-----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, CgHgPOyPYtbm3kvK85gQLvHb+BzcN5Rs2/5yNz42y1bzgQvTZ2a6OfXwW7NlZnol /8GNMj2f4fnYVBXEnT3qlg== 0000070538-99-000019.txt : 19990715 0000070538-99-000019.hdr.sgml : 19990715 ACCESSION NUMBER: 0000070538-99-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL SERVICE INDUSTRIES INC CENTRAL INDEX KEY: 0000070538 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 580364900 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03208 FILM NUMBER: 99664229 BUSINESS ADDRESS: STREET 1: 1420 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30309 BUSINESS PHONE: 4048531000 MAIL ADDRESS: STREET 1: 1420 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30309 10-Q 1 NATIONAL SERVICE INDUSTRIES, INC. 10-Q Page 1 of 61 Exhibit Index on Page 16 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarter ended May 31, 1999 Commission file number 1-3208 - -------------------------------------------------------------------------------- NATIONAL SERVICE INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 58-0364900 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 1420 Peachtree Street, N. E., Atlanta, Georgia 30309-3002 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (404) 853-1000 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) None - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes - X No - ---------- ---------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock - $1.00 Par Value - 40,445,220 shares as of June 30, 1999. - -------------------------------------------------------------------------------- Page 2 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS- MAY 31, 1999 AND AUGUST 31, 1998 3 CONSOLIDATED STATEMENTS OF INCOME- THREE MONTHS AND NINE MONTHS ENDED MAY 31, 1999 AND 1998 4 CONSOLIDATED STATEMENTS OF CASH FLOWS- NINE MONTHS ENDED MAY 31, 1999 AND 1998 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10-13 FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14 SIGNATURES 15 EXHIBIT INDEX 16-17 Page 3 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and per share data)
May 31, August 31, 1999 1998 --------------- --------------- Assets Current Assets: Cash and cash equivalents $ 62,893 $ 19,146 Receivables, less reserves for doubtful accounts of $5,784 at May 31, 1999 and $4,631 at August 31, 1998 333,236 307,140 Inventories, at the lower of cost (on a first-in, first-out basis) or market 202,002 197,950 Linens in service, net of amortization 58,054 58,826 Deferred income taxes 10,544 17,542 Prepayments 8,941 6,447 --------------- --------------- Total Current Assets 675,670 607,051 --------------- --------------- Property, Plant, and Equipment, at cost: Land 19,321 21,450 Buildings and leasehold improvements 156,227 150,326 Machinery and equipment 530,456 485,271 --------------- --------------- Total Property, Plant, and Equipment 706,004 657,047 Less-Accumulated depreciation and amortization (413,028) (385,176) --------------- --------------- Property, Plant, and Equipment-net 292,976 271,871 --------------- --------------- Other Assets: Goodwill and other intangibles 124,211 88,280 Other 46,529 43,482 --------------- --------------- Total Other Assets 170,740 131,762 --------------- --------------- Total Assets $1,139,386 $1,010,684 =============== =============== Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt $ 101 $ 98 Notes payable 11,225 7,883 Accounts payable 95,358 95,217 Accrued salaries, commissions, and bonuses 32,852 34,820 Current portion of self-insurance reserves 9,663 11,253 Accrued taxes payable 426 - Other accrued liabilities 78,431 72,724 --------------- --------------- Total Current Liabilities 228,056 221,995 --------------- --------------- Long-Term Debt, less current maturities 185,628 78,092 --------------- --------------- Deferred Income Taxes 41,131 40,404 --------------- --------------- Self-Insurance Reserves, less current portion 42,525 44,573 --------------- --------------- Other Long-Term Liabilities 56,854 46,719 --------------- --------------- Stockholders' Equity: Series A participating preferred stock, $.05 stated value, 500,000 shares authorized, none issued Preferred stock, no par value, 500,000 shares authorized, none issued Common stock, $1 par value, 120,000,000 shares authorized, 57,918,978 shares issued 57,919 57,919 Paid-in capital 29,010 28,521 Retained earnings 946,068 903,974 Accumulated other comprehensive income items (8,867) (11,357) --------------- --------------- 1,024,130 979,057 Less-Treasury stock, at cost (17,477,738 shares at May 31, 1999 and 16,457,340 shares at August 31, 1998) 438,938 400,156 --------------- --------------- Total Stockholders' Equity 585,192 578,901 --------------- --------------- Total Liabilities and Stockholders' Equity $1,139,386 $1,010,684 =============== ===============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. Page 4 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31 MAY 31 ----------------------------- ------------------------------- 1999 1998 1999 1998 -------------- -------------- -------------- ---------------- Sales and Service Revenues: Net sales of products $ 489,787 $ 442,144 $ 1,369,808 $ 1,253,529 Service revenues 80,051 79,464 229,315 235,073 -------------- -------------- -------------- ---------------- Total Revenues 569,838 521,608 1,599,123 1,488,602 -------------- -------------- -------------- ---------------- Costs and Expenses: Cost of products sold 301,328 269,019 836,864 765,854 Cost of services 44,762 45,270 134,107 136,366 Selling and administrative expenses 173,605 161,618 499,114 464,757 Interest expense (income), net 3,340 1,304 8,219 (1,092) Gain on sale of businesses (2,303) (442) (5,814) (2,404) Restructuring expense, asset impairments, and other charges - - (2,216) - Other (income) expense, net 471 50 (143) 665 -------------- -------------- -------------- ---------------- Total Costs and Expenses 521,203 476,819 1,470,131 1,364,146 -------------- -------------- -------------- ---------------- Income before Provision for Income Taxes 48,635 44,789 128,992 124,456 Provision for Income Taxes 18,094 16,650 47,985 46,161 -------------- -------------- -------------- ---------------- Net Income $ 30,541 $ 28,139 $ 81,007 $ 78,295 ============== ============== ============== ================ Per Share: Basic Earnings per Share $ .75 $ .67 $ 1.97 $ 1.83 ============== ============== ============== ================ Basic Weighted Average Number of Shares Outstanding 40,654 42,001 41,030 42,763 ============== ============== ============== ================ Diluted Earnings per Share $ .75 $ .66 $ 1.97 $ 1.81 ============== ============== ============== ================ Diluted Weighted Average Number of Shares Outstanding 40,851 42,659 41,221 43,300 ============== ============== ============== ================
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 5 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
NINE MONTHS ENDED MAY 31 -------------------------------------- 1999 1998 ------------------- ------------------ Cash Provided by (Used for) Operating Activities Net income $ 81,007 $ 78,295 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 44,033 36,108 Provision for losses on accounts receivable 2,762 3,908 Gain on the sale of property, plant, and equipment (1,164) (3,417) Gain on the sale of businesses (5,814) (2,404) Restructuring expense, asset impairments, and other charges (2,216) - Change in noncurrent deferred income taxes 727 12,216 Change in assets and liabilities net of effect of acquisitions and divestitures- Receivables (16,188) (28,309) Inventories and linens in service, net 5,388 (19,683) Deferred income taxes 6,998 (4,636) Prepayments and other (1,550) (971) Accounts payable and accrued liabilities (6,529) (68,834) Self-insurance reserves and other long-term liabilities 8,087 (3,841) ------------------- ------------------ Net Cash Provided by (Used for) Operating Activities 115,541 (1,568) ------------------- ------------------ Cash Provided by (Used for) Investing Activities Change in short-term investments - 205,244 Purchases of property, plant, and equipment (48,298) (56,829) Sale of property, plant, and equipment 3,487 4,717 Sale of businesses 3,767 3,011 Acquisitions (62,881) (39,424) Change in other assets (4,034) (6,230) ------------------- -------------------- Net Cash Provided by (Used for) Investing Activities (107,959) 110,489 ------------------- -------------------- Cash Provided by (Used for) Financing Activities Borrowings of notes payable, net 3,343 49,659 Borrowings (repayments) of long-term debt, net 107,538 (910) Purchase of treasury stock, net (38,293) (145,179) Cash dividends paid (38,913) (39,842) ------------------- -------------------- Net Cash Provided by (Used for) Financing Activities 33,675 (136,272) ------------------- -------------------- Effect of Exchange Rate Changes on Cash 2,490 (843) ------------------- -------------------- Net Change in Cash and Cash Equivalents 43,747 (28,194) Cash and Cash Equivalents at Beginning of Period 19,146 57,123 ------------------- -------------------- Cash and Cash Equivalents at End of Period $ 62,893 $ 28,929 =================== ==================== Supplemental Cash Flow Information: Income taxes paid during the period $ 37,888 $ 76,382 Interest paid during the period 9,940 4,929 Noncash Investing and Financing Activities: Noncash aspects of sale of businesses-- Receivables recorded $ 396 $ - Liabilities assumed or incurred 326 165 Noncash aspects of acquisitions-- Liabilities assumed or incurred $ 15,574 $ 4,891 Treasury stock issued 845 -
The accompanying notes to consolidated financial statements are an integral part of these statements. Page 6 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share and per share data) 1. BASIS OF PRESENTATION The interim consolidated financial statements included herein have been prepared by the company without audit and the condensed consolidated balance sheet as of August 31, 1998 has been derived from audited statements. These statements reflect adjustments, all of which are of a normal, recurring nature, which are, in the opinion of management, necessary to present fairly the consolidated financial position as of May 31, 1999, the consolidated results of operations for the three months and nine months ended May 31, 1999 and 1998, and the consolidated cash flows for the nine months ended May 31, 1999 and 1998. Certain reclassifications have been made to the prior year's financial statements to conform to the current year's presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998. The results of operations for the three months and nine months ended May 31, 1999 are not necessarily indicative of the results to be expected for the full fiscal year because the company's revenues and income are generally higher in the second half of its fiscal year and because of the uncertainty of general business conditions. 2. BUSINESS SEGMENT INFORMATION During the first quarter of fiscal 1999, the company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." The objective of SFAS No. 131 is to provide information about the different types of business activities in which the company engages. The following have been identified as reportable segments: lighting equipment, chemical, textile rental, and envelope.
Depreciation Capital Sales and Operating and Expenditures Service Profit Amortization Including Nine Months Ended May 31, 1999 Revenues (Loss) Expense Acquisitions -------------- ------------- ---------------- ----------------- Lighting Equipment $ 862,857 $ 82,270 $19,553 $67,076 Chemical 360,670 29,756 7,562 8,160 Textile Rental 229,315 26,146 10,862 11,955 Envelope 146,281 11,054 4,535 23,592 -------------- ------------- ---------------- ----------------- Subtotal 1,599,123 149,226 42,512 110,783 Corporate (12,015) 1,521 396 Interest income (expense), net (8,219) -------------- -------------- --------------- ----------------- Total $1,599,123 $128,992 $44,033 $111,179 ============== ============= ================ ================= Nine Months Ended May 31, 1998 Lighting Equipment $ 806,233 $ 76,649 $14,362 $ 25,131 Chemical 332,056 28,467 6,944 12,409 Textile Rental 235,073 21,525 9,765 14,594 Envelope 115,240 8,896 3,374 43,640 -------------- ------------- ---------------- ----------------- Subtotal 1,488,602 135,537 34,445 95,774 Corporate (12,173) 1,663 479 Interest income (expense), net 1,092 -------------- ------------- ---------------- ----------------- Total $1,488,602 $124,456 $36,108 $ 96,253 ============== ============= ================ =================
Page 7
Depreciation Capital Sales and Operating and Expenditures Service Profit Amortization Including Three Months Ended May 31, 1999 Revenues (Loss) Expense Acquisitions -------------- ------------- ---------------- ----------------- Lighting Equipment $ 306,192 $ 28,957 $ 6,642 $ 27,335 Chemical 127,230 11,495 2,586 3,837 Textile Rental 80,051 10,212 3,597 2,659 Envelope 56,365 4,400 1,713 6,081 -------------- ------------- ---------------- ----------------- Subtotal 569,838 55,064 14,538 39,912 Corporate (3,089) 507 60 Interest income (expense), net (3,340) -------------- ------------- ---------------- ----------------- Total $ 569,838 $ 48,635 $15,045 $ 39,972 ============== ============= ================ ================= Three Months Ended May 31, 1998 Lighting Equipment $ 277,497 $ 26,123 $ 4,745 $ 8,017 Chemical 119,111 11,321 2,331 3,114 Textile Rental 79,464 8,707 3,268 4,459 Envelope 45,536 4,428 1,425 36,033 -------------- ------------- ---------------- ----------------- Subtotal 521,608 50,579 11,769 51,623 Corporate (4,486) 522 135 Interest income (expense), net (1,304) -------------- ------------- ---------------- ----------------- Total $ 521,608 $ 44,789 $12,291 $ 51,758 ============== ============= ================ =================
Identifiable Assets ---------------------------------------------------- May 31, 1999 August 31, 1998 --------------------- --------------------- Lighting Equipment $ 461,416 $ 397,962 Chemical 239,415 235,269 Textile Rental 192,409 193,347 Envelope 125,535 103,087 --------------------- --------------------- Subtotal 1,018,775 929,665 Corporate 120,611 81,019 --------------------- --------------------- Total $1,139,386 $1,010,684 ===================== =====================
3. INVENTORIES Major classes of inventory as of May 31, 1999 and August 31, 1998 were as follows:
May 31, August 31, 1999 1998 ------------- ------------- Raw materials and supplies $ 81,071 $ 78,730 Work-in-progress 11,052 10,725 Finished goods 109,879 108,495 ------------- ------------- Total $ 202,002 $ 197,950 ============= =============
4. EARNINGS PER SHARE During the quarter ended February 28, 1998, the company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed similarly but reflects the potential dilution that could occur if dilutive options were exercised. The following table calculates basic earnings per common share and diluted earnings per common share at May 31: Page 8
Three Months Ended Nine Months Ended May 31 May 31 ----------------------------- -------------------------- 1999 1998 1999 1998 ------------- ------------ ------------ ---------- Basic earnings per common share: Net income $30,541 $ 28,139 $ 81,007 $ 78,295 Basic weighted average shares outstanding (in thousands) 40,654 42,001 41,030 42,763 ------------- ------------ ------------ ---------- Basic earnings per common share $ .75 $ .67 $ 1.97 $ 1.83 ============= ============ ============ ========== Diluted earnings per common share: Net income $30,541 $ 28,139 $ 81,007 $ 78,295 Basic weighted average shares outstanding (in thousands) 40,654 42,001 41,030 42,763 Add - Shares of common stock issuable upon assumed exercise of dilutive stock options (in thousands) 197 658 191 537 ------------- ------------ ------------ ---------- Diluted weighted average shares outstanding (in thousands) 40,851 42,659 41,221 43,300 ------------- ------------ ------------ ---------- Diluted earnings per common share $ .75 $ .66 $ 1.97 $ 1.81 ============= ============ ============ ==========
5. COMPREHENSIVE INCOME The company adopted SFAS No. 130, "Reporting Comprehensive Income," in the first quarter of fiscal 1999. SFAS No. 130 requires the reporting of a measure of all changes in equity of an entity that result from recognized transactions and other economic events other than transactions with owners in their capacity as owners. Other comprehensive income (loss) for the three and nine months ended May 31, 1999 and 1998 includes only foreign currency translation adjustments. The calculation of comprehensive income is as follows:
Three Months Ended Nine Months Ended May 31 May 31 ---------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------- ------------ Net income $ 30,541 $ 28,139 $ 81,007 $ 78,295 Other comprehensive income (loss) 824 (535) 2,490 (843) ------------ ------------ ------------- ------------ Comprehensive Income $ 31,365 $ 27,604 $ 83,497 $ 77,452 ============ ============ ============= ============
6. ENVIRONMENTAL MATTERS The company's operations, as well as similar operations of other companies, are subject to comprehensive laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances and solid and hazardous wastes and to the remediation of contaminated sites. Permits and environmental controls are required for certain of the company's operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. The company believes that it is in substantial compliance with all material environmental laws, regulations, and permits. On an ongoing basis, the company incurs capital and operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be substantial. The company's environmental reserves totaled $11,720 and $12,600 at May 31, 1999 and August 31, 1998, 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. Page 9 Certain environmental laws, such as Superfund, can impose liability for the entire cost of site remediation upon each of the current or former owners or operators of a site or parties who sent waste to a site where a release of a hazardous substance has occurred regardless of fault or the lawfulness of the original disposal activity. Generally, where there are a number of potentially responsible parties ("PRPs") that are financially viable, liability has been apportioned based on the type and amount of waste disposed of by each party at such disposal site and the number of financially viable PRPs, although no assurance 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 and M&J Solvents matters in Georgia, the company believes its liability is de minimis at each of the sites which it does not own where it has been named as a PRP. At the Crymes Landfill and M&J Solvents sites in Georgia, since the matters are currently in the investigative phase, the company does not know whether its liability is de minimis but believes that its exposure at each of the sites is not likely to result in a material adverse effect on the company. For property which the company owns on Seaboard Industrial Boulevard in Atlanta, Georgia, the company has conducted an investigation on its and adjoining properties and submitted a Compliance Status Report ("CSR") to the State of Georgia Environmental Protection Division ("EPD") pursuant to the Georgia Hazardous Site Response Act. Until EPD's review of the CSR is completed, the company will not be able to determine if remediation will be required, if the company will be solely responsible for the cost of such remediation, or whether such cost is likely to result in a material adverse effect on the company. For property which the company owns on East Paris Street in Tampa, Florida, the company has been requested by the State of Florida to clean up chlorinated solvent contamination in the groundwater on the property and on surrounding property known as Seminole Heights Solvent Site and to reimburse costs already incurred by the State of Florida in connection with such contamination. The company believes that it has a strong defense due to likely off-site sources of the contamination and because contamination from the property, if any, was due to prior owners and not the company's operations. At this time, it is too early to quantify the company's potential exposure or the likelihood of an adverse result. The company is currently evaluating emissions of volatile organic compounds from its manufacturing operations in the Atlanta 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 material expenditures to achieve compliance. In connection with the sale of the North Bros. business and 29 of the company's textile rental plants in 1997, the company has retained 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. The State of New York has filed a lawsuit against the company alleging that the company is responsible as a successor to Serv-All Uniform Rental Corp. for certain environmental liabilities in connection with the Blydenburgh Landfill in Islip, New York. The company believes that it has a strong defense that it is not a successor to Serv-All Uniform Rental Corp. At this time, it is too early to quantify the company's potential exposure or the likelihood of an adverse result. 7. INCREASE IN SHARES AUTHORIZED On January 6, 1999, the stockholders approved an amendment to the corporation's Restated Certificate of Incorporation to increase the corporation's authorized shares of common stock from 80,000,000 to 120,000,000. The additional shares will be available for potential acquisitions, stock dividends and splits, and other purposes determined by the board of directors to be in the best interests of the corporation. 8. SUBSEQUENT EVENTS On June 21, 1999, the company announced the execution of a definitive agreement to purchase for cash all outstanding shares of Holophane Corporation ("Holophane") for $38.50 per share, or a total of approximately $450 million. Holophane is a leading manufacturer and marketer of premium quality, highly engineered lighting fixtures and systems for a wide range of industrial, commercial, and outdoor applications. The company commenced a tender offer for all of Holophane's outstanding shares on June 25, 1999. The transaction is subject to a majority of Holophane's shares being tendered in the offer and customary closing conditions. The transaction is expected to be completed in the fourth quarter of NSI's fiscal 1999 and will be accounted for using the purchase method of accounting. In June, 1999, the company sold the envelope segment's Techno-Aide/Stumb Metal Products ("Techno-Aide") business to BSC Enterprises, LLC. Techno-Aide is a leading manufacturer and marketer of accessory products for users of X-ray equipment with annual revenues of approximately $4.0 million. The envelope segment realized a pretax gain of $2.0 million on the transaction. Page 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and related notes. National Service Industries is a diversified service and manufacturing company operating in four segments: lighting equipment, chemicals, textile rental, and envelopes. The company continued to be in strong financial condition at May 31, 1999. Net working capital was $447.6 million, up from $385.1 million at August 31, 1998, and the current ratio was 3.0 compared with 2.7 at August 31, 1998. At May 31, 1999, the company's debt to capitalization increased to 25.2 percent compared with 12.9 percent at August 31, 1998. Results of Operations National Service Industries generated revenue of $569.8 million and $1.6 billion in the three and nine months ended May 31, 1999, respectively, compared with revenue of $521.6 million and $1.5 billion in the three and nine months ended May 31, 1998, respectively. Revenue increased primarily due to the April 1999 acquisition of Peerless Lighting Corporation ("Peerless"), the February 1999 acquisition of Gilmore Envelope Corporation ("Gilmore"), the September 1998 acquisition of GTY Industries (d/b/a "Hydrel"), the July 1998 acquisition of Calman Australia Pty Ltd, and the March 1998 acquisition of Allen Envelope ("Allen"). Additionally, the revenue increase was due in part to higher revenue in the base business of the lighting equipment and chemical segments. Third quarter 1999 net income totaled $30.5 million, or $.75 per diluted share, compared to net income of $28.1 million, or $.66 per diluted share, for the same period in the prior year. The increase in income related to the base business and acquisitions was offset by an increase in net interest expense. Additionally, the current quarter included a $2.3 million pretax gain on the sale of industrial contracts in the textile rental segment. Net income for the nine months ended May 31, 1999 increased 3.5 percent to $81.0 million, or $1.97 per diluted share, primarily due to increased volume in the base business, income from acquisitions not included in the prior year results, a non-recurring $3.5 million net pretax gain in the textile rental segment, and a $2.3 million pretax gain on the sale of industrial contracts in the textile rental segment. These items were partially offset by an increase in net interest expense and gains recorded on the sale of businesses in the prior year. Diluted earnings per share also increased due to the reduction of diluted average shares outstanding for the three and nine months ended May 31, 1999 by 1.8 million and 2.1 million, respectively. The lighting equipment segment reported revenue of $306.2 million and $862.9 million for the three and nine months ended May 31, 1999, respectively, which is an increase of 10.3 percent and 7.0 percent over the same periods in the prior year. This increase resulted from continued strength in the non-residential construction market and the acquisitions of Peerless and Hydrel, offset partially by competitive pricing measures. Operating profit increased 10.8 percent to $29.0 million for the quarter and 7.3 percent to $82.3 million for the nine months ended May 31, 1999 primarily related to the additional sales and lower material costs. Chemical segment revenue increased 6.8 percent to $127.2 million for the third quarter and 8.6 percent to $360.7 million for the nine months ended May 31, 1999 primarily due to continued growth in the retail channel, higher revenue from the industrial and institutional distribution channels, and acquired international revenue. Operating profit of $11.5 million and $29.8 million in the three and nine months ended May 31, 1999, respectively, was slightly higher than last year's results as increased revenues were offset by higher selling and other operating costs. Textile rental segment revenue was $80.1 million for the quarter compared with $79.5 million for the three months ended May 31, 1998 while third quarter operating income increased to $10.2 million from last year's $8.7 million. The increase in operating income for the three months ended May 31, 1999 primarily relates to a $2.3 million pretax gain associated with the sale of certain industrial customer contracts partially offset by non-operating gains recognized during the same period of the prior year. Revenue for the nine months ended May 31, 1999 decreased 2.4 percent to $229.3 million primarily as a result of the sale of several industrial contracts and the rationalization of unprofitable accounts in fiscal 1998. Year to date 1999 revenue was also affected by the temporary, negative impact of two hurricanes on nine southeastern plants. Operating income for the nine months ended May 31, 1999 increased to $26.1 million from $21.5 million for the same period in the prior year. Year to date 1999 operating income includes a $5.7 million gain associated with the 1997 uniform plants divestiture and restructuring activities offset by a $2.2 million write-off for merchandise inventory previously used by unprofitable accounts. Additionally, year to date income includes a $2.3 million gain on the sale of industrial contracts. Excluding non-recurring items in the current and prior year, operating margins for the quarter and year to date increased due to the segment's focus on lowering merchandise costs and improving production efficiencies through the daily tracking of operational performance measures. Page 11 During the second quarter of 1999, management performed an extensive review of the liabilities recorded in 1997 in connection with the textile rental segment's uniform plants divestiture and restructuring activities. In 1997, the textile rental segment accrued for items related to the sale of its uniform plants including environmental exposures, severance agreements, and costs to return leased facilities to pre-lease condition. The company has realized lower costs than originally anticipated associated with these items and, as a result, has reduced the liability and recorded a gain of $3.5 million during the second quarter of 1999. Additionally, in 1997 the textile rental segment recorded an impairment charge and accrued for items related to restructuring activities that primarily related to branch consolidations and asset dispositions. As the company has realized lower than anticipated costs, the reserve was reduced and income of $2.2 million was recorded during the second quarter of 1999. During the current year, the restructuring reserves were also reduced by a minimal amount for payments related to plant consolidations. Envelope segment revenue increased 23.8 percent to $56.4 million for the three months ended May 31, 1999 primarily due to the Gilmore acquisition. Year to date 1999 revenue increased 26.9 percent to $146.3 million, largely due to the Allen and Gilmore acquisitions. Operating profit remained relatively unchanged at $4.4 million for the quarter and increased 24.3 percent to $11.1 million for the nine months as increased volumes and materials cost savings were partially offset by gains realized in 1998 on the sale of idle equipment. Corporate expenses were lower during the three months ended May 31, 1999 compared to the same period in the prior year, primarily due to a gain recognized on the sale of a building in the third quarter of 1999. Corporate expenses during the nine month period approximated last year. Net interest expense was $3.3 million and $8.2 million in the three and nine months ended May 31, 1999, respectively, compared with $1.3 million of net interest expense and $1.1 million of net interest income for the three and nine months ended May 31, 1998, respectively. The increase in net interest expense is due to lower interest income, resulting from the use of the short-term investments generated from the textile rental segment's 1997 divestiture proceeds, combined with higher interest expense from increased borrowing. The increased borrowing is the result of the issuance of $160 million in publicly traded notes in the second quarter of 1999 to fund acquisitions, share repurchases, and internal growth. See "Financing Activities" below for further discussion. The provision for income taxes was 37.2 percent of pretax income for the three and nine months ended May 31, 1999 compared with 37.2 percent for the prior third quarter and 37.1 percent for the prior year to date. Liquidity and Capital Resources Operating Activities Operations provided cash of $115.5 million during the first nine months of fiscal 1999 and used cash of $1.6 million during the nine months ended May 31, 1998. The increase in operating cash flow is primarily due to improved working capital management in the lighting equipment and chemical segments. The remaining improvement relates to additional tax payments of $38.5 million made during 1998 primarily related to the 1997 textile rental segment divestitures that are not repeated in current year results. Investing Activities Investing activities used cash of $108.0 million for the nine months ended May 31, 1999 compared with cash provided of $110.5 million in the nine months ended May 31, 1998. The cash flow in the first three quarters of fiscal 1998 was higher because of the liquidation of short-term investments. Additionally, acquisition spending in the first three quarters of fiscal 1999 totaled $62.9 million compared to $39.4 million during the respective prior year period. Current year acquisition spending was primarily related to the September 1998 purchase by the lighting equipment segment of the assets of Hydrel, a manufacturer of architectural-grade light fixtures for landscape, in-grade, and underwater applications; the February 1999 purchase by the envelope segment of Gilmore, an envelope manufacturer headquartered in Los Angeles, California; and the April 1999 purchase by the lighting equipment segment of Peerless, a manufacturer of high performance indirect/direct suspended lighting products. The company also made minor acquisitions related to the chemical and textile rental segments. Prior-year acquisition spending of $39.4 million was due to the chemical segment's purchase of Pure Corporation, a specialty chemical company with its core businesses in Indiana, Pennsylvania, and New York; the envelope segment's purchase of Allen Envelope Corporation, a single-plant, Pennsylvania-based envelope manufacturer serving markets in the Northeast; and performance payments associated with a 1997 chemical acquisition. Capital expenditures were $48.3 million in the first nine months of fiscal 1999 compared with $56.8 million in the first nine months of fiscal 1998. Capital spending in the first three quarters of fiscal 1999 was primarily attributable to the lighting equipment, textile rental, and envelope segments. The lighting equipment segment's capital expenditures related to the purchase of land and buildings for a new plant, manufacturing improvements and upgrades for capacity expansion, and implementation of Page 12 new technology. Expenditures in the textile rental segment were for implementation of new technology, production enhancements, and delivery truck purchases and refurbishments. The envelope segment's expenditures related primarily to manufacturing process improvements, information systems, facility expansion, and new folding capacity. Capital spending in the first three quarters of fiscal 1998 consisted primarily of facility expansions and manufacturing process improvements in the lighting equipment segment, efficiency improvements and replacements of processing equipment and information systems in the textile rental segment, and facility and machinery replacements in the envelope segment. Capital expenditures for fiscal 1999 are estimated to be $81 million. Financing Activities Cash provided by financing activities was $33.7 million in the first three quarters of fiscal 1999 compared with cash used of $136.3 million in the first three quarters of fiscal 1998. Contributing to the change were net purchases of treasury stock which were $38.3 million in the current year versus $145.2 million in the prior year. During the first three quarters of 1999 the company repurchased approximately 1.2 million of its common shares. In the second quarter, the company successfully completed the issuance of $160 million in ten-year publicly traded notes bearing a coupon rate of 6.0 percent. Proceeds were used for the repayment of $80.0 million in short-term borrowings, with the remainder available for general corporate purposes including working capital requirements, capital expenditures, acquisitions, repayment of outstanding indebtedness, and share repurchases. Dividend payments totaled $38.9 million, or 95 cents per share, compared with $39.8 million, or 92 cents per share, for the prior-year period. On January 6, 1999, the regular quarterly dividend rate was increased 3.2 percent to 32 cents per share, or an annual calendar year rate of $1.28 per share. Management believes the company's planned level of acquisition and capital spending and general operating cash requirements for the next twelve months will be sufficiently covered by current cash balances, anticipated cash flows from operations, available funds from the existing five-year revolving credit facility, the company's active shelf registration, complementary lines of credit, and a new 364-day revolving credit facility which is expected to be executed in late July 1999. As discussed in Note 8 to the financial statements, the company commenced a tender offer for the outstanding shares of Holophane for a total of approximately $450 million. The company will initially finance the transaction with short-term debt. Environmental Matters See Note 6 to the financial statements for a discussion of the company's environmental matters. 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 May 31, 1999, all areas of the company had completed the first three phases and implementation of the plan was approximately 92 percent complete. Management estimates that the total cost to be incurred in connection with the Year 2000 Issue will range from $4 million to $6 million, and substantially all mission critical systems are expected to be in compliance prior to the end of calendar year 1999. 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. At May 31, 1999, the company had spent approximately $4.0 million on the Year 2000 Issue. The cost of the project is being funded through operating cash flows. At this time, the company believes its most reasonably likely worst case scenario is that key suppliers or service providers who have not resolved their own Year 2000 Issue may cause a disruption of service to the company's critical business processes. 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, management is currently completing a contingency plan to address the potential for unforeseen issues that may arise. These contingency plans include identifying alternative suppliers and increasing inventory levels. 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. Page 13 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 and environmental issues; (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 projected capital expenditures and future cash flows; and (d) statements made regarding the acquisition of Holophane. 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; (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; (c) unforeseen competitive reactions to the Holophane acquisition; and (d) loss of key sales and management personnel due to the acquisition of Holophane. Page 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits are listed on the Index to Exhibits (page 16). (b) There were no reports on Form 8-K for the three months ended May 31, 1999. Page 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL SERVICE INDUSTRIES, INC. REGISTRANT DATE July 14, 1999 /s/ David Levy DAVID LEVY EXECUTIVE VICE PRESIDENT, ADMINISTRATION AND COUNSEL DATE July 14, 1999 /s/ Brock Hattox BROCK HATTOX EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Page 16 INDEX TO EXHIBITS Page No. EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements: (1) Employment Letter Agreement between National 18 Service Industries, Inc. and George H. Gilmore, Jr., Dated May 5, 1999 (2) Severance Protection Agreement between National Reference is made to Exhibit 10(iii)A(c) Service Industries, Inc. and George H. Gilmore, Jr., of registrant's Form 10-Q for the quarter Dated as of June 1, 1999 ended February 29, 1996 and to Exhibit 10(iii)A(6)(b) of registrant's Form 10-K for the fiscal year ended August 31, 1996, which are incorporated herein by reference. (3) Bonus Letter Agreement between National Service Reference is made to Exhibit 10(iii)A(j) of Industries, Inc. and George H. Gilmore, Jr., registrant's Form 10-K for the fiscal year Dated as of June 1, 1999 ended August 31, 1989, to Exhibit 10(iii)A(d) of the registrant's Form 10-Q for the quarter ended February 29, 1996, and to Exhibit 10(iii)A(7)(b) of registrant's Form 10-K for the fiscal year ended August 31, 1996, which are incorporated herein by reference. (4) Incentive Stock Option Agreement for 23 Executive Officers Effective Beginning June 1, 1999 between National Service Industries, Inc. and George H. Gilmore, Jr. (5) Nonqualified Stock Option Agreement for 30 Executive Officers Effective Beginning June 1, 1999 between National Service Industries, Inc. and George H. Gilmore, Jr. (6) Aspiration Achievement Incentive Award 36 Agreement for the Performance Cycle beginning September 1, 1997 between National Service Industries, Inc. and George H. Gilmore, Jr., Dated June 1, 1999. [a confidential portion of which has been omitted and filed separately with the Securities and Exchange Commission] (7) Aspiration Achievement Incentive Award 45 Agreement for the Performance Cycle beginning September 1, 1998 between National Service Industries, Inc. and George H. Gilmore, Jr., Dated June 1, 1999. [a confidential portion of which has been omitted and filed separately with the Securities and Exchange Commission] Page 17 INDEX TO EXHIBITS (Continued) Page No. (8) Amendment of Aspiration Achievement Incentive 54 Award Agreement and Election Form for Performance Cycle Ending August 31, 1999 between National Service Industries, Inc. and (a) James S. Balloun (b) Brock A. Hattox (c) David Levy (d) Stewart A. Searle III (9) Amendment No. 1 to National Service 60 Industries, Inc. Long-Term Achievement Incentive Plan, Dated April 7, 1999 Exhibit 27 Financial Data Schedule 61
EX-10 2 EMPLOYMENT LETTER - GEORGE GILMORE May 5, 1999 Page 18 EXHIBIT 10(iii)A(1) Mr. George H. Gilmore 631 Blackthorn Road Winnetka, Illinois 60093 Dear George: This letter will confirm the terms of your employment by National Service Industries, Inc. ("NSI") and NSI Services, L.P., effective June 1, 1999 (the "Effective Date"). We are enthusiastic about your decision to join NSI and look forward to working with you to build a bigger, stronger NSI. The terms of your employment, which are subject, of course, to approval by our Executive Resource and Nominating Committee and the Board of Directors (or its Executive Committee) and satisfactory completion of NSI's normal pre-employment screening procedures, will be as follows: 1. Title and Duties - As Executive Vice President and Group President, you will be a senior officer of NSI reporting to its Chief Executive Officer. You will have responsibility for NSI's Chemical Group, National Linen Service, and AECO operating units and any additional businesses and other duties consistent with your position which may be assigned to you by NSI's CEO. You will also serve in the same capacity for NSI Services, L.P. (the "Partnership"). You will assume the duties and responsibilities commensurate with those positions, which will include service to NSI, the Partnership, and other subsidiaries and partnerships of NSI and may receive compensation, benefits, and other amounts from such entities, the aggregate amount of which will equal the sums and benefits specified herein. You will devote substantially all of your working time and attention to the business and affairs of NSI and the foregoing entities. 2. Base Salary - Your base salary will be Thirty-seven Thousand Five Hundred Dollars ($37,500) per month or the equivalent annual rate of Four Hundred Fifty Thousand Dollars ($450,000), subject to review for increases. Senior officer reviews at NSI are normally conducted for the April Board meeting effective March 1. 3. Annual Incentive Compensation - You will participate in the NSI Management Compensation and Incentive Plan (the "AIP") for the fiscal year beginning September 1, 1999 with a target bonus equal to 50% of your base salary. You will participate in the AIP for the fiscal year ending August 31, 1999 on a pro rata basis for the period of your employment and will receive a bonus for the period of at least Seventy Five Thousand Dollars ($75,000). Page 19 EXHIBIT 10(iii)A(1) 4. Long-Term Achievement Incentive Plan - You will receive a grant of employee stock options for fifty thousand (50,000) shares of stock under our current long-term incentive plan upon your arrival at NSI. You will also be entitled to participate in the current long-term incentive plan on a prorated basis for the number of months you are employed with NSI during the remainder of the three-year cycle ending August 31, 2000 and the remainder of the three-year cycle ending August 31, 2001 based on the performance of NSI's Chemical Group, National Linen Service, and AECO operating units. In addition, subject to approval by our stockholders at the January 2000 annual meeting of additional shares to be granted under our Long-Term Achievement Incentive Plan, you will participate in the Plan for the three-year cycle beginning September 1, 1999 on a comparable basis with other senior officers. This Plan provides for annual grants of stock options and annual "aspiration awards" having a total value equal to 160% of salary at commitment (or target) level performance. Stock options represent 70% of total value (or 112% of salary) and aspiration awards represent 30% of total value (or 48% of salary) at commitment level performance. Currently, aspiration awards are based on achievement of cumulative economic profit goals over a three-year cycle and are payable one-half in cash and one-half in NSI stock following completion of each cycle. The form of payment may be changed under the new plan. The payout for aspiration level performance is equal to five times the value of the payout for commitment level performance (or 240% of salary). Failure to achieve threshold level performance will result in no payout. 5. Retirement Plans - Upon satisfying the eligibility requirements, you will be eligible to participate in NSI's tax-qualified retirement plans, NSI Pension Plan C, and the NSI 401(k) Plan for Corporate Office Employees. In addition, upon employment, you will become a participant in the Supplemental Retirement Plan for Executives of NSI (the "SERP"). Your benefits under the SERP will be determined in the same manner as for other executive officers of NSI participating in the plan (other than the Chief Executive Officer), except that you will be credited with service under the SERP for each year of actual service. You will become vested in your SERP benefit after completing five (5) years of employment with NSI and will be eligible for early retirement at age sixty (60). 6. Medical, Life Insurance, and Other Employee Benefits - You will be covered by, or eligible to participate in, the medical, dental, life insurance, disability, deferred compensation, and other benefit programs generally made available by NSI to its executive officers and their families, including a car allowance of Four Hundred Dollars ($400) per month. We will reimburse you for your COBRA expenses until you are covered under our program. You will be eligible to participate in NSI's financial planning program and NSI will reimburse you for any initiation fees and monthly dues for membership in the Commerce Club. Page 20 EXHIBIT 10(iii)A(1) 7. Relocation Expenses - NSI will pay the following relocation expenses: (a) your expenses for moving your household effects to Atlanta; (b) rent for an apartment and storage of your personal effects in Atlanta, pending your move into your new home in Atlanta; (c) brokerage and closing costs you incur in connection with the sale of your home in Chicago and the purchase of a home in Atlanta; (d) reasonable travel expenses to and from Chicago for you and your wife and children until you have moved your residence to Atlanta; and (e) a one-time payment of one month's salary for your assistance in the relocation. The foregoing payments will be "grossed up" so that, to the extent reasonably practicable, they will represent your after-tax cost for covered expenses. In addition to the foregoing, we will assist you in obtaining a bridge loan should you purchase a home in Atlanta before selling your home in Chicago and pay up to two (2) points of any loan fees incurred for such purchase. 8. Employment at Will/Severance Payment/Change in Control - Your employment will be at will and may be terminated by either NSI or you at any time for any reason, with or without notice. Except in the event of termination in connection with a Change in Control of NSI (as defined in the Severance Protection Agreement that will cover you), you will be entitled to the following severance payment: o If your employment is terminated on or before June 1, 2000 for any reason other than voluntary termination, termination upon death or Disability (as defined below), or termination by NSI for Cause (as defined below), you will receive a severance payment (payable in semi-monthly installments) equal to your then current salary for a period equal to the time from the date of termination through June 1, 2002. If your employment is terminated after June 1, 2000 but on or before June 1, 2009 for any reason other than voluntary termination, termination upon death or Disability, or termination by NSI for Cause, you will receive a severance payment (payable in semi-monthly installments) equal to your then current salary for a period of two (2) years. Page 21 EXHIBIT 10(iii)A(1) o For purposes of entitlement to a severance benefit, "Cause" shall mean any act(s) on your part that constitutes fraud, a felony involving dishonesty, a breach of fiduciary duty, or gross malfeasance or habitual neglect of your duties for NSI, and "Disability" shall mean a physical or mental infirmity which impairs your ability to substantially perform your duties as Executive Vice President, Operations of NSI with or without reasonable accommodation for a period of one hundred eighty (180) consecutive days. The NSI Board, based upon the information provided to it, shall determine whether an act constituting Cause has occurred and whether you have suffered a Disability. In the case of termination for Cause, (i) you will be given written notice of the actions constituting Cause at least fifteen (15) days prior to any meeting of the Board of Directors of NSI at which your termination is to be considered; (ii) you will be given the opportunity to be heard by the Board; and (iii) your termination for Cause must be evidenced by a resolution adopted by a majority of the Board. In the event of termination by you "for good reason" (as defined below) during the time periods described above, you will be entitled to the applicable severance payments described above. For purposes of this Agreement, the term "good reason" means: a) any material diminution in your duties and responsibilities as Executive Vice President and Group President or authority or title; b) any reduction in your base salary to less than $400,000.00 per annum; c) any reduction in the target amount of your annual bonus to less than 50% of your salary, which reduction is not applicable to other senior officers of NSI; and d) your being required to relocate to an office more than fifty miles from NSI's current office. With respect to Change in Control situations, you will be covered by a Severance Protection Agreement with the same provisions as are applicable to NSI's other executive officers. In the event of your termination in connection with a Change in Control that entitles you to benefits under the Severance Protection Agreement, you will receive the greater of the payments and benefits provided under the Severance Protection Agreement (after consideration of any tax penalties) or the severance payments described above. 9. Relocation of Residence to Atlanta - You will relocate your residence to Atlanta and complete the move of your family on or before July 1, 2000. Page 22 EXHIBIT 10(iii)A(1) The base salary, annual incentive, long-term incentives, nonqualified retirement benefits, and any severance payments will be structured to ensure the tax deductibility to NSI of the payments and benefits under the Internal Revenue Code of 1986, including Code Section 162(m). We can provide additional information on these issues if you so desire. We will prepare a SERP provision and Severance Protection Agreement to evidence the arrangements set forth in this letter. We are delighted you are joining NSI and we look forward to a long and mutually satisfactory relationship. This letter outlines your employment relationship with NSI; if you agree with the employment terms as outlined above, please sign and date both copies of this letter agreement and return one copy to me at your earliest convenience. Sincerely, /s/ James S. Balloun James S. Balloun ACCEPTED AND AGREED TO THIS 6th DAY OF May, 1999 /s/ George H. Gilmore, Jr. George H. Gilmore EX-10 3 INCENTIVE STOCK OPTION AGREEMENT Page 23 EXHIBIT 10(iii)A(4) INCENTIVE STOCK OPTION AGREEMENT FOR EXECUTIVE OFFICERS AND OPERATING UNIT PRESIDENTS THIS AGREEMENT, made as of the 1st day of June, 1999 (the "Grant Date"), between National Service Industries, Inc., a Delaware corporation (the "Company"), and George H. Gilmore, Jr. (the "Optionee"). WHEREAS, the Company has adopted the National Service Industries, Inc. Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional incentive to certain officers and key employees of the Company and its Subsidiaries; and WHEREAS, the Optionee performs services for the Company or one of its Subsidiaries; and WHEREAS, the Committee responsible for administration of the Plan has determined to grant the Option to the Optionee as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. 1.1 The Company hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of 10,844 whole Shares subject to, and in accordance with, the terms and conditions set forth in this Agreement. 1.2 The Option is intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code and shall be so construed; provided, however, that nothing in this Agreement shall be interpreted as a representation, guarantee or other undertaking on the part of the Company that the Option is or will be determined to be an Incentive Stock Option within the meaning of Section 422 of the Code. To the extent this Option is not treated as an Incentive Stock Option, it will be treated as a Nonqualified Stock Option. 1.3 This Agreement shall be construed in accordance and consistent with, and subject to, the provisions of the Plan (the provisions of which are incorporated herein by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. 2. Purchase Price. The price at which the Optionee shall be entitled to purchase Shares upon the exercise of the Option shall be $36.875 per Share. Page 24 EXHIBIT 10(iii)A(4) 3. Duration of Option. The Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the "Exercise Term"); provided, however, that the Option may be earlier terminated as provided in Section 6 hereof. 4. Exercisability of Option. Unless otherwise provided in this Agreement or the Plan, the Option shall entitle the Optionee to purchase, in whole at any time or in part from time to time, 25% of the total number of Shares covered by the Option after the expiration of one (1) year from the Grant Date and an additional 25% of the total number of Shares covered by the Option on each of the second, third, and fourth anniversaries of the Grant Date. Each such right of purchase shall be cumulative and shall continue, unless sooner exercised or terminated as herein provided during the remaining period of the Exercise Term. 5. Manner of Exercise and Payment. 5.1 Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by delivery of written notice to the Company, at its principal executive office. Such notice shall state that the Optionee is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. If requested by the Committee, such person or persons shall (i) deliver this Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option. 5.2 The notice of exercise described in Section 5.1 shall be accompanied by the full purchase price for the Shares in respect of which the Option is being exercised, in cash, by check or by transferring Shares to the Company having a Fair Market Value on the day preceding the date of exercise equal to the cash amount for which such Shares are substituted. 5.3 Upon receipt of notice of exercise and full payment for the Shares in respect of which the Option is being exercised, the Company shall, subject to Section 17 of the Plan, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise was effective. 5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership rights with respect to such Shares. Page 25 EXHIBIT 10(iii)A(4) 6. Termination of Employment. 6.1 In General. If the employment of the Optionee with the Company and its Subsidiaries shall terminate for any reason, other than for the reasons set forth in Sections 6.2 and 7.2 below, the Option shall continue to be exercisable (to the extent the Option was vested and exercisable on the date of the Optionee's termination of employment) at any time within three (3) months after the date of such termination of employment, but in no event after the expiration of the Exercise Term. 6.2 Termination of Employment Due to Death, Disability or Retirement. If the Optionee's termination of employment is due to Death, Disability or Retirement (termination on or after age 65), or if Optionee terminates employment after age 55, the following shall apply: (a) Termination Due To Death. In the event the Optionee dies while actively employed, all vested Options at the date of death shall remain exercisable at any time prior to the expiration of the Exercise Term by (A) such person(s) that have acquired the Optionee's rights under such Options by will or by the laws of descent and distribution, or (B) if no such person described in (A) exists, the Optionee's estate or representative of the Optionee's estate. All Options that are not vested as of the date of death shall be immediately forfeited. (b) Termination by Disability. In the event the employment of the Optionee is terminated by reason of Disability, all vested Options as of the date the Committee determines the Optionee terminated for Disability shall remain exercisable at any time prior to the expiration of the Exercise Term. All Options that are not vested as of the date of termination for Disability shall be immediately forfeited. (c) Termination by Retirement. In the event the employment of the Optionee is terminated by reason of Retirement, the Optionee's Options shall continue to vest in accordance with the original schedule (just as if the Optionee had remained employed) and shall remain exercisable at any time prior to the expiration of the lesser of five years or the remaining Exercise Term of the Options. In the event of the Optionee's death after Retirement, the Options shall continue to vest and be exercisable in accordance with this subsection (c) as if the Optionee had lived and the Options shall be exercisable by the persons described in (a) above. Page 26 EXHIBIT 10(iii)A(4) (d) Termination After Attaining Age 55. If the Optionee terminates employment (other than as a result of death or Disability) after attaining age 55 but prior to age 65, unless the Committee determines otherwise at the time of such termination, the Optionee's Options shall continue to vest in accordance with the original schedule (just as if the Optionee had remained employed) and shall remain exercisable at any time prior to the expiration of the lesser of five years or the remaining Exercise Term of the Options. In the event of the Optionee's death after Retirement, the Options shall continue to vest and be exercisable in accordance with this subsection (d) as if the Optionee had lived and the Options shall be exercisable by the persons described in (a) above. 7. Effect of Change in Control. 7.1 Notwithstanding anything contained to the contrary in this Agreement, in the event of a Change in Control, (i) the Option shall become immediately and fully exercisable, and (ii) the Optionee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control, the Option or any portion of the Option to the extent not yet exercised, and the Optionee shall be entitled to receive immediately a cash payment in an amount equal to the excess, if any, of (A) the Fair Market Value, at the time of surrender, of the Shares subject to the Option or portion thereof surrendered, over (B) the aggregate purchase price for such Shares under the Option; provided, however, that if the Option was granted within six (6) months prior to the Change in Control and the Optionee may be subject to liability under Section 16(b) of the Exchange Act, the Optionee shall be entitled to surrender the Option, or any portion of the Option, for cancellation during the sixty (60) day period following the expiration of six (6) months from the Grant Date and to receive the amount described above with respect to such surrender for cancellation. 7.2 If the employment of the Optionee is terminated within two (2) years following a Change in Control, all vested Options shall continue to be exercisable at any time within three (3) years after the date of such termination of employment, but in no event after expiration of the Exercise Term. 8. Nontransferability. The Option shall not be transferable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee. 9. No Right to Continued Employment. Nothing in this Agreement or the Plan shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment by the Company or a Subsidiary, nor shall this Agreement or the Plan interfere in any way with the right of the Company or a Subsidiary to terminate the Optionee's employment at any time. Page 27 EXHIBIT 10(iii)A(4) 10. Adjustments. In the event of a Change in Capitalization, the Committee may make appropriate adjustments to the number and class of Shares or other stock or securities subject to the Option and the purchase price for such Shares or other stock or securities. The Committee's adjustment shall be made in accordance with the provisions of Section 11 of the Plan and shall be effective and final, binding, and conclusive for all purposes of the Plan and this Agreement. 11. Terminating Events. Subject to Section 7 hereof, upon the effective date of (i) the liquidation or dissolution of the Company or (ii) a merger or consolidation of the Company (a "Transaction"), the Option shall continue in effect in accordance with its terms and the Optionee shall be entitled to receive in respect of all Shares subject to the Option, upon exercise of the Option, the same number and kind of stock, securities, cash, property, or other consideration that each holder of Shares was entitled to receive in the Transaction. 12. Withholding of Taxes and Notice of Disposition. 12.1 The Company shall have the right to deduct from any distribution of cash to the Optionee an amount equal to the federal, state, and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to the Option. If the Optionee is entitled to receive Shares upon exercise of the Option, the Optionee shall pay the Withholding Taxes (if any) to the Company in cash prior to the issuance of such Shares. In satisfaction of the Withholding Taxes, the Optionee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Committee, to have withheld a portion of the Shares issuable to him or her upon exercise of the Option, having an aggregate Fair Market Value equal to the withholding Taxes, provided that, if the Optionee may be subject to liability under Section 16(b) of the Exchange Act, the election must comply with the requirements applicable to Share transactions by such Optionees. 12.2 If the Optionee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to him pursuant to his exercise of the Option within the two-year period commencing on the day after the Grant Date or within the one-year period commencing on the day after the date of transfer of such Share or Shares to the Optionee pursuant to such exercise, the Optionee shall, within ten (10) days of such disposition, notify the Company thereof, by delivery of written notice to the Company at its principal executive office, and immediately deliver to the Company the amount of Withholding Taxes. Page 28 EXHIBIT 10(iii)A(4) 13. Employee Bound by the Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 14. Modification of Agreement. This Agreement may be modified, amended, suspended, or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 15. Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 16. Governing Law. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 17. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon each successor corporation. This Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding, and conclusive upon the Optionee's heirs, executors, administrators, and successors. 18. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction, or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding, and conclusive on the Optionee and the Company for all purposes. Page 29 EXHIBIT 10(iii)A(4) 19. Shareholder Approval. The effectiveness of this Agreement and of the grant of the Option pursuant hereto is subject to the approval of the Plan by the stockholders of the Company in accordance with the terms of the Plan. ATTEST: NATIONAL SERVICE INDUSTRIES, INC. /s/ Helen D. Haines By:/s/ James S. Balloun Secretary James S. Balloun Chairman, President, and Chief Executive Officer /s/ George H. Gilmore, Jr. Name of Optionee: George H. Gilmore, Jr. EX-10 4 NONQUALIFIED STOCK OPTION AGREEMENT Page 30 EXHIBIT 10(iii)A(5) NONQUALIFIED STOCK OPTION AGREEMENT FOR EXECUTIVE OFFICERS AND OPERATING UNIT PRESIDENTS THIS AGREEMENT, made as of the 1st day of June, 1999(the "Grant Date"), between National Service Industries, Inc., a Delaware corporation (the "Company"), and George H. Gilmore, Jr. (the "Optionee"). WHEREAS, the Company has adopted the National Service Industries, Inc. Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional incentive to certain officers and key employees of the Company and its Subsidiaries; and WHEREAS, the Optionee performs services for the Company and/or one of its Subsidiaries; and WHEREAS, the Committee responsible for administration of the Plan has determined to grant the Option to the Optionee as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. 1.1 The Company hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of 39,156 whole Shares subject to, and in accordance with, the terms and conditions set forth in this Agreement. 1.2 The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. 1.3 This Agreement shall be construed in accordance and consistent with, and subject to, the provisions of the Plan (the provisions of which are incorporated herein by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. 2. Purchase Price. The price at which the Optionee shall be entitled to purchase Shares upon the exercise of the Option shall be $36.875 per Share. 3. Duration of Option. The Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the "Exercise Term"); provided, however, that the Option may be earlier terminated as provided in Section 6 hereof. Page 31 EXHIBIT 10(iii)A(5) 4. Exercisability of Option. Unless otherwise provided in this Agreement or the Plan, the Option shall entitle the Optionee to purchase, in whole at any time or in part from time to time, 25% of the total number of Shares covered by the Option after the expiration of one (1) year from the Grant Date and an additional 25% of the total number of Shares covered by the Option on each of the second, third, and fourth anniversaries of the Grant Date, and each such right of purchase shall be cumulative and shall continue, unless sooner exercised or terminated as herein provided during the remaining period of the Exercise Term. 5. Manner of Exercise and Payment. 5.1 Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by delivery of written notice to the Company, at its principal executive office. Such notice shall state that the Optionee is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. If requested by the Committee, such person or persons shall (i) deliver this Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option. 5.2 The notice of exercise described in Section 5.1 shall be accompanied by the full purchase price for the Shares in respect of which the Option is being exercised, in cash, by check, or by transferring Shares to the Company having a Fair Market Value on the day preceding the date of exercise equal to the cash amount for which such Shares are substituted. 5.3 Upon receipt of notice of exercise and full payment for the Shares in respect of which the Option is being exercised, the Company shall, subject to Section 17 of the Plan, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise was effective. 5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership rights with respect to such Shares. Page 32 EXHIBIT 10(iii)A(5) 6. Termination of Employment. 6.1 In General. If the employment of the Optionee with the Company and its Subsidiaries shall terminate for any reason, other than for the reasons set forth in Sections 6.2 and 7.2 below, the Option shall continue to be exercisable (to the extent the Option was vested and exercisable on the date of the Optionee's termination of employment) at any time within three (3) months after the date of such termination of employment, but in no event after the expiration of the Exercise Term. 6.2 Termination of Employment Due to Death, Disability or Retirement. If the Optionee's termination of employment is due to Death, Disability or Retirement (termination on or after age 65), or if Optionee terminates employment after age 55, the following shall apply: (a) Termination Due To Death. In the event the Optionee dies while actively employed, all vested Options at the date of death shall remain exercisable at any time prior to the expiration of the Exercise Term by (A) a Permitted Transferee (as defined in Section 8 below), if any, or such person(s) that have acquired the Optionee's rights under such Options by will or by the laws of descent and distribution, or (B) if no such person described in (A) exists, the Optionee's estate or representative of the Optionee's estate. All Options that are not vested as of the date of death shall be immediately forfeited. (b) Termination by Disability. In the event the employment of the Optionee is terminated by reason of Disability, all vested Options as of the date the Committee determines the Optionee terminated for Disability shall remain exercisable at any time prior to the expiration of the Exercise Term. All Options that are not vested as of the date of termination for Disability shall be immediately forfeited. (c) Termination by Retirement. In the event the employment of the Optionee is terminated by reason of Retirement, the Optionee's Options shall continue to vest in accordance with the original schedule (just as if the Optionee had remained employed) and shall remain exercisable at any time prior to the expiration of the lesser of five years or the remaining Exercise Term of the Options. In the event of the Optionee's death after Retirement, the Options shall continue to vest and be exercisable in accordance with this subsection (c) as if the Optionee had lived and the Options shall be exercisable by the persons described in (a) above. (d) Termination After Attaining Age 55. If the Optionee terminates employment (other than as a result of death or Disability) after attaining age 55 but prior to age 65, unless the Committee determines otherwise at the time of such termination, the Optionee's Options shall continue to vest in accordance with the original schedule (just as if the Optionee had remained employed)and shall remain exercisable at any time prior to the expiration of the lesser of five years or the remaining Exercise Term of the Options. In the event of the Optionee's death after Retirement, the Options shall continue to vest and be exercisable in accordance with this subsection (d) as if the Optionee had lived and the Options shall be exercisable by the persons described in (a) above. Page 33 EXHIBIT 10(iii)A(5) 7. Effect of Change in Control. 7.1 Notwithstanding anything contained to the contrary in this Agreement, in the event of a Change in Control, (i) the Option shall become immediately and fully exercisable, and (ii) the Optionee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control, the Option or any portion of the Option to the extent not yet exercised, and the Optionee shall be entitled to receive immediately a cash payment in an amount equal to the excess, if any, of (A) the greater of (x) the Fair Market Value on the date preceding the date of surrender, of the shares subject to the Option or portion of the Option surrendered, or (y) the Adjusted Fair Market Value of the Shares subject to the Option or portion thereof surrendered, over (B) the aggregate purchase price for such Shares under the Option; provided, however, that if the Option was granted within six (6) months prior to the Change in Control and the Optionee may be subject to liability under Section 16(b) of the Exchange Act, the Optionee shall be entitled to surrender the Option, or any portion of the Option, for cancellation during the sixty (60) day period following the expiration of six (6) months from the Grant Date and to receive the amount described above with respect to such surrender for cancellation. 7.2 If the employment of the Optionee is terminated within two (2) years following a Change in Control, all vested Options shall continue to be exercisable at any time within three (3) years after the date of such termination of employment, but in no event after expiration of the Exercise Term. 8. Nontransferability. The Option shall not be transferable other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, the Option may be transferred, in whole or in part, without consideration, by written instrument signed by the Optionee, to any members of the immediate family of the Optionee (i.e., spouse, children, and grandchildren), any trusts for the benefit of such family members or any partnerships whose only partners are such family members (the "Permitted Transferees"). Appropriate evidence of any such transfer to the Permitted Transferees shall be delivered to the Company at its principal executive office. If all or part of the Option is transferred to a Permitted Transferee, the Permitted Transferee's rights hereunder shall be subject to the same restrictions and limitations with respect to the Option as the Optionee. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee, or if applicable, by the Permitted Transferees. 9. No Right to Continued Employment. Nothing in this Agreement or the Plan shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment by the Company or a Subsidiary, nor shall this Agreement or the Plan interfere in any way with the right of the Company or a Subsidiary to terminate the Optionee's employment at any time. Page 34 EXHIBIT 10(iii)A(5) 10. Adjustments. In the event of a Change in Capitalization, the Committee may make appropriate adjustments to the number and class of Shares or other stock or securities subject to the Option and the purchase price for such Shares or other stock or securities. The Committee's adjustment shall be made in accordance with the provisions of Section 11 of the Plan and shall be effective and final, binding, and conclusive for all purposes of the Plan and this Agreement. 11. Terminating Events. Subject to Section 7 hereof, upon the effective date of (i) the liquidation or dissolution of the Company or (ii) a merger or consolidation of the Company (a "Transaction"), the Option shall continue in effect in accordance with its terms and the Optionee shall be entitled to receive in respect of all Shares subject to the Option, upon exercise of the Option, the same number and kind of stock, securities, cash, property, or other consideration that each holder of Shares was entitled to receive in the Transaction. 12. Withholding of Taxes. The Company shall have the right to deduct from any distribution of cash to the Optionee an amount equal to the federal, state, and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to the Option. If the Optionee is entitled to receive Shares upon exercise of the Option, the Optionee shall pay the Withholding Taxes to the Company in cash prior to the issuance of such Shares. In satisfaction of the Withholding Taxes, the Optionee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Committee, to have withheld a portion of the Shares issuable to him or her upon exercise of the Option, having an aggregate Fair Market Value equal to the withholding Taxes, provided that, if the Optionee may be subject to liability under Section 16(b) of the Exchange Act, the election must comply with the requirements applicable to Share transactions by such Optionees. 13. Employee Bound by the Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 14. Modification of Agreement. This Agreement may be modified, amended, suspended, or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. Page 35 EXHIBIT 10(iii)A(5) 15. Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 16. Governing Law. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 17. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon each successor corporation. This Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding, and conclusive upon the Optionee's heirs, executors, Permitted Transferees, administrators, and successors. 18. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction, or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding, and conclusive on the Optionee and the Company for all purposes. ATTEST: NATIONAL SERVICE INDUSTRIES, INC. /s/ Helen D. Haines By:/s/ James S. Balloun Secretary James S. Balloun Chairman, President, and Chief Executive Officer /s/ George H. Gilmore, Jr. Name of Optionee: George H. Gilmore, Jr. EX-10 5 ASPIRATION ACHIEVEMENT 1997 Page 36 EXHIBIT 10(iii)A(6) ASPIRATION ACHIEVEMENT INCENTIVE AWARD AGREEMENT FOR EXECUTIVE VICE PRESIDENT AND GROUP PRESIDENT THIS AGREEMENT, made as of the 1st day of June, 1999 (the "Grant Date"), between National Service Industries, Inc., a Delaware corporation ("NSI") and NSI SERVICES, L.P. (GA), a Subsidiary of NSI (together, the "Company"), and GEORGE H. GILMORE, JR. (the "Grantee"). WHEREAS, NSI has adopted the National Service Industries, Inc. Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional incentives to certain officers and key employees of NSI and its Subsidiaries; and WHEREAS, the Grantee, as an executive of the above-referenced Subsidiary, performs services with respect to the CHEMICAL GROUP, NATIONAL LINEN SERVICE, AND AECO operations of the Company (the "Operations"); and WHEREAS, the Committee responsible for administration of the Plan has determined to grant to the Grantee an Aspiration Achievement Incentive Award as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Aspiration Award. 1.1 The Company hereby grants to the Grantee an Aspiration Achievement Incentive Award (the "Award"), which has a value determined as provided in Section 2 below based upon the performance of the Operations during the Performance Cycle from September 1, 1997 to August 31, 2000. As provided in the Plan, Grantee's right to payment of this Award is dependent upon Grantee's continued employment in Grantee's current position with the Company, or in a position with responsibilities of substantially similar value to the Company during the remainder of the Performance Cycle. Under certain circumstances as described below, Grantee may be entitled to receive payment for some portion of the Award if Grantee's employment terminates prior to the end of the Performance Cycle. 1.2 The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. This Agreement shall be construed in accordance with, and subject to, the provisions of the Plan (the provisions of which are hereby incorporated by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. 2. Performance Measure and Performance Levels. Page 37 EXHIBIT 10(iii)A(6) The Committee has established the performance measure (the "Performance Measure"), and award and performance levels set forth in Appendix A attached hereto. The chart in Appendix A specifies a Commitment performance level, at which the Commitment Level Award will be paid, an Aspiration performance level, at or above which an Aspiration Level Award will be paid, and a threshold performance level, at which a minimum incentive award will be paid and below which no award will be paid. For each level of performance at or above the threshold performance level through the Aspiration performance level, Grantee will receive an award determined in accordance with the chart and formulae set forth in Appendix A. The terms used in determining the Performance Measure are defined in Appendix B. 3. Determination of Aspiration Award. 3.1 Determination Notice. Subject to Section 3.2, as soon as practical following the last day of the Performance Cycle, the Committee will determine, in accordance with Section 7(c) of the Plan, the performance level of the Operations with respect to the Performance Measure for the Performance Cycle. The Committee may in determining the performance level with respect to the Performance Measure adjust the Operations' financial results for the Performance Cycle to exclude the effect of unusual charges or income items which are distortive of financial results for the Performance Cycle; provided, that, in determining financial results, items whose exclusion from consideration will increase the performance level of the Operations shall only have their effects excluded if they constitute "extraordinary items" under generally accepted accounting principles and all such items shall be excluded. The Committee shall also adjust the performance calculations to exclude the unanticipated effect on financial results of changes in the Code, or other tax laws, and the regulations thereunder. The Committee shall also exclude from consideration the effect on financial performance of each of the following events or items where the result of excluding the particular event or item is to increase the performance level of the Operations: (i) an acquisition or a divestiture involving more than $10 million in net worth or $25 million in business revenues; (ii) an equity restructuring involving more than $1 million; (iii) asset impairment charges involving more than $1 million and restructuring costs involving more than $1 million associated with facility closings or reduction in employment levels; (iv) changes in accounting treatment or rules involving more than $1 million. The Committee may decrease the amount of the Award otherwise payable to Grantee if, in the Committee's view, such adjustment is necessary or desirable, regardless of the extent to which the Performance Measure has been achieved. The Committee may establish such guidelines and procedures for reducing the amount of an Award as it deems appropriate. The Company will notify the Grantee (or the executors or administrators of the Grantee's estate, if applicable) of the Committee's determination (the "Determination Notice"). The Determination Notice shall specify the performance level of the Operations with respect to the Performance Measure for the Performance Cycle and the amount of Award (if any) Grantee will be entitled to receive. Unless the Committee determines otherwise at the time the Award is paid and except as otherwise provided in the event of a Change in Control, the amount Grantee is entitled to receive will be paid one-half in cash and one-half in Shares. The Shares will be valued at their Fair Market Value as of the last day of the Performance Cycle. Except in the case of a Change in Control, the Committee may, in its discretion, attach restrictions, terms and conditions to the Shares issued as part of the Award. 3.2 Significant Events Involving the Operations. If, during a Performance Cycle, NSI consummates an acquisition or disposition involving the Operations that (i) involves assets whose value equals or exceeds 20% of the total value of the Operations' assets, (ii) represents a part of the business whose revenues equal or exceed 20% of the total of the Operations' revenues, or (iii) causes a material restructuring of the Operations, the following rules shall apply: Page 38 EXHIBIT 10(iii)A(6) (a) If the transaction is consummated during the first year of the Performance Cycle, the Performance Cycle and the Grantee's outstanding Award will be terminated with no payout and a new Performance Cycle containing a new Award will be started. (b) If the transaction is consummated after the first year of the Performance Cycle, the Performance Cycle will end and the outstanding Award will be determined and paid at the Operations' actual performance level to such date, taking into account the adjustments provided for in Section 3.1 above and using prorated performance levels of the Performance Measure to reflect the portion of the Performance Cycle that had elapsed as of the date of consummation of the acquisition or disposition. Payment of the Award will be made as soon as practical after it is determined. A new Performance Cycle will be started to cover the period remaining in the initial Performance Cycle or, if that result is not practical, the Committee will make an appropriate adjustment to reflect the premature termination of the initial Performance Cycle. If, during a Performance Cycle, NSI consummates an acquisition or disposition that is not covered by the special provisions of this Section 3.2, the financial effects of such acquisition or disposition shall be handled as provided in Section 3.1. Any actions under this Section 3.2 shall be taken in accordance with the requirements of Code Section 162(m) and the regulations thereunder. 4. Termination of Employment. 4.1 In General. Except as provided in Sections 4.2, 4.3 and 4.4 below, in the event that a Grantee's employment terminates during a Performance Cycle, all unearned Aspiration Awards shall be immediately forfeited by the Grantee. 4.2 Termination of Employment Due to Death, Disability, or Retirement. In the event the employment of a Grantee is terminated by reason of death or Disability during a Performance Cycle, the Grantee shall be entitled to a prorated payout with respect to the unearned Award. The prorated payout shall be determined by the Committee based upon the length of time that the Grantee was actively employed during the Performance Cycle relative to the full length of the Performance Cycle; provided, that payment shall only be made to the extent at the end of the Performance Cycle the Award would have been earned based upon the performance level achieved for the Performance Cycle (taking into account the adjustment provisions and other rules in Section 3 above); and provided, further, that the performance level used to determine the prorated award cannot exceed 200% of the Commitment performance level. Page 39 EXHIBIT 10(iii)A(6) In the event of Grantee's Retirement (on or after age 65), the full Award shall continue to be eligible for payout at the end of the Performance Cycle, just as if Grantee had remained employed for the remainder of the Performance Cycle (including if the Grantee dies after Retirement but before the end of the Performance Cycle). At the end of the Performance Cycle, the Committee shall make its determination in the same manner as provided in Section 3. Payment of earned Awards to Grantee in the event of termination due to death, Disability, or Retirement shall be made at the same time payments would be made to Grantee if Grantee did not terminate employment during the Performance Cycle. 4.3 Change In Control. Notwithstanding anything in this Agreement to the contrary, if a Change in Control occurs during the Performance Cycle, then the Grantee's Award shall be determined for the Performance Cycle then in progress as though the Performance Cycle had ended as of the date of the Change in Control and the outstanding Award will be paid at the Commitment Level Award or the actual performance level to such date (using, for such purpose, prorated performance levels of the Performance Measure to reflect the portion of the Performance Cycle that has elapsed as of the date of the Change in Control), whichever provides the greater payment. The Award determined in accordance with the preceding sentence shall be fully vested and payable immediately to the Grantee. The Committee shall determine the amount of the Award under this Section 4.3, subject to the terms of this section, and no downward adjustment of the Award which would result in reduction of the Award by more than 50% shall be permitted. The Award will be paid in full in cash, unless the Grantee elects to receive one-half of the Award in Shares. For purposes of determining the number of Shares to be paid to a Grantee under this Section 4.3, the Fair Market Value of a Share shall be determined by taking the average closing price per share for the last twenty (20) trading days prior to the commencement of the offer, transaction or other event which resulted in a Change in Control. 4.4 Termination Without Cause. In the event Grantee's employment is terminated by the Company without Cause more than one (1) year after the commencement of the Performance Cycle and prior to the end of the Performance Cycle, the Grantee shall be entitled to a prorated payout of the Award based upon the length of time that the Grantee was actively employed during the Performance Cycle relative to the full length of the Performance Cycle; provided, that payment shall be made only to the extent at the end of the Performance Cycle the Award would have been earned based upon the performance level achieved during the Performance Cycle (taking into account the adjustment provisions and other rules in Section 3 above); and provided, further, that the performance level used to determine the prorated award cannot exceed 200% of the Commitment performance level. Payment shall be made to Grantee at the same time as if Grantee had not terminated employment during the Performance Cycle 5. No Right to Continued Employment. Nothing in this Agreement or the Plan shall be interpreted to confer upon the Grantee any rights with respect to continuance of employment by the Company, nor shall this Agreement or the Plan interfere in any way with the right of the Company to terminate the Grantee's employment at any time. Page 40 EXHIBIT 10(iii)A(6) 6. Nonassignment. The Grantee shall not have the right to assign, alienate, pledge, transfer or encumber any amounts due Grantee hereunder, and any attempt to assign, alienate, pledge, transfer, or encumber Grantee's rights or benefits shall be null and void and not recognized by the Plan or the Company. 7. Modification of Agreement. This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 8. Severability; Governing Law Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. 9. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon any successor to the Company. All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall be binding upon the Grantee's heirs, executors, and administrators. 10. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Grantee and the Company for all purposes. 11. Withholding of Taxes. The Company shall have the right to deduct from any amount payable under this Agreement, an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to any such amount. In satisfaction of all or part of the Withholding Taxes, the Grantee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Company, to have withheld a portion of the Shares issuable to him or her pursuant to an Award, having an aggregate Fair Market Value equal to the Withholding Taxes. Page 41 EXHIBIT 10(iii)A(6) NATIONAL SERVICE INDUSTRIES, INC. By:/s/ James S. Balloun ----------------------------- JAMES S. BALLOUN Chairman, President and Chief Executive Officer NSI SERVICES, L.P. (GA), Subsidiary By:/s/ James S. Balloun ----------------------------- JAMES S. BALLOUN Chairman, President and Chief Executive Officer /s/ George H. Gilmore, Jr. ----------------------------- Name of Grantee: GEORGE H. GILMORE, JR. Page 42 EXHIBIT 10(iii)A(6) Appendix A Aspiration Award Program Illustration - FY 1998-2000 Name: George H. Gilmore, Jr. Division: Corporate Position: Executive Vice President and Group President Salary: $450,000 Total LTI Multiple: 160% AAI % of LTI: 30% Prorated Months: 15 of 36 Achievement Level Threshold Commitment Aspiration FY98-00 Economic Profit ($000,000) (Chemical Group, National Linen Service, AECO) ** ** ** Individual AAI Opportunity $22,500 $90,000 $450,000
Aspiration Award Program Opportunity The following graph depicts the potential incentive award that would be paid out at different levels of the Operations cumulative econimic profit, including: a Threshold performance level; a Commitment performance level; and an Aspiration performance level. Individual Aspiration Economic Profit (000,000) Award Threshold ** $ 22,500 Commitment ** $ 90,000 Aspiration ** $ 450,000
** Confidential information has been omitted and filed separately with the Securities and Exchange Commission. Page 43 EXHIBIT 10(iii)A(6) Appendix A (continued) ASPIRATION ACHIEVEMENT INCENTIVE AWARD FOR 1998 - 2000 PERFORMANCE PERIOD CHEMICAL GROUP, NATIONAL LINEN SERVICE, AND AECO OPERATIONS Formula: Payout as a Percent of Commitment Award = a x EP + b Below Commitment Level EP: a = 0.02517 b = -0.65101 Above Commitment Level EP: a = 0.09877 b = -5.47901 Notes: 1. EP = Cumulative Economic Profit for performance period, which will be expressed in millions, rounded to one decimal place. 2. Values for "a" and "b" will be rounded to five decimal places. 3. Payout percentages will be rounded to a tenth of a percent. 4. No award is payable below the Threshold Level EP, notwithstanding the formula set forth above. 5. The maximum award payable is 500% of the Commitment Level award, notwithstanding the formula set forth above. Page 44 EXHIBIT 10(iii)A(6)
APPENDIX B ASPIRATION ACHIEVEMENT INCENTIVE AWARD PERFORMANCE MEASURE PERFORMANCE MEASURE DEFINITION Economic Profit Sum of the annual economic profits for the performance cycle. Annual economic profit shall be determined as follows: Adjusted After-Tax Profits (AATP) minus [Average Invested Capital times the Weighted Average Cost of Capital (WACC)] RELATED TERMS DEFINITION Average Invested Capital Average of the average beginning and ending Invested Capital balances each month. Adjusted After-Tax Profit (AATP) Adjusted Pre-Tax Profit minus Book Income Taxes. Adjusted Pre-Tax Profit (APTP) Income before provision for income taxes plus interest expense plus implied interest on capitalized operating leases. Book Income Taxes Reported tax rate (determined by dividing the provision for income taxes by the income before the provision for income taxes, as reported in NSI's annual financial statements) applied to APTP. Invested Capital [Total assets plus capitalized operating leases, less short and long-term investment in tax benefits] less [non-interest bearing liabilities except for self insurance reserves and deferred tax credits relating to the safe harbor lease]. Weighted Average Cost of Capital (WACC) Ten percent (10%) will be the WACC for the Performance Cycle ending August 31.
EX-10 6 ASPERATION ACHIEVEMENT GILMORE 1998 Page 45 EXHIBIT 10(iii)A(7) ASPIRATION ACHIEVEMENT INCENTIVE AWARD AGREEMENT FOR EXECUTIVE VICE PRESIDENT AND GROUP PRESIDENT THIS AGREEMENT, made as of the 1st day of June, 1999(the "Grant Date"), between NATIONAL SERVICE INDUSTRIES, INC., a Delaware corporation ("NSI"), and NSI SERVICES, L.P.(GA), a Subsidiary of NSI (together, the "Company"), and GEORGE H. GILMORE, JR. (the "Grantee"). WHEREAS, NSI has adopted the National Service Industries, Inc. Long-Term Achievement Incentive Plan (the "Plan") in order to provide additional incentives to certain officers and key employees of NSI and its Subsidiaries; and WHEREAS, the Grantee, as an executive of the above-referenced Subsidiary, performs services with respect to the CHEMICAL GROUP, NATIONAL LINEN SERVICE, AND AECO operations of the Company (the "Operations"); and WHEREAS, the Committee responsible for administration of the Plan has determined to grant to the Grantee an Aspiration Achievement Incentive Award as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Aspiration Award. 1.1 The Company hereby grants to the Grantee an Aspiration Achievement Incentive Award (the "Award"), which has a value determined as provided in Section 2 below based upon the performance of the Operations during the Performance Cycle from September 1, 1998 to August 31, 2001. As provided in the Plan, Grantee's right to payment of this Award is dependent upon Grantee's continued employment in Grantee's current position with the Company, or in a position with responsibilities of substantially similar value to the Company during the remainder of the Performance Cycle. Under certain circumstances as described below, Grantee may be entitled to receive payment for some portion of the Award if Grantee's employment terminates prior to the end of the Performance Cycle. 1.2 The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. This Agreement shall be construed in accordance with, and subject to, the provisions of the Plan (the provisions of which are hereby incorporated by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. Page 46 EXHIBIT 10(iii)A(7) 2. Performance Measure and Performance Levels. The Committee has established the performance measure (the "Performance Measure"), and award and performance levels set forth in Appendix A attached hereto. The chart in Appendix A specifies a Commitment performance level, at which the Commitment Level Award will be paid, an Aspiration performance level, at or above which an Aspiration Level Award will be paid, and a threshold performance level, at which a minimum incentive award will be paid and below which no award will be paid. For each level of performance at or above the threshold performance level through the Aspiration performance level, Grantee will receive an award determined in accordance with the chart and formulae set forth in Appendix A. The terms used in determining the Performance Measure are defined in Appendix B. 3. Determination of Aspiration Award. 3.1 Determination Notice. Subject to Section 3.2, as soon as practical following the last day of the Performance Cycle, the Committee will determine, in accordance with Section 7(c) of the Plan, the performance level of the Operations with respect to the Performance Measure for the Performance Cycle. The Committee may in determining the performance level with respect to the Performance Measure adjust the Operations' financial results for the Performance Cycle to exclude the effect of unusual charges or income items which are distortive of financial results for the Performance Cycle; provided, that, in determining financial results, items whose exclusion from consideration will increase the performance level of the Operations shall only have their effects excluded if they constitute "extraordinary items" under generally accepted accounting principles and all such items shall be excluded. The Committee shall also adjust the performance calculations to exclude the unanticipated effect on financial results of changes in the Code, or other tax laws, and the regulations thereunder. The Committee shall also exclude from consideration the effect on financial performance of each of the following events or items where the result of excluding the particular event or item is to increase the performance level of the Operations: (i) an acquisition or a divestiture involving more than $10 million in net worth or $25 million in business revenues; (ii) an equity restructuring involving more than $1 million; (iii) asset impairment charges involving more than $1 million and restructuring costs involving more than $1 million associated with facility closings or reduction in employment levels; (iv) changes in accounting treatment or rules involving more than $1 million. The Committee may decrease the amount of the Award otherwise payable to Grantee if, in the Committee's view, such adjustment is necessary or desirable, regardless of the extent to which the Performance Measure has been achieved. The Committee may establish such guidelines and procedures for reducing the amount of an Award as it deems appropriate. The Company will notify the Grantee (or the executors or administrators of the Grantee's estate, if applicable) of the Committee's determination (the "Determination Notice"). The Determination Notice shall specify the performance level of the Operations with respect to the Performance Measure for the Performance Cycle and the amount of Award (if any) Grantee will be entitled to receive. Unless the Committee determines otherwise at the time the Award is paid and except as otherwise provided in the event of a Change in Control, the amount Grantee is entitled to receive will be paid one-half in cash and one-half in Shares. The Shares will be valued at their Fair Market Value as of the last day of the Performance Cycle. Except in the case of a Change in Control, the Committee may, in its discretion, attach restrictions, terms, and conditions to the Shares issued as part of the Award. Page 47 EXHIBIT 10(iii)A(7) 3.2 Significant Events Involving the Operations. If, during a Performance Cycle, NSI consummates an acquisition or disposition involving the Operations that (i) involves assets whose value equals or exceeds 20% of the total value of the Operations' assets, (ii) represents a part of the business whose revenues equal or exceed 20% of the total of the Operations' revenues, or (iii) causes a material restructuring of the Operations, the following rules shall apply: (a) If the transaction is consummated during the first year of the Performance Cycle, the Performance Cycle and the Grantee's outstanding Award will be terminated with no payout and a new Performance Cycle containing a new Award will be started. (b) If the transaction is consummated after the first year of the Performance Cycle, the Performance Cycle will end and the outstanding Award will be determined and paid at the Operations' actual performance level to such date, taking into account the adjustments provided for in Section 3.1 above and using prorated performance levels of the Performance Measure to reflect the portion of the Performance Cycle that had elapsed as of the date of consummation of the acquisition or disposition. Payment of the Award will be made as soon as practical after it is determined. A new Performance Cycle will be started to cover the period remaining in the initial Performance Cycle or, if that result is not practical, the Committee will make an appropriate adjustment to reflect the premature termination of the initial Performance Cycle. If, during a Performance Cycle, NSI consummates an acquisition or disposition that is not covered by the special provisions of this Section 3.2, the financial effects of such acquisition or disposition shall be handled as provided in Section 3.1. Any actions under this Section 3.2 shall be taken in accordance with the requirements of Code Section 162(m) and the regulations thereunder. 4. Termination of Employment. 4.1 In General. Except as provided in Sections 4.2, 4.3, and 4.4 below, in the event that the Grantee's employment terminates during a Performance Cycle, all unearned Aspiration Awards shall be immediately forfeited by the Grantee. Page 48 EXHIBIT 10(iii)A(7) 4.2 Termination of Employment Due to Death, Disability, or Retirement. In the event the employment of the Grantee is terminated by reason of death or Disability during a Performance Cycle, the Grantee shall be entitled to a prorated payout with respect to the unearned Award. The prorated payout shall be determined by the Committee based upon the length of time that the Grantee was actively employed during the Performance Cycle relative to the full length of the Performance Cycle; provided, that payment shall only be made to the extent at the end of the Performance Cycle the Award would have been earned based upon the performance level achieved for the Performance Cycle (taking into account the adjustment provisions and other rules in Section 3 above); and provided, further, that the performance level used to determine the prorated award cannot exceed 200% of the Commitment performance level. In the event of Grantee's Retirement (on or after age 65), the full Award shall continue to be eligible for payout at the end of the Performance Cycle, just as if Grantee had remained employed for the remainder of the Performance Cycle (including if the Grantee dies after Retirement but before the end of the Performance Cycle). At the end of the Performance Cycle, the Committee shall make its determination in the same manner as provided in Section 3. Payment of earned Awards to Grantee in the event of termination due to death, Disability, or Retirement shall be made at the same time payments would be made to Grantee if Grantee did not terminate employment during the Performance Cycle. 4.3 Change In Control. Notwithstanding anything in this Agreement to the contrary, if a Change in Control occurs during the Performance Cycle, then the Grantee's Award shall be determined for the Performance Cycle then in progress as though the Performance Cycle had ended as of the date of the Change in Control and the outstanding Award will be paid at the Commitment Level Award or the actual performance level to such date (using, for such purpose, prorated performance levels of the Performance Measure to reflect the portion of the Performance Cycle that has elapsed as of the date of the Change in Control), whichever provides the greater payment. The Award determined in accordance with the preceding sentence shall be fully vested and payable immediately to the Grantee. The Committee shall determine the amount of the Award under this Section 4.3, subject to the terms of this section, and no downward adjustment of the Award which would result in reduction of the Award by more than 50% shall be permitted. The Award will be paid in full in cash, unless the Grantee elects to receive one-half of the Award in Shares. For purposes of determining the number of Shares to be paid to the Grantee under this Section 4.3, the Fair Market Value of a Share shall be determined by taking the average closing price per share for the last twenty (20) trading days prior to the commencement of the offer, transaction, or other event which resulted in a Change in Control. Page 49 EXHIBIT 10(iii)A(7) 4.4 Termination Without Cause. In the event Grantee's employment is terminated by the Company without Cause more than one (1) year after the commencement of the Performance Cycle and prior to the end of the Performance Cycle, the Grantee shall be entitled to a prorated payout of the Award based upon the length of time that the Grantee was actively employed during the Performance Cycle relative to the full length of the Performance Cycle; provided, that payment shall be made only to the extent at the end of the Performance Cycle the Award would have been earned based upon the performance level achieved during the Performance Cycle (taking into account the adjustment provisions and other rules in Section 3 above); and provided, further, that the performance level used to determine the prorated award cannot exceed 200% of the Commitment performance level. Payment shall be made to Grantee at the same time as if Grantee had not terminated employment during the Performance Cycle. 5. No Right to Continued Employment. Nothing in this Agreement or the Plan shall be interpreted to confer upon the Grantee any rights with respect to continuance of employment by the Company, nor shall this Agreement or the Plan interfere in any way with the right of the Company to terminate the Grantee's employment at any time. 6. Nonassignment. The Grantee shall not have the right to assign, alienate, pledge, transfer, or encumber any amounts due Grantee hereunder, and any attempt to assign, alienate, pledge, transfer, or encumber Grantee's rights or benefits shall be null and void and not recognized by the Plan or the Company. 7. Modification of Agreement. This Agreement may be modified, amended, suspended, or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 8. Severability; Governing Law. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflicts of laws principles thereof. Page 50 EXHIBIT 10(iii)A(7) 9. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon any successor to the Company. All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall be binding upon the Grantee's heirs, executors, and administrators. 10. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction, or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding, and conclusive on the Grantee and the Company for all purposes. 11. Withholding of Taxes. The Company shall have the right to deduct from any amount payable under this Agreement, an amount equal to the federal, state, and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to any such amount. In satisfaction of all or part of the Withholding Taxes, the Grantee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Company, to have withheld a portion of the Shares issuable to him or her pursuant to an Award, having an aggregate Fair Market Value equal to the Withholding Taxes. NATIONAL SERVICE INDUSTRIES, INC. By:/s/ James S. Balloun JAMES S. BALLOUN Chairman, President and Chief Executive Officer NSI SERVICES L.P. (GA), Subsidiary By:/s/ James S. Balloun JAMES S. BALLOUN Chairman, President and Chief Executive Officer /s/ George H. Gilmore, Jr. Name of Grantee: GEORGE H. GILMORE, JR. Page 51 EXHIBIT 10(iii)A(7) Appendix A Aspiration Award Program Illustration - FY 1999-2001 Name: George H. Gilmore, Jr. Division: Corporate Position: Executive Vice President and Group President Salary: $450,000 Total LTI Multiple: 160% AAI % of LTI: 30% Prorated Months: 27 of 36 Achievement Level Threshold Commitment Aspiration FY99-01 Economic Profit ($000,000) (Chemical Group, National Linen Service, AECO) ** ** ** Individual AAI Opportunity $40,500 $162,000 $810,000
Aspiration Award Program Opportunity The following graph depicts the potential incentive award that would be paid out at different levels of the Operations cumulative econimic profit, including: a Threshold performance level; a Commitment performance level; and an Aspiration performance level. Individual Aspiration Economic Profit (000,000) Award Threshold ** $ 40,500 Commitment ** $162,000 Aspiration ** $810,000
** Confidential information has been omitted and filed separately with the Securities and Exchange Commission. Page 52 EXHIBIT 10(iii)A(7) Appendix A (continued) ASPIRATION ACHIEVEMENT INCENTIVE AWARD FOR 1999 - 2001 PERFORMANCE PERIOD CHEMICAL GROUP, NATIONAL LINEN SERVICE, AND AECO OPERATIONS Formula: Payout as a Percent of Commitment Award = a x EP + b Below Commitment Level EP: a = 0.02586 b = -0.75862 Above Commitment Level EP: a = 0.14286 b = -8.71429 Notes: 1. EP = Cumulative Economic Profit for performance period, which will be expressed in millions, rounded to one decimal place. 2. Values for "a" and "b" will be rounded to five decimal places. 3. Payout percentages will be rounded to a tenth of a percent. 4. No award is payable below the Threshold Level EP, notwithstanding the formula set forth above. 5. The maximum award payable is 500% of the Commitment Level award, notwithstanding the formula set forth above. Page 53 EXHIBIT 10(iii)A(7) APPENDIX B ASPIRATION ACHIEVEMENT INCENTIVE AWARD PERFORMANCE MEASURE PERFORMANCE MEASURE DEFINITION Economic Profit Sum of the annual economic profits for the performance cycle. Annual economic profit shall be determined as follows: Adjusted After-Tax Profits (AATP) minus [Average Invested Capital times the Weighted Average Cost of Capital (WACC)] RELATED TERMS DEFINITION Average Invested Capital Average of the average beginning and ending Invested Capital balances each month. Adjusted After-Tax Profit (AATP) Adjusted Pre-Tax Profit minus Book Income Taxes. Adjusted Pre-Tax Profit (APTP) Income before provision for income taxes plus interest expense plus implied interest on capitalized operating leases. Book Income Taxes Reported tax rate (determined by dividing the provision for income taxes by the income before the provision for income taxes, as reported in NSI's annual financial statements) applied to APTP. Invested Capital [Total assets plus capitalized operating leases, less short and long-term investment in tax benefits] less [non-interest bearing liabilities except for self insurance reserves and deferred tax credits relating to the safe harbor lease]. Weighted Average Cost of Capital (WACC) Ten percent (10%) will be the WACC for the Performance Cycle ending August 31, 2001.
EX-10 7 AMENDMENT OF ASPERATION ELECTION FORM Page 54 EXHIBIT 10(iii)A(8) AMENDMENT OF ASPIRATION ACHIEVEMENT INCENTIVE AWARD AGREEMENT AND ELECTION FORM WHEREAS, the undersigned Participant was granted an Aspiration Award under the NSI Long-Term Achievement Incentive Plan (the "Plan") for the Performance Cycle ending August 31, 1999; and WHEREAS, under the Plan, the amount (if any) of the Aspiration Award the Participant will receive for such Performance Cycle is currently uncertain; and WHEREAS, the Plan has been amended to permit the Participant to receive all or a portion of the Aspiration Award in a different form; NOW, THEREFORE, the Participant hereby elects to receive any Aspiration Award earned for the Performance Cycle ending August 31, 1999, in the manner provided below and agrees to amend the Aspiration Achievement Incentive Award Agreement in accordance with such election: I. AMENDMENT TO SURRENDER / EXCHANGE AWARD (OR PORTION THEREOF) FOR STOCK OPTIONS. By checking "YES" below, you are electing to amend your Aspiration Achievement Incentive Award Agreement for the Performance Cycle ending August 31, 1999 to provide that your Award (or a portion thereof) will be exchanged as indicated, to the fullest extent possible, for the grant of Options to acquire NSI stock under the terms set forth below. Page 55 EXHIBIT 10(iii)A(8) Originally, one-half of the Aspiration Award, determined as of August 31, 1999, was to have been paid in cash and one-half in NSI stock. If you elect to amend your Agreement, the value of the component of your Aspiration Award which would have originally been paid in NSI stock will be adjusted to reflect any change in NSI's stock price during the period August 31, 1999 to the Determination Date (meaning that date in October, 1999 on which the Executive Resource and Compensation Committee of the Board of Directors determines the amount of the Award earned and payable). The total value of the Award at the Determination Date will therefore be equal to the total of (a) the amount of the Award as of August 31, 1999 and (b) the amount (either gain or loss) calculated by multiplying (i) the number of shares you would have originally received by (ii) the amount resulting from subtracting the Fair Market Value of NSI stock on August 31 from the Fair Market Value at the Determination Date. The amount of your Aspiration Award exchanged for Options will not be currently taxable (i.e., it will be treated similarly to a bonus deferral). The Options will be nonqualified options under the Plan. Please see the description of the tax treatment for nonqualified options attached hereto as Exhibit "1". Of course, you should consult your tax advisor. _____ YES, I elect to amend my Agreement to provide for the exchange of all of my Award (or a portion thereof), to the fullest extent possible, for the grant of Options to acquire NSI stock under the terms set forth below, in the following manner: [ ] In exchange for $__________ of my Award (minimum $1,000). [ ] In exchange for _________% of my Award (minimum $1,000). [ ] In exchange for the grant of _________ Options (minimum 100 options). Page 56 EXHIBIT 10(iii)A(8) The portion of the Award elected above (whether measured in dollars, percentage, or Options) will be surrendered from the total value of the Award at the Determination Date. The calculation of Options granted in the exchange will be rounded down to the next whole amount. Any unexchanged portion of your Award will be payable half in NSI stock and half in cash. _____ NO, I elect to continue to receive the entire Award payment half in NSI stock and half in cash. Terms of Stock Options: (a) Each Option will be valued for purposes of the surrender and exchange at a percentage, as provided below, of the Fair Market Value of NSI stock (closing price on NYSE) on the Determination Date: (1) At 24.35%, if the Fair Market Value of NSI stock is below $40.00 on the Determination Date; (2) At 20.00%, if the Fair Market Value of NSI stock is $40.00 or greater on the Determination Date. This value is less than the Black-Scholes formula to be used for determining an annual option grant award. (b) The exchange will be limited by the size of your Award payment and may be further reduced, on a pro rata basis, for Options elected in excess of the number of Options granted to you in September 1998 (or a fraction thereof determined by the Committee on the Determination Date), if the total number of Options elected by all participants exceeds the pool of Options available for exchange. It is the intention of the Committee that 300,000 Options will be available for exchange. The final number of Options available will be established by the Committee at the Determination Date, and your election will be adjusted in accordance with the final number of Options available. Page 57 EXHIBIT 10(iii)A(8) (c) The Options will be nonqualified stock options, will be fully vested at the time of receipt, and will have a ten-year term except as follows: (1) in the case of termination due to death, Disability, retirement at or after age 65, or involuntary termination by the Company (other than for cause), the Options will remain exercisable until seven years after the date of grant, or one year after the date of termination, whichever is later; (2) in the case of voluntary termination, the Options will remain exercisable until 90 days after the date of termination; and (3) in the case of involuntary termination for "cause", the Options will expire on the date of termination. The Options will generally have such other terms and conditions as the nonqualified Options granted by the Company in September 1998. Page 58 EXHIBIT 10(iii)A(8) II. SIGNATURE. Sign and date this form below and return it to Helen Haines. The undersigned hereby agrees to amend the Aspiration Achievement Incentive Award Agreement in accordance with the election in I. above. --------------------------------------------- (Grantee) --------------------------------------------- Date Received and Award Agreement Amendment approved on behalf of National Service Industries, Inc.: By:____________________________________ Helen D. Haines - --------------------------------------- Date Page 59 EXHIBIT 10(iii)A(8) EXHIBIT 1 TAX TREATMENT Nonqualified Stock Options ("NSOs"). On exercise of an NSO, the amount by which the market price of the Shares on the date of exercise of the Stock Option exceeds the purchase price for the Shares will generally be taxable to the Participant as ordinary income and will generally be deductible for tax purposes by NSI. Selling or transferring the Shares acquired upon exercise of an NSO will generally result in a capital gain or loss for the Participant, but will have no tax consequences for NSI. The gain or loss will be measured by the difference between the amount realized on disposition of the Shares and the tax basis of the Shares. The tax basis for the Shares will generally be equal to the amount taken into ordinary income upon exercise of the Stock Option, plus the amount of cash paid by the Participant upon exercise of the Stock Option (which will in the aggregate generally be equal to the market price of the Shares at the time the Stock Option was exercised). Aspiration Awards. The grant of an Aspiration Award pursuant to the Plan will not result in income for the Participant or in a tax deduction for NSI. Upon the settlement of such an Award, the Participant will recognize ordinary income equal to the fair market value of any Shares and/or any cash received and NSI will be entitled to a tax deduction in the same amount. EX-10 8 AMENDMENT TO THE LONG TERM INCENTIVE PLAN Page 60 EXHIBIT 10(iii)A(9) AMENDMENT NO. 1 TO THE NATIONAL SERVICE INDUSTRIES, INC. LONG-TERM ACHIEVEMENT INCENTIVE PLAN WHEREAS, The National Service Industries, Inc. Long-Term Achievement Incentive Plan (the "Plan") was adopted by the Board of Directors (the "Board") of National Service Industries, Inc. ("NSI") and became effective on September 17, 1996, and was approved by stockholders on January 8, 1997; and WHEREAS, paragraph 14(a) of the Plan permits the Board to amend the Plan, subject to certain restrictions set forth therein; and WHEREAS, the Board desires to amend the Plan as set forth herein to enable a Participant to exchange the payment of an Aspiration Award for Options under certain circumstances; NOW THEREFORE, pursuant to action taken by the Board of Directors on April 7, 1999, the Plan is amended, effective April 7, 1999, by adding, at the end of paragraph 7(d) of the Plan, the following: Notwithstanding the foregoing, the Committee may permit a Participant to surrender all or a portion of an earned Aspiration Award in exchange for Options pursuant to an election and upon terms established by the Committee. IN WITNESS WHEREOF, the Board has caused this AMENDMENT NO. 1 to be executed on behalf of the Corporation and the Corporation's seal affixed hereto, this 7th day of April, 1999. Attest: National Service Industries, Inc. /s/ Helen D. Haines By:/s/ James S. Balloun Helen D. Haines, Secretary James S. Balloun Chairman, President, and Chief Executive Officer (CORPORATE SEAL) EX-27 9 FDS --
5 Page 61 Exhibit 27 Financial Data Schedule Quarter Ended May 31, 1999 Pursuant to Section 601(c) of Regulation S-K This schedule contains summary financial information extracted from National Service Industries, Inc. consolidated balance sheet as of May 31, 1999 and the consolidated statement of income for the nine months ended May 31, 1999, and is qualified in its entirety by reference to such financial statements. 9-MOS AUG-31-1998 SEP-01-1998 MAY-31-1999 62,893 0 339,020 5,784 202,002 675,670 706,004 413,028 1,139,386 228,056 185,628 0 0 57,919 527,273 1,139,386 1,369,808 1,599,123 836,864 970,971 486,146 2,762 10,252 128,992 47,985 81,007 0 0 0 81,007 1.97 1.97
-----END PRIVACY-ENHANCED MESSAGE-----