-----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, FzWHUR3pyb3lJk2muTkdGG9staL9f+fldwu8BKUuUPqr7Ep+Newt1RAhiB96yC5v Q2E5ojYMOSqUDiwZtJvTFQ== 0000070538-99-000027.txt : 19991018 0000070538-99-000027.hdr.sgml : 19991018 ACCESSION NUMBER: 0000070538-99-000027 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990729 ITEM INFORMATION: FILED AS OF DATE: 19991012 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: 8-K/A SEC ACT: SEC FILE NUMBER: 001-03208 FILM NUMBER: 99727072 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 8-K/A 1 NATIONAL SERVICE INDUSTRIES, INC. 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 8-K/A Amendment No. 1 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) July 29, 1999 National Service Industries, Inc. (Exact name of registrant as specified in its charter) Delaware 1-3208 58-0364900 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 1420 Peachtree St., N.E., Atlanta, Georgia 30309-3002 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (404) 853-1000 Page 1 The undersigned registrant hereby amends the following item of its Current Report on Form 8-K filed on August 3, 1999 as set forth in the pages attached hereto. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Business Acquired. The following audited financial statements of Holophane Corporation, together with the manually signed independent auditors report thereon and the notes thereto, are included in Exhibit 99.1 and are incorporated into this Item 7 by this reference: (i) Consolidated Statements of Income for the Years Ended December 31, 1998, 1997, and 1996 (ii) Consolidated Balance Sheets as of December 31, 1998 and 1997 (iii)Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996 (iv) Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997, and 1996 (v) Independant Auditors' Report (vi) Notes to Financial Statements The following unaudited interim financial statements of Holophane Corporation and the notes thereto are included in Exhibit 99.2 and are incorporated into this Item 7 by reference: (i) Condensed Consolidated Statements of Income for the three and six months ended June 30, 1999 and 1998 (ii) Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 (iii)Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 (iv) Condensed Consolidated Statement of Stockholders' Equity as of June 30, 1999 (v) Notes to Condensed Consolidated Financial Statements (b) Pro Forma Financial Information The following unaudited pro forma financial information of National Service Industries, Inc. is included in Exhibit 99.3 and is incorporated into this Item 7 by reference. (i) Unaudited Pro Forma Condensed Consolidated Balance Sheet as of May 31, 1999 (NSI) and June 30, 1999 (Holophane) (ii) Unaudited Pro Forma Condensed Consolidated Statement of Income for the twelve months ended August 31, 1998 (NSI) and June 30, 1998 (Holophane) (iii)Unaudited Pro Forma Condensed Consolidated Statement of Income for the nine months ended May 31, 1999 (NSI) and June 30, 1999 (Holophane) (iv) Notes to Pro Forma Condensed Consolidated Financial Statements (c) Exhibits 23.1 Consent of Deloitte and Touche LLP 99.1 Audited Financial Statements of Holophane Corporation, as described in Item 7(a) of this Form 8-K. 99.2 Unaudited Financial Statements of Holophane Corporation, as described in Item 7(a) of this Form 8-K. 99.3 Unaudited Pro Forma Condensed Consolidated Financial Statements of National Service Industries, Inc., as described in Item 7(b) of this Form 8-K. Page 2 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: October 12, 1999 By:/s/ Brock A. Hattox Brock A. Hattox Executive Vice President and Chief Financial Officer Page 3 EXHIBIT INDEX 23.1 Consent of Deloitte & Touche LLP 99.1 Audited Financial Statements of Holophane Corporation, as described in Item 7(a) of this Form 8-K. 99.2 Unaudited Financial Statements of Holophane Corporation, as described in Item 7(a) of this Form 8-K. 99.3 Unaudited Pro Forma Condensed Consolidated Financial Statements of National Service Industries, Inc., as described in Item 7(b) of this Form 8-K. EXHIBIT 23.1 INDEPENDANT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-36980, 33-51339, 33-51341, 33-51343, 33-51345, 33-51355, 33-51351, 33-51357, 33-60715, 333-35609, 333-48835, 333-73133, and 333-73135 of National Service Industries, Inc. on Form S-8 and in Registration Statement No. 333-59627 of National Service Industries, Inc. on Form S-3 of our report dated February 19, 1999, relating to the the financial statements of the Holophane Corporation, appearing in this Current Report on Form 8-K/A Amendment No. 1. /s/ Deloitte and Touche LLP Deloitte and Touche Columbus, Ohio October 12, 1999 EXHIBIT 99.1 Page 1
CONSOLIDATED STATEMENTS OF INCOME HOLOPHANE CORPORATION AND SUBSIDIARIES (in thousands except per share data) Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- NET SALES $214,875 $205,327 $190,939 Cost of goods sold 129,930 125,133 117,284 - ------------------------------------------------------------------------------------------------------------------- GROSS MARGIN 84,945 80,194 73,655 Selling and administrative 46,617 42,704 39,405 Research and development 6,463 6,037 5,533 Other expense 258 466 700 OPERATING INCOME 31,607 30,987 28,017 Interest expense 1,537 1,719 2,139 Interest income (404) (414) (527) - ------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 30,474 29,682 26,405 Provision for income taxes 11,265 11,059 9,937 - ------------------------------------------------------------------------------------------------------------------- NET INCOME $19,209 $18,623 $ 16,468 =================================================================================================================== BASIC EARNINGS PER SHARE $1.77 $1.65 $ 1.44 DILUTED EARNINGS PER SHARE $1.72 $1.60 $ 1.40 Weighted Average Number of Shares Outstanding: Basic 10,848 11,283 11,473 Diluted 11,190 11,663 11,779 ===================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Page 2 CONSOLIDATED BALANCE SHEETS
HOLOPHANE CORPORATION AND SUBSIDIARIES ($ in thousands except per share data) December 31, 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Assets - --------------------------------------------------------------------------------------------------------------------- Current Assets: Cash and equivalents $5,535 $11,709 Accounts receivable (less allowance of $1,331 and $1,087, respectively) 32,992 29,903 Inventories 15,705 12,651 Prepaid and other assets 3,522 3,988 - --------------------------------------------------------------------------------------------------------------------- Total Current Assets 57,754 58,251 - --------------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment, net 49,626 42,102 Goodwill (net of accumulated amortization of $4,171 and $3,124, respectively) 23,156 21,285 Other Assets 6,011 5,158 - --------------------------------------------------------------------------------------------------------------------- TOTAL $136,547 $126,796 ===================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long term debt $ 278 $ 6,610 Trade payables 9,351 10,366 Compensation and employee benefits 8,305 8,881 Income taxes payable 1,312 1,987 Other accrued liabilities 4,753 3,678 - --------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 23,999 31,522 - --------------------------------------------------------------------------------------------------------------------- Long Term Debt (less current maturities) 21,249 12,964 Long Term Compensation 4,661 3,522 Other Long Term Liabilities 4,440 3,685 Commitments and Contingencies - - Stockholders' Equity: Preferred stock (par value $.01 per share: 1,000,000 shares authorized; none issued) Common stock (par value $.01 per share: 20,000,000 shares authorized; 11,895,861 shares issued) 119 119 Additional paid-in capital 42,760 43,143 Retained earnings 68,359 49,150 Common shares in treasury, at cost (1998: 1,333,413 shares; 1997: 880,014 shares) (26,706) (15,882) Accumulated other comprehensive income (deficit) (2,334) (1,427) - --------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 82,198 75,103 - --------------------------------------------------------------------------------------------------------------------- Total $136,547 $126,796 ===================================================================================================================== The accompanying notes are an integral part of these consolidated financial statements. - ---------------------------------------------------------------------------------------------------------------------
Page 3 CONSOLIDATED STATEMENTS OF CASH FLOWS
HOLOPHANE CORPORATION AND SUBSIDIARIES (in thousands) Year Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: - -------------------------------------------------------------------------------------------------------------- Net income $ 19,209 $ 18,623 $ 16,468 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,189 6,905 6,487 Loss on disposal of property, plant and equipment 113 28 232 Provision for deferred income taxes 160 866 253 Change in assets and liabilities net of effects from acquisitions: Accounts receivable (864) 2,966 (4,053) Inventories (469) 580 1,568 Prepaid and other current assets 618 (356) (281) Trade payables (1,491) (536) (1,171) Compensation and employee benefits (856) 536 (732) Income taxes payable (1,122) 812 (780) Other, net 1,491 77 955 - -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 24,978 30,501 18,946 - -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: - -------------------------------------------------------------------------------------------------------- Purchase of investment securities (1,179) (1,906) (1,551) Sale of investment securities 39 842 1,005 Capital expenditures (12,379) (8,007) (4,956) Proceeds from the sale of assets 88 102 42 Acquisitions, net of cash acquired (674) 0 (6,100) - -------------------------------------------------------------------------------------------------------- Net cash used in investing activities (14,105) (8,969) (11,560) - -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: - -------------------------------------------------------------------------------------------------------- Principal payments on long term debt (60,380) (6,381) (9,359) Proceeds from long term debt 62,002 0 0 Purchase of treasury shares (12,676) (11,645) (3,769) Payments to pre-acquisition shareholders (7,350) 0 0 Proceeds from the sale of treasury shares 677 214 385 - -------------------------------------------------------------------------------------------------------- Net cash used in financing activities (17,727) (17,812) (12,743) - -------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 680 (83) 73 - -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents (6,174) 3,637 (5,284) Cash and equivalents at beginning of year 11,709 8,072 13,356 - -------------------------------------------------------------------------------------------------------- Cash and equivalents at end of year $ 5,535 $ 11,709 $ 8,072 ======================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 1,457 $ 1,712 $ 2,160 Income taxes $ 11,057 $ 9,066 $ 10,472 Non-cash investing and financing activity: Treasury shares used for acquisitions $ 704 $ 1,380 $ 2,145 Additional goodwill relating to contingent purchase price $ 1,020 $ 704 $ 1,381 Trade payables for property, plant and equipment $ 206 $ 687 $ 252 Capital leases for property, plant and equipment $ 0 $ 699 $ 0 Shares exchanged to exercise stock options $ 59 $ 488 $ 0 ========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Page 4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' Equity HOLOPHANE CORPORATION AND SUBSIDIARIES ($ in thousands)
Accumulated Common Stock Additional Treasury Stock Other -------------------- Paid-in Retained --------------- Comprehensive Stockholders Shares Amount Capital Earnings Shares Amount Income(Deficit) Equity - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 11,895,861 $119 $42,969 $14,059 425,148 ($4,529) ($2,229) $50,389 Comprehensive income Net income 16,468 16,468 Translation adjustments(net of tax benefit of $0) 1,460 1,460 -------- Comprehensive income 17,928 Shares used for acquisitions 780 (121,629) 1,365 2,145 Purchase of treasury shares 206,000 (3,769) (3,769) Stock options exercised, including related tax benefits 52 (36,150) 399 451 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 11,895,861 119 43,801 30,527 473,369 (6,534) (769) 67,144 Comprehensive income Net income 18,623 18,623 Translation adjustments (net of tax benefit of $0) (658) (658) --------- Comprehensive income 17,965 Shares used for acquisitions 13 (71,725) 1,367 1,380 Purchase of treasury shares 544,408 (12,133) (12,133) Stock options exercised, including related tax benefits (671) (66,038) 1,418 747 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 11,895,861 119 43,143 49,150 880,014 (15,882) (1,427) 75,103 Comprehensive income Net income 19,209 19,209 Translation adjustments (net of tax benefit of $216) (907) (907) --------- Comprehensive income 18,302 Shares used for acquisitions 91 (28,675) 613 704 Purchase of treasury shares 536,598 (12,676) (12,676) Stock options exercised, including related tax benefits (474) (54,524) 1,239 765 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 11,895,861 $119 $42,760 $68,359 1,333,413 ($26,706) ($2,334) $82,198 ===============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Page 5 INDEPENDENT AUDITOR'S REPORT TO THE STOCKHOLDERS AND DIRECTORS OF HOLOPHANE CORPORATION -------------------------------------------- We have audited the accompanying consolidated balance sheets of Holophane Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Holophane Corporation and subsidiaries at December 31, 1998 and 1997, and results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP - ------------------------- Deloitte & Touche LLP Columbus, Ohio February 19, 1999 Page 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The company is engaged in the manufacture and sale of lighting fixtures and systems primarily for industrial, commercial and outdoor applications. The company has operations in the United States, Canada, Mexico, United Kingdom, Germany and Australia. CONSOLIDATION The consolidated financial statements include the accounts of Holophane Corporation and all of its majority owned subsidiaries. All significant intercompany transactions have been eliminated. FOREIGN CURRENCY TRANSLATION The assets and liabilities of the company's subsidiaries outside the United States are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates. Income and expense items are translated at the average exchange rates prevailing during the period. Gains and losses resulting from foreign currency transactions are recognized currently in net income and those resulting from translation of financial statements are recognized currently in comprehensive income. DISCLOSURES REGARDING FINANCIAL INSTRUMENTS The carrying value of cash and equivalents, receivables, accrued liabilities and accounts payable are considered to approximate fair value due to the relatively short maturity of the respective instruments. For long-term debt, the interest rates fluctuate with the London Interbank Offered Rate (LIBOR) or Prime Rate and thus their carrying value is a reasonable estimate of fair value. CASH AND EQUIVALENTS The company considers money market funds and all highly liquid debt instruments with an initial maturity of three months or less to be cash equivalents. At December 31, 1998 and 1997, the company had approximately $732,000 and $6,590,000, respectively, invested in bank commercial paper and U.S. treasury related investments. INVENTORIES Inventories are valued at the lower of cost, determined on the first-in, first-out basis, or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from one and one-half to forty years. GOODWILL The excess of purchase price over the fair values of net assets acquired is amortized on a straight-line basis over forty years. ASSET IMPAIRMENTS Annually, or more frequently if events or circumstances change, a determination is made by management, in accordance with Statement of Financial Accounting Standards (SFAS) 121, to ascertain whether property, plant and equipment, goodwill and other intangible assets have been impaired based on the sum of expected future undiscounted cash flows from operating activities. Based upon its most recent analysis, the company believes that property, goodwill and other intangibles at December 31, 1998 and 1997 are realizable and the depreciation and amortization periods are appropriate. SELF INSURANCE The company is self-insured for certain health and workers' compensation programs in the United States. The company purchases insurance to limit exposure under these programs. Insurance for the health plan provides a stop-loss ceiling of $100,000 per individual per year and an aggregate annual stop-loss ceiling (based on enrollment) of $1,720,000, $1,709,000 and $1,585,000 for 1998, 1997 and 1996, respectively. Insurance for the workers' compensation plan contains a stop-loss ceiling of $300,000 per event. The company accrues for both claims reported but not yet paid and claims incurred but not yet reported. Page 7 MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. REVENUE RECOGNITION Revenues are recognized at the time the products are shipped. ADVERTISING Advertising costs are expensed as incurred. Advertising expense for 1998, 1997 and 1996 was $2,593,000, $2,447,000 and $2,365,000, respectively. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," was issued and is required to be adopted for the company's 2000 annual financial statements. The company has not yet determined what, if any, impact the adoption of this will have on its financial statements. 2. ACQUISITION HOLOPHANE S.A. DE C.V. (HOLOPHANE MEXICO) - On June 1, 1998, the company acquired the stock of Holophane Mexico for $770,000. Under the terms of the purchase agreement, the company will make additional payments of up to $2,023,000, contingent upon Holophane Mexico achieving certain operating results during the three year period ending December 31, 2000. At the date of acquisition, the market value of assets acquired was $11,270,000 and liabilities assumed were $10,770,000. METALOPTICS, INC. - On September 1, 1996, the company acquired the stock of MetalOptics, Inc. Under the terms of the purchase agreement, the company will make additional payments of up to $500,000 and 154,589 additional shares of common stock, contingent upon MetalOptics, Inc. achieving certain operating results during the period ending December 31, 2001. Any future amounts earned under these agreements will be recorded as additional goodwill and amortized over the remaining life of the goodwill recognized at the time of acquisition. Results of operations after the acquisition dates are included in the Consolidated Statements of Income. The following pro forma information (in thousands, except earnings per share [EPS] amounts) has been prepared assuming the Holophane Mexico and MetalOptics, Inc. acquisitions had taken place at the beginning of 1997 and 1996, respectively. The pro forma information includes adjustments for interest expense that would have been incurred to finance the purchase, additional depreciation based on the fair market value of the property, plant and equipment acquired and the amortization of goodwill arising from the transaction, net of tax. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates.
- ------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------ Net Sales $218,834 $215,652 $204,545 Net Income $19,285 $19,069 $17,088 Basic EPS $1.78 $1.69 $1.48 Diluted EPS $1.72 $1.63 $1.44 ==================================================================
Page 8 3. INVENTORIES Inventories consist of the following (in thousands):
- --------------------------------------------------------------- DECEMBER 31, 1998 1997 - --------------------------------------------------------------- Raw materials $8,973 $7,610 Work in process 4,869 3,850 Finished goods 2,498 1,838 - --------------------------------------------------------------- TOTAL 16,340 13,298 Less valuation allowance (635) (647) - --------------------------------------------------------------- TOTAL $15,705 $12,651 ===============================================================
4. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are summarized as follows (in thousands):
- ----------------------------------------------------------------- DECEMBER 31, 1998 1997 - ----------------------------------------------------------------- Land $3,272 $2,322 Buildings and improvements 24,799 23,687 Machinery and equipment 57,822 51,016 Office and computer equipment 13,916 12,464 Construction in progress 3,654 1,670 - ----------------------------------------------------------------- TOTAL 103,463 91,159 Less accumulated depreciation (53,837) (49,057) - ----------------------------------------------------------------- TOTAL $49,626 $42,102 =================================================================
5. LONGTERM DEBT AND CREDIT FACILITIES In March 1998, the company refinanced its debt with an unsecured $30,000,000 revolving credit agreement with National City Bank which matures on April 1, 2001. Under the new agreement, the company can elect to borrow Eurodollars or domestic funds at .20% to .875% (Applicable Margin) in excess of the LIBOR or Prime Rate, respectively. The Applicable Margin is determined by the ratio of debt (as defined in the credit agreement) to the sum of operating income plus depreciation and amortization. Based on the Applicable Margin, commitment fees of .15% to .30% are charged on the average daily unused portion of the available commitment. This credit agreement contains certain financial and operating covenants. Page 9 The old credit agreement consisted of a term loan that reduced semi-annually until scheduled maturity on September 30, 2000 and a revolving commitment of up to $15,000,000, collateralized by substantially all of the company's assets. Interest rates as of December 31, 1998 and 1997 were 5.4% and 6.8%, respectively. Long term debt consists of the following (in thousands):
- -------------------------------------------------------------- DECEMBER 31, 1998 1997 - -------------------------------------------------------------- Revolving Loan $21,000 $0 Term loan 0 18,660 Capital lease obligations (Note 6) 515 883 Other borrowings 12 31 - -------------------------------------------------------------- Total 21,527 19,574 Less current maturities (278) (6,610) ============================================================== Total $21,249 $12,964 ==============================================================
6. LEASES The company leases certain computer and plant equipment under capital leases. The cost of these assets leased under capital leases is approximately $818,000 and $1,326,000 at December 31, 1998 and 1997, respectively. In addition, the company leases certain equipment and office space under non-cancelable operating leases. Future minimum lease payments are as follows (in thousands):
- ---------------------------------------------------------------- CAPITAL OPERATING LEASES LEASES - ---------------------------------------------------------------- 1999 $294 $788 2000 256 394 2001 0 154 2002 0 95 2003 0 47 Thereafter 0 224 - ---------------------------------------------------------------- TOTAL MINIMUM LEASE PAYMENTS 550 $1,702 Less amount representing interest (35) - ---------------------------------------- Present value of net minimum lease payments (Note 5) $515 ========================================
Total rent expense under operating leases for 1998, 1997 and 1996 was approximately $1,574,000, $1,693,000 and $1,381,000, respectively. Page 10 7. INCOME TAXES The company follows the provisions of SFAS 109. The components of income before income taxes are as follows (in thousands):
- ----------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------- Domestic $27,073 $27,068 $24,781 Foreign 3,401 2,614 1,624 - ----------------------------------------------------------- TOTAL $30,474 $29,682 $26,405 ===========================================================
The components of the provision (credit) for income taxes are as follows (in thousands):
- -------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------- Current: Federal $8,561 $8,366 $7,918 State and local 1,281 1,196 1,279 Foreign 1,263 631 487 - -------------------------------------------------------------- TOTAL CURRENT 11,105 10,193 9,684 Deferred: Federal 480 550 171 State and local 106 373 37 Foreign (426) (57) 45 - -------------------------------------------------------------- TOTAL DEFERRED 160 866 253 TOTAL $ 11,265 $ 11,059 $ 9,937 ==============================================================
Page 11
The principal items accounting for the difference in the expected tax expense on income before income taxes computed at the United States statutory rate are as follows (in thousands): - -------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------- Computed expense at 35% of pretax income $ 10,666 $ 10,389 $ 9,242 State and local taxes (net of federal and foreign tax) 979 1.127 905 Elimination of valuation allowance on foreign NOLS 0 (712) 0 Other (380) 255 (210) - -------------------------------------------------------------- TOTAL $ 11,265 $ 11,059 $ 9,937 ==============================================================
The tax effect of the items comprising the company's net deferred tax asset are as follows (in thousands):
- --------------------------------------------------------------- DECEMBER 31, 1998 1997 - --------------------------------------------------------------- Deferred tax assets: Intangibles $ 33 $ 365 Reserves 539 1,004 Compensation and employee benefits 2,933 2,128 Other 1,182 1,184 - --------------------------------------------------------------- TOTAL 4,687 4,681 Deferred tax liabilities: Property, plant and equipment 3,258 2,260 - --------------------------------------------------------------- NET DEFERRED TAX ASSET $1,429 $2,421 ===============================================================
At December 31, 1998 the company had foreign net operating loss carryforwards (NOLs) totaling $545,000 which the company expects to fully utilize before it expires in 2007. At December 31, 1998 unremitted earnings of subsidiaries outside the United States were approximately $8,420,000. The company intends to indefinitely reinvest the undistributed earnings of its foreign subsidiaries or to repatriate them only when it is tax effective to do so. Accordingly, no deferred income taxes for additional United States federal income taxes from distribution of foreign earnings have been recorded. Page 12 8. EMPLOYEE BENEFIT PLANS The company has five 401(k) defined contribution savings plans covering substantially all United States union and non-union employees. The plans, which provide for both optional and mandatory company contributions of up to 5%, are intended to qualify under Section 401(k) of the Internal Revenue Code. The company matches participant contributions of up to 3% of their salary. The company's Canadian subsidiary has a defined contribution savings plan covering substantially all employees. The expense charged to operations under these plans was $2,196,000, $2,530,000 and $2,133,000 for 1998, 1997 and 1996, respectively. On June 1, 1998, the company acquired Holophane Mexico, including its pension benefit plan. Holophane Mexico's benefit plan consists of a seniority premium based on years of service and final salary (as defined under the Mexican Federal Labor Laws) covering all full time employees and a defined benefit based on years of service and average salary over the last five years of service covering all full time non-union employees. Holophane Europe has a defined benefit plan, covering substantially all of its employees, in which benefits are based primarily on years of service and employee compensation near retirement. The company's funding policy is in accordance with local laws and income tax regulations. Fund assets consist primarily of common stocks, common trust funds and government securities. The following table sets forth the funded status of Holophane Europe's and Holophane Mexico's plan and amounts recognized in the company's balance sheets (in thousands):
- ---------------------------------------------------------------- DECEMBER 31, 1998 1997 - ---------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $10,552 $8,751 Service cost 734 777 Interest cost 813 709 Actuarial gain 1,307 709 Acquisition 907 0 Exchange (gain)/loss (35) (304) Benefits paid (1,972) (90) - ---------------------------------------------------------------- Benefit obligation at end of year 12,306 10,552 - ---------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 11,417 9,914 Actual return on plan assets 1,924 1,217 Acquisition 868 0 Employer contributions 508 499 Plan participants' contributions 240 236 Exchange (gain)/loss (27) (358) Benefits paid (1,972) (91) - ---------------------------------------------------------------- Fair value of plan assets at end of year 12,958 11,417 - ---------------------------------------------------------------- Funded status 652 865 Unrecognized net actuarial costs 144 173 Unrecognized prior service cost (390) (655) - ---------------------------------------------------------------- Prepaid benefit cost $406 $383 ================================================================
Weighted average actuarial assumptions used in the accounting for the plans were as follows:
- --------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------- Discount rate 7.41% 7.50% 8.50% Expected return on plan assets 8.03% 8.50% 8.50% Rate of compensation increase 5.10% 5.25% 6.25% ===============================================================
Page 13 Net periodic benefit cost included in the company's Consolidated Statements of Income consisted of the following components (in thousands):
- --------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------- Service cost $ 734 $ 777 $ 682 Interest cost 813 709 545 Plan participants' contributions (240) (236) (222) Expected return on plan assets (899) (787) (748) Amortization of prior service costs 33 33 1 Recognized net actuarial loss 10 0 0 - --------------------------------------------------------------- Net periodic benefit cost $ 451 $ 496 $ 258 ===============================================================
The company's Supplemental Executive Retirement Plan (SERP) allows participants to defer up to 50% of their annual bonus. Deferred compensation under the SERP is used to fund a Rabbi Trust. Gains and losses on participant's accounts directly offset the SERP liability for each participant. The fair value of the investment included in other assets and offsetting liability was $4,661,000 and $3,522,000 at December 31, 1998 and 1997, respectively. Page 14 9. STOCK OPTIONS On April 30, 1998, the stockholders approved an Employee Stock Purchase Plan (ESPP) within the meaning of Section 423 of the Internal Revenue Code with 300,000 shares of stock for its U.S. and Canadian subsidiaries. The 1997 Offering granted under the plan allows eligible employees to have up to 5% of their first $50,000 of annual compensation during the two year grant period withheld from payroll to purchase company stock on December 31, 1999 at an option price of $20.30 which was established on December 15, 1997 at 85% of the average trade value. As of December 31, 1998, 69,000 of the 84,000 options granted were outstanding. The 1996 and 1993 Holophane Corporation Incentive Stock Plans authorize the grant of options, restricted stock and awards of performance shares of common stock to officers, key employees and directors. Options are to be granted at exercise prices equal to the fair market value of such stock as of the date of grant. All options granted have a maximum term of 10 years. Employee options vest ratably over four years and directors' options vest in six months. The weighted average remaining contractual life of these options is 6.8 years. The number of authorized options to be granted under these plans are 800,000 and 1,182,000, respectively. Stock option activity is summarized as follows:
- ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Outstanding at beginning of year 1,097,637 972,825 802,425 Weighted average exercise price $ 14.79 $ 13.14 $ 11.27 Granted 207,800 234,100 209,600 Weighted average exercise price $ 24.84 $ 20.76 $ 19.88 Exercised (56,912) (66,038) (36,150) Weighted average exercise price $ 12.93 $ 10.64 $ 10.67 Canceled (16,338) (43,250) (3,050) Weighted average exercise price $ 19.09 $ 16.19 $ 14.15 - ------------------------------------------------------------------------------- Outstanding at end of year 1,232,187 1,097,637 972,825 Weighted average exercise price $ 16.51 $ 14.79 $ 13.14 =============================================================================== Exercisable at end of year 768,129 606,091 421,800 Weighted average exercise price $ 13.70 $ 12.45 $ 11.60 =============================================================================== Available for grant at end of year 612,255 801,329 963,900 ===============================================================================
The company applies Accounting Principles Board Opinion 25 in accounting for its fixed stock compensation plans. Accordingly, no compensation cost has been recognized for the plans in 1998, 1997 or 1996. In accordance with SFAS 123, the fair value approach has not been applied to stock options granted prior to January 1, 1995. The compensation cost calculated under SFAS 123 is recognized over the vesting period of the stock options. Fair value is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
- --------------------------------------------------------------- INCENTIVE STOCK PLAN ESPP 1998 1997 1996 1998 - --------------------------------------------------------------- Weighted average fair value $9.87 $7.95 $6.74 $6.68 Risk-free interest rate 5.73% 6.19% 5.88% 5.68% Dividend yield 0 0 0 0 Volatility factor .252 .254 .230 .254 Weighted average expected life (years) 6.5 5.8 5.5 2.0 ===============================================================
Page 15 Had compensation costs for stock options been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS 123, the company's net earnings and EPS would have been reduced to the pro forma amounts indicated as follows:
- ----------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------- Net Income: As reported $19,209 $18,623 $16,468 Pro forma $17,895 $17,832 $15,919 Basic EPS: As reported $1.77 $1.65 $1.44 Pro forma $1.65 $1.58 $1.39 Diluted EPS: As reported $1.72 $1.60 $1.40 Pro forma $1.60 $1.53 $1.35 ===========================================================
The following table summarizes stock options outstanding and exercisable at December 31, 1998 (shares in thousands):
- ----------------------------------------------------------- Outstanding Exercisable - ----------------------------------------------------------- Exercise Average Average Average Price Remaining Exercise Exercise Range Options Life Price Options Price - ----------------------------------------------------------- $10-$13 629 5.4 yrs $11.34 574 $11.31 $18-$27 603 8.2 yrs $21.90 194 $20.78 ===========================================================
10. EARNINGS PER SHARE All share data is presented in accordance with SFAS 128. The reconciliation of basic and diluted shares outstanding is as follows (in thousands):
- ---------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------- Basic shares outstanding 10,848 11,283 11,473 Dilutive securities: Stock options 338 373 281 Contingent shares 4 7 25 - ---------------------------------------------------------- Dilutive shares outstanding 11,190 11,663 11,779 ==========================================================
The following options to purchase shares of common stock were outstanding during each year, but were not included in the computation of diluted EPS because the option's exercise price was greater than the average market price of the common shares for all quarters during the year and, therefore, the effect would be anti-dilutive:
- ----------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------- Number of options 30,000 0 174,000 Weighted average exercise price $27.19 $0.00 $20.38 ===========================================================
Page 16 11. SEGMENT INFORMATION The company has adopted SFAS 131, "Disclosures about Segments of a Business Enterprise and Related Information." The company operates predominantly in one industry segment, that being the design, manufacture and sale of lighting fixtures. No single customer accounted for as much as 10% of consolidated net sales. The following table presents information about the company managed by geographic area (in thousands):
- ---------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------- NET SALES TO CUSTOMERS United States $172,519 $171,749 $157,981 Europe 23,762 23,908 23,376 Other 18,594 9,670 9,582 - ---------------------------------------------------------------------- TOTAL $214,875 $205,327 $190,939 ====================================================================== TRANSFERS BETWEEN GEOGRAPHIC AREAS (eliminated in consolidation) United States $10,046 $7,268 $7,694 Other 256 271 0 - ---------------------------------------------------------------------- TOTAL $10,302 $7,539 $7,694 ====================================================================== OPERATING INCOME United States $27,813 $27,688 $25,882 Europe 2,286 1,945 1,791 Other 1,508 1,354 344 - ---------------------------------------------------------------------- TOTAL $31,607 $30,987 $28,017 ====================================================================== IDENTIFIABLE ASSETS United States $100,045 $102,934 $101,361 Europe 20,585 20,268 20,166 Other 15,917 3,594 2,440 - ---------------------------------------------------------------------- TOTAL $136,547 $126,796 $123,967 ====================================================================== CAPITAL SPENDING United States $11,172 $7,607 $4,212 Europe 655 291 438 Other 552 109 306 - ---------------------------------------------------------------------- TOTAL $12,379 $8,007 $4,956 ====================================================================== DEPRECIATION & AMORTIZATION United States $7,143 $6,057 $5,615 Europe 684 755 741 Other 362 93 131 - ---------------------------------------------------------------------- TOTAL $8,189 $6,905 $6,487 ======================================================================
EXHIBIT 99.2 Page 1 HOLOPHANE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands except per share data)
Three Month Period Ended ------------------------ June 30, June 30, 1999 1998 - -------------------------------------------------------------------------------- Net Sales $58,730 $51,453 Cost of Goods Sold 35,751 31,690 ------- ------- Gross Margin 22,979 19,763 Selling and Administrative Expenses 13,572 11,109 Research and Development 1,617 1,473 Other Expenses 223 199 ------- ------- Operating Income 7,567 6,982 Interest Expense 244 317 Interest Income (36) (40) ------- ------- Income Before Income Taxes 7,359 6,705 Provision for Income Taxes 2,557 2,530 ------- ------- Net Income 4,802 4,175 ================================================================================ Basic Earnings Per Share $0.45 $0.38 - -------------------------------------------------------------------------------- Diluted Earnings Per Share $0.44 $0.37 - -------------------------------------------------------------------------------- Weighted Average Number of Shares Outstanding: Basic 10,597 10,910 Diluted 11,028 11,306 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Page 2 HOLOPHANE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands except per share data)
Six Month Period Ended ---------------------- June 30, June 30, 1999 1998 - -------------------------------------------------------------------------------- Net Sales $111,503 $98,700 Cost of Goods Sold 68,042 60,605 -------- ------- Gross Margin 43,461 38,095 Selling and Administrative Expenses 26,231 22,038 Research and Development 3,152 3,003 Other Expenses 401 689 -------- ------- Operating Income 13,677 12,365 Interest Expense 545 704 Interest Income (142) (189) -------- ------- Income Before Income Taxes 13,274 11,850 Provision for Income Taxes 4,687 4,411 -------- ------- Net Income 8,587 7,439 ================================================================================ Basic Earnings Per Share $0.81 $0.68 - -------------------------------------------------------------------------------- Diluted Earnings Per Share $0.78 $0.66 - -------------------------------------------------------------------------------- Weighted Average Number of Shares Outstanding: Basic 10,599 10,969 Diluted 10,980 11,343 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Page 3 HOLOPHANE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)
June 30, December 31, 1999 1998 - -------------------------------------------------------------------------------- ASSETS - -------------------------------------------------------------------------------- Cash and Equivalents $ 3,932 $ 5,535 Receivables 36,207 32,992 Inventory 17,916 15,705 Other Current Assets 4,544 3,522 - -------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 62,599 57,754 - -------------------------------------------------------------------------------- Plant, Property and Equipment, Net 54,309 49,626 Intangibles 22,987 23,156 Other Assets 6,254 6,011 - -------------------------------------------------------------------------------- TOTAL ASSETS $146,149 $136,547 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Excluding Debt $ 27,099 $ 23,721 Current Portion of Long Term Debt 268 278 Long Term Debt 19,625 21,249 Other Long Term Liabilities 9,118 9,101 Stockholders' Equity 90,039 82,198 - -------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $146,149 $136,547 ================================================================================
The accompanying notes are an integral part of these financial statements. Page 4 HOLOPHANE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Six Month Period Ended ---------------------- June 30 June 30 1999 1998 - -------------------------------------------------------------------------------- Net cash flow provided by operating activities $10,327 $ 2,702 - -------------------------------------------------------------------------------- Investing activities: Capital expenditures (8,945) (6,770) Other (342) (1,292) ------- -------- Net cash used in investing activities (9,287) (8,062) - -------------------------------------------------------------------------------- Financing activities: Principal payments of long term debt (9,804) (26,610) Proceeds from long term debt 8,170 29,752 Purchase of treasury shares (1,004) (5,802) Proceeds from the sales of treasury shares 230 453 ------- -------- Net cash used in financing activities (2,408) (2,207) - -------------------------------------------------------------------------------- Effects of exchange rate changes on cash (235) (57) - -------------------------------------------------------------------------------- Net increase/(decrease) in cash and equivalents (1,603) (7,624) - -------------------------------------------------------------------------------- Cash and equivalents at beginning of period 5,535 11,709 - -------------------------------------------------------------------------------- Cash and equivalents at end of period $ 3,932 $ 4,085 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Page 5 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY HOLOPHANE CORPORATION AND SUBSIDIARIES ($ in thousands)
ACCUMULATED COMMON STOCK ADDITIONAL TREASURY STOCK OTHER ----------------- PAID-IN RETAINED ------------------- COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT INCOME/(DEFICIT) EQUITY - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 11,895,861 $119 $42,760 $68,359 1,333,413 $(26,706) $(2,334) $82,198 Comprehensive income Net income 8,587 8,587 Translation adjustments (net of tax benefit of $0) (381) (381) ------- Comprehensive income 8,206 Shares used for acquisitions 141 (15,910) 267 408 Purchase of treasury shares 36,100 (1,004) (1,004) Stock options exercised, including related tax benefits (280) (22,008) 511 231 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1999 11,895,861 $119 $42,621 $76,946 1,331,595 $(26,932) $(2,715) $90,039 ===========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Page 6 HOLOPHANE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- Basis of Presentation - The condensed consolidated balance sheet as of June 30, 1999, the condensed consolidated statements of income for the three months ended June 30, 1999 and June 30, 1998 and the condensed consolidated statements of income, cash flows and stockholders' equity for the six months ended June 30, 1999 and June 30, 1998 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations, changes in stockholders' equity and changes in cash flows for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1998 annual report on Form 10-K. The results of operations for the six month period ended June 30, 1999 are not necessarily indicative of the operating results for the full year. Classification of Inventory - --------------------------- (in thousands)
--------------------------------------------------------------------- (UNAUDITED) JUNE 30, 1999 DECEMBER 31, 1998 --------------------------------------------------------------------- Raw materials $ 9,371 $ 8,973 Work in process 5,924 4,869 Finished goods 3,345 2,498 --------------------------------------------------------------------- TOTAL 18,640 16,340 Less valuation allowance (724) (635) --------------------------------------------------------------------- TOTAL $17,916 $15,705 =====================================================================
Segment Information - The Company operates predominantly in one industry segment, that being the design, manufacture and sale of lighting fixtures. The following table presents information about the Company managed by geographic area (in thousands): Page 7
-------------------------------------------------------------------------- JUNE 30, 1999 JUNE 30, 1998 -------------------------------------------------------------------------- NET SALES TO CUSTOMERS United States $ 90,832 $81,337 Europe 11,159 10,580 Other 9,512 6,783 -------------------------------------------------------------------------- TOTAL $111,503 $98,700 ========================================================================== TRANSFERS BETWEEN GEOGRAPHIC AREAS (eliminated in consolidation) United States $ 4,051 $ 4,643 Europe 51 176 -------------------------------------------------------------------------- TOTAL $ 4,102 $ 4,819 ========================================================================== OPERATING INCOME United States $ 12,646 $11,283 Europe 669 646 Other 362 436 -------------------------------------------------------------------------- TOTAL $ 13,677 $12,365 ==========================================================================
No material changes have occurred in total assets since December 31, 1998. EXHIBIT 99.3 Page 1 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION On July 29, 1999, National Service Industries, Inc. ("Parent"), a Delaware corporation, became the owner of all of the capital stock of Holophane Corporation, a Delaware corporation (the "Company"), pursuant to the merger (the "Merger") of NSI Enterprises, Inc. ("Purchaser"), a Delaware corporation and wholly-owned subsidiary of Parent, with and into the Company with the Company as the surviving corporation. At the effective time of the Merger (the "Effective Time"), the Company became a wholly-owned subsidiary of Parent. Prior to the Merger, Parent consummated a tender offer (the "Offer") to purchase all outstanding shares of common stock, par value $.01 per share (the "Shares") of the Company, at a purchase price of $38.50 per Share, net to the seller in cash, less any required withholding taxes and without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase, dated June 25, 1999 (the "Offer to Purchase") and in the related Letter of Transmittal (which together with the Offer to Purchase constituted the Offer). The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of May 31, 1999 (NSI) and June 30, 1999 (Holophane) gives effect to the Merger and financing thereof as if they had occurred on that date. The Unaudited Pro Forma Condensed Consolidated Statement of Income for the twelve months ended August 31, 1998 (NSI) and June 30, 1998 (Holophane) gives effect to the Merger and financing thereof as if they had occurred on the first day of the period presented. The Unaudited Pro Forma Condensed Consolidated Statement of Income for the nine months ended May 31, 1999 (NSI) and June 30, 1999 (Holophane) gives effect to the Merger and financing thereof as if they had occurred on the first day of the respective period presented. The acquisition has been accounted for under the purchase method of accounting. The total cost of the acquisition has been allocated to the net assets of Holophane Corporation based upon the estimated fair values of such assets. The purchase price allocation is preliminary and further refinements may be necessary based upon the completion of final valuation studies, however the Company does not expect the impact of such adjustments to be material to the Company's financial position or results of operations. The following unaudited pro forma condensed consolidated financial information does not purport to reflect the financial position or results of operations that actually would have resulted had the above transactions occurred as of the dates indicated or to project the results of operations for any future period. These financial statements should be read in conjunction with the separate historical financial statements and notes thereto of National Service Industries, Inc. and Holophane Corporation. Page 2
Unaudited Pro Forma Condensed Consolidated Balance Sheet As of May 31, 1999 (NSI) and June 30, 1999 (Holophane) (in thousands) Historical Historical Holophane Pro Forma NSI (Reclassified) (A) Adjustments Pro Forma ------------- ---------------- ---------------- --------------- ASSETS Current Assets Cash $ 62,893 $ 3,932 $ (60,000) (D) $ 6,825 Receivables 333,236 36,207 - 369,443 Inventories and linens in service 260,056 17,916 943 (B) 278,915 Other current assets 19,485 4,416 2,382 (B) 26,283 ------------- ---------------- ---------------- --------------- Total Current Assets 675,670 62,471 (56,675) 681,466 ------------- ---------------- ---------------- --------------- ------------- ---------------- ---------------- --------------- Property, plant, and equipment 292,976 54,309 7,542 (B) 354,827 ------------- ---------------- ---------------- --------------- Goodwill, intangibles and other assets 170,740 28,091 399,538 (B) 625,554 ------------- ---------------- 27,185 (E) --------------- --------------- Total Assets 1,139,386 144,871 377,590 1,661,847 ============= ================ ================ =============== LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities Short-term debt - - 108,966 (D) 108,966 Notes payable 11,225 - - 11,225 Accounts payable 95,358 11,868 - 107,226 Other accrued liabilities 121,473 15,371 51,764 (D) 188,608 ------------- ---------------- ---------------- --------------- Total Current Liabilities 228,056 27,239 160,730 416,025 ------------- ---------------- ---------------- --------------- LTD, less current maturities 185,628 19,625 (19,500) (C) 435,753 250,000 (D) Deferred income taxes 41,131 435 49,620 (B) 91,186 Self-insurance reserves, less current portion, and other long-term liabilities 99,379 7,533 (406) (B) 133,691 27,185 (E) Stockholders Equity: Series A preferred Stock - - - - Preferred Stock - - - - Common Stock 57,919 119 (119) (B) 57,919 Paid in Capital 29,010 42,621 (42,621) (B) 29,010 Retained Earnings 946,068 76,946 (76,946) (B) 946,068 Accumulated other comprehensive income items (8,867) (2,715) 2,715 (B) (8,867) ------------- ---------------- ---------------- --------------- 1,024,130 116,971 (116,971) 1,024,130 Less: Treasury Stock 438,938 26,932 (26,932) (B) 438,938 ------------- ---------------- ---------------- --------------- Total Stockholders Equity 585,192 90,039 (90,039) 585,192 ------------- ---------------- ---------------- --------------- Total Liabilities & Stockholders Equity $1,139,386 $144,871 $377,590 $1,661,847 ============= ================ ================ =============== See accompanying notes to pro forma condensed consolidated financial statements.
Page 3
Unaudited Pro Forma Condensed Consolidated Statement of Income For the Twelve Months Ended August 31, 1998 (NSI) and June 30, 1998 (Holophane) (in thousands except per share amounts) Historical Historical Holophane Pro Forma NSI (Reclassified) (A) Adjustments Pro Forma ------------- ----------------- ---------------- --------------- Sales & Service Revenues Net sales of products $1,718,564 $209,012 $ - $1,927,576 Service revenues 312,746 - - 312,746 -------------- ----------------- ---------------- --------------- Total Revenues 2,031,310 209,012 - 2,240,322 -------------- ----------------- ---------------- --------------- Costs & Expenses Cost of products sold 1,044,215 133,594 261 (F) 1,178,070 Cost of services 183,470 - - 183,470 Selling & administrative expense 634,061 43,361 - 677,422 Interest expense (income), net 749 1,106 (1,272) (H) 26,029 19,154 (I) 6,292 (J) Gain on sale of businesses (2,449) - - (2,449) Other (Income) expense, net (1,857) 583 12,655 (G) 11,381 -------------- ----------------- ---------------- --------------- Total Costs & Expenses 1,858,189 178,644 37,090 2,073,923 -------------- ----------------- ---------------- --------------- Income before Taxes 173,121 30,368 (37,090) 166,399 Provision for Income Taxes 64,401 11,334 (11,438) (K) 64,297 -------------- ----------------- ---------------- --------------- Net Income $108,720 $ 19,034 $(25,652) $ 102,102 ============== ================= ================ =============== Basic Earnings per Share $ 2.56 $ 2.40 ============== =============== Basic Weighted Average Number of Shares Outstanding 42,462 42,462 ============== =============== Diluted Earnings per Share $ 2.53 $ 2.37 ============== =============== Diluted Weighted Average Number of Shares Outstanding 43,022 43,022 ============== =============== See accompanying notes to pro forma condensed consolidated financial statements.
Page 4
Unaudited Pro Forma Condensed Consolidated Statement of Income For the Nine Months Ended May 31, 1999 (NSI) and June 30, 1999 (Holophane) (in thousands except per share amounts) Historical Historical Holophane Pro Forma NSI (Reclassified) (A) Adjustments Pro Forma -------------- ----------------- ---------------- --------------- Sales & Service Revenues Net sales of products $1,369,808 $167,948 $ - $1,537,756 Service revenues 229,315 - - 229,315 -------------- ----------------- ---------------- --------------- Total Revenues 1,599,123 167,948 - 1,767,071 -------------- ----------------- ---------------- --------------- Costs & Expenses Cost of products sold 836,864 106,497 196 (F) 943,557 Cost of services 134,107 - - 134,107 Selling & administrative expense 499,114 38,441 - 537,555 Interest expense (income), net 8,219 670 (867) (H) 26,655 14,366 (I) 4,267 (J) Gain on sale of businesses (5,814) - - (5,814) Restructuring expense, asset impairments, and other charges (2,216) - - (2,216) Other (Income) expense, net (143) (54) 9,491 (G) 9,294 -------------- ----------------- ---------------- --------------- Total Costs & Expenses 1,470,131 145,554 27,453 1,643,138 -------------- ----------------- ---------------- --------------- Income before Taxes 128,992 22,394 (27,453) 123,933 Provision for Income Taxes 47,985 8,044 (8,442) (K) 47,587 -------------- ----------------- ---------------- --------------- Net Income $ 81,007 $ 14,350 $(19,011) $ 76,346 ============== ================= ================ =============== Basic Earnings per Share $ 1.97 $ 1.86 ============== =============== Basic Weighted Average Number of Shares Outstanding 41,030 41,030 ============== =============== Diluted Earnings per Share $ 1.97 $ 1.85 ============== =============== Diluted Weighted Average Number of Shares Outstanding 41,221 41,221 ============== =============== See accompanying notes to pro forma condensed consolidated financial statements.
Page 5 Notes to Pro Forma Condensed Consolidated Financial Statements (in thousands unless otherwise noted) (A) Certain reclassifications have been made to the Holophane historical financial statements to conform to the presentation to be used by NSI upon completion of the acquisition. (B) The acquisition is to be accounted for as a purchase business combination. The purchase price includes an adjustment for deferred income taxes representing the difference between the assigned values and the tax bases of the assets and liabilities acquired. The preliminary allocation of the purchase price to the net assets of Holophane is based upon the estimated fair values of such assets and is as follows: Purchase price: Acquisition of outstanding shares of common stock $ 407,358 Settlement of Holophane stock options 31,526 Severance and restrictive covenants 5,450 Acquisition expenses 6,896 Debt assumed 19,500 Book value of net assets acquired (excluding debt assumed) (109,539) --------------- Increase in basis $ 361,191 =============== Allocation of increase in basis: Increase in inventory to adjust to fair value $ 943 Increase in the fair value of property, plant, and equipment 7,542 Adjust pension accrual 406 Adjust pension prepaid 96 Increase in the fair value of intangibles 145,725 Current deferred tax asset 2,382 Long-term deferred tax liability (49,620) Increase in goodwill 253,717 --------------- Increase in basis $ 361,191 ===============
The purchase price allocation is preliminary and further refinements may be necessary based on the completion of final valuation studies, however the Company does not expect the impact of such adjustments to be material to the Company's financial statements or results of operations. (C) Represents the repayment of Holophane's outstanding long-term debt. (D) Details of acquisition financing: Cash on hand $ 60,000 Accrued acquisition costs 51,764 Commercial paper, estimated interest rate 5.336% 358,966 -------------- Total Cash Requirement $ 470,730 ==============
Of the total commercial paper issued to effect the acquisition, $250,000 is classified as long-term, as the Company intends to and has the ability, based on existing availability under its long-term revolving credit facility, to refinance it on a long-term basis. The remainder is classified as short-term debt. The portion attributable to accounts payable represents the difference between cash on hand at the pro forma balance sheet date and the actual cash used to effect this acquisition in addition to portions of the purchase price to be paid subsequent to closing. Page 6 (E) Represents the portion of the Holophane stock option settlement which employees elected to defer into a grantor trust maintained by Holophane. (F) Represents the additional depreciation expense as a result of the adjustment to the fair value of property, plant, and equipment using average lives of 20 years for real property and 5 years for personal property. (G) Represents the additional amortization of goodwill and intangibles. Identified intangibles are being amortized over periods ranging from 2 to 40 years and goodwill is being amortized over 40 years. (H) Represents the interest expense on Holophane's long-term debt that was paid off by NSI (see note C). (I) Represents interest expense related to the commercial paper issued to effect the transaction as identified in D above. (J) Represents the foregone interest income on the total cash, excluding borrowed cash identified in D above, necessary to fund the acquisition of Holophane. The average interest rate used is 5.63% for the twelve months ended August 31, 1998 and 5.09% for the nine months ended May 31, 1999. (K) Represents statutory effective rate adjusted for goodwill amortization generated by the Holophane acquisition that is not deductible for tax purposes. -----END PRIVACY-ENHANCED MESSAGE-----