the grant. In January 1993, the stockholders approved the National Service Industries, Inc. 1992 Nonemployee Directors' Stock Option Plan, under which 100,000 treasury shares were reserved for issuance. The stock options granted under that plan become exercisable one year from the date of the grant. Under all stock option plans, the options expire ten years from the date of the grant and have an exercise price equal to the fair market value of the company's stock on the date of the grant. At August 31, shares available for issuance under all plans were 1,236,574 in 1998, 1,732,574 in 1997, and 300,408 in 1996. Stock option transactions for the stock option plans and stock option agreements during the years ended August 31, 1998, 1997, and 1996 were as follows: Outstanding Exercisable Weighted Weighted Number of Average Number of Average Shares Exercise Price Shares Exercise Price Outstanding at August 31, 1995 1,088,773 $ 24.89 Granted 513,200 $ 32.06 Exercised (185,044) $ 24.01 Cancelled (150,886) $ 26.19 Outstanding at August 31, 1996 1,266,043 $ 27.74 466,377 $ 25.76 Granted 324,500 $ 37.96 Exercised (196,115) $ 25.96 Cancelled (7,214) $ 31.46 Outstanding at August 31, 1997 1,387,214 $ 30.35 731,914 $ 27.11 Granted 500,000 $ 44.50 Exercised (142,568) $ 26.32 Cancelled - - Outstanding at August 31, 1998 1,744,646 $ 34.74 876,721 $ 29.05 Range of option exercise prices: $19.75-$39.75 (average life-6.3 years) 1,247,646 $ 30.85 876,721 $ 29.05 $44.25-$59.44 (average life-9.1 years) 497,000 $ 44.50 - -
During fiscal 1997, the company adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for these stock option plans. Had compensation cost for the company's stock option plans been determined based on the fair value at the grant date for awards in fiscal years 1998, 1997, and 1996 consistent with the provisions of SFAS No. 123, the company's net income and earnings per share would have been reduced to the following pro forma amounts: 1998 1997 1996 Pro Forma Information: Net income $106,297 $105,793 $100,284 Basic earnings per share $ 2.50 $ 2.34 $ 2.09 Diluted earnings per share $ 2.47 $ 2.32 $ 2.08
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. The weighted average grant date fair value of options was $12.23, $9.69, and $6.08 for 1998, 1997, and 1996, respectively. The following weighted average assumptions were used to estimate fair value: 1998 1997 1996 Dividend yield 2.809% 3.350% 4.009% Expected volatility 18.1% 16.8% 15.3% Risk-free interest rate 6.10% 6.73% 6.10% Expected life of options 10 years 10 years 10 years Turnover rate 5.0% 5.0% 5.0%
Employee Stock Purchase Plan In 1998, the stockholders approved the National Service Industries, Inc. Employee Stock Purchase Plan for the benefit of eligible employees. Under the plan, employees may purchase, through payroll deduction, the company's common stock at a 15 percent discount. Shares are purchased quarterly at 85 percent of the lower of the fair market value of the company's common stock on the first business day of the quarterly plan period or on the last business day of the quarterly plan period. There were 1,500,000 treasury shares reserved for purchase under the plan. Page 62 Exhibit 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) National Service Industries, Inc. Note 4: Commitments and Contingencies Self-Insurance It is the policy of the company to self insure for certain insurable risks consisting primarily of physical loss to property; business interruptions resulting from such loss; and workers' compensation, comprehensive general, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. Based on an independent actuary's estimate of the aggregate liability for claims incurred, a provision for claims under the self-insured program is recorded and revised annually. Leases The company leases certain of its buildings and equipment under noncancelable lease agreements. Minimum lease payments under noncancelable leases for years subsequent to August 31, 1998, are as follows: 1999 - $11,902; 2000 - $9,762; 2001 - $7,201; 2002 - $5,680; 2003 - $4,737; after 2003 - $9,109. Total rent expense was $12,237 in 1998, $11,327 in 1997, and $10,907 in 1996. Collective Bargaining Agreements Approximately 50 percent of the company's total work force is covered by collective bargaining agreements. Collective bargaining agreements representing 30 percent of the company's total work force will expire within one year. Litigation The company is involved in various legal matters primarily arising in the normal course of business. In the opinion of management, the company's liability in any of these matters will not have a material adverse effect on its financial condition or results of operations. Environmental Matters The company's operations, as well as other similar operations, are subject to comprehensive laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances and solid and hazardous wastes and to the remediation of contaminated sites. Permits and environmental controls are required for certain of the company's operations to prevent air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. The company believes that it is in substantial compliance with all material environmental laws, regulations, and its permits. On an ongoing basis, the company incurs capital and operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be substantial. The company's environmental reserves totaled $12,600 and $17,100 at August 31, 1998 and 1997, respectively. The actual cost of environmental issues may be substantially lower or higher than that reserved due to the difficulty in estimating such costs, potential changes in the status of government regulations, and the inability to determine the extent to which contributions will be available from other parties. The company does not believe that any such amount below or in excess of that accrued is reasonably estimable. Certain environmental laws, such as Superfund, can impose liability for the entire cost of site remediation upon each of the current or former owners or operators of a site or parties who sent waste to a site where a release of a hazardous substance has occurred regardless of fault or the lawfulness of the original disposal activity. Generally, where there are a number of financially viable potentially responsible parties ("PRPs"), liability has been apportioned based on the type and amount of waste disposed of by each party at such disposal site and the number of financially viable parties, although no assurance can be given as to any particular site. The company is currently a party to, or otherwise involved in, legal proceedings in connection with several state and federal Superfund sites, two of which are located on property owned by the company. Except for the Crymes Landfill matter in Georgia, the company believes its liability is de minimis at each of the sites which it does not own where it has been named as a PRP. At the Crymes Landfill Site, since the matter is currently in the investigative phase, the company does not know whether its liability is de minimis but believes that its exposure at the site is not likely to result in a material adverse effect on the company. For the property which the company owns on Seaboard Industrial Boulevard in Atlanta, Georgia, the company has agreed to conduct an investigation on its and adjoining properties pursuant to the Georgia Hazardous Site Response Act. Until that investigation is completed, the company will not be able to determine if remediation will be required, if the company will be solely responsible for the cost of such remediation, or whether such cost is likely to result in a material adverse effect on the company. For the property which the company owns on East Paris Street in Tampa, Florida, the company has been requested by the State of Florida to clean up chlorinated solvent contamination in the groundwater on the property and on surrounding property known as Seminole Heights Solvent Site and to reimburse costs already incurred by the State of Florida in connection with such Page 63 Exhibit 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) National Service Industries, Inc. contamination. The company believes that it has a strong defense due to likely off- site sources of the contamination and because contamination from the property, if any, was due to prior owners and not the company's operations. The company plans to meet with the State of Florida in the near future regarding this matter. At this time, it is too early to quantify the company's potential exposure or the likelihood of an adverse result. The company is currently evaluating emissions of volatile organic compounds from its manufacturing operations in the Atlanta area to determine whether it will need to install pollution control equipment or modify its operations to comply with federal and state air pollution regulations. Until the current evaluations are completed, the company is not able to quantify the possible cost of compliance. However, based upon currently available information, the company does not expect any expenditures which may have to be made to achieve compliance to be material. In connection with the sale of the North Bros. business and 29 of the company's textile rental plants in 1997, the company has retained certain environmental liabilities. The company has received notice from the buyer of the textile rental plants of the alleged presence of perchloroethylene contamination on one of the properties involved in the sale. The company has since asserted an indemnification claim against the company from which it bought the property. At this time, it is too early to quantify the company's potential exposure in this matter, the likelihood of an adverse result, or the possibility that the company may be fully or partially indemnified. In November 1997, the Environmental Protection Agency ("EPA") proposed stringent new wastewater discharge limits, which would become effective in the future, that could apply to certain facilities operated by the company. While the company does not believe that these regulations should apply to its operations, if the regulations are adopted as proposed, following adoption, the company's cost to comply with them could be as much as $6,000 to $9,000 of equipment expenditures spread over a three-year period, which the company does not believe would be material to its financial condition or results of operations. Note 5: Restructuring Expense and Asset Impairments During 1997, the company conducted reviews of the textile rental, European chemical, and corporate operations as a part of management's strategic initiatives to examine under-performing operations and to position the company for growth. As a result of the reviews, the company approved a significant restructuring program and recorded a related charge of $9,600 during the fourth quarter. The accrual included severance and union-related costs totaling $2,950 for 120 employees of the textile rental, chemical, and envelope segments and $6,650 in exit expenses to close certain facilities and consolidate the operations of others in the textile rental segment. Exit expenses include costs of unexpired leases, costs to dispose of facilities, and costs of personnel to effect the closures and consolidations. The severance accrual was reduced by payments of $205 in 1997 and $2,115 in 1998. Plant consolidation payments were $1,910 in 1997 and $390 in 1998. As a further result of the 1997 reviews, the company recognized long-lived asset impairments totaling $43,500. Textile rental assets to be disposed of in under-performing branches were reduced by $22,300 to state them at their estimated fair value less costs to sell. The remaining net book value of these assets is immaterial. Fixed assets held for use by the textile rental, European chemical, and corporate units were reduced by $12,400 and related intangibles were reduced by $8,800. Impairments were recognized for those assets where the sum of estimated undiscounted future cash flows was less than the carrying amount of the assets, including related goodwill. Fair market values were established based on independent appraisals, comparable sales or purchases, and expected future cash flows discounted at the company's cost of capital. Factors leading to the impairments were a combination of the results of the reviews discussed above, historical losses, anticipated future losses, and inadequate cash flows. The losses resulting from the accruals and impairments are included in "Restructuring expense, asset impairments, and other charges" in the consolidated statements of income. Note 6: Acquisitions and Divestitures Acquisition spending in 1998 totaled $45,305 and was primarily related to the chemical and envelope segments. In November 1997, the chemical segment purchased Pure Corporation, a specialty chemical company with its core businesses in Indiana, Pennsylvania, and New York. In March 1998, the envelope segment purchased Allen Envelope Corporation, a single-plant, Pennsylvania-based envelope manufacturer, providing the segment with access to markets in the Northeast. In July 1998, the company purchased Calman Australia Pty Ltd ("Calman"). Calman, located in Victoria, Australia is a manufacturer of cleaning, maintenance, sanitation and industrial products, chemicals, supplies, and accessories. Additionally, the company paid certain performance payments associated with a prior year chemical acquisition. Divestitures during 1998 related to the textile rental segment and excess properties and were not material. Page 64 Exhibit 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) National Service Industries, Inc. In February 1997, the company sold the North Bros. insulation business for $27,113 in cash. An immaterial gain was realized on the sale. The business had 1997 sales of $57,000 and operating income of $1,900. Additionally, immaterial gains were recognized as the company divested several non-strategic textile rental locations. In July 1997, the company sold 29 textile rental plants to G & K Services, Inc. at a pretax gain of $74,044. The following condensed pro forma consolidated statements of income present reported results for the respective fiscal years to remove both the gain on the transaction and the results of the operations sold: Condensed Pro Forma Consolidated Statements of Income 1997 1996 (Unaudited) Sales and Service Revenues $1,859,653 $1,803,034 Other Costs and Expenses 1,708,672 1,648,460 Restructuring Expense, Asset Impairments, and Other Charges 63,091 -- Income before Provision for Income Taxes 87,890 154,574 Provision for Income Taxes 32,172 57,988 Net Income $ 55,718 $ 96,586 Basic Earnings per Share $1.23 $2.01 Basic Weighted Average Number of Shares Outstanding (thousands) 45,191 47,941 Diluted Earnings per Share $ 1.22 $ 2.00 Diluted Weighted Average Number of Shares Outstanding (thousands) 45,534 48,189
The pro forma statements are not necessarily indicative of the financial position and results of operations that would have been attained had the divestiture been consummated on the dates indicated or that may be attained in the future. In 1997, cash acquisition spending totaled $4,320 and was the result of the chemical segment's purchase of chemical products companies in Ohio and Canada and the lighting equipment segment's acquisition of a small emergency lighting products manufacturer in Canada. The company also issued 536,872 shares valued at $20,522 to acquire Enforcer Products, Inc. ("Enforcer"), a specialty chemical company with a retail focus. The operating results of Enforcer were included in the chemical segment beginning with the third quarter of fiscal 1997. Acquisitions during 1996 related to the textile rental segment and were not material. During 1996, the company divested several non-strategic or unprofitable businesses, primarily in the textile rental segment, generating cash of $15,250. Note 7: Income Taxes The company accounts for income taxes using the asset and liability approach. This approach requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Using the enacted tax rates in effect for the year in which the differences are expected to reverse, deferred tax liabilities and assets are determined based on the differences between the financial reporting and the tax basis of an asset or liability. The provision for income taxes consists of the following components: 1998 1997 1996 Provision for current Federal taxes $ 54,997 $ 94,426 $ 52,809 Provision for current state taxes 3,143 11,994 5,275 Provision for current foreign taxes 1,952 1,598 1,073 Provision (credit) for deferred taxes 4,309 (36,218) 1,543 Total provision for income taxes $ 64,401 $ 71,800 $ 60,700
A reconciliation from the Federal statutory rate to the total provision for income taxes is as follows: 1998 1997 1996 Federal income tax computed at statutory rate $ 60,592 $ 62,677 $ 56,647 State income tax, net of Federal income tax benefit 2,144 5,960 3,489 Foreign and other, net 1,665 3,163 564 Total provision for income taxes $64,401 $ 71,800 $ 60,700
Page 65 Exhibit 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) National Service Industries, Inc. Components of the net deferred income tax liability at August 31, 1998 and 1997 include: 1998 1997 Deferred tax liabilities: Depreciation $26,837 $28,839 Amortization of linens 21,017 16,951 Pension 12,835 12,015 Other 26,640 30,596 Total deferred tax liabilities 87,329 88,401 Deferred tax assets: Self-insurance (24,753) (27,054) Deferred compensation (10,393) (8,698) Bonuses (2,609) (3,035) Foreign tax losses (1,014) (605) Restructuring and asset impairment (14,594) (15,049) Asset disposition reserves (4,365) (5,723) Other assets (6,739) (7,221) Total deferred tax assets (64,467) (67,385) Net deferred tax liability $22,862 $21,016
At August 31, 1998, the company had foreign net operating loss carryforwards of $2,784 expiring in fiscal years 1999 through 2004. Note 8: Quarterly Financial Data (Unaudited) Sales and Income Basic Diluted Service Gross before Net Earnings Earnings Revenues Profit Taxes Income per Share per Share 1998 1st Quarter $487,584 $193,345 $42,355 $26,668 $.61 $.60 2nd Quarter 479,411 186,049 37,312 23,488 .55 .54 3rd Quarter 521,608 207,319 44,789 28,139 .67 .66 4th Quarter 542,707 216,912 48,665 30,425 .73 .72 1997 1st Quarter $511,893 $199,711 $39,340 $24,834 $.54 $.54 2nd Quarter 499,236 188,726 32,187 20,345 .45 .45 3rd Quarter 515,279 210,864 46,808 29,434 .65 .65 4th Quarter (1) 509,771 208,060 60,743 32,665 .73 .72
(1) Results for the fourth quarter included the gain on the sale of textile rental plants of $75,097 and charges for restructuring and other reserves of $19,600 and asset impairments of $43,500. Note 9: Business Segment Information Depreciation Capital Sales and Operating and Expenditures Service Profit Identifiable Amortization Including Revenues (Loss) Assets Expense Acquisitions 1998 Lighting Equipment $1,105,255 $ 109,286 $ 397,962 $ 19,114 $ 37,541 Chemical 454,532 36,460 235,269 9,194 20,217 Textile Rental (1) 312,746 29,734 193,347 13,912 21,595 Envelope 158,777 13,293 103,087 4,383 47,111 2,031,310 188,773 929,665 46,603 126,464 Corporate (14,903) 81,019 2,243 875 Interest Expense, net (749) $2,031,310 $ 173,121 $1,010,684 $ 48,846 $127,339 1997 Lighting Equipment $ 952,026 $ 92,372 $ 353,224 $ 16,722 $ 21,688 Chemical (2) 402,569 31,647 202,769 8,679 12,875 Textile Rental (1) 493,535 60,792 190,139 27,014 13,050 Envelope (3) 131,015 10,190 55,271 3,297 7,159 Other 57,034 1,906 - 611 509 2,036,179 196,907 801,403 56,323 55,281 Corporate (4) (16,205) 304,949 1,658 1,709 Interest Expense, net (1,624) $2,036,179 $ 179,078 $1,106,352 $ 57,981 $ 56,990 1996 Lighting Equipment $ 867,771 $ 76,085 $ 332,006 $ 15,224 $ 20,800 Chemical 367,682 38,611 170,327 8,127 5,744 Textile Rental (1) 530,625 42,198 420,169 29,753 28,418 Envelope 125,834 10,041 51,258 2,741 5,759 Other 121,650 5,242 29,436 1,410 1,221 2,013,562 172,177 1,003,196 57,255 61,942 Corporate (8,764) 91,450 1,173 3,624 Interest Expense, net (1,565) $2,013,562 $ 161,848 $1,094,646 $ 58,428 $ 65,566
(1) Textile rental segment 1997 operating profit included one-time charges of $17,800 for restructuring and other and $31,800 for asset impairments. Gains resulting from the sale of businesses were $2,449 in 1998, $75,097 in 1997, and $7,800 in 1996. (2) Chemical segment operating profit included one-time charges of $1,500 for restructuring and $8,100 for asset impairments. (3) Envelope segment operating profit included one-time charges of $230 for restructuring. (4) Corporate operating profit included one-time charges of $3,700 for asset impairments. Page 66 Exhibit 13 REPORT OF MANAGEMENT National Service Industries, Inc. The management of National Service Industries, Inc. is responsible for the integrity and objectivity of the financial information in this annual report. These financial statements are prepared in conformity with generally accepted accounting principles, using informed judgments and estimates where appropriate. The information in other sections of this report is consistent with the financial statements. The company maintains a system of internal controls and accounting policies and procedures designed to provide reasonable assurance that assets are safeguarded and transactions are executed and recorded in accordance with management's authorization. The audit committee of the Board of Directors, composed entirely of outside directors, is responsible for monitoring the company's accounting and reporting practices. The audit committee meets regularly with management, the internal auditors, and the independent public accountants to review the work of each and to assure that each performs its responsibilities. Both the internal auditors and Arthur Andersen LLP have unrestricted access to the audit committee allowing open discussion, without management's presence, on the quality of financial reporting and the adequacy of internal accounting controls. /s/ James S. Balloun /s/ Brock A. Hattox /s/ Mark R. Bachmann James S. Balloun Brock A. Hattox Mark R. Bachmann Chairman, President, and Executive Vice President and Vice President and Chief Executive Officer Chief Financial Officer Controller REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of National Service Industries, Inc.: We have audited the accompanying consolidated balance sheets of National Service Industries, Inc. (a Delaware corporation) and subsidiaries as of August 31, 1998 and 1997 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Service Industries, Inc. and subsidiaries as of August 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1998 in conformity with generally accepted accounting principles. Arthur Andersen LLP Atlanta, Georgia October 9, 1998 Page 67 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS National Service Industries, Inc. National Service Industries is a diversified service and manufacturing company operating in four segments: lighting equipment, chemicals, textile rental, and envelopes. The company continued to be in strong financial condition at August 31, 1998. Net working capital was $385.1 million, down from $498.8 million at August 31, 1997, and the current ratio was 2.7, compared with 2.8 at the prior year-end. The decrease in net working capital was the result of the company's utilization of approximately $325 million of cash, generated from the 1997 divestiture of several non-strategic assets, to fund acquisitions, capital expenditures, share repurchases, and payment of dividends. At August 31, 1998, the company's debt to capitalization increased according to plan to 12.9 percent compared with 4.6 percent at the prior year-end. Strategic Transactions The company periodically implements strategic transactions that, it believes, afford it the opportunity to redeploy resources to create value and position the company for future growth. During the three-year period ending 1998, the following transactions occurred: Acquisitions Acquisition spending in 1998 totaled $45.3 million and was primarily related to the chemical and envelope segments. In November 1997, the chemical segment purchased Pure Corporation, a specialty chemical company with its core businesses in Indiana, Pennsylvania, and New York. In March 1998, the envelope segment purchased Allen Envelope Corporation, a single-plant, Pennsylvania-based envelope manufacturer, providing the segment with access to markets in the Northeast. In July 1998, the company purchased Calman Australia Pty Ltd ("Calman"). Calman, located in Victoria, Australia, is a manufacturer of cleaning, maintenance, sanitation and industrial products, chemicals, supplies, and accessories. Additionally, the company paid certain performance payments associated with a prior year chemical acquisition. In 1997, acquisition spending totaled $4.3 million and resulted from the chemical segment's purchase of chemical products companies in Ohio and Canada and the lighting equipment segment's acquisition of a small emergency lighting products manufacturer in Canada. In March 1997, the company also issued 536,872 shares valued at $20.5 million to acquire Enforcer Products, Inc. ("Enforcer"), a specialty chemical company with a retail focus. In 1996, the company made minor acquisitions related to the textile rental segment. Divestitures In 1998, divestitures of non-strategic textile rental operations and excess properties resulted in net proceeds of $3.1 million and pretax gains of $2.4 million. In February 1997, the company sold the North Bros. insulation business for cash of $27.1 million, recognizing an immaterial gain. The business had 1997 sales of $57.0 million and operating income of $1.9 million through the date of sale. In July 1997, the company sold 29 textile rental plants to G&K Services, Inc. for approximately $280 million, recognizing a pretax gain of $74.0 million. The divested locations had 1997 sales of $176.5 million and operating income of $9.4 million through the date of sale. Additionally, in 1997 and 1996, the company divested other non-strategic businesses, primarily in the textile rental segment, generating cash of $4.3 million and $15.3 million, respectively. Liquidity and Capital Resources Operating Activities Operations provided cash of $29.3 million in 1998, compared with cash provided of $127.6 million in 1997 and $153.0 in 1996. The decrease in 1998 was primarily the result of increased tax payments associated with the divestiture of 29 textile plants in July 1997 and an increase in accounts receivable commensurate with the increased revenue in the lighting equipment and chemical segments. The 1997 decrease compared with 1996 resulted primarily from investment in inventories to support increased sales of the lighting equipment segment and changes in deferred taxes associated with the textile rental plant divestiture. Investing Activities Investing activities provided cash of $82.5 million and $61.8 million in 1998 and 1997, respectively, and used cash of $41.8 million in 1996. The increase in 1998 is the result of the liquidation of $205.3 million of short-term investments, generated by 1997 divestitures, to fund acquisitions, capital expenditures, share repurchases, and payment of dividends. Capital expenditures were $82.0 million in 1998, compared with $48.8 million in 1997 and $65.5 million in 1996. During 1998, the lighting equipment segment invested in facility expansions and manufacturing process improvements, the textile rental segment invested in a merchandise tracking system and fleet refurbishment, and the envelope segment invested in facility and machinery replacements. Capital spending in 1997 and 1996 consisted primarily of lighting equipment segment facilities and process improvements, equipment replacements, and tooling for new products and textile rental segment facilities improvements and equipment replacements. Additionally, in 1996, the lighting equipment segment expanded its production facility in Monterrey, Mexico. As noted under "Acquisitions" and "Divestitures," the company has engaged in a number of strategic transactions. The company spent $45.3 million, $4.3 million, and $0.6 million in 1998, 1997, and 1996, respectively, on acquisitions. Additionally, the company received $3.1 million, $311.4 million, and $15.3 million in connection with dispositions of non-strategic assets in 1998, 1997, and 1996, respectively. In 1999, capital expenditures are expected to approximate $85 million as the company continues to invest capital in technology and facilities. Contractual commitments for capital and acquisition spending for fiscal year 1999 approximate $27 million. Page 68 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) National Service Industries, Inc. Financing Activities Financing activities used $145.2 million, $187.6 million, and $131.2 million in 1998, 1997, and 1996, respectively. In the three years ending August 31, 1998, the company distributed approximately $510 million to stockholders through share repurchases and dividends. Cash of $154.0 million, $121.7 million, and $75.2 million was utilized in 1998, 1997, and 1996, respectively, for share repurchases of 3.0 million, 3.0 million, and 2.0 million shares, respectively. The company has a standing annual authorization to repurchase 2.0 million shares plus the number of new shares issued in any one year. Included in the 1998 and 1997 amounts was a supplemental authorization for the repurchase of 1.25 million shares granted as a result of the textile rental divestiture transaction. Additionally, the company distributed cash of $52.6 million, $54.2 million, and $55.3 million in 1998, 1997, and 1996, respectively, to the company's stockholders in the form of dividends. The increase in dividends to $1.23 per share in 1998 from $1.19 per share in 1997 represented an increase of 3.4 percent, marking the sixty-second consecutive year of quarterly dividends without a decrease. During the fourth quarter of 1998, the company filed a registration statement (the "shelf registration"), which became effective September 8, 1998, with the Securities and Exchange Commission to allow the company to offer for sale, from time to time, up to $400 million of unsecured senior debt securities or unsecured senior subordinated debt securities (the "Debt Securities") consisting of notes, debentures, or other evidence of indebtedness. The Debt Securities may be convertible into or exchangeable for shares of the company's common stock, shares of its preferred stock, or other Debt Securities. The Debt Securities may be offered as a single series or as two or more separate series in amounts, at prices and on terms to be determined at the time of the offering. The Debt Securities may be sold to or through one or more agents designated from time to time. In 1996, the company negotiated a $250 million multi-currency committed credit facility (the "Credit Facility") with ten domestic and international banks. The Credit Facility has a term of five years, expiring in July 2001, with no provision for reduction in commitments. The Credit Facility contains restrictions on the incurrence of indebtedness by subsidiaries, as well as financial and other covenants, including restrictions that the company's ratio of total debt to capitalization may not exceed 60 percent at any time. The company has complimentary lines of credit totaling $122.0 million for general operating purposes, of which $22.0 million is available on a multi-currency basis. On August 31, 1998, the company borrowed $52.0 million under the $100.0 million domestic line of credit. Subsequent to the company's fiscal year end, these borrowings were repaid through borrowings on the Credit Facility. This borrowing has been classified as noncurrent because it is the company's intention to refinance this obligation on a long-term basis. In addition, $28.4 million in letters of credit were outstanding at August 31, 1998 under the domestic line of credit. At August 31, 1998, the company had foreign currency short-term bank borrowings under the $22.0 million line of credit equivalent to $7.9 million at a weighted average interest rate of 4.91 percent. Management believes current cash balances, anticipated cash flows from operations, and available funds from the Credit Facility, complimentary lines of credit, and the shelf registration are sufficient to meet the company's planned level of capital spending and general operating cash requirements for the next twelve months. Results of Operations Years Ended August 31 (in millions, except per 1998 1997 1996 share amounts) Sales and Service Revenue: Lighting Equipment $1,105.3 $ 952.0 $ 867.8 Chemical 454.5 402.6 367.7 Textile Rental 312.7 493.5 530.6 Envelope 158.8 131.0 125.8 Other - 57.1 121.7 $2,031.3 $2,036.2 $2,013.6 Operating Profit (Loss): Lighting Equipment $ 109.3 $ 92.4 $ 76.1 Chemical 36.5 31.6 38.6 Textile Rental 29.7 60.8 42.2 Envelope 13.3 10.2 10.0 Other - 1.9 5.3 188.8 196.9 172.2 Corporate (14.9) (16.2) (8.8) Interest expense, net (0.8) (1.6) (1.6) $ 173.1 $ 179.1 $ 161.8 Net Income $ 108.7 $107.3 $101.1 Earnings per Share: Basic $ 2.56 $ 2.37 $ 2.11 Diluted 2.53 2.36 2.10
National Service Industries posted revenues of $2.0 billion for the fiscal year ended August 31, 1998. The slight revenue decline in 1998 in comparison with the prior year resulted from increased lighting equipment, chemical, and envelope revenues of approximately $233 million offset primarily by revenues not included in 1998 as a result of 1997 divestitures. Revenues in 1997 increased $22.6 million, or 1.1 percent, as a result of higher volumes in the lighting equipment, chemical, and envelope segments partially offset by revenues from businesses divested. Net income for 1998 increased $1.4 million, or 1.3 percent, to a record level of $108.7, or $2.56 per basic share, $2.53 diluted. Earnings per share grew at the higher rate of 8.0 percent per basic share and 7.2 percent per diluted share due to a reduction of 2.7 million basic and 2.5 million diluted average shares outstanding. Net income in 1997 increased $6.2 million, or 6.1 percent, to $107.3 million, or $2.37 per basic share, $2.36 diluted. Lighting equipment segment sales grew $153.3 million, or 16.1 percent, to $1.1 billion in 1998. Strong demand in the non-residential construction market and increased volumes resulting from new products contributed to the growth in sales. As a result of the increased sales and ongoing productivity improvements, operating profit increased 18.3 percent in 1998. Sales for 1997 increased 9.7 percent due primarily to higher unit volumes in the non-residential construction markets. Operating profit for 1997 increased 21.4 percent as a result of the increased sales, improved product mix, and lower manufacturing costs. Page 69 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) National Services Industries, Inc. Chemical segment revenues for 1998 increased $51.9 million, or 12.9 percent, to $454.5 million. Incremental revenues were a result of the inclusion of a full year of Enforcer as well as increased retail volumes of Enforcer and Zep Manufacturing Company. Operating profit increased $4.9 million, or 15.5 percent, to $36.5 million as a result of the increased revenues and the impact of the 1997 restructuring charge on 1997 operating profit. These increases to operating profit were somewhat offset by additional severance costs and increased selling expenses incurred in the industrial chemical channel of the segment. Revenues in 1997 increased 9.5 percent, as a result of incremental volumes from U.S. and Canadian acquisitions. Operating profit in 1997 declined 18.1 percent, as a study of the segment's European operations resulted in a severance-related charge of $1.5 million for operational reorganizations and an asset impairment loss of $8.1 million resulting from historical losses and inadequate future cash flows. Additionally in 1997, higher manufacturing costs and investments to increase the size and capability of the segment's fully commissioned sales force offset the profits resulting from revenue gains. Textile rental segment revenues for 1998 decreased 36.6 percent to $312.7 million primarily as a result of the businesses divested in 1997 as described in "Strategic Transactions" above. Excluding the 1997 divestiture, revenues declined approximately $4.0 million as the segment continued to eliminate low-margin customer accounts. Operating profit decreased 51.2 percent to $29.7 million, primarily as a result of the 1997 divestitures. The 1997 sale of non-strategic assets to G&K Services, Inc., which had 1997 operating profits of $9.4 million, resulted in gains of $74.0 million. These gains were somewhat offset in 1997 by restructuring expenses, asset impairment, and other charges totaling $49.6 million. Excluding the impact on 1997 operating profit of the gains, restructuring, and loss of revenue from divested facilities, 1997 operating profit would have been approximately $27.0 million. The increase in operating profit in 1998 after adjusting for the 1997 items is primarily due to gains on the sale of certain uniform contracts and improved profitability as a result of tighter inventory control. Segment revenues for 1997 decreased 7.0 percent from 1996 primarily as a result of the businesses divested in 1997. Operating profit increased 44.1 percent as a result of the gains recognized on the divestitures discussed above, offset by the restructuring and other charges recorded in 1997. A review of the textile rental segment's under-performing and non-strategic locations during 1997 resulted in a plan to dispose of certain plants and consolidate the operations of others. Restructuring expenses included severance and union related expenses of $1.2 million and exit expenses of $6.7 million for unexpired leases, costs to dispose of facilities, and costs of personnel to effect closures and consolidations. Also as a result of the review and due to a combination of historical losses, anticipated future losses, and inadequate cash flows, the segment recorded an impairment loss of $22.3 million on assets to be disposed of and $9.5 million on assets held for use. After the impairment charge, the remaining net book value of the assets to be disposed of was immaterial. The ongoing impact to operating profit as a result of reduced employee and facility expenses is estimated to be an increase of $4 million to $5 million annually. The restructuring is not expected to materially impact future liquidity or other sources and uses of capital. Envelope segment revenue increased $27.8 million, or 21.2 percent, in 1998 to $158.8 million. The March 1998 purchase of Allen Envelope, as discussed in "Strategic Transactions," accounted for approximately $18 million of the revenue increase. The remaining increase is attributable to higher shipment volumes. Operating profit for the segment increased 30.4 percent to $13.3 million, primarily as a result of the increased revenues generated by the Allen Envelope acquisition. Segment revenue in 1997 increased 4.1 percent as volume gains were offset somewhat by contractual price adjustments. Operating profit in 1997 was flat in comparison to the prior year as increased revenues were offset by higher manufacturing costs associated with the segment's growth initiatives. Revenue and operating profit of the "other" segment have been eliminated as a result of the February 1997 divestiture of the insulation service business discussed in "Strategic Transactions." Corporate expenses decreased $1.3 million in 1998, as 1997 expense included an asset impairment recorded to reflect the $1.2 million appraised value of an asset held for sale. Corporate expenses in 1997 were $7.4 million higher than 1996 as a result of the asset impairment and higher accrued incentive plan costs. Net interest expense decreased $0.8 million in 1998 as the company benefited from higher average levels of short-term investments, offset slightly by higher average debt levels. Consolidated income before taxes decreased $6.0 million, or 3.4 percent, to $173.1 million primarily due to the effect of the 1997 divestitures and associated gains included in 1997 amounts, partially offset by increased income from the lighting segment in 1998. The provision for income taxes was 37.2 percent, 40.1 percent, and 37.5 percent in 1998, 1997, and 1996, respectively. The increase in the effective rate in 1997 was due primarily to higher rates applicable to the textile rental divestiture. Environmental Matters The company's operations, as well as other similar operations, are subject to comprehensive laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances and solid and hazardous wastes and to the remediation of contaminated sites. Permits and environmental controls are required for certain of the company's operations to prevent air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. The company believes that it is in substantial compliance with all material environmental laws, regulations, and its permits. On an ongoing basis, the company incurs capital and operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be substantial. The company's environmental reserves totaled $12.6 million and $17.1 million at August 31, 1998 and 1997, respectively. The actual cost of environmental issues may be substantially lower or higher than that reserved due to the difficulty in estimating such costs, potential changes in the status of government regulations, and the inability to determine the extent to which contributions will be available from other parties. The company does not believe that any such amount below or in excess of that accrued is reasonably estimable. Certain environmental laws, such as Superfund, can impose liability for the entire cost of site remediation upon each of the current or former owners or operators of a site or parties who sent waste to a site where a release of a hazardous substance has occurred regardless of fault or the lawfulness of the original disposal activity. Generally, where there are a number of financially viable potentially responsible parties ("PRPs"), liability has been apportioned based on the type and amount of waste disposed of by each party at such disposal site and the number of financially viable parties, although no assurance can be given as to any particular site. The company is currently a party to, or otherwise involved in, legal proceedings in connection with several state and federal Superfund sites, two of which are located on property owned by the company. Except for the Crymes Landfill matter in Georgia, the company believes its liability is de minimis at each of the sites which it does not own where it has been named as a PRP. At the Crymes Landfill Site, since the matter is currently in the investigative phase, the company does not know whether its liability is de minimis but believes that its exposure at the site is not likely to result in a Page 70 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) National Service Industries, Inc. material adverse effect on the company. For the property which the company owns on Seaboard Industrial Boulevard in Atlanta, Georgia, the company has agreed to conduct an investigation on its and adjoining properties pursuant to the Georgia Hazardous Site Response Act. Until that investigation is completed, the company will not be able to determine if remediation will be required, if the company will be solely responsible for the cost of such remediation, or whether such cost is likely to result in a material adverse effect on the company. For the property which the company owns on East Paris Street in Tampa, Florida, the company has been requested by the State of Florida to clean up chlorinated solvent contamination in the groundwater on the property and on surrounding property known as Seminole Heights Solvent Site and to reimburse costs already incurred by the State of Florida in connection with such contamination. The company believes that it has a strong defense due to likely off-site sources of the contamination and because contamination from the property, if any, was due to prior owners and not the company's operations. The company plans to meet with the State of Florida in the near future regarding this matter. At this time, it is too early to quantify the company's potential exposure or the likelihood of an adverse result. The company is currently evaluating emissions of volatile organic compounds from its manufacturing operations in the Atlanta area to determine whether it will need to install pollution control equipment or modify its operations to comply with federal and state air pollution regulations. Until the current evaluations are completed, the company is not able to quantify the possible cost of compliance. However, based upon currently available information, the company does not expect any expenditures which may have to be made to achieve compliance to be material. In connection with the sale of the North Bros. business and 29 of the company's textile rental plants in 1997, the company has retained certain environmental liabilities. The company has received notice from the buyer of the textile rental plants of the alleged presence of perchloroethylene contamination on one of the properties involved in the sale. The company has since asserted an indemnification claim against the company from which it bought the property. At this time, it is too early to quantify the company's potential exposure in this matter, the likelihood of an adverse result, or the possibility that the company may be fully or partially indemnified. In November 1997, the Environmental Protection Agency ("EPA") proposed stringent new wastewater discharge limits, which would become effective in the future, that could apply to certain facilities operated by the company. While the company does not believe that these regulations should apply to its operations, if the regulations are adopted as proposed, following adoption, the company's cost to comply with them could be as much as $6 million to $9 million of equipment expenditures spread over a three-year period, which the company does not believe would be material to its financial condition or results of operations. Impact of the Year 2000 Issue The "Year 2000 Issue" resulted from the use of two digits rather than four digits to define the applicable year in certain computer programs. With the coming millennium, any of the company's computer programs that have two-digit date-sensitive software may interpret a date of "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruption of the operation of computer hardware and software, as well as intelligent manufacturing equipment and processes, and telephony. Management is addressing the Year 2000 Issue in four phases: awareness, assessment, action plan, and plan implementation. At August 31, 1998, all areas of the company had completed the first three phases and implementation of the plan was approximately 60 percent complete. Management estimates that the total cost to be incurred in connection with the Year 2000 Issue will range from $3 million to $5 million, and substantially all major systems are expected to be in compliance prior to the end of calendar year 1999. At August 31, 1998, the company had spent approximately $1.5 million on the Year 2000 Issue. The cost of the project is being funded through operating cash flows. Approximately one-third of the total cost reflects the redeployment of existing internal information technology resources and should not be incremental costs to the company. Management has evaluated the potential exposure of the company to related problems of its customers and suppliers and has implemented a vendor certification process. While management believes that its plan is sufficient to address the Year 2000 Issue, a contingency plan is currently being developed to address the potential for unforeseen issues that may arise. There can be no assurance, however, that such exposures or the costs of remediating any problems associated therewith will not materially affect the company's future business, financial condition, or results of operations. Outlook Management continues to execute its strategic plan to grow both internally and through acquisitions. Fiscal 1999 sales from the existing businesses are anticipated to grow at a rate in excess of 5.0 percent, led primarily by the lighting equipment segment through continued lighting equipment market strength and in the chemical segment by product development and growth in the retail market. Additionally, subsequent to year-end, the company completed the acquisition of the assets of GTY Industries, Inc., a manufacturer of architectural-grade light fixtures for landscape, in-grade, and underwater applications. Assuming economic conditions similar to the fall of 1998, management expects earnings growth that is consistent with or slightly higher than reported 1998 results. Cautionary Statement Regarding Forward-Looking Information From time to time, the company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, capital expenditures, 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. Statements herein which may be considered forward-looking include: (a) statements made regarding the company's current expectations or beliefs with respect to the outcome and impact on the company's business, financial condition, or results of operations of the Year 2000 Issue, environmental issues, and legal proceedings; (b) statements made concerning management's expectations with respect to the company's plan for strategic growth; (c) statements made regarding management's expectations with regard to future cash flows; and (d) statements made regarding the effect of the 1997 reduction of employees and facility expenses in the textile rental segment on future operating profit. 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 non-residential construction awards; and (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, enhanced sales force, new products, and improved customer service, as well as share repurchases and acquisitions. Page 71 Exhibit 13 TEN-YEAR FINANCIAL SUMMARY National Service Industries, Inc. (Dollar amounts in thousands, except per share data) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Operating Results Net sales of products $1,718,564 $1,542,644 $1,482,937 $1,424,180 $1,337,410 $1,257,906 $1,189,684 $1,164,181 $1,250,833 $1,183,666 Service revenues 312,746 493,535 530,625 546,447 544,454 546,916 444,127 437,534 396,981 355,845 Total revenues 2,031,310 2,036,179 2,013,562 1,970,627 1,881,864 1,804,822 1,633,811 1,601,715 1,647,814 1,539,511 Cost of products sold 1,044,215 945,794 933,405 908,869 875,055 832,264 810,552 791,355 832,867 800,385 Cost of services 183,470 283,024 304,381 299,687 286,519 281,551 236,474 240,376 219,673 198,262 Selling and administrative expenses 634,061 633,740 616,513 601,143 576,463 556,162 462,240 456,622 438,949 397,160 Interest expense (income), net 749 1,624 1,565 1,648 2,788 3,645 (837) (4,332) (3,712) (3,805) Gain on sale of business (2,449) (75,097) (7,579) (5,726) (2,249) (1,379) - - - (3,080) Restructuring expense, asset impairments, and other charges - 63,091 - - - - - 63,467 - - Other (income) expense, net (1,857) 4,925 3,429 14,509 11,090 13,063 8,474 5,591 4,322 2,571 Income before taxes 173,121 179,078 161,848 150,497 132,198 119,516 116,908 48,636 155,715 148,018 Provision for income taxes 64,401 71,800 60,700 56,400 49,500 44,400 42,800 16,400 56,000 53,300 Net Income $ 108,720 $ 107,278 $ 101,148 $ 94,097 $ 82,698 $ 75,116 $ 74,108 $ 32,236 $ 99,715 $ 94,718 Per Share Data Net income: (1) Basic $ 2.56 $ 2.37 $ 2.11 $ 1.93 $ 1.67 $ 1.52 $ 1.50 $ .65 $ 2.02 $ 1.92 Diluted 2.53 2.36 2.10 1.93 1.67 1.51 1.50 .65 2.02 1.92 Cash dividends 1.23 1.19 1.15 1.11 1.07 1.03 .99 .95 .90 .82 Stockholders' equity 13.96 15.20 15.45 15.41 14.77 14.21 13.79 13.33 13.68 12.44 Financial Ratios Current ratio 2.7 2.8 3.1 3.2 3.2 2.9 3.5 3.4 4.5 4.8 Net income as a percent of sales 5.4% 5.3% 5.0% 4.8% 4.4% 4.2% 4.5% 2.0% 6.1% 6.2% Return on average stockholders' equity 17.4% 15.5% 13.6% 13.0% 11.6% 10.9% 11.1% 4.8% 15.6% 16.3% Dividends as a percent of current year earnings 48.4% 50.5% 54.6% 57.6% 64.1% 67.9% 66.3% 146.2% 44.6% 42.6% Percent of debt to total capitalization 12.9% 4.6% 4.2% 4.3% 4.3% 4.7% 4.2% 5.0% 4.2% 3.5%
Page 72 Exhibit 13 TEN-YEAR FINANCIAL SUMMARY (CONTINUED) National Service Industries, Inc. (Dollar amounts in thousands, except per share data) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Financial Position Increase (decrease) in: Cash and cash equivalents $ (37,977)$ (1,539)$ (20,740)$ 20,783 $ 42,766 $ (85,284)$ 27,617 $ (50,437)$ 23,433 $ 14,612 Short-term investments(205,302) 204,751 (3,047) 1,019 (2,197) (3,736) (5,551) 12,813 (27,247) (19,633) Net working capital 385,056 498,758 408,955 437,840 413,114 363,575 399,893 386,306 447,800 450,185 Short-term debt $ 7,981 $ 5,889 $ 6,742 $ 6,486 $ 5,765 $ 6,196 $ 1,434 $ 3,254 $ 2,253 $ 1,372 Long-term debt 78,092 26,197 24,920 26,776 26,863 28,418 28,359 31,373 27,465 20,765 Total debt 86,073 32,086 31,662 33,262 32,628 34,614 29,793 34,627 29,718 22,137 Stockholders' equity 578,901 671,813 718,008 744,404 727,385 704,023 682,954 660,567 675,444 612,668 Capitalization $ 664,974 $ 703,899 $ 749,670 $ 777,666 $ 760,013 $ 738,637 $ 712,747 $ 695,194 $ 705,162 $ 634,805 Other Data Capital expenditures (including acquisitions) $ 127,339 $ 56,990 $ 65,566 $ 59,910 $ 42,508 $ 82,171 $ 49,789 $ 90,229 82,932 $ 66,491 Depreciation and amortization 48,846 57,981 47,643 57,130 60,548 62,097 53,816 50,249 42,821 36,260 Total assets 1,010,684 1,106,352 1,094,646 1,131,346 1,101,261 1,081,510 1,036,908 1,008,319 960,622 886,358 Deferred income tax liability 40,404 34,093 63,347 65,756 73,319 78,286 87,150 96,627 99,277 101,320 Self-insurance reserves, less current portion 44,573 57,056 63,369 67,830 61,081 56,335 47,638 38,428 15,222 15,213 Other long-term liabilities 46,719 35,193 27,576 24,010 22,940 27,110 28,677 22,015 16,067 17,964 Weighted average number of shares outstanding (in thousands): (1) Basic 42,462 45,191 47,941 48,696 49,547 49,556 49,539 49,540 49,389 49,255 Diluted 43,022 45,534 48,189 48,797 49,614 49,623 49,566 49,561 49,389 49,255 Stockholders 6,774 7,165 6,281 6,655 7,034 7,262 7,554 7,996 8,248 8,459 Employees 16,700 16,100 20,600 21,100 22,000 22,200 20,100 20,900 21,800 20,800 Use of Total Revenues Salaries and wages $ 552,816 $ 572,517 $ 580,571 $ 568,616 565,859 $ 572,163 $ 502,709 $ 501,502 $ 491,334 $ 465,522 Materials and supplies 955,307 909,082 875,658 832,668 783,610 760,551 700,338 683,871 713,310 668,655 Other operating expenses 305,888 334,503 348,143 370,575 349,849 301,356 273,330 258,919 246,288 222,350 Taxes and licenses 111,028 124,805 115,621 110,397 102,097 97,015 83,326 59,889 97,167 91,346 Gain on sale of businesses (2,449) (75,097) (7,579) (5,726) (2,249) (1,379) - - - (3,080) Restructuring expense, asset impairments, and other charges - 63,091 - - - - - 63,467 - - Dividends paid 52,603 54,222 55,272 54,156 53,042 51,041 49,105 47,124 44,506 40,389 Retained earnings 56,117 53,056 45,876 39,941 29,656 24,075 25,003 (13,057) 55,209 54,329 $2,031,310 $2,036,179 $2,013,562 $1,970,627 $1,881,864 $1,804,822 $1,633,811 $1,601,715 $1,647,814 $1,539,511
(1) In 1998, the company adopted Financial Accounting Standards No. 128, "Earnings per Share." Prior period amounts have been restated in accordance with this statement. EX-21 7 SUBSIDIARIES Page 73 Exhibit 21 LIST OF SUBSIDIARIES Registrant - National Service Industries, Inc. Registrant owns, directly or indirectly, the following subsidiaries and other affiliates: State or Other Jurisdiction of Incorporation Subsidiary or Affiliate Principal Location or Organization Chemical Specialties B.V. Bergen op Zoom, Holland Netherlands Enforcer Products, Inc. Atlanta, Georgia Georgia Graham International B.V. Bergen op Zoom, Holland Netherlands Kem Europa B.V. Bergen op Zoom, Holland Netherlands Keplime B.V. Bergen op Zoom, Holland Netherlands Lithonia Lighting Mexico, S.A. de C.V. Monterrey, Nuevo Leon Mexico Lithonia Lighting Servicios, S.A. de C.V. Monterrey, Nuevo Leon Mexico National Service Industries, Inc. Atlanta, Georgia Georgia NSI Enterprises, Inc. Atlanta, Georgia California NSI Export Ltd. Bridgetown, Barbados Barbados NSI Holdings, Inc. Montreal, Quebec, Canada Canada NSI Insurance (Bermuda) Ltd. Hamilton, Bermuda Bermuda NSI International Pty Ltd. Melbourne, Australia Australia NSI Leasing, Inc. Atlanta, Georgia Delaware NSI Realty, L.P. Atlanta, Georgia Texas NSI Services, L.P. Atlanta, Georgia Georgia Productos Lithonia Lighting de Mexico, S.A. de C.V. Monterrey, Nuevo Leon Mexico Produits de Maintenance et de Proprete Industrielle Nogent-le-Roi, France France Selig Company of Puerto Rico, Inc. Atlanta, Georgia Puerto Rico ZEP Belgium S.A. Brussels, Belgium Belgium ZEP Europe B.V. Bergen op Zoom, Holland Netherlands ZEP FRANCE Nogent-le-Roi, France France Zep Industries S.A. Nogent-le-Roi, France France Zep International Pty Ltd. Melbourne, Australia Australia Zep Italia S.r.l. Aprilia, Italy Italy Zep Manufacturing Company Santa Clara, California Delaware Zep Industries, S.A. Bern, Switzerland Switzerland
The consolidated financial statements include the accounts of all subsidiaries and affiliates. EX-23 8 CONSENT FORM INDEPENDANT PUBLIC ACCOUNTS Page 74 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated October 9, 1998, included or incorporated by reference in National Service Industries, Inc. Form 10-K for the year ended August 31, 1998, into the company's previously filed Registration Statement File Nos. 33-35609, 33-36980, 33-48835, 33-51339, 33-51341, 33-51343, 33-51345, 33-51351, 33-51355, 33-51357, 33-59627, and 33-60715. ARTHUR ANDERSEN LLP Atlanta, Georgia November 18, 1998 EX-24 9 POWER OF ATTORNEY Page 75 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ James S. Balloun James S. Balloun, Chairman of the Board, President and Chief Executive Officer, and Director /s/ Brock Hattox Brock Hattox, Executive Vice President and Chief Financial Officer /s/ David Levy David Levy, Executive Vice President, Administration and Counsel, and Director /s/ Mark R. Bachmann Mark R. Bachmann, Vice President and Controller (Principal Accounting Officer) Dated: November 18, 1998 Page 76 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ John L. Clendenin John L. Clendenin Dated: November 18, 1998 Page 77 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Thomas C. Gallagher Thomas C. Gallagher Dated: November 18, 1998 Page 78 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Robert M. Holder, Jr Robert M. Holder, Jr Dated: November 18, 1998 Page 79 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ James C. Kennedy James C. Kennedy Dated: November 18, 1998 Page 80 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Bernard Marcus Bernard Marcus Dated: November 18, 1998 Page 81 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Charles W. McCall Charles W. McCall Dated: November 18, 1998 Page 82 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ John G. Medlin, Jr John G. Medlin, Jr Dated: November 18, 1998 Page 83 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Samuel A. Nunn Samuel A. Nunn Dated: November 18, 1998 Page 84 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Herman J. Russell Herman J. Russell Dated: November 18, 1998 Page 85 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, her true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for her in her name, place, and stead in her capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Betty E. Siegel Betty E. Siegel Dated: November 18, 1998 Page 86 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints David Levy and Brock Hattox, and each of them individually, his true and lawful attorneys-in-fact (with full power of substitution and resubstitution) to act for him in his name, place, and stead in his capacity as a director or officer of National Service Industries, Inc., to file a registrant's annual report on Form 10-K for the fiscal year ended August 31, 1998, and any and all amendments thereto, with any exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done in the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Barrie A. Wigmore Barrie A. Wigmore Dated: November 18, 1998 EX-27 10 FDS --
5 Page 87 Exhibit 27 Financial Data Schedule Year Ended August 31, 1998 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 August 31, 1998 and the consolidated statement of income for the year ended August 31, 1998, and is qualified in its entirety by reference to such financial statements. (Replace this text with the legend) 12-mos AUG-31-1998 SEP-1-1997 AUG-31-1998 $19,146 0 311,771 4,631 197,950 607,051 657,047 385,176 1,010,684 221,995 78,092 0 0 57,919 520,982 1,010,684 1,718,564 2,031,310 1,044,215 1,227,685 619,682 3,558 7,264 173,121 64,401 108,720 0 0 0 108,720 2.56 2.53
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